Towards the close of FY21—the year of the pandemic—it seemed that FY22 would probably be life as usual, as India was showing a glimmer of hope and strong economic recovery.

In his unscheduled virtual address on May 5, Reserve Bank of India (RBI) governor Shaktikanta Das endorsed the view that the Indian economy was advantageously poised, relative to its peers. “India was at the foothills of a strong recovery, having regained positive growth, but more importantly, having flattened the infection curve,” said Das.

But, in a few weeks since the close of FY21, the situation has altered drastically, as India is fighting a ferocious rise in infections and mortalities. New mutant strains have emerged, causing severe strain on healthcare and medical facilities, vaccine supplies, and front line health personnel. “The fresh crisis is still unfolding,” Das said.

In the backdrop of an increasing number of states imposing lockdowns, which are affecting economic activities, there was anticipation that the central bank would announce a loan moratorium to help borrowers tide over the second Covid-19 wave. With over 3.82 lakh fresh cases on May 4, the cumulative case count has bypassed 20.67 crore, while the cumulative count of deaths has crossed 2.26 lakh, with an addition of 3,780 on May 4 alone. But there was no announcement of a loan moratorium like last year. “The fact that there is no moratorium announcement will be seen by the markets as positive since the message is that the situation is not so bad as to warrant another moratorium,” says V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.

On his part, Das said that the RBI will continue to monitor the emerging situation and deploy all resources and instruments at its command in the service of the nation, especially for its citizens, business entities, and institutions beleaguered by the second wave. “The devastating speed with which the virus affects different regions of the country has to be matched by swift-footed and wide-ranging actions that are calibrated, sequenced, and well-timed so as reach out to various sections of society and business, right down to the smallest and the most vulnerable,” the RBI governor said.

With regard to the country’s economy, Das highlighted the resilience of the agricultural sector, as record foodgrain production and buffer stocks in FY21 would provide food security and support to other sectors in the form of rural demand. The forecast of a normal monsoon by the India Meteorological Department (IMD) is expected to sustain rural demand and overall output in FY22, while also having a soothing impact on inflation pressures.

Inflation remains a pertinent worry for the central bank in its ‘accommodative’ monetary policy stance, which it has promised to keep ‘as long as necessary to sustain growth’. Consumer price index (CPI) inflation had edged up to 5.5% in March, compared to 5% in February. For the record, the central bank’s medium-term target for CPI inflation currently stands at 4%, with a tolerance band of plus/minus 2%. “The inflation trajectory over the rest of the year will be shaped by the Covid-19 infections and the impact of localised containment measures on supply chains and logistics,” Das warned.

Away from agriculture and inflation woes, Das said that the aggregate demand conditions, particularly in contact-intensive services, are likely to see a temporary dip, depending on how the Covid-19 situation unfolds. According to the central bank, with restrictions and containment measures being localised and targeted, businesses and households are learning to adapt. “Consequently, the dent to aggregate demand is expected to be moderate in comparison to a year ago,” said Das.

While announcing additional measures to overcome the pandemic woes, Das said that the fight against the second wave required a comprehensive targeted policy response. With an intent to boost the provision of immediate liquidity for ramping up Covid-19-related healthcare infrastructure and services in the country, Das announced the opening of an on-tap liquidity window of ₹50,000 crore with tenors of up to three years at the repo rate. The scheme will be open till March 31, 2022, wherein banks can provide fresh lending support to a wide range of entities, including vaccine manufacturers, importers/suppliers of vaccines and priority medical devices, hospitals/dispensaries, pathology labs, manufactures and suppliers of oxygen and ventilators, importers of vaccines and Covid-19-related drugs, logistics firms, and also to patients for treatment.

The RBI governor added that banks will be incentivised for quick delivery of credit under the scheme through extension of priority sector classification to such lending up to March 31, 2022. “These loans will continue to be classified under priority sector till repayment or maturity, whichever is earlier,” Das said. Also, under the scheme, banks may deliver these loans to borrowers directly or through intermediary financial entities regulated by the central bank.

Further, banks are expected to create a Covid-19 loan book under the scheme. Also, by way of an additional incentive, banks will be eligible to park their surplus liquidity up to the size of the Covid-19 loan book with the RBI under the reverse repo window at a rate which is 25 basis points—hundred basis points make a per cent—or 0.25% lower than the repo rate which currently stands at 4%. From the lens of reverse repo, the Covid-19 loan book will help the banks earn 40 basis points, or 0.40%, higher than the regular reverse repo rate of 3.35%.

At the sectoral level, in order to mitigate the pandemic-related stress on lenders and as a measure to enable capital conservation, the RBI has allowed banks to utilise 100% of floating provisions/countercyclical provisioning buffer held by them as on December 31, 2020, for making specific provisions for non-performing assets (NPAs) with prior approval of their Boards. The central bank has permitted such utilisation with immediate effect and up to March 31, 2022.

Apart from the ₹50,000-crore window, the central bank also announced a three-year Special Long-Term Repo Operations (SLTRO) for small finance banks (SFBs) of ₹10,000 crore at the repo rate. The RBI said that SFBs have been playing a prominent role by acting as a conduit for last-mile supply of credit to individuals and small businesses. Under the SLTRO facility—which is available till October 31, 2021 and is aimed at providing further support to small business units, micro and small industries, and other unorganised sector entities adversely affected during the current wave of the pandemic—SFBs would have to do fresh lending of up to ₹10 lakh per borrower.

Under the prevailing norms, lending by SFBs to microfinance institutions (MFIs) for on-lending is not reckoned for priority sector lending (PSL) classification. However, in view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, the RBI has decided to permit SFBs to reckon fresh lending to smaller MFIs, with an asset size of up to ₹500 crore, for on-lending to individual borrowers as PSL. This facility will, however, be available up to March 31, 2022.

Earlier, in February this year, with a view to incentivise credit flow to micro, small, and medium enterprise (MSME) borrowers, the central bank had allowed scheduled commercial banks (SCBs) to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR). This dispensation, to incentivise inclusion of unbanked MSMEs into the banking system, was available for exposures up to ₹25 lakh and for credit disbursed up to the fortnight ending October 1, 2021. Among the measures announced by Das, this facility has been extended by four more fortnights, till December 31, 2021.

Among the other key measures, the RBI also unveiled the Resolution Framework 2.0 for Covid-19-related stressed assets of the most vulnerable category of borrowers: individuals, small businesses and MSMEs.

Under the Resolution Framework 2.0, the above set of borrowers having aggregate exposure of up to ₹25 crore and who have not availed restructuring under any of the earlier restructuring frameworks, including under the Resolution Framework 1.0 dated August 6, 2020, and who were classified as ‘standard’ as on March 31, 2021 shall be eligible. Restructuring under the proposed framework may be invoked up to September 30, 2021, and shall have to be implemented within 90 days after invocation.

For borrowers who have availed loan restructuring under Resolution Framework 1.0 where the resolution plan permitted moratorium of less than two years, the central bank has now permitted the lending institutions to use this window to modify such plans to the extent of increasing the period of moratorium and/or extending the residual tenor up to a total of two years without altering other conditions. And, in respect of small businesses and MSMEs restructured earlier, the RBI has permitted lending institutions to review the working capital sanctioned limits, based on a reassessment of the working capital cycle, margins, etc., as a one-time measure.

“These guidelines as well as the recently introduced pre-arranged insolvency resolution process will enable MSMEs to restructure their debts without the looming fear of losing or liquidating their businesses,” said Aashit Shah, partner, J. Sagar Associates, a national law firm. However, Kiran Chonkar, partner-resolution advisory at BDO India, who called the steps timely and prudent, had a counter view. “The pandemic has affected the industry across segments,” says Chonkar. “A roll-out of broader relief measures applicable to mid-corporate and large borrowers and towards sectors heavily impacted by the pandemic such as hospitality would have been welcome.”

In conclusion, Das stressed that the immediate objective was to preserve human life and restore livelihoods through all means possible. “The second wave, though debilitating, is not insurmountable,” the RBI governor said. He also insisted that the RBI stands in battle readiness to ensure that financial conditions remain congenial and markets continue to work efficiently. “We are committed to go unconventional and devise new responses as and when the situation demands,” he said. Das also said that the RBI will continue to be proactive throughout the year—taking small and big steps—to deal with the evolving situation.

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