RBI Governor Shaktikanta Das announces fiscal measures amid COVID-19 2nd wave

Reserve Bank of India Governor Shaktikanta Das, on May 5, announced a set of fiscal measures to help individuals, small businesses and micro-finance institutions tide over the second wave of COVID-19 cases in the country.

The measures included:

>> A second purchase of G-SEC for Rs 35,000 cr under G-SAP 1.0 will be conducted on May 20

>> On-tap liquidity of Rs 50,000 crore at repo rate is being opened till March 31, 2022

>> Banks are incentivised to extend swift credit to weak sectors and will create a COVID loan book in their balance sheets. Money equal to COVID book can be parked with the RBI at 40 bps above reverse repo rate.

>> Borrowers up to Rs 25 crore, not taken restructuring earlier, were standard as of March 2021, will be considered for restructuring till September 30, 2021

>> RBI will conduct three year long term repo operations for small finance banks with limit of up to Rs 10 lakh per borrower

>> Small finance banks' on-lending to microfinance institutions (MFIs) to be categorised as a priority sector

>> Resolution Framework 2.0 is targetted at individuals and medium, small and micro enterprises (MSMEs)

>> Relaxation in overdraft facility for state governments

Das' speech comes amid a ferocious second wave of COVID-19 cases in India. Many states have introduced lockdowns and other COVID-induced restrictions, which could hurt the economy.

The RBI Governor on May 3 met the representatives of non-banking finance companies – micro-finance institutions (NBFC-MFIs) and the two industry associations — Sa-Dhan and MFIN (microfinance institutions network), Moneycontrol reported.

Deputy Governors MK Jain and MD Patra and other top RBI officials attended the meeting.

The microfinance industry has asked for restructuring of borrower loans and liquidity assistance.

Earlier, a section of senior banking industry officials said that the RBI may have to announce yet another round of loan moratorium scheme or similar relief measures for stressed borrowers if the lockdowns announced by various state governments in the wake of COVID second wave prolongs beyond the immediate future.

Most states, like Maharashtra, Delhi and Karnataka, have announced partial lockdowns or other restrictions in the face of increasing COVID infections. This has started to affect businesses, especially in the services sector. Such a scenario could eventually lead to loan defaults as the repayment ability of borrowers may get affected.

In 2020, the impact of the lockdown was not seen on banks' earnings because of the emergency measures announced by the central bank and the government. The RBI announced a six-month moratorium and a subsequent one-time restructuring facility for banks.

This helped banks to escape from a huge spike in their non-performing assets (NPAs). A loan becomes an NPA if there is no repayment of interest or principal for 90 days. Once a loan becomes an NPA, banks need to set aside money to cover the potential losses from such accounts. High provisions hurt banks' profitability.