Government needs to recapitalise banks

Three-four months from now, the supply issue will go away depending on how this process goes on, and demand constraint will come back

In my opinion, the Reserve Bank of India (RBI) has done more than anybody expected.
 

So far as EMIs are concerned, you are stopping the clock on March 31. This means no EMIs are to be paid till clock starts again, say on August 1. Now, think what happens to banks’ revenue situation. It will be okay in their balance sheets because EMIs will be shown as accounts receivables. However, banks are not getting interest on their assets, but they have to pay to their depositors.

This means, banks are going to run into a problem of negative income for these months and they will eat into their capitals. This will bring down their capital to risk (weighted) assets ratio (CRAR). If CRAR becomes tighter, it will restrict banks in terms of further loans that they can give. So new loans will not happen. The RBI said that CRAR norms will not apply in this period. However, capital base has to be replenished at the end. How that will be done is not being talked. My sense is that sooner or later, the government will have to step in and not the RBI. The RBI can only provide liquidity to manage the situation, but it cannot recapitalise banks.
 

At the moment, demand is not the issue. In fact, last thing you want is to boost the demand. The issue at present is with the supply side. At least 55 per cent of the economy has now stopped production. In a situation of that kind, demand boost is a bad idea. The demand issue is going to crop up when you unfreeze the system and say lock down is gone and now please produce. A month ago, we were looking at a demand constraint, then suddenly  overnight we have shifted our focus to a pure supply constraint.

Three-four months from now, the supply side issue will go away depending on how this process goes on, and demand constraint will come back and that too in a stronger way, it will be even worse. That is the point when massive fiscal expansion has to happen. Doing it just now will lead to increase in prices of essentials through roof. As it is, these are going to go up.
 

Now, timing has become critically important. You do things too early or too late, you are going to damage the situation.

The writer is the  former chief statistician