COVID-19: RBI announces second set of measures

ECONOMY/ GOVERNANCE

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

COVID-19: RBI announces second set of measures

Context: After its first relief package, RBI announced second set of measures to combat the lockdown impact on the economy

Relief measures announced by RBI are

• Liquidity infusion of ₹1 lakh crore, of which 
  • ₹50,000 crore is exclusively for non-banking finance companies (NBFCs), via banks through TLTROs
  • ₹50,000 crore to refinance agencies like NABARD, SIDBI and National Housing Bank.
• Help for States: RBI has increased the ways and means advances (WMA) limits of States by 60%, over and above the level as on March 31, 2020.
• Reserve repo rate reduced by 25 bps to 3.75%. — while keeping the repo rate unchanged 
• An asset classification will be on standstill during the moratorium period for accounts that were not already NPAs as of March 1,2020
• Accommodative on rates: RBI has indicated room for reduction in repo rate as inflation softens.

About TLTROs

• These are Targeted Long Term Repo Operations
• Repo rate is the rate at which Banks borrow from RBI. Generally, these loans are for short durations up to 2 weeks
• LTRO is a tool that lets banks borrow one to three-year funds from RBI at the repo rate by providing government securities with similar or higher tenure as collateral.
• It is called ‘Targeted’ LTRO when RBI wants banks opting for funds under this option to be specifically invested in Targeted Sector (Ex: Corporate debt, NBFC, MFI)

Impact of RBI’s actions

• Liquidity enhancing measures will ease financial stress and help increase credit flows particularly to NBFC sector
  • The NBFCs have experienced liquidity shortage since banks had not offered them any moratorium for repayment
• Housing sector: The soft loan to NHB should help bring down the cost of home loans
• Small businesses can hope for some cheap credit from SIDBI, and the rural-agrarian community from NABARD.
• Provides comfort to States to plan market borrowing programmes better and undertake better containment and mitigation efforts.
• Avoids Lazy Banking: Reduction in repo rate will discourage banks from parking their excess liquidity with RBI
• Relief to borrowers who were worried that opting for the moratorium may turn them into NPAs

Challenges Ahead

• Implementation Challenges: With regard to TLTROs into NBFC, investment-grade NBFC assets will be harder to come by now, which will disincentivize the banks from engaging with TLTROs altogether
• Insufficient: There is no buy-out of corporate bonds by RBI, and no big largesse for real estate developers
• Muted demand in Housing sector, hence soft loans to NHB will not yield dramatic results.
• Consequences of heightened liquidity like Inflation which needs to tackled in future

Way Ahead

• Banks will have to be liberal in extending help for working capital loans and overdrafts to their borrowers, including MSMEs.
• The government could help by extending a scheme of credit assurance cover that will encourage banks to be more liberal in their lending activity

Connecting the dots:

• Priority Sector Lending
• Impact of money supply on exchange rate