RBI's rescue act

The move to avoid the moratorium route is a wise one

The Reserve Bank of India (RBI) did most of the heavy lifting last year in terms of providing relief to the Indian economy hit by disruption caused by the Covid-19 pandemic. The second wave has now prompted the central bank to come up with a fresh set of measures to support different segments of the economy. A rapid surge in Covid-19 cases has overwhelmed the medical infrastructure in different parts of the country, forcing state governments to impose restrictions on public mobility, which will affect both demand and supply. Lower output will potentially reverse the ongoing economic recovery. Although the impact is likely to be less severe than last year, disruption in economic activity will add to the overall cost.

The economic impact of the second wave, among other things, will depend on the quality of medical response. In order to address the funding needs of the health sector, the RBI launched an on-tap liquidity window worth Rs 50,000 crore. Under this scheme, banks will be able to provide loans to businesses engaged in the area of manufacturing, importing, or supplying vaccines and medical devices. Banks will also be able to lend to hospitals, dispensaries, and pathology labs. To incentivise banks for creating a Covid loan book, the RBI will offer 40 basis points higher than the reverse repo rate for surplus liquidity up to the size of the Covid book. This will help increase funding for the health sector at a lower cost.

Further, the RBI will conduct special three-year long-term repo operations worth Rs 10,000 crore at the repo rate for small finance banks (SFBs). The funds will have to be used for fresh lending up to Rs 10 lakh per borrower. This will help small businesses in the unorganised sector. Additionally, SFBs will be permitted to rate fresh lending to microfinance institutions for on-lending to individual borrowers as priority sector lending. This relaxation will be available till the end of the fiscal year. Thus, the idea is to support small businesses and individual borrowers likely to be affected the most because of economic disruption. The banking regulator has further extended the incentive given to commercial banks in terms of calculating the cash reserve ratio on account of lending to micro, small, and medium enterprises (MSMEs). The RBI has also relaxed the restructuring framework to provide relief to MSME borrowers.

Besides relaxing rules for different sets of private-sector borrowers, the central bank has eased norms regarding the overdraft facility for state governments. Overall, along with the scheme for the health sector, the RBI has done well to focus on small borrowers who are likely to face a disproportionate impact of Covid-related disruption once again. It is also good that no general moratorium has been announced. This will give banks and other lenders the discretion to extend benefits. Most of the measures are anyway for small borrowers. However, the lenders and the regulator will need to carefully watch the asset quality. At a broader level, it is also worth noting that the RBI will not be able to do as much as last year. The real policy rate is in negative territory and the financial system has significant excess liquidity. Moreover, potentially higher inflation and capital outflows because of faster economic recovery in some of the advanced economies could increase macroeconomic risks.