Good start by RBI. Now banks must step up and do their part to help the economy hit by Covid

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TThe Reserve Bank of India (RBI) has announced a new round of measures to tackle the economic disruption caused by the sharp resurgence of the Covid-19 pandemic. The surge in infections has put enormous strain on the country’s medical infrastructure and prompted state governments to impose lockdowns and mobility restrictions.

While the impact on the Indian economy will likely be less severe than last year, small businesses and retail borrowers are likely to face a disproportionate impact from the disruption.

RBI relief measures focus on small borrowers and entities in the unorganized sector. In another welcome gesture, the central bank has also taken steps to meet the credit needs of the health sector.

The measures are timely and in the right direction, but it is the implementation of the banks that holds the key.

Also read: Here’s what more RBI can do to help India’s economy as Covid rages

Tax calculations are hit

India’s GDP growth forecast did not assume that India was going to face a devastating second wave of Covid. Neither authorities, the public, forecasters or economists have taken into account the impact on the economy of such a virulent strain of SARS-CoV2.

This wave is different. While in the first wave the economy was hit by the national lockdown, there are currently no brakes nationwide, but it is a large number of workers, including their families, who fall patients who disrupted work in several sectors.

Local lockdowns or restrictions aimed at reducing the spread of the virus and helping the healthcare system cope have had an additional impact on economic activity.

Not only did these disruptions affect the economy on the supply side, but the second wave also caused demand to contract.

Sales of refrigerators and air conditioners were negatively impacted. Likewise, sectors such as airlines, hotels, tourism, etc. suffer high incidence of Covid. April’s data for durable goods, autos, fashion, lifestyle and food were also very successful.

This time, the demand shock could be greater than in the first wave, when a supply shock dominated. With the demand shock linked to the well-off, whose spending share is disproportionate, uncertainty over corporate income and Covid’s outlook has the potential to impact GDP more significantly on the demand side than during the downturn. first wave.

The blow to the GDP will upset the budget calculations made before the second wave. The budget deficit as a percentage of GDP and the debt as a percentage of GDP will be higher.

Also read: Why does it seem like Indian stock markets live on another planet?

RBI relief measures

To help small entrepreneurs affected by Covid, the RBI package contains provisions to ease credit for small businesses.

In addition to the restructuring of commercial bank loans, there is a special provision for small financial banks (SFBs). India has 10 small financial banks like AU Small Finance Bank Ltd, Jana Small Finance Bank Ltd, etc.

The RBI has announced a liquidity window of Rs 50,000 crore to accelerate the healthcare infrastructure linked to Covid. Under this program, banks will be able to borrow up to Rs 50,000 crore at the repo rate to lend to a wide range of entities such as vaccine manufacturers, vaccine importers, hospitals, pathology laboratories, oxygen suppliers, etc. the health sector is likely to use this scheme to ease its funding constraints.

For small borrowers, the RBI announced special long-term repo transactions of Rs 10,000 crore for SFBs. These small banks could borrow from the RBI at the repo rate to lend to small businesses and other entities in the unorganized sector.

In addition, to help small businesses, micro, small and medium enterprises (MSMEs) and individuals overcome the uncertainty caused by the second wave of the pandemic, the central bank announced a one-off loan restructuring.

The RBI also allowed banks to deduct loans disbursed to new MSME borrowers from their net demand and time commitments (NDTL) for the calculation of the cash reserve ratio (CRR).

Ball in the court of the banks

The restructuring program is better than a general moratorium announced last year because it gives banks the flexibility to assess the credit needs of their borrowers.

Banks now have the flexibility to provide easier repayment options for borrowers affected by localized lockdowns. At the same time, there would be borrowers whose businesses were not affected much. Banks cannot restructure the loans of these borrowers.

However, previous restructuring episodes show that only a few MSME borrowers opt for restructuring window. For example, the SBI has seen only 2 percent of its MSME loan portfolio restructured.

Fear of rising rates and accounts labeled “advanced restructured” deters many borrowers from opting for restructuring. Banks place higher risk weights when lending to borrower accounts labeled as restructured. This increases their cost of borrowing and their ability to take on debt in the future.

While the long-term repo window for MFIs could increase the flow of credit to smaller entities, actual use by MFIs would depend on their risk appetite.

Although they can borrow from the RBI at a low interest rate to on-lend to small borrowers, unlike last year, these loans are not guaranteed by the government. Under the emergency line of credit guarantee program announced last year, loans to MSMEs have been guaranteed. This is not the case this time. The risk of loan slippages could prevent SFBs from taking advantage of this window to lend to small businesses.

In general, banks have been cautious about lending. the non-food credit growth fell to 5.4 percent for the fortnight ended April 9. Banks have indicated that they will calibrate the growth of their loans according to changing conditions.

The banks’ cautious outlook could also limit the adoption of the measures announced by the RBI.

Ila Patnaik is an economist and professor at the National Institute of Public Finance and Policy.

Radhika Pandey is a consultant at NIPFP.

Opinions are personal.

Also read: Why Higher Inflation Could Be India’s Next Big Concern Amid Worsening Covid Crisis

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