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
