The RBI is impelling all banks to lend to contact-intensive sectors, which have suffered the most during the covid-hit.
According to current high inflation rates, it was largely expected that the (RBI) Reserve Bank of India would leave interest rates unchanged in its recent credit policy review last week, as any lowering of rates could stir inflation. It is the sixth consecutive meeting in which the RBI has kept its repo rate unchanged at 4%.
The RBI has pegged the inflation outlook for the current fiscal year at 5.1 %, but some experts say it can go higher due to the supply-side disturbance caused by the second wave of COVID. At the same time, downside risks include high inflation and any unexpected change in the progress of the monsoon.
RBI has lowered its GDP forecast for 2022 to 9.5 % from the 10.5% as announced earlier. Several agencies had already foreshortened their growth expectations for India after 98% of the country went into state-ordered lockdowns in April and May to fight the pandemic.
Some states have announced ease of restrictions and will be done in a phased manner and under strict jurisdiction, making it difficult for firms in contact-intensive sectors to resume business at total capacity in the near future. The central bank has focused on new policy measures to address the livelihood issues arising out of Covid-19. It can be a relief for such businesses.
Although Covid-19 cases have been lessened in the country at large, there are concerns about a rise in infections once again as most states are on the verge of reopening. Moreover, the threat of a third wave is also something that needs to be taken into consideration. The economic situation is in a dire position:
shutdowns and layoffs in factories have already pushed unemployment rates into double digits, at 14.73% for the ending week of May 23. Nine million people with salaried jobs were lost during February and April because of the government’s restrictions, says research firm (CMIE) Centre for Monitoring Indian Economic as 97% of Indian households have suffered a fall in incomes.
In this regard, the RBI’s measures to assist some stressed sectors are of significance. It has prompted banks to lend to contact-intensive industries that have suffered the most during the pandemic—such as hotels, restaurants, tourism, bus operators—by opening a Rs 15,000 crore liquidity window for lenders to do so.
Another Rs 16,000 crore has been provided to SIDBI (Small Industries Development Bank of India) to cater to MSMEs’ short- and medium-term credit requirements (micro, small and medium scale enterprises). Moreover, the restructuring window for loans taken by individuals and MSMEs has been expanded, with the eligibility limit for debt doubled to Rs 50 crore. It means that borrowers with loans upto Rs 50 crore are eligible for loan restructuring, allowing them to delay repayments to banks without being classified as defaulters.
According to a note from Care Ratings, this policy is continuing with the sustained liquidity support that the RBI has been undertaking via the on-tap lending facility through banks and financial institutions. The Covid-loan book idea was first announced in the RBI policy of April 2021, and this has now been extended to contact-intensive sectors.
‘This is a positive move for these sectors currently facing the brunt of the second wave of the pandemic’, the rating firm said. As of April 2021, the outstanding credit to the hotels, restaurants and aviation sectors was around Rs 75,000 crore, which is only 3 per cent of the total outstanding credit to the services sector.
So far, the on-tap Targeted Long Term Repo Operations (TLTRO) scheme, which the RBI announced in October 2020, totalling Rs 1 lakh crore, has seen bids worth only Rs 5,000 crore, while a similar strategy for small finance banks, worth Rs 10,000 crore, has only seen takers worth Rs 400 crore.
Under the TLTRO scheme, banks can invest in specific sectors through debt instruments (corporate bonds, commercial papers and non-convertible debentures) to improve credit flow in the economy. Experts say it remains to be seen how the banks will absorb much of the funding via these new schemes.
Meanwhile, the central bank also raised its bond purchases under the Government Securities Acquisition Programme by Rs 20,000 crore or 20 per cent, to Rs 1.2 lakh crore. It will help to keep interest rates low and support the government’s borrowing programme at a time when tax collections are likely to fall because of the pandemic.