Big booster dose but interest waiver could have given small borrower a firmer cushion
RBI Governor Shaktikanta Das Tuesday 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.
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.
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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.
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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.
P. Vaidyanathan Iyer is The Indian Express’s Managing Editor, and leads the newspaper’s reporting across the country. He writes on India’s political economy, and works closely with reporters exploring investigation in subjects where business and politics intersect.
He was earlier the Resident Editor in Mumbai driving Maharashtra’s political and government coverage. He joined the newspaper in April 2008 as its National Business Editor in Delhi, reporting and leading the economy and policy coverage.
He has won several accolades including the Ramnath Goenka Excellence in Journalism Award twice, the KC Kulish Award of Merit, and the Prem Bhatia Award for Political Reporting and Analysis. A member of the Pulitzer-winning International Consortium of Investigative Journalists (ICIJ), Vaidyanathan worked on several projects investigating offshore tax havens.
He co-authored Panama Papers: The Untold India Story of the Trailblazing Offshore Investigation, published by Penguin.
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