RBI governor Shaktikanta Das on Monday said the central bank has taken no decision on the extension of the loan moratorium beyond August 31.

Das was responding to a plea made by HDFC group chairman Deepak Parekh not to extend the moratorium for the second time.

The original moratorium ran for three months till May 31 and was subsequently extended till the end of August.

“We are hearing talk about another three-month extension of the moratorium,” Parekh said at a CII virtual conference with the RBI governor. “Please do not extend the moratorium.”

The moral hazard question — thrown up by the moratorium — hove into view with Parekh claiming that “a situation has arisen where even those with the capacity to pay are taking advantage of the circular and holding back loan repayments”.

The governor refused to be drawn into this debate even after Parekh drew attention to the RBI’s own forecast in its financial stability report released last week that suggested gross NPAs in the banking industry in the worst case would surge by 14.7 per cent by March next year – an increase of 6.2 percentage points.

Das said he was in no position to comment at this stage but had taken note of the suggestion.

The RBI governor told Tata Steel managing director T.V. Narendran that the central bank had no view on the value of the rupee and was only interested in checking the volatility in the currency markets. The rupee has slid 5.06 per cent since the beginning of this calendar year.

The meet also saw Atul Punj of the Punj Lloyd group slam banks for ducking their funding commitments to projects, especially in the construction sector, which amplified the risks of NPAs. “The construction sector cannot operate unless there is a steady flow of bank finance,” Punj claimed.

The governor admitted that there had been some reports but he did not want to go into specific cases, adding that the central bank was in talks with commercial banks on this sensitive issue.

Parekh also brought to the RBI governor’s attention that globally, central banks are buying the bonds of private sector companies, junk bonds as well as commercial paper whereas the RBI is funding only banks who will in turn buy all of these instruments.Das said the law does not permit so in India.

However, the issuance of corporate bonds in the first quarter of the current financial year stood at about Rs 1 lakh crore, much more than the issuances in the corresponding first quarter of the previous year.

Das added that liquidity support has been given to the corporate bond markets through enhanced liquidity and the targeted long term repo (TLTRO) programmes.

Governor’s Response: I have made a note of the suggestions (Moratorium + RBI buying of corporate bonds as in other jurisdictions + liquidity support to bond markets and bad asset resolution). I can’t comment now on the moratorium and what stand we might take. Second, the RBI cannot buy corporate bonds; the law doesn’t permit it now.”

We have to recognize that liquidity support has been given to the corporate bond markets through enhanced liquidity and the TLTRO programmes. If I remember correctly, the corporate bond issuances have surged past Rs 1 lakh crore in the first quarter (NOTE: TLTRO 1.0 raised Rs 1 lakh crore; these funds were supposed to be parked in corporate bonds. No data on deployment of TLTRO 1.0 has been made available till date. This is the first comment from the RBI governor on this. But it is not clear whether all of the money has flown into the corporate bonds. Because it was also supposed to go into CPs etc).

The corporate bond market has got a new lease of life; it was freezing up in March. Most funds have gone into AAA corporate bonds, it’s true; but the Centre’s decision to provide a first loss guarantee of up to 20% has provided comfort to investors.

We do see renewed activity in the corporate bond market; there has been purchase of even in bonds rated below AAA.

The RBI remains vigilant; as and when steps are required, we will take them; you are aware of how we supported the MF industry.

Uday Kotak: There is a fundamental issue on quality of corporate bond paper rated below AA.