Reserve Bank of India (RBI) Governor Shaktikanta Das has virtually ruled out any relaxation in the loan restructuring scheme to tackle the Covid-19-related stress, saying the scheme had been structured to balance the interests of both depositors and borrowers, and to prevent the piling up of bad loans as had happened some years ago.
Das also cautioned that the economic recovery would likely be only gradual, as the upticks in some sectors “appear to be levelling off”.
“We don’t want to be back in the situation that was five years ago, when NPAs of banks had risen very steeply,” the Governor said at the FICCI Executive Committee meeting on Wednesday. He was responding to a plea to extend the recast scheme to four years, with liberal ratios.
Lessons from past crisis
The more accommodative stance taken by the RBI in the wake of the global financial crisis of 2008-09, led to a surge in bad loans from 2014-15. The primary concern of banks, according to the Governor, should be to protect the interests of depositors.
“We are also mindful of the fact that Covid has negatively impacted a large number of businesses… they also need relief,” he said.
The RBI had chosen an accommodative policy, injected more liquidity, and eased various norms to tackle the global financial crisis in 2008-09. However, this led to a surge in bad loans from 2014-15.
The primary concern of banks should be the protection of depositors’ interest, the Governor said. “It is the depositors’ money, there are crores of depositors while borrowers could be in lakhs… there are small depositors, middle-class people, retired persons who depend on deposit income, their interest has to be protected,” he said.
The economic recovery, Das said, “is not yet fully entrenched, and moreover, in some sectors, upticks in June and July appear to be levelling off”.
“By all indications, the recovery is likely to be gradual as efforts towards reopening of the economy are confronted with rising infections.”
The RBI was “battle ready to take whatever steps need to be taken for the economy”, Das said. The high-frequency indicators of agricultural activity, Purchasing Managers’ Index (PMI) for manufacturing, and private estimates for unemployment point to some stabilisation of economic activity in Q2, while contractions in several sectors are easing as well, he said.
Following large policy stimuluses and indications of hesitant economic recovery, global financial markets have turned upbeat, Das said. “Equity markets in both advanced and emerging market economies (EMEs) have bounced back, scaling new peaks after the ‘Covid crash’ in February-March,” he said.
Bond yields have hardened in advanced economies as risk appetite has improved, fuelling a shift in investor preference towards riskier assets. Portfolio flows to EMEs have resumed, and this has pushed up EME currencies, aided also by the US dollar’s weakness following the Fed’s recent communication on pursuing an average inflation target. Gold prices moderated after reaching an all-time high in the first week of August 2020 on prospects of economic recovery, he said.
A comprehensive approach for the health sector may be warranted, Das said, covering a deeper penetration of insurance given the high burden of out-of-pocket expenses in India, as well as preventive care. The health ecosystem must be improved by creating new medical colleges, increasing the number of PG seats, and more colleges for paramedics and nursing, he said.
The Governor also touched upon “five areas (that) would determine our ability to step up and sustain India’s growth in the medium-run: human capital, in particular education and health; productivity; exports, which is linked to raising India’s role in the global value chain; tourism; and food processing and associated productivity gains”.
It is increasingly clear, he said, “that life will never be the same again” post Covid-19. “We should look upon these fundamental changes as opportunities rather than threats, converting them into game changing new vistas of progress.”
According to Das, following the RBI’s announcement of special open market operations (OMOs) and other measures to restore orderly functioning of the G-sec market, bond yields have softened and traded in a narrow range in September.
Although bank credit growth remains muted, the investments by scheduled commercial banks in commercial paper, bonds, debentures, and shares of corporate bodies in this year so far (up to August 28) had increased by Rs 5,615 crore as against a decline of Rs 32,245 crore during the same period of last year. Benign financing conditions and the substantial narrowing of spreads have spurred a record issuance of corporate bonds of close to Rs 3.2 lakh crore during 2020-21 up to August.
“The immediate policy response to Covid-19 in India has been to prioritise stabilisation of the economy and support a quick recovery. Policies for durable and sustainable high growth in the medium-run after the crisis, nevertheless, are equally important,” he said.
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