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Helping a lending hand: On RBI’s second lockdown stimulus
Context: Measures by RBI for dealing COVID-19 pandemic and the economic slowdown
With the objective to keep the economy afloat by deploying all the instruments at the RBI’s command, there comes second set of measures by the RBI. Most are aimed at maintaining liquidity, the economy’s lifeblood, though there are some regulatory proposals aimed at making life easier for banks, NBFCs and borrowers.
This brings us to the question of measures taken by RBI again to combat the lockdown impact on economy. In this article we will discuss the following:
- Why there is further reduction in Reverse Repo Rate?
- How RBI gave further relief to states?
- How RBI gave relief to borrowers?
- What is TLTRO 2.0?
- Conclusion
Why there is further reduction in Reverse Repo Rate?
- Earlier, in late March, the central bank reduced the reverse repo rate by 90bps to 4%.
- Despite the earlier measures taken, the banks had ₹6.9-lakh crore parked with the RBI as on April 15.
- Therefore, RBI has further lowered the reverse repo rate by 25 basis points to 3.75%.
- This is to discourage banks from keeping their surplus funds with RBI and indulge in more lending.
- With these measures RBI ensured liquidity for small non-banking financial companies (NBFCs) and asked banks to lend at least half the money earmarked to be borrowed from the liquidity window to them.
How RBI gave further relief to states?
- There is increase of WMA (Ways and Means Advances) limit to 60% over the level as on March 31.
- It is done to enable states “to undertake COVID-19 containment and mitigation efforts” and “to better plan their market borrowings”.
- With economic activity at a near standstill, there is hardly any money coming in from GST, petroleum products, liquor, motor vehicles, and stamp duty or registration fee.
- At the same time, the states are also incurring the bulk of the on-the-ground expenditures for combating the novel corona virus.
- These extend not only to purchases of testing kits, personal protective equipment and ventilators or deployment of healthcare and police personnel, but even to providing food, shelter and other relief measures to those worst hit by the lockdown.
- The states are facing an unprecedented cash crunch and therefore increase in WMA will provide temporary relief as higher limit of WMA is valid till September 30.
- For the states, the aggregate WMA limit was Rs 32,225 crore till March 31, 2020. On April 1, the RBI announced a 30% hike in this limit, which has now been enhanced to 60%, taking it to Rs 51,560 crore.
- Reserve Bank had constituted an Advisory Committee under Shri Sudhir Shrivastava to review the Ways and Means limits for State Governments and Union Territories.
How RBI gave relief to borrowers?
- Earlier on 27 March, the lending institutions were permitted to grant a moratorium of three months on payment of all term loan installments falling due between March 1, 2020 and May 31, 2020 (‘moratorium period’).
- RBI has clarified that there will be an asset classification standstill during the moratorium period for accounts that were not already NPAs as of March 1.
- The 90-day NPA norms shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020.
- This step of the RBI has brought relief to borrowers who were worried that opting for the moratorium may turn them into NPAs.
- The rescheduling of payments, including interest, will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs) by the lending institutions.
- CICs shall ensure that the actions taken by lending institutions regarding moratorium period do not adversely impact the credit history of the beneficiaries.
What is TLTRO 2.0?
- Last month, the RBI had announced special targeted long term repos operations (TLTRO) operations to ease liquidity conditions. Under this, RBI will be conducting auctions of targeted term repos of up to three years tenor for a total of up to ₹1 lakh crore at a floating rate linked to the policy repo rate.
- The RBI introduced an additional Rs 50,000 crore under its targeted long-term repo operations (TLTRO 2.0). Through this the RBI will provide cheaper money for lending to corporate.
- RBI has now mandated banks to lend at least 50 per cent of the money they raise from the central bank’s targeted long term repo operations (TLTRO) to small and medium sized NBFCs and microfinance institutions (MFIS) so that NBFCs and MFIs get enough liquidity.
- LTROs provide banks with access to cheaper capital from the RBI. This, in turn, encourages them to lend more and spur economic activity. They can also invest these long-term funds in assets that yield better returns to improve profitability.
Conclusion
The IMF’s Economic Counselor has named it the ‘Great Lockdown’, estimating the cumulative loss to global GDP over 2020 and 2021 at around $9 trillion. India is among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9 per cent). In fact, this is the highest growth rate among the G 20 economies.
In this scenario, RBI has been proactively monitoring the evolving situation continuously and using all its instruments to address the daunting challenges posed by the pandemic. The overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable. Regulatory measures that have been announced so far are dovetailed into the objective of preserving financial stability.
As India accelerates its fight against Covid-19, the RBI emerges as top runner in the time taken to respond to the crisis and targeting the issues. While RBI’s measures provide for relief, the wait now is for the government to come out with a stimulus package to salvage the economy.
Although social distancing separates us, we stand united and resolute. Eventually, we shall cure and we shall endure.
