The COVID health crisis is mounting in India and CMIE just reported record unemployment of 7.97% in Apr-21. It was a matter of time before government intervened and soothed frayed nerves. On the morning of 05 May, RBI governor Shaktikanta Das, made an unscheduled address to the nation outlining monetary and credit measures to alleviate the economic stress.
The Governor, in his address, admitted that the economy recovery between Sep-20 and Feb-21 received a setback with the COVID resurgence. Apart from the health emergency, Das noted that it had also created the need for a more humanitarian approach to dealing with the financial exigencies of businesses and households.
Where the Indian economy stands in Apr-21
Das noted that the aggressive resurgence of the pandemic in India had created a dichotomy. The world economy was recovering, but India was struggling in the last couple of months. While the global recovery may be uneven, the fact remains that IMF had upgraded the global GDP growth forecast for CY-2021 from 5.5% to 6.0%. The governor noted that the availability of vaccines had become a temporary bottleneck for Indian growth. The other macro trend was the growth of 5.4% in world trade in Feb-21.
While the likes of Warren Buffett and Janet Yellen have flagged the inflation risk across the board, Das feels inflation should be under control in India. While food inflation would be controlled by expectations of a normal monsoon, Das underlined that industrial inflation was still a challenge which was exhibited by sticky core inflation. However, he does not see headline inflation stretching beyond the RBI outer limit of 6%.
Takeaways from the measures announced by the governor
It may be recollected that the government has already committed to keep liquidity abundant in the economy through a record borrowing program. In addition, the RBI has managed to soften bond yields via the G-SAP program. In the context of the financial exigency created by the COVID resurgence, the RBI governor announced some additional palliative measures.
a) RBI has created an on-tap liquidity window of Rs50,000cr for ramping up COVID-related infrastructure. These funds would be available at repo rates for tenors up to 3 years till the end of March 2022. Under this special scheme, banks will be allowed to lend money to vaccine manufacturers, vaccine importers, suppliers of priority medical devices, pathology laboratories, suppliers of oxygen, suppliers of ventilators as well as to firms that provide logistic support for transport and cold storage of such vaccines.
b) From a bank balance sheet perspective, the above loans would be classified as priority sector lending till March 2022. An additional incentive for banks would be that they can park their surplus liquidity up to the size of COVID loan book with the RBI under the reverse repo window and earn 40 bps higher than the reverse repo rate.
c) The pandemic and lockdowns have been specifically harsh on MSMEs, traders and households. RBI will support small finance banks or SFBs with Rs10,000cr for special 3-year long term repo operations (SLTRO) for individuals and small businesses. This allows fresh lending of up to Rs10 lakh per borrower at repo rate up to the end of Oct-21. This should alleviate the pain of small business and households.
d) The incentives of priority sector classification will also be extended to loans given by SFBs to MFIs with asset size up to Rs500cr to on-lend to borrowers. Such lending will be available till the end of March 2021. The facility of deduction of MSME loans from NDTL till October 2021 has been extended till December 2021.
e) RBI launched a special Resolution 2.0 scheme for borrowers with aggregate exposure of Rs25cr. Such exposures must be standard exposures and borrowers must not have availed Resolution 1.0 last year. For those who had already availed of the resolution facility last time, such residual tenures would be extended for up to 2 years.
f) RBI has offered simplification and leniency for KYC updating. RBI extended video-KYC to most customers including proprietary firms, beneficial owners, authorized signatories etc. RBI has also asked all routine updates of KYC to be done by video-KYC only and no punitive action be taken or restrictions imposed on operation of such accounts.
g) Between now and March 2022, banks are being permitted to utilize 100% of countercyclical provisioning buffer as on Dec-20 for making provisions for NPAs. However, such actions will need the specific approval of their boards.
h) RBI has also take measures to ease the financial position of state governments. The maximum number of days of overdraft in a quarter has been raised from 36 days to 50 days with consecutive days enhanced from 14 days to 21 days. This will be over and above the enhancement limits of WMA.
As the governor said, the immediate priority is to preserve lives and livelihoods. Whether this package will be followed up with a fiscal stimulus is still not too clear!