The central banker’s stewardship in tackling the economic downturn is remarkable and inspirational.
The outbreak of COVID-19 has severely impacted economies worldwide, including India. The fear of contagion and unprecedented lockdown measures have halted industrial activities. These have affected the demand and supply-side elements of the economy. Consequently, global economies are set to witness a sharp contraction in the current fiscal. The International Monetary Fund (IMF) has projected that India will grow at 1.9% in 2020-21.
Taking cognisance of the situation, the Reserve Bank of India (RBI) has announced a series of regulatory moves to preserve financial stability in the economy; these are in line with the various Central Government’s measures to provide relief to businesses during this crisis. The steps announced last week are aimed at improving the liquidity of financial institutions such as banks, non-banking financial companies (NBFCs) and microfinance institutions (MFIs). These included:
- Reduction of the fixed-rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.0% to 3.75%.
- Infusion of INR 500 billion through targeted long-term repo operations (TLTRO) for the NBFC sector. This was the second round of TLTRO operations and will primarily help small and medium-sized financial organisations which mostly cater to MSMEs.
- Refinancing support of INR 500 billion to the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB). The support, extended at repo rate at the time of availment, will enable these All India financial institutions (AIFIs) to meet sectoral credit needs.
- Extension of the date for commencement for commercial operations (DCCO) guidelines to NBFCs in terms of their lending to commercial real estate.
- Decrease in liquidity coverage ratio (LCR) requirement of Scheduled Commercial Banks from 100% to 80% till September 2020.
- Increase in the ways and means advances (WMA) limit of states by 60%.
- Changes to non-performing assets (NPA) classification period to 180 days from 90 days.
- Additional regulatory measures to mitigate the burden of debt servicing.
These measures will positively impact the entire ecosystem. Banking institutions will be incentivised to explore more lending opportunities with the easing of LCR norms, NPA relief during the moratorium period and reversal of repo rate.
Further, the steps for the NBFC sector will ease the liquidity challenges facing the industry amid the current circumstances. The special refinance facilities to AIFIs will help in meeting the credit needs of MSME and housing finance sectors. The flexibility in regulatory forbearance will provide relief to borrowers in meeting their payment obligations.
Relaxation of rules for the real estate sector is essential to restart the economy since the industry is the second-largest employer in the country. Increased WMA limit will enable state governments to tide over short-term liquidity requirements without duress.
The steps taken by the banking regulator to stabilise the economy amid the pandemic are commendable. This was the second unscheduled announcement in one month, and RBI is continually monitoring the situation. These measures bear testimony to the evolving market conditions. The central banker will continue to use its power proactively to address the daunting challenges posed by COVID-19.
The onus is now on the financial services fraternity to implement these measures in a time-bound manner. Only then can the economy derive maximum benefits from the forward-thinking strategies of the regulator. I am confident that joint efforts by all stakeholders will help in moderating the post-Covid19 slowdown curve and enable the economy to deliver a sharp V-shaped turnaround in FY22.
As Shri Shaktikanta Das, Governor, RBI, noted in his concluding remarks during the press conference last week, “Although social distancing separates us, we stand united and resolute. Eventually, we shall cure; and we shall endure.”
