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Event update: Financials; Credit Policy – Key Measures

RBI hiked repo rate by 25 bps against the consensus expectation that RBI will hold rates. We do not see any major impact on stock prices from this policy. If at all, the policy is marginally negative for state owned banks due to revaluation of state government loans. However the amortization dispensation will help spread losses over four quarters.

Following are key measures relating to banks:

• New valuation for state govt securities will lead to higher MTM losses for state banks: Earlier state government securities were valued at 25bps over the relevant central government paper.  Now the valuation will be based on observed prices. The valuation of traded state government securities shall be at the price at which they have been traded in the market. In case of non-traded state government securities, the valuation shall be based on the state-specific weighted average spread over the yield of the central government securities of equivalent maturity, as observed at primary auctions. The total outstanding state government securities are Rs20.89trn. We estimate the MTM loss for the financial sector at today’s prices to be around 25bps which translates to Rs50-55bn. State government securities are held by banks, LIC and EPFO.
• However continuation of amortization dispensation for 1Q19 will help spread MTM losses: Due to rise in yields and the new method of valuing state government securities, MTM will be high in 1Q as well. As such RBI has continued with the dispensation to banks of amortizing MTM losses over 4 quarters even in 1Q19. Banks enjoyed a similar dispensation in 4Q18.
• Higher SLR carve out for LCR is positive for private banks: RBI has increased the total carve-out from SLR available to banks for meeting LCR requirements to 13 per cent of their NDTL from 11% earlier. This is positive for private banks that will have better funds available to lend.
• The MSME dispensation has been extended to non GST registered MSMEs. In the last policy the RBI had given a dispensation to GST registered MSMEs that these loans will become NPLs for non-payment for 180 days against the existing norm of 90 days. Many banks could not use the dispensation because they did not have enough band width to check whether the MSMEs they deal with are GST registered or not.
• Housing loans

o  After a careful analysis of the Housing Loans data, it has been observed that the level of NPAs for the ticket size of up to Rupees 0.2 million has been high and is rising briskly. This does not impact HFCs we track because their average ticket size is far higher. It is also relieving that amidst too much negative news flow on quality of low ticket home loans, RBI has highlighted only the Rs0.2M segment, not others.

o  In order to bring greater convergence of the Priority Sector Lending guidelines for housing loans with the Affordable Housing Scheme, and to give a fillip to the low-cost housing for the Economically Weaker Sections and Lower Income Groups, it has been decided to revise the housing loan limits for PSL eligibility from existing Rs2.8 M to Rs3.5M in metropolitan centres (with population of ten lakh and above), and from existing Rs2.0M to Rs2.5M in other centres, provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed Rs4.5M and Rs3.5M respectively. A circular in this regard shall be issued by June 30, 2018.