RBI new announcement to Boost Economy – All India Radio (AIR) IAS UPSC

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  • May 1, 2020
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RBI new announcement to Boost Economy

Search 17th April, 2020 Spotlight here: http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx 

Topic: General Studies 3:

  • Indian Economy and issues 
  • Measures to revive the economy during COVID-19  crisis

“…In the midst of death life persists, in the midst of untruth truth persists, in the midst of darkness light persists.” 

– Mahatma Gandhi, during his famous Kingsley Hall, London address in October 1931

The International Monetary Fund has christened the ongoing economic crisis due to Covid-19 as “The Great Lockdown” and reckons it to be the worst recession that the world would have faced since the Great Depression that happened in the first half of the 20th Century. The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.

Earlier, the RBI had announced a flurry of measures essentially trying to do two things: 

  • One, provide regulatory forbearance (that is, greater leniency) in recognising non-performing assets; 
  • Two, it tried to boost the liquidity in the financial system so that businesses do not starve of funds.

RBI’s additional measures are aimed to:

  • Maintain adequate liquidity in the system and its constituents in the face of COVID-19 related dislocations
  • Facilitate and incentivise bank credit flows
  • Ease financial stress, and
  • Enable the normal functioning of markets

The Measures

Liquidity Management

1) Targeted Long-Term Operations (TLTRO) 2.0: 

  • A second set of targeted long-term repo operations (TLTRO 2.0) for an initial aggregate amount of Rs. 50,000 crore will be conducted to facilitate funds flow to small and mid-sized corporates, including NBFCs and MFIs, who have been more severely impacted by the disruptions due to COVID-19. 
  • The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of non-banking financial companies (NBFCs), with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and micro finance institutions (MFIs).

2) Refinancing Facilities for All India Financial Institutions

  • Special refinance facilities for a total amount of Rs. 50,000 crore will be provided to National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB) to enable them to meet sectoral credit needs. This will comprise Rs. 25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs); Rs. 15,000 crore to SIDBI for on-lending / refinancing; and Rs. 10,000 crore to NHB for supporting housing finance companies (HFCs).
  • Advances under this facility will be charged at the RBI’s policy repo rate at the time of availment, in order to enable them to provide credit at rates affordable for their borrowers.

3) Reduction of Reverse Repo Rate under Liquidity Adjustment Facility

  • Reverse repo rate has been reduced by 25 basis points from 4.0% to 3.75% with immediate effect, in order to encourage banks to deploy surplus funds in investments and loans in productive sectors of the economy.
  • What is reverse repo rate: The interest offered by the RBI to banks who deposit funds into the treasury; can be used to control the money supply in the country.
  • What is repo rate: It is the rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds; used by monetary authorities to control inflation.

4) Raising Limit of Ways and Means Advances of states and UTs

  • Ways and Means Advances (WMAs) Limit of states and union territories has been increased by 60% over and above the limit, in order to provide greater comfort to states for undertaking COVID-19 containment and mitigation efforts, and also to help them plan their market borrowing programmes better. The increased limit will be available till September 30, 2020.
  • What are WMAs: These are temporary loan facilities provided by RBI to help governments tide over temporary mismatches in receipts and expenditure. 

Regulatory Measures

To lessen debtors’ burden in wake of the pandemic

5) Asset Classification

  • The moratorium period will be excluded while considering 90-day NPA norm for those accounts for which lending institutions decide to grant moratorium or deferment and which were standard as on March 1, 2020. This means that there will be an asset classification standstill for such accounts from March 1 – May 31, 2020. NBFCs will have the flexibility under the prescribed accounting standards to provide such relief to their borrowers.
  • Simultaneously, banks have been asked to maintain higher provision of 10% on all accounts whose classification has been put on a standstill as above, so that banks maintain sufficient buffers
  • What are Non-performing Assets: A classification for loans or advances that are in default or in arrears. A loan is in arrears when principal or interest payments are late or missed. A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations.
  • Solve: Why are NPAs detrimental for the economy? Examine.

6) Extension of Resolution Timeline

  • Recognizing challenges to resolution of stressed assets or accounts which are or are likely to become NPAs, the period for implementation of resolution plan has been extended by 90 days. 
  • Currently, scheduled commercial banks and other financial institutions are required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default.

7) Distribution of Dividend

  • Scheduled commercial banks and cooperative banks shall not make any further dividend pay-outs from profits pertaining to FY 2019-20; the decision will be reviewed based on the financial position of banks at the end of the second quarter of the financial year 2019-20.
  • This has been done in order to enable banks to conserve capital so that they can retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty.

8) Lowering of Liquidity Coverage Ratio requirement

  • To improve the liquidity position for individual institutions, Liquidity Coverage Ratio requirement for scheduled commercial banks has been brought down from 100% to 80% with immediate effect. 
  • This will be gradually restored in two phases – 90% by October 1, 2020 and 100% by April 1, 2021.

9) NBFC Loans to Commercial Real Estate Projects

  • The treatment available for loans to commercial real estate projects with respect to the date for commencement for commercial operations (DCCO) has been extended to NBFCs, in order to provide relief to both NBFCs and the real estate sector. 

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

Important value additions: 

Monetary Policy Committee

  • It is responsible for fixing the benchmark interest rate in India. 
  • The meetings are held at least 4 times a year. 
  • The committee comprises six members – three officials of the Reserve Bank of India and three external members nominated by the Government of India.

Cash Reserve Ratio

  • It is the share of a bank’s total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter in the form of liquid cash.

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)

Connecting the Dots:

  1. How can central bank, during a crisis like COVID-19, ensure smoother & quicker monetary transmission? Suggest.
  2. What will the impact of money supply be on exchange rate? Discuss.
  3. Are the measures taken by RBI to rescue the Indian economy enough? Discuss

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