Easing the pain

With the Centre hobbled by fiscal constraints, it was India’s central bank that provided the first line of defence to the worst-affected segments of the economy during the first wave of Covid-19. And, it is the Reserve Bank of India that stepped up again on Wednesday to address the challenges posed by the ongoing second wave. In structuring this package, the RBI has taken care to precisely target small borrowers in the informal sector, micro enterprises and self-employed folks who are likely to be worst hit by the localised lockdowns across the country. It has also been mindful of its responsibilities as a regulator by wisely veering away from blunt instruments such as blanket loan moratoriums, interest waivers and loan classification standstills that were experimented with the first time. Such measures dispense relief to borrower segments that don’t need them and needlessly peg up risks for bank depositors and investors.

The special liquidity window of ₹50,000 crore where banks can borrow up to three-year money at the repo rate to on-lend special Covid loans to a range of healthcare providers, from vaccine makers to equipment importers, is a sound move to provide immediate funding to sectors that are struggling to scale up to meet unprecedented demand. Credit support, as opposed to direct grants, creates a multiplier effect, matches relief to genuine need and prevents a few high-profile entities from cornering incentives. Taking lessons from previous instances where banks did not fully utilise such targeted accommodation, the RBI has sweetened this deal with a priority sector tag and an extra 40 basis point spread for banks parking their Covid loan surpluses in reverse repo. Allowing small finance banks to classify loans to small microfinance institutions as priority sector and opening a ₹10,000- crore repo window exclusively for them to lend to micro units and individuals ensures that last-mile credit reaches borrowers neglected by mainstream banks.

If there’s one measure on which the RBI has been a little half-hearted, it is on the new one-time restructuring scheme for borrowers. Not only is this concession limited to loans up to ₹25 crore but borrowers who received relief last year or are already in default have been specifically excluded. The ₹25-crore threshold may be too low to make a material difference to small/medium enterprises and it stands to reason that borrowers who took a debilitating hit from the first wave would be vulnerable to the second wave as well. Perhaps, the RBI is of the view that restructuring demands from larger borrowers can be evaluated by banks on a case-to-case basis, but this still risks leaving out those most in need of relief. Overall, while the RBI has done its bit to alleviate pain from the second wave, the Centre needs to keep the powder dry to complement these efforts with fiscal aid. Easy credit routed via banks cannot substitute for direct income or livelihood support measures to households devastated by Covid.

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