The RBI's coherent response in an uncertain time

RBI Governor Shaktikanta Das

In announcement after announcement in recent times Reserve Bank Governor Shaktikanta Das has harked back to the Mahatma’s quotes to contextualise his moves. Today too, as the RBI became the first public institution to come with a constructive and relevant clutch of decisions, in an atmosphere marred by mutual blamegames, he began and ended with sayings of Gandhiji, the unblinking guiding light for any policy maker.

Das’s focus today was on relief for micro, small and medium businesses and individual borrowers who have been hit again by the second wave, additional low cost/priority bank loans of Rs 50,000 crore for manufacture of vaccines, medical equipment, oxygen, hospital equipment, etc, help for micro finance institutions and relief for States through additional time for repaying their Ways and Means drawings from their account with RBI.

Here, in a gist, is what the RBI has done:

• Banks to create a Covid Loan Book by providing “fresh lending support to a wide range of entities including vaccine manufactures; importers/suppliers of vaccines and priority medical devices; hospitals/dispensaries; pathology labs; manufactures and suppliers of oxygen and ventilators; importers of vaccines and COVID related drugs; logistics firms and also patients for treatment. The RBI will give money for these loans at 4% to banks up to Rs 50,000 crores. They can give these as loans to NBFCs too for onlending for the same purpose. This will ensure cheap credit for these high-priority areas right now

• Small Finance Banks will be given Rs 10,000 crores at the repo rate (4% now) for onlending to Micro Finance Institutions who lend small sums of money to individuals and businesses. Further, loans from SFBs to MFIs, with total loans of up to Rs 500 crores, will be classified under Priority Sector Loans. (This classification benefit was not allowed earlier)

• In what can be called a Covid-2 restructuring package, “borrowers i.e. individuals and small businesses and MSMEs having aggregate exposure of upto ₹25 crore and who have not availed restructuring under any of the earlier restructuring frameworks (including under the Resolution Framework 1.0 dated August 6, 2020), and who were classified as ‘Standard’ as on March 31, 2021 shall be eligible for restructuring.

• For State governments, the RBI allows an Overdraft facility. The maximum number of days of OD in a quarter has now been increased from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days.

There were also announcements about changes in the video KYC facility, a facility for banks to reassess working capital limits to the MSME sector and the option for Banks to use some buffer capital for NPA provisions,, which are an indication of flexibility of the RBI to respond quickly to the shifting fortunes of our national economy.

A worker walks past the logo of Reserve Bank of India (RBI) inside its office in New Delhi, India July 8, 2019. File photo: REUTERS/Anushree Fadnavis

The key question to be asked is whether these will be enough? The outlook seems to have a number of uncertainties. But the RBI has stated that it is watching these developments and will announce calibrated moves in future too.

“The devastating speed with which the virus affects different regions of the country has to be matched by swift-footed and wide-ranging actions that are calibrated, sequenced and well-timed so as reach out to various sections of society and business, right down to the smallest and the most vulnerable,” the Governor said in his statement.

As we write this, life across large parts of the country seems to have been disrupted and economic outcomes are going to be hit. Growth projections for the current year may also have to be revised downwards. We were hoping for a sharp recovery and the discussion was about the letters of the alphabet to which the recovery would fit in. Right now, it does seem that the first quarter will be another difficult one.

So at this juncture, the only comfort to be drawn is that the national banking regulator has acted, recognised the need to respond fast. Bankers will support all such moves with a positive frame of mind. “Positivity is the need of the hour,” Dinesh Khara, the Chairman of the largest lender in the country, State Bank of India, had said. This national effort of supporting our economy, will succeed only with a good dose of that line of thinking.

(S Adikesavan is a top bank executive. Views are personal.)

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