A monetary policy for the pandemic times

K Srinivasa Rao | Updated on February 14, 2021

RBI’s measures in the recent policy review will jumpstart banks’ lending activities and revive growth

In its monetary policy review, the RBI has taken forward its growth strategies keeping speedy credit flow at its epicentre. Sticking to its low lending rate regime, it kept the repo rate unchanged and continued its accommodative stance during the current year and into the next financial year.

The RBI also reiterated its commitment to ensure availability of ample liquidity.

Based on the evolving signs of recovery, the RBI raised its GDP outlook to 10.5 per cent in 2021-22, in sync with the Budget and IMF projections. With inflation returning to RBI’s comfort level of 6 per cent in December 2020, it is awaiting the review of inflation targeting framework, currently valid till March 2021.

CPI-led inflation is expected to stay at 5.2 per cent during Q4: 2020-21, 5.2-5 per cent in H1: 2021-22 and 4.3 per cent for Q3: 2021-22 with risks broadly balanced. Amid the positive headwinds of the economy, thrust on credit flow assumes more significance.

Enlarged credit push

As part of its continuing thrust on credit growth diversification, the targeted long-term repo operations (TLTRO) on tap scheme introduced on October 9, 2020, for banks is now extended to non-banking financial companies (NBFCs) for incremental lending to the specified stressed sectors. The scheme of allowing banks to use up to 3 per cent of net demand and time liabilities (NDTL) rising from one per cent under Marginal Standing Facility (MSF) is now extended to September 2021.

At the same time, the RBI began normalisation of Cash Reserve Ratio (CRR) by raising it in phases from 3 per cent to 3.5 per cent from March 27, 2021, and 4 per cent from May 22, 2021. When the two measures are seen together, it is a non-disruptive seamless normalisation.

The RBI boosted flow of formal credit to new micro, small and medium enterprises (MSMEs) that have never taken loans from banks. Loans up to ₹25 lakh granted to ‘New MSME borrowers’ from January 1, 2021 are now excluded from the purview of calculation of CRR of banks till October 1, 2021. This move will encourage more MSMEs to access formal bank credit.

In order to ease pressure on banks’ capital base, the RBI postponed implementation of last tranche of the capital conservation buffer (CCB) of 0.625 per cent till October 1, 2021. This will free banks from the need to augment additional capital, creating more space for lending. The implementation of Net Stable Funding Ratio (NFSR) that was deferred till April 1, 2021, due to Covid stress is now postponed to October 1, 2021.

Structural reforms

Based upon the discussion paper on Revised Regulatory Framework for NBFCs, a separate framework for NBFC-Microfinance Institutions will be part of it for harmonising the regulatory frameworks for various regulated lenders and credit companies. An expert committee will also be set up on primary (urban) cooperative banks — an important credit delivery structure to explore the scope of leveraging the sector.

Entering a select league of countries, the RBI allowed entry of retail investors into primary and secondary government securities market to deepen the financial markets and broaden the investor base.

While extending credit truncation system across the country by September 2021, a 24/7 helpline is mooted to attend to digital users’ queries. An integrated ombudsman scheme will be rolled out by June 2021 for greater convenience of customers of banks, NBFCs and Prepaid payment instrument issuers.

The way forward

With flattening of the virus curve, launch of vaccine campaign and waning chances of a second wave, it is the opportune time to pump prime growth, reinforcing the ability of banks to lend. Banks can play a bigger role in dispensing credit if and when the proposed Asset Reconstruction Company (ARC) shapes up and takes over the bad loans of banks.

The RBI has aligned many initiatives to empower banks to jumpstart credit growth to hasten recovery. Implementation of the measures and inclusive action at every level will hold the key.

The writer is Adjunct Professor, Institute of Insurance and Risk Management. Views expressed are personal

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Published on February 14, 2021
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