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Event update: Financials - Repo rate cut and sops for retail loans and NBFCs

RBI cut the repo rate by 35bps versus market whispers of 50bps and published consensus of 25bps.It also announced measures to increase flow of bank credit to NBFCs.

The following measures have been announced for boosting retail loans and credit to NBFCs:

• Risk weights on consumer credit including personal loans but excluding credit cards have been reduced to 100% from 125%.
• NBFC measures announced in the policy:

o   Banks can lend 20% of Tier I to a single NBFC versus 15% earlier. This will enable state banks that are currently constrained for exposure limits to lend more to NBFCs

o   Banks can meet their priority sector requirements by on lending to NBFCs / HFCs. Bank lending to NBFCs for on lending to 1) agriculture upto Rs1m, 2) MSME upto Rs2m and 3) housing upto Rs2m versus Rs1m earlier, will qualify for priority sector lending.

NBFC measures announced earlier:

• The FALLCR has been increased on two occasions by 2% each
• A special FALLCR of 0.5% for specifically lending to NBFCs was announced in Oct-2018.
• The risk weights for banks’ lending to NBFCs have been harmonized with other corporate exposures
• The prudential limit of exposure to NBFCs was aligned to that of other sectors by increasing it from 10 to 15%.
• The minimum holding period for assets to be securitized was reduced from one year to six months
• The durable liquidity in the system has been increased through OMOs and forex.
• The RBI allowed banks in July to frontload the FALLCR increase to the extent of incremental credit to NBFCs and HFCs.
• The government in the budget offered credit enhancement upto 6 months to banks for buying NBFC/HFC pools. To facilitate the buy-outs, RBI has offered a liquidity window of 1% of deposits (NDTL) amounting to Rs1.3 trn to all banks (PSU and private). The liquidity facility is only for incremental lending to NBFCs and HFCs

Impact: We believe RBI has been offering many liquidity boosting measures for enhancing credit flow to NBFCs. However banks are still not very confident of lending to NBFCs in a big way as they perceive high risks. We believe these measures will be incrementally positive for Shriram Transport (STFC) who complained about state banks not having limits to lend to it  and HDFC/LICHF/CanFin  (they benefit from priority on-lending). Retail banks led by HDFC Bank benefit from reduction of risk weights.​