Necktie Nomics: Can the RBI Governor's tie colour predict rate moves?
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Economic Times
3 hours ago
- Economic Times
Coiled for a comeback: Credit revival likely faster this time due to stronger fundamentals
Two to tango RBI has eased monetary conditions, with MPC members talking of 'the need to support growth'. The focus now shifts to the first step in growth restoration-a revival in credit growth, that is, monetary fast can credit growth pick up, and by how much? Several commentators lament the current weak demand for loans and point to prolonged lags with which credit growth picked up in the monetary-easing episodes of 2002 and 2014. Whereas their concerns and observations hold merit, current conditions are meaningfully different than in prior cycles and so should outcomes. Let us assess four major channels of monetary transmission: rates, credit, asset prices and exchange rates. Exchange rate When interest rates fall, a country's currency tends to weaken, which becomes a growth stimulus (exports become more competitive and import substitution becomes an opportunity), boosting demand for credit. However, given that the rupee is not fully convertible, it is only weakly affected by interest rate differentials, limiting the impact of this channel. Asset price A reduction in interest rates boosts prices of both financial and real assets. Borrowers then feel more emboldened, and lenders have more collateral to lend against. This channel is also not potent here, as the economy is far less financialised than other major economies, and interest rates have, at best, a marginal impact on asset prices. Rates Lower interest rates increase demand for loans. Rates on new loans change in the same direction as policy rates, though the gap between them varies, reflecting transmission lags. For example, interest rates on term deposits (TDs), which account for 60% of funds for banks, would only come down over a year, as 75% of TDs are of greater than one year duration said, most banks have cut interest rates they pay on savings account balances and wholesale funding rates, as measured by rates on certificates-of-deposit (CD) of 12-month duration are down more than 1.75%. Thus, banks are now cutting interest rates on new loans, which should boost loan growth. Credit channel In their 1995 paper, Inside the Black Box: The Credit Channel of Monetary Policy Transmission, Ben Bernanke and Mark Gertler wrote that monetary easing helps credit availability via its impact on borrowers' creditworthiness as well as lender's risk appetite. Given that banks are also businesses, their willingness to take on credit risk also depends on economic momentum. Usually, monetary easing starts when the momentum is weak, like it is now, so naturally at such points banks are less willing to take business is the most potent channel of monetary policy transmission in India. The low debt-to-GDP ratio in India indicates demand for loans far exceeds their supply at all points of time. There is also evidence that the loan slowdown last year was many believe that credit growth slowed last year only due to curtailment of unsecured personal loans (PL), data shows a broad-based slowdown driven by banks de-risking. Unsecured PLs contributed to only a fifth of the growth decline; bigger contributors were bank loans to non-banking finance companies and fact, a 2018 St Louis Fed paper found that in the US, shocks to unsecured firm credit explain more of economic fluctuations than shocks to secured credit, demonstrating how banks' risk appetite affects economic momentum. They found unsecured firm credit is pro-cyclical and tends to lead GDP (meaning growth in risky loans occurs before economic growth), whereas secured firm credit is in 2014 nearly 60% of bank loans were at interest rates higher than 12% (loans at higher rates are considered riskier), today that ratio is just 11%. Over the past year, the banking system curtailed loans at rates above 10%, collectively de-risking further. For these loans to grow again, banks' risk appetite must improve, and that may not occur immediately after the start of monetary expect this to be a gradual process that slowly gains momentum-the first percent point increase in loan growth would improve economic momentum, which, in turn, would affect the demand and supply of higher-interest-rate (riskier) is also likely that improvement should be meaningfully faster than in prior cycles due to three reasons. There is no overhang of unrecognised bad loans, whereas in 2002-04 due to SARFAESI Act, and in the 2014-16 period due to the Asset Quality Review (AQR) and then the new IBC, borrowers as well as lenders were cautious. There is much more capacity to lend and borrow, as lenders are well capitalised and borrowers have low debt-equity ratios. Market share in the banking system has shifted towards the private sector. In the 2002 and 2014 cycles, PSBs held nearly three-fourths of assets and liabilities, but their share is now just half. As private banks have more incentives to take risk, once economic momentum builds, the credit channel of transmission should work faster in this cycle. The first signs of improvement could be visible in a few months. The acceleration thereafter can be faster, as regulatory easing (cuts to risk weights as well as the cash reserve ratio) is likely to amplify the recovery, and bank capital buffers are strong. (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of Elevate your knowledge and leadership skills at a cost cheaper than your daily tea. Just before the Air India crash, did India avert another deadly mishap? Do bank stress tests continue to serve their intended purpose? Did Jane Street manipulate Indian market or exploit its shallowness? Second only to L&T, but controversies may weaken this infra powerhouse's growth story How Balrampur Chini, EID Parry are stirring up gains amid melting sugar stocks Stock Radar: Poly Medicure stock looks attractive for short-term gains; still down 30% from highs Stock picks of the week: 5 stocks with consistent score improvement and return potential of more than 29% in 1 year Capital market stocks: Some corrections are opportunities, 5 stocks with potential downside to upside from -20% to +24%
Time of India
3 hours ago
- Time of India
NHB asks housing finance companies to pay interest on advance EMIs
The National Housing Bank ( NHB ) has directed housing finance companies to pay interest to borrowers on any advance payments not immediately adjusted against Equated Monthly Instalments (EMIs) and are parked in sundry or suspense accounts, two people familiar with the development told ET. The interest must be paid at the same rate as that applied to the customers' home loan. The move aims to promote fair lending practices and prevent borrowers from bearing undue interest costs when their advance payments are not promptly applied. "NHB is essentially saying that HFCs cannot earn by holding on to customers' advance EMIs," said the chief executive of a housing finance company. "This ensures borrowers aren't unfairly charged interest when they've already paid in advance." The regulator has also advised HFCs to focus on improving borrower quality rather than relying on upfront collections as a safeguard against defaults. "Some housing finance firms were taking one or two EMIs in advance from economically weaker section (EWS) and low-income group (LIG) borrowers to cushion their books against potential EMI bounces," said a senior executive at another HFC. "NHB has made it clear that either disburse a lower loan amount or be prepared to pay interest on the advance EMI collected." The NHB directive aligns with the Reserve Bank of India's broader push for transparent and fair lending practices. Last year in April, the RBI instructed all lenders to begin charging interest only from the actual date of loan disbursement, not from the date of loan agreement execution, after inspections revealed discrepancies. In several cases, lenders were found charging interest for the entire month, even if the loan was disbursed partway through, resulting in higher borrower costs. The RBI's intervention sought to ensure borrowers are charged only for the actual duration their loans are outstanding. NHB, which regulates and supervises housing finance companies, has been steadily tightening oversight of the sector. In December 2024, it mandated that all HFCs report non-performing asset (NPA) data on the first of each month, after discovering delays in how some lenders recorded collections from previous months. In March, the regulator pulled up HFCs for mis-selling insurance policies bundled with home loans, instructing them to immediately halt the sale of insurance products without clearly disclosing terms to borrowers. In May, NHB further tightened its rules for refinancing home loans in under-construction projects. It stated that refinance would only be available if less than half of the construction was completed at the time of the first disbursement, aiming to curb misuse of funds and reduce risk in early-stage projects.
Time of India
3 hours ago
- Time of India
Elaborate reporting norms likely under PMLA
The Financial Intelligence Unit (FIU) is eyeing a fresh framework for reporting entities under the Prevention of Money Laundering (PML) Rules and will approach the Reserve Bank to enhance reporting requirements , people familiar with the development said. Changes could include enhanced user details, immediate alert for any change in 'know your customer' (KYC) for accounts red-flagged for suspicious transactions and a fresh set of 'alert indicators' for capital market, money exchanges and bulk property or gems and jewellery purchases. The move aims to make disclosures more robust in the fintech and cryptocurrency space to prevent suspicious transactions before it is too late to track. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Monatelang ausverkauft – Ohrenreiniger Nummer 1 endlich wieder verfügbar! (70% Rabatt!) Apotheke Regional Undo "There is a need for enhancing the reporting requirement especially in fintech space and crypto currency, where enforcing agencies face maximum challenges. We are discussing it with RBI and other regulators and will formally approach them with a framework for detailed discussions," a senior official told ET. Live Events In April, both FIU-IND and RBI signed a memorandum of understanding (MoU) for better information exchange and effective implementation of requirements of the Prevention of Money Laundering Act and Rules. While most of these reporting agencies send their reports to the FIU on quarterly basis with suspicious transaction reports, officials said that by the time the report reaches, money crosses several borders making it difficult to get the trail. "The idea is that when a big bulk transfer or purchase happens, it will immediately send an alert to the internal system so that FIU can be immediately alerted, which makes it easier to track the transaction. This will also help FIU to generate meaningful intelligence for law enforcement agencies like the income tax department, ED and CBI, the official said. FIU had introduced the 'alert indicators' in 2022 for the capital market, but it is felt that these need to be revamped in view of technological changes over time. "The idea is to track order spoofing, misutilisation of client funds by stock brokers and suspicious off-market transactions by brokers and users," the official added.
