Opinion

The RBI should do more to boost bank lending

K Srinivasa Rao | Updated on April 20, 2020

Additional measures such as easing of prudential standards are needed for banks to expand credit during crisis times like Covid

Building upon the measures announced on March 27, the RBI has proposed additional policy initiatives to address the economic distress and challenges caused by Covid-19. Amid the widespread global recession caused by the pandemic, the Indian economy is better placed with possibility of remaining in positive growth range during 2020-21 with much stronger growth impulse in 2021-22.

The RBI has been vigilant in monitoring the impact of the ongoing lockdown 2.0 on various sectors of the economy and in reaching out to them in time. Among the multiple sectoral disruptions, small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs), are in deep distress with limited access to funds.

Liquidity-enhancing measures

The RBI has rolled out targeted long-term repo operations (TLTROs) 2.0 for ₹50,000 crore to be invested within one month in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed of going to small and mid-sized NBFCs and MFIs. Such specific allocation of funds should be able to provide timely relief.

Another long term refinance facility of up to ₹50,000 crore is provided through NABARD/SIDBI/NHB to benefit agriculture, the rural sector, small industries, housing finance companies, NBFCs and MFIs. It should be able to meet the sectoral credit needs at the bottom of the pyramid. But banks need to lend and avail refinance through them.

Looking at the spurt in inflow of funds under the reverse repo route reaching a staggering ₹6.9 trillion up to April 15, the reverse repo rate has been reduced from 4 per cent to 3.75 per cent to encourage banks to lend instead of using the reverse repo route to manage excess liquidity. Some relief has been given to banks in asset classification as the period of moratorium for three months granted in loan accounts that are standard on March 1, 2020, will be excluded from the asset classification as substandard, making the period 180 days instead of the present 90 days. But it will be confined to loan accounts where moratorium is extended. NBFCs can also avail themselves of the benefit and pass it on to the borrowers.

But in such case, banks/NBFCs will have to make an additional provision of 10 per cent in March 2020 and June 2020 on loan accounts where moratorium is granted and period of default is beyond 90 days. Similarly, the extension of resolution timelines by 90 days can provide some space to banks in invoking insolvency and bankruptcy provisions. Withholding dividend payment of banks for the financial year March 31, 2020, and slashing liquidity coverage ratio (LCR) requirement from 100 per cent to 80 per cent for one year can provide relief to banks .

No push for lending

The RBI has been steadfast in supporting with ample liquidity, but there have been no incentives to banks to lend, particularly when public sector banks are in the grip of disruptions due to consolidation and their capital adequacy continues to be fragile.

Neither the risk weights nor capital adequacy requirements have been revisited. The credit growth in banks continue to languish at 6.1 per cent in February-March 2020 despite many banks announcing special lending schemes for those suffering from the shocks of Covid-19.

It will be pertinent to recall that on April 3, the Basel Committee announced deferral of Basel-III implementation by one year till January 1, 2023, including implementation of revised market risk framework, disclosures to be made under Pillar 3, etc., to increase operational capacity of banks to respond to Covid.

Since the RBI is on a continuous path to support the banking and financial system, some more measures of easing prudential standards will be forthcoming instead of just leaving the onus of last mile delivery of credit to banks. More should be in the pipeline to create enough elbowroom for banks to expand credit on a scale warranted in this kind of unprecedented disruption.

The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. The views are personal

Published on April 20, 2020

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