COVID-19: In the fight against economic slowdown, RBI introduces new measures

RBI tries to discourage banks from sitting on their liquidity, makes it mandatory to lend to small and medium NBFCs money raised from liquidity window.

The Reserve Bank of India (RBI) on Friday came with another round of measures to ease a slowdown caused by the COVID-19, which includes discouraging banks from parking their excess liquidity with the central bank and mandating the lenders to buy debt papers of small and medium-sized non-banking financial companies (NBFC).

In a streamed address to the media on Friday morning, RBI governor Shaktikanta Das said the measures are taken to ensure financial stability.

“The RBI will monitor the evolving situation continuously and use all its instruments to address the daunting challenges posed by the pandemic. The overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable,” Das said in his address.

He also said that as inflation eases and come down below 4 per cent b the second half of 2020-21, more space will open up for rate cuts to address the intensification of risks to growth and financial stability brought on by Covid-19.

“This space needs to be used effectively and in time,” he said.

The central bank has now cut the reverse repo rate, the rate at which banks park their excess liquidity with the central bank, by a further 25 basis points to 3.75 per cent. The central bank had on March 27 lowered this rate by 90 basis points, even as it had lowered the policy lending rate repo by 75 basis points, in order to discourage banks from parking their money with the central bank. Evidently, the sizeable cut last time didn’t work, as instead of lending, banks continued to park surplus money of about Rs 7 trillion with the RBI.

RBI has now mandated banks to lend at least 50 per cent of the money they raise from the central bank’s targeted long term repo operations (TLTRO) to small and medium sized NBFCs.

So far, banks have raised Rs 1 trillion of liquidity under this window, including the Rs 25,000 crore of TLTRO auctions that happened on Friday, but so far the banks have bought papers of top rated firms and even papers of public sector entities, defeating the very purpose of such targeted lending operations by the RBI.

The RBI will now come up with another Rs 50,000 crore of TLTRO window, it said, and more if needed in the coming days.

The mandatory part in TLTRO can spur many bond issuances by small and medium sized NBFCs that do not get banks loans readily, and are also suffering from liquidity issues.

While the RBI governor remained silent about a possible moratorium on repayment obligations by the NBFCs, the TLTRO mandate is expected to ease some of their pains.

The RBI had left it to banks to decide if they want to extend the moratorium to NBFCs, but the banks were not sure if that would mean that such loans would become bad debt, as the March 27 rules mentioned moratorium for only working capital loans and retail loans.

The RBI governor cleared the confusion to a large extent.

“It has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020,” the governor said in his address.

This would mean that banks will be able to give moratorium to NBFCs as well without fearing increased provisioning that comes with a default account.

However, the RBI said if they decide to extend the moratorium, banks will have to make additional provision of 10 per cent, which can be fully reversed back in two quarters once the situation normalizes. This is to safeguard banks from any default risk on loans given under moratorium that may turn unserviceable now because of economic hardship.

“RBI’s announcement to infuse liquidity into the system is extremely welcoming and a big relief to NBFC borrowers. The decision to cut the reverse repo rate by 25bps will encourage banks to look for lending opportunities. We would appreciate if banks reciprocate positively to NBFCs request on moratorium to manage cash flow smoothly,” said Umesh Revankar, MD and CEO, Shriram Transport Finance.

Furthermore, the RBI said it will open a refinance window for National Housing Bank (NHB), National Bank for Agriculture Credit (NABARD) and Small Industries Development Board of India (SIDBI).

Importantly, the RBI said banks need not pay dividend for the financial year March, 2020 till September 30 of this year.

The RBI also eased liquidity coverage ratio for banks, but that won’t make much of a difference as banks are flushed with liquidity anyway.

In a relief to the micro, small and medium enterprises, who stare at being classified as a defaulter due to lack of business in the lockdown period, the RBI said the period for resolution plan can be extended by 90 days.