RBI gets into the act; lays foundation for more measures going ahead

The signal really given by the RBI is that while it does believe today that things have not taken a turn for the worse as all enterprises are better prepared than last year while facing lockdowns

The Reserve Bank of India's (RBI's) emergency measures announced on Wednesday are well guarded and tuned to the evolving situation. After taking cognizance of the pandemic impact, the RBI believes that the economy has not yet derailed, and some of the indicators for April are indicative of stability rather than disruption. This view may be contested at the ground level, with several small businesses being shut in the midst of uncertainty. Nonetheless, there have been some measures announced from the point of view of supporting the economy.

The liquidity measures announced are more in line with what was done last year. The special long-term refinance option (LTRO) for small finance banks for Rs 10,000 crore is to ensure that smaller enterprises benefit directly from this measure. This is a new dimension added to policy measures of last year.

Similarly, the Covid loan book is a very progressive measure where banks can lend up to Rs 50,000 crore for all related sectors, which include hospitals, oxygen manufacturers, equipment, etc. after getting the funds at the repo rate. This will lower the cost for the borrowers. The innovative part is that all such funding would also get a benefit for the banks in terms of being able to place an equivalent amount in the reverse repo window at 40 bps higher rate. Therefore, hypothetically if Rs 50,000 crore is lent to the borrowers in this category, Rs 50,000 crore of surplus funds of the system can be put in the reverse repo and earn 3.75 per cent instead of 3.35 per cent. Hence, there is a dual benefit for the banking system, as these funds would come in at least 1.5-2 per cent lower than their usual cost of funds and would also have an add-on of 40 basis point (bps) on the reverse repo operation.

The other significant measure relates to restructuring of loans given to individuals, small business and small-and-medium enterprises (SMEs). As this segment gets affected more than the larger enterprises; the three levels of restructuring of loans for these categories into new and existing cases will benefit them for sure.

The measure to increase the maximum number of days a state can be in overdraft mode is very proactive as given that the lockdowns this time are regional and will affect the revenue flows of the state governments. Such facilities will offer more room to them when managing their fiscal balances.

The signal really given by the RBI is that while it does believe today that things have not taken a turn for the worse as enterprises at all levels are better prepared than last year while facing lockdowns, there could be surprises on the infection side that can engineer various measures by states that can affect business. However, the RBI will remain proactive and get in measures to address worries.

Presently the central bank does not feel there is need for any moratorium and the focus is hence more on making available funding for the healthcare sector in particular besides the SMEs. A payment crisis is definitely not seen presently. To that extent, there could be a rise in non-performing assets (NPAs), banks can make use of the counter-cyclical provisioning buffer.

Madan Sabnavis, is chief economist at CARE Ratings and author of: Hits & Misses: The Indian Banking Story. Views are personal