WITHIN three weeks of announcing a major COVID-19 relief package, the Reserve Bank of India (RBI) Friday stepped in again to ensure liquidity and alleviate stress in segments where the pain is becoming acute — state finances, NBFCs, micro-finance institutions, commercial real estate, and housing.
Stating that COVID-19 has “severely impacted” small and mid-sized corporates, including NBFCs and micro-finance institutions, the RBI slashed reverse repo rate — the rate at which the RBI borrows funds from banks. The 25-basis point cut to 3.75 per cent will nudge banks to give loans to productive sectors rather than lazily park these with RBI.
The RBI provided a Rs 50,000 crore refinance support to all India financial institutions (Nabard: Rs 25,000 crore; Sidbi: Rs 15,000 crore; and, NHB: Rs 10,000 crore), a move that will boost liquidity to agri and rural businesses, small and medium enterprises and to small housing finance companies. With the Rs 50,000 crore support, the total funds to be released by the RBI work out to Rs one lakh crore.
With the lockdown adversely impacting the already stressed finances of states which are at the vanguard of the war against COVID-19, the RBI has enhanced the limit on ways and means advances (WMAs) by 60 per cent over the March 30 levels. ICRA Ratings said this would help them borrow Rs 51,600 crore (roughly Rs 20,000 crore more over the March 30 levels).
WMA is a short-term liquidity arrangement facilitated by the central bank, which enables states to borrow money up to 90 days from the RBI (with a 21-day overdraft permitted) at the repo rate of 4.4 per cent to tide over their liquidity problems. This is significantly lower than about 7.5-7.7 per cent they are paying on 10-year bonds.
Announcing the string of measures in an online address, RBI Governor Shaktikanta Das said, “The RBI will monitor the evolving situation continuously and use all it instruments to address the daunting challenges posed by the pandemic. Although social distancing separates us, we stand united and resolute. Eventually, we shall cure; and we shall endure.”
The hike in WMA limit is expected to provide greater comfort to the states for undertaking COVID-19 containment and mitigation efforts, and to plan their market borrowing programmes better. On April 1, the RBI had announced an increase in the WMA limit of states by 30 per cent, which seems to have now been subsumed under the 60 per cent hike.
However, the RBI kept the main policy rate, Repo rate, or the rate at which the RBI lends funds to banks, unchanged at 4.40 per cent. On March 27, the RBI, in its first Covid package, had slashed the Repo rate by 75 basis points to 4.40 per cent, cash reserve ratio (CRR) — the portion of deposits to be kept with the RBI — by 100 bps to 3 per cent and announced three-month moratorium on terms loans to support the economy.
Governor Das said the central bank has decided to offer Rs 50,000 crore to banks which should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and microfinance institutions. This amount will be given through its mechanism of targeted long-term repo operations (TLTRO 2.0) at the repo rate of 4.40 per cent.
In another sop to borrowers and banks, Das said for all accounts which were standard as on March 1, 2020, the norm to classify them as non-performing assets (NPAs) — loan overdue above 90 days — will exclude the moratorium period. This is applicable for accounts for which lending institutions decide to grant moratorium on loan repayment for three months. This means there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. “NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers,” he said.
Further, in view of the COVID-19- related economic shock, the RBI has directed banks and cooperative banks not to make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions.
It also reduced the liquidity coverage ratio (LCR) requirement for from 100 per cent to 80 per cent with immediate effect. LCR requires banks to hold enough high-quality liquid assets (HQLA) — such as short-term government debt — that can be sold to fund banks during a 30-day stress scenario designed by regulators. Now banks are required to hold HQLA equivalent to 80 per cent of projected cash outflows during the stress scenario.
Das said the payment infrastructure is running seamlessly. “Banks have been required to put in place business continuity plans to operate from their disaster recovery (DR) sites and/or to identify alternate locations for critical operations so that there is no disruption in customer services,” he said.
“Our data show that there was no downtime of internet or mobile banking. On an average, ATM operations stood at over 91 per cent of full capacity. The average availability of Business Correspondents (BCs) is over 80 per cent,” he said.
Bankers said the measures will benefit financial sector players. “The second round of announcements by RBI today bears testimony and rightful recognition to the evolving market conditions. The RBI has unveiled TLTRO 2.0 through defined incentivisation for banks that will clearly allow NBFCs and MFIs the benefit of such largesse,” said State Bank of India Chairman Rajnish Kumar.
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