Good start by RBI. Now, banks need to step up & do their bit to help Covid-hit economy

RBI’s relief steps are centred on small borrowers and entities in unorganised sector. Credit needs of the healthcare sector are addressed too. Implementation now holds the key.

Illustration: Soham Sen/ThePrint

The Reserve Bank of India (RBI) has announced a fresh set of measures to tackle the economic disruption caused by the sharp resurgence of the Covid-19 pandemic. The steep rise in infections has caused a huge strain on the country’s medical infrastructure and has prompted state governments to impose lockdowns and mobility restrictions.

While the impact on the Indian economy is likely to be less severe than last year, the small businesses and retail borrowers are likely to face a disproportionate impact of the disruption.

The RBI’s relief measures are centred on the small borrowers and entities in the unorganised sector. In an additional welcome move, the central bank has taken steps to address the credit needs of the healthcare sector too. 

The measures are timely and in the right direction, but it’s the banks’ implementation that holds the key.

Fiscal calculations are hit

Forecasts for GDP growth in India did not assume that India was going to face a devastating second Covid wave. Neither the authorities nor the public or forecasters or economists took into account the impact on the economy of such a virulent strain of SARS-CoV2.

This wave is different. While in the first wave the economy was affected by the nationwide lockdown, currently there are no nationwide curbs, but it is a large number of the workforce, including their families, falling sick that has disrupted work across several sectors.

Local lockdowns or restrictions to reduce the spread of the virus and help the health system cope have further impacted economic activity. 

Not only have these disruptions affected the economy on the supply side, the second wave has also brought a contraction in demand.

Sales of refrigerators and air-conditioners have been adversely impacted. Similarly, sectors like airlines, hotels, tourism etc. are suffering badly due to the high incidence of Covid. The April data for durables, auto, fashion, lifestyle and food also showed a sharp hit.

This time the demand shock could be bigger than in the first wave when it was a supply shock that dominated. With the demand shock arising from the well-off, whose share in expenditure is disproportionately large, the uncertainty in business incomes and in outlook for Covid has the potential of hitting GDP in a bigger way from the demand side than in the first wave. 

The hit to GDP will upset fiscal calculations made prior to the second wave. Both the fiscal deficit as a share of GDP and debt as a share of GDP will be higher.

RBI’s relief measures

To help small entrepreneurs who are affected by Covid, the RBI package has provisions to ease credit for small enterprises.

In addition to restructuring of loans from commercial banks, there is a special provision for small finance banks (SFBs). India has 10 small finance banks like AU Small Finance Bank Ltd, Jana Small Finance Bank Ltd, etc.

The RBI has announced a liquidity window of Rs 50,000 crore to ramp up the Covid related healthcare infrastructure. Under the scheme, banks will be able to borrow up to Rs 50,000 crore at the repo rate to lend to a wide range of entities such as vaccine manufacturers, importers of vaccines, hospitals, pathology labs, suppliers of oxygen etc. Large firms in the healthcare sector are likely to avail this scheme to alleviate their funding constraints.

For small borrowers, the RBI has announced special long term repo operations of Rs 10,000 crore for SFBs. These small banks would be able to borrow from the RBI at the repo rate to lend to small businesses and other unorganised sector entities.

Moreover, to help small businesses, micro, small and medium enterprises (MSMEs) and individuals tide over the uncertainty caused by the second wave of the pandemic, the central bank has announced a one-time restructuring of loans. 

The RBI has also allowed banks to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR).

Ball in the banks’ court

The restructuring scheme is better than a blanket moratorium announced last year as it gives flexibility to banks to assess the credit needs of their borrowers. 

Banks now have the flexibility to provide easier repayment options to the borrowers impacted by the localised lockdowns. At the same time, there would be borrowers whose businesses have not been impacted much. Banks may not restructure the loans of such borrowers.

However, the previous episodes of restructuring show that only a few MSME borrowers opt for the restructuring window. For instance, the SBI saw only 2 per cent of its MSME loan book go into restructuring.

The fear of higher rates, and accounts being labelled as “restructured advanced” deters many borrowers to opt for restructuring. Banks place higher risk weights while lending to borrower accounts labelled as restructured. This increases their cost of borrowings and ability to raise debt in future. 

While the long term repo window for SFBs could augment credit flow to small entities, the actual utilisation by SFBs would depend on their risk appetite.

While they are able to borrow from the RBI at a low interest rate to on-lend to small borrowers, unlike last year, these loans are not guaranteed by the government. Under the Emergency Credit Line Guarantee scheme announced last year, loans to MSMEs were guaranteed. That is not the case this time. The risk of slippages in loans could limit SFBs from availing this window to lend to small businesses. 

In general, banks have turned cautious in lending. The growth in non-food credit fell to 5.4 per cent for the fortnight ended 9 April. Banks have indicated that they will calibrate their loan growth based on evolving conditions. 

The cautious outlook of banks could also limit the uptake of the measures announced by the RBI.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.

Radhika Pandey is a consultant at NIPFP.

Views are personal.