NEW DELHI: Reserve Bank of India (RBI) Governor Shaktikanta Das, in an unscheduled address on Wednesday, unleashed the first set of liquidity-boosting measures and relaxations including loan restructuring for individuals and for the sectors faced with cash flow concerns to alleviate the financial burden threatening economic recovery.
Bankers say, the RBI's response was overall “well-timed and proactive”, exemplifying the popular adage of “a stitch in time saves nine”. However, two of their demands fell on deaf ears which include re-introduction of the liberalised working capital assessment and allowing standstill on asset classification between ‘invoking’ and ‘implementation’ of the debt resolution to avoid the NPA tag on companies that restructure loans to overcome slowdown pangs caused by Covid-19.
To begin with, the RBI announced a special ₹50,000 crore term liquidity facility for banks for on-lending to entities such as vaccine manufacturers involved in the fight against Covid-19. Banks are supposed to create a “Covid loan book” under this facility, which will be three years tenor and will be open up to March 31, 2022. Such loans will be considered priority sector lending (PSL) for classification. Further, banks can park surplus liquidity equal to the size of such books with the RBI for a rate 40 bps higher than reverse repo rate of 3.35 per cent.
While the announcement gently nudged banks to undertake fresh lending to the emergency health services, it may noted that bank credit offtake was only 5.6 per cent in FY21 despite a host of liquidity measures from RBI last fiscal.
Care Ratings economists Madan Sabnavis and Sushant Hede estimated the banking system to save `890 crore with the implementation of the scheme. Here's the math: Let’s consider the weighted average deposit rate of 5.38 per cent as of March 2021 as the cost of borrowings for the banks. In case banks utilise the available funding under this facility, the borrowing at a lower rate of 4 per cent i.e the repo rate will lead to a saving of `690 crore on the total borrowing window of `50,000 crore. Additionally, the incentive of parking surplus liquidity under the reverse repo window will garner earnings of around `200 crore for the banking system. However, one needs to see if banks borrow via this channel because in the previous “On Tap TLTRO Scheme” of `1 lakh crore, the borrowing has been only `5,000 crore as of May 4, 2021.
Small finance banks (SFBs) is another segment that has received special attention. SFBs can tap a special ₹10,000 crore long-term repo operation of three years tenor for on-ward lending. This move is aimed at enhancing the flow of credit to microfinance institutions which are grappling to raise funds.
Thirdly, the RBI has brought in a resolution framework 2.0 for individuals and vulnerable small businesses. Borrowers with exposure up to `25 crore who didn’t avail earlier facilities and where loans are standard as on March 31, 2021 will be eligible for restructuring in the second round, Das said. The restructuring under the proposed framework can be invoked up to September 30, 2021 and banks have to implement it within 90 days of invocation.
Lenders can review the working capital limits of small businesses and MSMEs as a one-time measure. Those who availed earlier window of restructuring can be given additional two years of moratorium.
“The 25 crore-limit is a right thing as it covers as much as 90 per cent of the total borrowers. Last year, a blanket moratorium was announced because assessing the Covid impact was not possible due to the nationwide lockdown. But, this time many states have not announced lockdown and as such the impact on businesses is expected to be largely limited. Now, banks can address those in need and relax repayment tenure in a customised manner, examining the localised nature of the stress,” Sunil Mehta, chief executive of Indian Banks’ Association told this publication.
On growth, Das admitted that the economic outlook is now “highly uncertain” and clouded with “downside risks" as India continues to fight a ferocious rise in infections and mortalities and developments in global economy aren't favourable either. There are also some concerns evident on inflation from the Das’ speech, predominantly emanating from a spike in global commodity prices. Inflation projection over the rest of the year, according to Das, will be shaped by the impact of localised containment measures on supply chains and logistics as the pandemic situation unfolds. In March this year, RBI had projected inflation for Q1 and Q2 at 5.2 per cent, while FY22 growth was retained at 10.5 per cent.
"As the financial year 2020-21 – the year of the pandemic – was drawing to a close, the Indian economy was advantageously poised, relative to peers. India was at the foothills of a strong recovery, having regained positive growth, but more importantly, having flattened the infection curve. In a few weeks since then, the situation has altered drastically," said the RBI Governor.
RBI, meanwhile, is convinced that the impact of the fresh lockdowns this time will be lesser than that of last year, but Das said it will keep its guard on in the ensuing period and devise new responses when the situation demands.
“The fresh crisis is still unfolding… Today, we have taken some steps, and we will continue to be proactive throughout the year – taking small and big steps – to deal with the evolving situation," noted governor Das.