RBI sharpens tools to fight Covid 2.0

K Srinivasa Rao | Updated on June 14, 2021

It’s time for banks to aggressively use the liquidity windows provided by the RBI to lend to the ailing sectors and hasten revival

Clearly prioritising revival of the economy, the RBI retained the benchmark rates notwithstanding the upside risks to inflation. As expected, the stance of the monetary policy too remains accommodative so long as it is necessary to revive the economy.

Looking to the distress from Covid 2.0, the RBI downgraded its GDP outlook to 9.5 per cent for 2021-22 down from its earlier estimate of 10.5 per cent. But it expects to maintain CPI inflation at 5.1 per cent well within the glide path though wholesale price inflation (WPI) climbed to a 11-year high to 10.49 per cent in April.

Normal monsoon and better farm sector prospects aided by the pass through impact of front-loaded policy measures can potentially douse the inflation headwinds though rising commodity prices continue to cause concern.

Taking forward the sector specific liquidity support announced on May 5, 2021, to fight Covid 2.0, the RBI has further earmarked ₹15,000 crore to the battered contact-intensive sectors. This special liquidity window will be available to banks till March 31, 2022, with tenors of up to three years at the repo rate.

Under the scheme, banks can provide fresh lending support to hotels and restaurants; and tourism — travel agents and other related sector entities.

By way of an incentive, banks will be permitted to park their surplus liquidity up to the size of the loan book created under this scheme with the RBI under the reverse repo window at a rate which is 25 basis points (bps) lower than the repo rate or at 40 bps higher than the reverse repo rate. Similar incentive was offered for creation of ‘Covid loan book’ and an amount equal to it can be parked with RBI to earn better.

As part of liquidity support to all-India financial institutions , ₹15,000 crore was granted to Small Industries Development Bank of India (SIDBI) on April 7 to meet funding requirements for micro, small and medium enterprises (MSMEs) sector for fresh lending. In order to further support the sector, another ₹16,000 crore is now provided to SIDBI. This special fund is intended for on-lending/refinancing through novel models and structures to mitigate Covid stress. This facility will be available at the prevailing policy repo rate for a period of up to one year, which may be further extended depending on its usage.

Operational flexibility

Adding to the forbearance to enable borrowers to overcome the ongoing crisis, the RBI expanded the scope of debt Resolution Framework 2.0, announced on May 5, that covered restructuring of stressed loans to MSMEs as well as non-MSME, small businesses, and loans to individuals for business purposes. The loan limit covered by the scheme was ₹25 crore. It is now increased to ₹50 crore to extend the benefit of restructuring to more borrowers.

The other flexibility, permitting RRBs (regional rural banks) to buy back their certificate of deposits for better liquidity management, is an apt move.

Making available services of National Automatic Clearing House operating under the National Payment Corporation of India (NPCI) from bank working days to all days effective from August 1, akin to RTGS/NEFT, is a progressive move. It will provide convenience to bulk payers and recipients.

With bank credit growth staying truncated at 6 per cent during 2020-21, it is time for banks to be aggressive in using the non-conventional liquidity windows provided by the RBI to channel credit to the ailing sectors to hasten revival. Even the modified Emergency Credit Line Guarantee Scheme (ECLGS) 4.0 of the government provides scope to lend to aviation and health sectors where banks can further disburse loans up to ₹45,000 crore, the unutilised out of the limit of ₹3 trillion.

Beginning with its March 27, 2020, narrative, the RBI has been providing liquidity for various sectors through TLTROs/other measures that now sum up to ₹15.47 trillion excluding the current liquidity support of ₹31,000 crore proposed on June 4, 2021. The RBI should come out with a disclosure statement about its utilisation by the lenders with details of its impact on incremental rise in the flow of credit to the targeted sectors.

The RBI may have to identify other tools if liquidity and credit flow continue to remain in silos. The fight of RBI against Covid 2.0 has to be joined by lenders and other stakeholders to make it work.

The writer is a former General Manager – Strategic Planning, Bank of Baroda. Views are personal

Published on June 14, 2021

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