Here is what RBI must do to unclog markets: Former SEBI chief’s formula for economic revival

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Updated: Apr 26, 2020 12:58 PM

RBI’s monetary support not reaching desired beneficiaries, says UK Sinha; suggests steps to revive the economy.

On March 27, the RBI had given borrowers a three-month moratorium on debt repayments for the March-May period due to the COVID-19 pandemic.UK Sinha stressed on the urgent need to focus on reviving the economy and securing jobs.

The Reserve Bank of India (RBI) has to ensure that the targeted long term repo operations (TLTRO) money it announced recently to support non-banking financial companies (NBFC), housing finance companies (HFC), microfinance institutions (MFI), and micro, small and medium enterprises (MSME) actually reaches such deserving financial institutions and small businesses, former Securities and Exchange Board of India (SEBI) Chairman UK Sinha said. “There should be willingness to enhance the targeted amount as and when needed,” Sinha wrote in The Indian Express today stressing on the urgent need to focus on reviving the economy and securing jobs. He suggested measures for unclogging the financial markets as the first step towards economic revival.

Sinha sought for more clarity in directions and monitoring along with increasing credit to cover first loss or credit guarantee, issuing tax-free bonds, supporting MSMEs under stress through a special fund or a special purpose vehicle, and lastly, direct corporate bond buying programme by the RBI for increasing the targeted amount. The former SEBI chief said that the liquidity released by the RBI is not reaching the desired beneficiaries. Instead, banks have parked the money with the RBI under reverse repo while insurance firms are, reportedly, out of the bond market currently. According to Sinha banks are hesitant in lending and declined to apply the moratorium facility to them. This could partially be because of bankers worry about severe action despite honest mistakes are made. The All India Manufacturers’ Organisation predicted that 25 per cent of MSMEs will shutdown if the lockdown extends. Moreover, in case of a 25 per cent default by the MSMEs, it will lead to solvency issues for the entire financial system, according to a McKinsey report.

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The RBI had announced the financial package for NBFCs, MFIs on April 17 wherein 50 per cent of the Rs 50,000 crore was earmarked for them, “but, no bank is willing to entertain this,” he said. On the other hand, in the first such auction made by RBI on April 23 for Rs 25,000 crore, “only half the amount was subscribed” while another booster shot from the central bank by refinancing through NABARD, National Housing Bank (NHB) and Small Industries Development Bank of India (SIDBI) is “yet to take off,” the former SEBI chief said.

For the economic revival post Covid-19, both SEBI and Insurance Regulatory and Development Authority (IRDAI) will have to actively coordinate to ensure normal functioning of the industries they regulate. Sinha said that the two will have to re-look at some of their ‘peace time’ rules and regulations. “Linear solutions to deal with it (pandemic) will not succeed. We have to be nimble, take calculated risks with newer approaches, and should be prepared to review and redesign our steps as things unfold,” he said.

Referring to the Franklin Templeton Mutual Fund shutting six of its funds even as “there are already indications that other mutual funds are facing huge redemption requests,” Sinha said that the problem of the mutual fund industry can swiftly migrate to the entire financial services industry and might then soon spread to the real economy. While such funds’ portfolios have investment-grade securities, the market has dried up for such debt even as there were signs from the debt markets since the beginning of April, according to Sinha.

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