Targeted economic measures by RBI are for next Tide of Covid-19

Central bank’s measures to mitigate impact of the second wave of infections focus on healthcare. TopicsCoronavirus | RBI | India economy With rising infections, Covid 2.0 has taken a huge toll on India’s health infrastructure. The economic impact is nowhere close to the scale of impact on public health. This is more to do with the fact that this…

Central bank’s steps to mitigate effect of the next wave of infections focus on healthcare.

Coronavirus | RBI | India economy

With rising infections, Covid 2.0 has taken a massive toll on India’s health infrastructure. The financial effect is nowhere close to the scale of effect on public health. This is much more to do with how this time around, the containment steps have been more localised. This past year, India had gone to get a nationwide lockdown to build health systems and infra to fight the first wave.

The next wave has shown that we need to further fortify our health infrastructure. As a first step, the Reserve Bank of India (RBI) has given leeway to banks to borrow Rs 50,000 crore at repo rate (4 per cent) for onward lending for health care spending by hospitals, manufacturers and people. These loans will be categorized as Covid loans. The credit risk is to be borne by the banks. As another incentive, banks may park a sum equivalent to Covid loans in RBI’s overnight window in a top of 0.4 per cent to the prevailing rate. In a way, this may take care of credit losses which may emerge from these types of loans. Such loans will also be categorized under priority sector lending. Thus, banks are given generous incentive to lend for health spending.

In spite of neighborhood containment measures, the informal sector comprising sellers and daily wage labor suffer the most because their freedom is restricted. Little Finance Banks (SFBs) supply last mile supply of credit to small companies and individuals. Thus, the central bank has given SFBs an option to borrow Rs 10,000 crore at repo rate for new lending around Rs 10 lakh each borrower. This is almost 10 percent of the charge book of SFBs as of December 2020. In order to guarantee availability of credit to small borrowers, SFBs lending to relatively smaller Micro Finance Institutions (MFIs) for onward lending will qualify for priority sector lending.

ALSO READ: RBI gets to the action; lays foundation for more steps going ahead

Small companies and self-employed people will find it hard to repay their loans as money flows dry up when retail shops in massive markets are not operational. For this, RBI has introduced resolution framework 2.0, under which people who haven’t availed benefit of restructuring earlier and are standard until March 31, 2021 are now eligible for restructuring. For those who did avail of restructuring up to two years are now eligible for an expansion of residual tenor up to two decades. As was seen last year, working capital cycles do get extended during these times. Thus, banks can assess working capital requirements for smaller companies.

The RBI has gone one step forward in providing a boost to digital Know Your Customer (KYC) requirements by extending the same to proprietorship firms and permitting periodic upgrading among others. This may improve ease of doing banking.

While GST collections for March 2021 have struck an all-time high, tax collections are sure to take a hit in coming months as noticed in reduction of economic downturn in diesel sales in the month of April over March. However, state governments will have to spend on purchasing vaccines and wellness equipment, paying salaries and continuing with welfare strategies. Here, RBI has eased overdraft limits and requirements for states.

For the Centre, RBI will probably do the next round of purchase under G-SAP 1.0 (government securities acquisition program) of Rs 35,000 crore on May 20. Bond yields did react favourably to this announcement. These are the initial set of steps to mitigate the impact of the second wave. Our approach for the next wave is more decentralised. Thus besides RBI, states will also be announcing measures to mitigate the economic influence in coming months. A few countries have made a beginning. The rest of the measures will follow.

(Sameer Narang is chief economist at Bank of Baroda. Views expressed in this article are personal.)

Disclaimer: Views expressed are personal. They do not signify the view/s of Business Standard.

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