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Explained: How the RBI is handling ‘The Great Lockdown’

Coronavirus lockdown: The RBI has tried to provide more focussed help for NBFCs and micro-finance institutions, which, in turn, should help the people hardest hit by the Covid-19 economic crisis.

Written by Udit Misra , Edited by Explained Desk | New Delhi |
Updated: April 19, 2020 4:55:05 pm
rbi coronavirus, shaktikanta das covid 19, rbi covid 19 measures, bank npa extension, reverse repo rate cut, indian express explained, rbi news, rbi measures explained Migrants gather in the national capital at a food distribution point. The government and the RBI have announced a slew of measures to contain the economic losses arising out of the nationwide lockdown that has been extended to May 3. (Express Photo by Amit Mehra)

Coronavirus (COVID-19): On Friday, Reserve Bank of India Governor Shaktikanta Das unveiled the second round of policy announcements to counter the debilitating effects of the spread of Covid-19 on the Indian economy. (Click here to read what the RBI announced in the first round)

The Context

The International Monetary Fund has christened the ongoing economic crisis due to Covid-19 as “The Great Lockdown” and reckons it to be the worst recession that the world would have faced since the Great Depression that happened in the first half of the 20th Century. The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.

However, while the rest of the world is certain to contract, India is hoping to be one of the few countries that expand their overall GDP, regardless of how small that increase may be.

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In this regard, both the Centre and state governments as well as the RBI, have been coming out with policy announcements that mitigate economic distress.

On March 27, the RBI had announced a flurry of measures essentially trying to do two things: One, provide regulatory forbearance (that is, greater leniency) in recognising non-performing assets; Two, it tried to boost the liquidity in the financial system so that businesses do not starve of funds. To achieve the latter, it cut the repo rate (the rate at which it lends money to the banking system) and the reverse repo rate (the interest rate it pays banks when they park their money with the RBI). It also started Targeted Long Term Repo Operations (TLTROs) — essentially, this facility allowed banks to borrow money from the RBI at the repo rate, which is far lower than the prevailing interest rate in the market. The hope was that banks would use cheaper loans to extend cheaper credit to businesses and that will help businesses survive this tumultuous period.

What has the RBI announced today? (Click here for highlights)

A) To begin with, the RBI has cut the reverse repo rate further by 25 basis points (100 basis points make up one full percentage point). The reverse repo rate now stands at 3.75 per cent while the repo rate is 4.40 per cent. On March 27, too, the RBI had cut the reverse repo more sharply than the repo rate.

The idea behind repeatedly cutting reverse repo more than the repo, and thereby increase the gap between the two rates, is two-fold: On the one hand, the RBI is incentivising banks to borrow from it at low rates and lend it forward to businesses, yet, on the other, it is disincentivising them from coming back and parking these funds with the RBI.

To be sure, banks have been dithering from extending credit and the total amount of money parked with the RBI is close to Rs 7 lakh crore as of April 15. In other words, cuts in the repo rate are largely failing to boost credit as banks are so risk-averse that they are preferring to keep the money with RBI, even if it pays them less than what they borrowed it for. By further cutting reverse repo, the RBI is telling banks that it is even more unremunerative for banks to park their funds with the RBI.

B) The second key thing that the RBI has done is to announce another TLTRO of Rs 50,000 crore but this time it has mandated that 50 per cent of this amount borrowed by the banks must go to small and mid-sized Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs).

Again, the benefits of this move are two-fold. One, it provides more liquidity. But more importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves and boost economic activity at the bottom of the pyramid (that is, the poorest customers).

rbi coronavirus, shaktikanta das covid 19, rbi covid 19 measures, bank npa extension, reverse repo rate cut, indian express explained, rbi news, rbi measures explained RBI Governor Shaktikana Das. (Express Photo by Prashant Nadkar)

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C) Further, to help the end consumer, especially in the rural sector, small industries, and housing finance companies, All India financial institutions (AIFIs) such as the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB), which borrow from the RBI and the market to extend credit to NBFCs and MFIs, will be provided “special refinance facilities for a total amount of Rs 50,000 crore” by the RBI.

D) On the issue of providing liquidity and fulfilling its role as “the lender of last resort”, the RBI also announced that it will provide more funding to state governments — under the Ways and Means Advances (WMA) facility — as they try to spend to mitigate the economic stress.

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The WMA is essentially is a facility by which state governments borrow from the RBI to meet the shortfall between their revenues and their expenditure. But the WMA is a short-term measure, only meant for exigencies.

On April 1, the RBI had said it will extend the WMA limit for states by 30 per cent. Today the Governor extended it to 60%. This will enable states to borrow from the RBI and spend that money to provide support (both monetary and otherwise) to the people most badly hit by Covid-19.

E) Apart from easing liquidity in the system like in the past, the other focus has been to provide an easier regulatory regime. The global lockdown has almost completely halted the economic activity. Under the circumstances, it is natural that business will struggle to pay back their loans and there will be a steady accretion of non-performing assets (NPAs) across the board.

Also Read: 7 million jobs are on the line, losses piling up, restaurants stare into lockdown abyss

“Therefore, it has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm 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,” said the Governor.

Similarly, the RBI has extended the deadline for large account NPAs by another 90 days. “Under RBI’s prudential framework of resolution of stressed assets dated June 7, 2019, in the case of large accounts under default, Scheduled Commercial Banks, AIFIs, NBFC-ND-SIs and NBFC-D are currently required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default,” Governor Das stated.

Similarly, to ensure that loans given to real estate projects, that are getting delayed due to the crisis, do not turn into NPAs, the RBI provided an extension of another year before they are recognised as NPAs.

Lastly, given the stress on the system and the demand for cash, the RBI has allowed Scheduled Commercial Banks to reduce their Liquidity Coverage Ratio from 100 per cent to 80 per cent with immediate effect. The LCR essentially mandates the amount of cash that a bank is required to keep with itself. At 100 per cent LCR, a bank would have been required to keep 100 per cent of the net cash it expects to flow out of the bank over the next 30 days. With this being reduced to 80 per cent, banks would have more cash to deal with. However, the RBI said that this limit will gradually go back to 100 per cent by April 2021.

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