Bankers must be relieved the Governor hasn’t asked them to offer borrowers a moratorium on the repayment of interest and principal.
Much like it did through 2020, RBI continues to try and ensure credit keeps flowing to the economy, especially the weaker sectors. Indeed, it has more than kept its end of the bargain. This time around, Governor Shaktikanta Das’s focus is on the beleaguered small and mid-sized enterprises; on Wednesday, RBI took some steps to try and persuade banks and other intermediaries to assist them. At a time when the Centre is yet to announce any special financial assistance for those badly affected by the second surge of the pandemic in the country, it is reassuring that Das is taking steps to try and move money into the MSME sector.
Bankers must be relieved the Governor hasn’t asked them to offer borrowers a moratorium on the repayment of interest and principal. A moratorium is never a good idea because it vitiates the repayment culture and, given the trials and tribulations of the last round, when the matter was stuck in the courts for months, a moratorium is to be avoided.
But loan recasts have been allowed. Those borrowers—individuals, small businesses and MSMEs with exposures of up to Rs 25 crore—that haven’t participated in any of the earlier restructuring rounds, including the Resolution Framework 1.0 of August 2020, will be eligible candidates under the RF 2.0. That is, if they have been classified as standard assets on March 31, 2021.
Moreover, if an individual borrower or a small business did make use of the RF 1.0, but if the resolution plan permitted a moratorium of less than two years, that can now be tweaked. The moratorium period can be lengthened or the residual tenure can be stretched for up to two years. Lenders can even do both. RBI has, in fact, given bankers extra room to assist any units in trouble. They can also revisit or reassess the working capital limits for small borrowers—small units and MSMEs—whose debt has been recast earlier; this too is a useful relaxation, but one is not sure to what extent lenders will help out these smaller businesses.
On the contrary, the Rs 10,000 crore SLTRO, or special three-year long-term repo operations, for Small Finance Banks (SFBs) is timely and likely to be used efficiently. The idea, again, is to support small business units, micro as also other unorganised-sector ones, with fresh credit of up to Rs 10 lakh per borrower. As this paper has been pointing out, it is the small businesses that have been badly bruised and need assistance. In fact, RBI has done even better. It has allowed SFBs to categorise fresh loans to smaller micro finance institutions—with assets of up to Rs 500 crore—that are lent further to individual borrowers as priority sector loans. It has also prolonged the time period for the relief given earlier this year, allowing banks relief from CRR on exposures of up to Rs 25 lakh to MSMEs.
While easing the rules, the central bank is also making sure lenders are prepared for loan losses. Given some pockets of trade and industry could be badly hit following the restricted lockdowns in some parts of the country, banks could see a deterioration in asset quality. RBI is allowing banks to use 100% of their floating and counter-cyclical provisions, the buffer held by them, to make specific provisions for non-performing assets (NPAs).
To try and facilitate credit flows in staying strong, Das, on Wednesday, announced measures that will help keep the liquidity in the system more abundant than it already is. Despite Rs 6 lakh crore of surplus liquidity lying around in the system—thanks to deposits pouring in—banks remain reluctant to lend, claiming there is little demand. So high is the hesitancy that even to get them to lend to healthcare-related businesses, at a time when there is a pandemic raging across the country, RBI must sweeten the deal. Not only will the central bank provide them with cheap money, it will also top that up with an extra 40 basis points for surpluses parked in the reverse repo window, against the loans given. And it will allow them to classify these loans as priority sector loans. Also, the banks needn’t take a direct exposure to the company; they can pass on the money to another intermediary like an NBFC, which would then lend to the company. One hopes the central bank’s on-tap corpus of Rs 50,000 crore to help businesses in the healthcare space—vaccine manufacturers, importers or suppliers of vaccines, hospitals and dispensaries among others—gets utilised.
To keep the bond markets in good cheer, the central bank announced another round of the GSAP1.0—for an amount of Rs 35,000 crore. In other words, the central bank will buy back bonds from the market. Bonds rallied almost immediately, with the benchmark yield slipping below 6%. The last few auctions of government securities haven’t fared too well, with investors believing yields will trend up on expectations of inflationary pressures. Given he must ensure the Centre’s large borrowing programme for FY22 must go through, Governor Das needs has little choice but to keep the markets happy.