A day after the Finance Minister announced a modest relief package for the poor that may need to be expanded, RBI Governor Shaktikanta Das Friday opened up the central bank armoury and used a variety of weapons to counter the distress due to the sudden and sharp destruction of demand, exacerbated by the lockdown to contain the spread of Covid-19.
Das slashed the policy rate, flushed the financial system with liquidity using multiple instruments, and used conventional as well as unconventional tools to support the economy. The most potent move, a game changer by all means, was the call to extend a three-month moratorium on repayment of all term loans. While it will definitely give a breather to all companies, it will be a life saver for the micro enterprises, proprietors with small loans, as well as individuals such as taxi and auto drivers, or small shop owners, who are facing sudden loss of income.
In doing so, the RBI, probably, missed out enlarging the benefit to the small borrower. It could have avoided charging interest on outstanding loans during the three-month moratorium period at least for loans of smaller ticket size, say a home loan of up to Rs 15 lakh. In stressful times, and dramatic lifestyle changes due to social distancing, this cost should not add to the worry of the small borrower.
While exact numbers are not available, the average ticket size of home loans extended by SBI and HDFC — which together command a 40 per cent market share in the home loan segment – is around Rs 27 lakh. But the number of loans that fall under Rs 15 lakh would be around 50 per cent. Over the last 3-4 years, bankers said small ticket size loans of under Rs 15 lakh were taken by many who applied under the Pradhan Mantri Awas Yojana. For HDFC, PMAY accounts for more than a third of total loan accounts.
From the fiscal, regulatory and monetary measures taken over the last two days, it appears the Governor has a dimmer view of the nature and extent of economic disruption. The RBI’s measures on the credit front would alleviate cash flow problems and prevent the liquidity problem from turning into a solvency problem for firms. But the problem essentially is of economic stagnation, which is largely due to an income shock. So, the RBI measures will have only a limited impact on the key problem of income loss.
This has to be the government’s role, and could be achieved more by enhancing fiscal support. Probably that’s why the RBI Governor noted that strong fiscal measures were needed to deal with the situation. May be, this points to RBI’s own assessment the government may do more than what it did Thursday.
But Governor Das hit the ball out of the park in his messaging. Some of his lines provided more comfort than his actions. In fact, the choice of words amplified the effect of the decisions he took.
The unprecedented and challenging times notwithstanding, he said, “I remain an optimist. India’s fundamentals are strong, deficits are lower and inflation is benign.” Confidence.
“Covid-10 is upon us, this too shall pass. Tough times never last, tough people and institutions do,” he said. Hope.
“All instruments, conventional and unconventional, are on the table,” Das said, suggesting he was ready for the long haul.
In sending this message of hope and confidence out, Das also told his audience — the hyper sensitive financial markets, and all its consumers — that he was keeping the RBI safe, and has a business continuity plan for the organisation ready.
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