In his second big announcement since the onslaught of Covid-19 began to wreck the Indian economy, RBI Governor Shaktikanta Das announced a slew of measures to ease flow of credit into the economy.

A 25 basis point reverse repo cut, TLTRO (Targeted Long Term Refinancing Options) of Rs 50,000 targeted at NBFCs; relaxation of asset classification norms; more funds for states – the RBI has increased the limit under Ways and Means Advances for states to avail short term funds to 60 per cent of the existing limit.

A special refinance facility of Rs 50,000 crores was announced to meet sectoral credit requirements – this is to specifically boost liquidity of financial institutions like NABARD, SIDBI and National Housing Bank.

NPA (Non-performing Assets) norms of 90 days have been relaxed. The period of moratorium will be excluded from the 90-day classification norms of NPAs for those accounts, which would avail the moratorium facility. The NBFCs (Non-Banking Financial Companies) have been given flexibility to give such relief to their borrowers.

Subhash Chandra Garg, former finance secretary, Government of India, explains that the reverse repo rate cut is to encourage banks to start lending.

Financial institutions continue to be wary of lending-businesses across sectors have complained that even as the RBI has brought down lending rates and has been urging banks to lend, their experience with lending institutions continues to be difficult.

In fact, from the last time, the RBI announced a repo rate cut, the amount deposited with the RBI has gone up from Rs 2 lakh crore to Rs 4-4.5 lakh crore in the last 20 days. Risk appetite of banks continues to be low on concerns of loans turning NPAs.

“While the intent behind cut in the repo rate has been to get banks to lend, the experience has been completely opposite in the last few weeks. I hope this rate cut will not lead to a similar experience,” said Garg.

“Root of the problem is to make Indian banks take the risk and lend,” Garg said.

Easing up of NPA norms could boost the confidence of banks to start lending. Trough TLTRO of Rs50,000, the RBI will provide cheaper money for lending to corporates. But in the past, the experience with this has been that banks tend to give to best credit worthy companies.

The RBI has stated that 50 per cent of the funds should be utilised for ‘investment grade’, which is a safer bet and will mean that banks end up providing this money to higher graded NBFCs and several small NBFCs facing a massive liquidity crunch could be left out.

Investment grade refers to the quality of a company’s credit. To be considered an investment grade, the company must be rated at BBB or higher by Standard and Poor’s or Moody’s. Anything below ‘BBB’ rating is considered non-investment grade.

RBI’s liquidity injection could help the real estate sector, which is one of the biggest employment generators and has been crippled for several years.

“The allotment of Rs 10,000 crore to the National Housing Bank is a big move for the real estate sector reeling under the liquidity crisis. It will help provide capital to the Housing Finance Corporations and eventually provide major relief to developers battling liquidity issues during Covid -19 pandemic,” said Anuj Puri, chairman of Anarock Consultants.

Increase in state governments’ WMA (Ways and Means Advances) limits by 60 per cent of the original limit will spur economic activity in the states including states making their pending payments.

When Governor Das was appointed to lead the Reserve Bank of India, there were several questions raised on the autonomy of the banking regulator and the capability of the governor to steer the economy. But as India accelerates its fight against Covid-19, the RBI and Das emerge as top runners in the time taken to respond to the crisis and targeting the issues.

In the first tranche, the RBI had announced a 75 basis point cut (one basis point is a hundredth of a percentage point) in repo rate; a 100 basis point cut in cash reserve ratio; a moratorium on payment of installments on term loans; deferment of interest on working capital loans. He had promised at the time: “Whatever steps are necessary -all instruments, conventional and unconventional are on the table.”

While RBI’s measures provide for relief, the wait now is for the government to come out with a stimulus package to salvage the economy. A slew of growth projections have revised India’s growth down drastically – Goldman Sachs, in its assessment, has revised India’s growth down to 1.6 per cent.

The World Bank has forecast India’s economic growth at 1.5-2.8 per cent in 2020 while the IMF has predicted the growth to slip to 1.5 per cent. Barclays has projected zero growth for 2020.

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