4 indicators to watch after a new RBI governor joins

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After September 2016, there would be a new Governor at the Reserve Bank of India (RBI) following the decision of incumbent Dr Raghuram Rajan to not to continue after his terms gets over. In this scenario, there are four indicators to watch for after the new Governor joins. This includes, tapping of RBI's excess funds for capitalisation of public sector banks (PSBs), operation of stressed asset funds, treatment of restructuring and asset quality review (AQR), and rate cuts, says a research note.

In the report, Religare Capital Markets Ltd says, there are certain ramifications of changes in these four key regulatory areas if the new Governor diverges from Dr Rajan's stance. 

Here is the analysis from Religare about the four key regulatory areas and its impact...

1. Tapping RBI’s excess funds for PSU bank capitalisation: 

The Economic Survey 2015-16 (pages 19 & 20) highlighted that the RBI’s capital adequacy ratio at 32% is much higher than the median 16% ratio of all other central banks. The government has stated that even if the RBI brings down capital adequacy to 16%, it will free up Rs3-4 lakh crore for capital infusion into PSU banks and/ or the creation of a bad bank to resolve bad loans. 

"The government has budgeted only Rs70,000 crore for capital infusion over four years. Considering the huge gap between the capital required and that budgeted, the new governor may agree to use the RBI’s capital for banks. In our view, this creates a clear moral hazard, but proponents of such a move see nothing wrong with the government tapping its own funds for a one-time capital injection under Basel III," Religare says.

2. Operation of stressed asset funds: 

The RBI, Indian Banks’ Association (IBA) and banks are in the last stage of finalising norms for the operation of stress asset funds in India. As per media reports, the central bank is against allowing banks to own a majority stake in distressed funds. Also, the RBI believes banks should not contribute meaningfully to stressed funds in the form of debt, as this will do nothing to alter their risk. Additionally, such contributions could involve opaque asset pricing. However, banks are aggressively pushing to be allowed to contribute and/or own stakes in stressed funds. 

Religare says, "If permitted by the new governor, this will be negative for the sector as it will mask the true value of write-offs or haircuts required on such assets and prolong the uncertainty over NPAs."

3. Treatment of restructuring and AQR norms: 

Banks are pitching hard to the RBI for further relaxation of the recently announced restructuring norms and the upgrade of certain borderline cases that were classified as NPA under the RBI’s AQR. 

"Though we agree with certain procedural relaxations or changes, any measures which merely push the problem down the road will be negative for the sector," the research report says.

4. Policy and lending rates: 

Religare feels that if the new governor cuts policy rates more aggressively than Dr Rajan, banks will have to lower lending rates. 

"We do not rule out further changes to marginal cost of funds based lending rate (MCLR) or base rate norms for better transmission of policy rates. If lending rates come off aggressively, banks’ margins will reduce. The correlation between lower rates and higher loan growth or NPAs is very weak," Religare concluded.