In a bid to resuscitate the economy devastated by the Corona virus, on March 27, 2020, RBI governor, Shaktikanta Das announced a host of measures to inject liquidity in the country’s financial system; reduce the cost of capital and ease the stress of loan repayments.
These included (i) reduction in policy rate [interest rate charged by the apex bank on loans given to banks] by 75 basis points to 4.4%; (ii) 3-month moratorium on payment of installments in respect of all term loans outstanding on March 31, 2020; (iii) relaxation in the norms for cash credit and working capital limits; (iv) reduction in cash reserve ratio [CRR] [portion of deposits, banks are required to keep with RBI] by 100 basis points to 3%; (v) auction of targeted long term repo operations [TLTRO] of 3-year tenor for Rs 1,00,000 crore at floating rate; (vi) accommodation under Marginal Standing Facility [MSF] to be increased from 2% of SLR [statutory liquidity ratio] to 3% with immediate effect till June 30, 2020.
In continuation of the above, on April 17, 2020, Das announced a further set measures. These included (a) reduction in reverse repo rate [interest rate at which banks lend money to RBI by 25 basis points from existing 4% to 3.75%; (b) make available liquidity worth Rs 50,000 crore directly under TLTRO 2.0 window [under it, banks can access three-year funding from RBI to invest in investment grade papers of non-bank finance companies (NBFCs), with at least 50% invested in small and mid-sized NBFCs and micro-financiers]; (c) Rs 50,000-crore special refinance facility for financial institutions.
As regards (b), the RBI has also assured companies that it will make available further liquidity under this facility depending on the pattern of utilization and requirement. Banks will have a month to invest funds raised under TLTRO 2.0. Exposures under the facility will not be included while calculating large corporate exposure.
Of the Rs 50,000 crore under (c), Rs 25,000 crore will go to the National Bank for Agriculture and Rural Development [Nabard] for refinancing regional rural banks [RRBs], cooperative banks and micro-financiers; Rs 15,000 crore to the Small Industries Development Bank of India [Sidbi] for on-lending or refinancing; and Rs 10,000 crore to National Housing Bank [NHB] for supporting mortgage lenders.
In terms of regulatory measures, RBI has tried to ease the burden of bad loans on banks by easing asset classification norms for all accounts where moratorium or deferment has been applied [as per March 27, 2020 announcement]. This means that all accounts covered under the moratorium from March 1 to May 31, 2020 will be treated as non-performing assets [NPA] from 180 days overdue instead of 90 days overdue. However, banks will have to maintain additional 10% provisioning on these standstill accounts over the two quarters ending March 2020 and June 2020.
Furthermore, the RBI has extended the 210-day resolution period for all large stressed accounts identified under its June 7, 2019 circular by a further 90 days. It has also banned dividend payouts by banks and cooperative banks from profits pertaining to fiscal year 2019-20. This decision will be reviewed on the basis of financial position of banks at the end of the second quarter.
To analyze the implication of the measures, at the outset, it is important to understand as to how the Cornona crisis has impacted the businesses. At present, there being no cure available for this deadly virus [the efforts of scientists and medical professionals – currently under way – will take at least one year to reach the stage when the vaccine is available for use on mass scale, as per WHO protocol], the only cure is prevention. That can be done only by maintaining ‘social distancing’ which in turn, is being enforced through nation-wide lockdown [initially imposed on March 25, 2020 for three weeks till April 14, 2020, it has been further extended till May 3, 2020].
As a consequence, barring bare essentials relating to health, food, fuel etc all economic activities have come to a grinding halt during the 40 days up to May 3, 2020; even thereafter, for the activities to resume, it will take some time which could even extend to August, 2020 [much will depend on the effectiveness of lockdown and containment measures in combating the virus’]. When, businesses don’t run, they don’t generate revenue hampering their ability to pay wages/salaries, make payment to vendors/suppliers, service loans etc. This leads to a spiraling effect on the entire demand-supply chain.
Tens of million workers not getting wages/salaries have a crippling effect on demand; millions of vendors not getting payments means they are unable to honor their liabilities including payment of salaries to their own workers. With cash flows of various entities viz. suppliers/vendors, workers/employees under stress, servicing of loans taken from banks and other financial institutions [FIs] viz. NBFCs, MFIs etc suffers. This affects ability of FIs to lend.
The RBI package seeks to help businesses in two ways. First, it exempts them from having to service their loans during March 1 to May 31, 2020 and also ignoring these 3 months for determining if a loan has gone bad. If, the firm is unable to generate revenue [inevitable in lockdown], it need not pay to the bank and it does not risk its loan being declared as NPA and attendant consequences.
Second, the firm can get more money from banks at lower interest rate which it can use to pay to vendors/suppliers and workers/employees [including for the period they don’t work – as wished by Modi] as also to fund new projects as and when there is exit from the lockdown and conditions are apt for resumption of economic activities. The measures announced by RBI on March 27/April 17, 2020 will inject plenty of liquidity close to Rs 600,000 crore.
This comes along with cut in repo rate by 0.75% [this is on top of cumulative reduction of 1.35% during 2019] which will ensure that the additional funds are available at lower cost. Further, by reducing the reverse repo rate from existing 4% to 3.75%, RBI has goaded banks to lend to businesses or buy government securities instead of parking excess funds with itself [as on April 13, 2020, this amount was a gargantuan Rs 690,000 crore which the apex bank wants to be released for spurring economic activity].
Clearly, the RBI has done all that was needed to give a boost to the economy in these testing times. But, the industries and businesses argue that this won’t be of much help in the absence of demand. They argue what will they do with increase in output when there are no buyers. They are asking the government to come up with a fiscal package to put cash in the hands of the people [the demand ranges from 2% of GDP (gross domestic product) to as high as 10% or Rs 400,000 crore to Rs 2000,000 crore]. This is a flawed approach.
Undoubtedly, lack of demand is a problem; it existed even before Corona, now it has got aggravated. But, why should businesses depend entirely on the government for boosting demand. Why can’t there be sharing of the burden?
While, the latter can take care of the most vulnerable particularly those in the informal sector such as daily wage earners, vendors, migrant labor etc [already, it is doing under PM Garib Kalyan Yojna (PMGKY) and more assistance can be given by extending coverage], the former should provide continued support to all of their workers/employees – including those who don’t have written contracts – for the whole of lockdown period. From where will the funds come?
While, companies who have built enough cash reserves from the operations in the past [when the going was good] can use a portion of that to support their staff in this crisis situation, others not so blessed can take loans from banks and other FIs who have plenty of liquidity; courtesy massive injection by the apex bank. This should be taken as investment in the future. As and when, there is exit from the lockdown and economic activity resumes, the revenue stream from operations can help in servicing the loans.
The banks need to ensure that money gets distributed in ‘fair’ and ‘equitable’ manner. Under TLTRO 1.0, almost all of the funds released by RBI or Rs 75,000 crore were given to big corporate. This should be avoided even as a major portion of the package is given to small businesses. The apex bank has tried to rectify this anomaly under TLTRO 2.0 by reserving 50% of liquidity injection for small and mid-sized NBFCs and MFIs. However, greater care is needed at the implementation level.
The above approach even while providing the much needed fillip to the economy will also have the added advantage of avoiding big slippage in fiscal deficit [inevitable if the government is made to bear the entire burden of propping up demand] and disastrous implications in terms of spurring inflation, high interest rate, unsustainable debt etc.
Meanwhile, all out efforts should be made to defeat Corona expeditiously as that will help early resumption of economic activity and reduce the cost of revival.