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The second wave of the deadly epidemic in India has harshly distorted the economic condition. Considering the unsympathetic trauma placed by the pandemic on the economy, the Reserve Bank of India (RBI) has recently unpacked many measures to enhance the fund flow to the healthcare sector and is looking to inject more liquidity into the system, on top of offering one more window to individual borrowers and small firms for loan restructuring.

Uday Kotak, President, Confederation of Indian Industry, said “The RBI Governor has taken the financial sector battle against Covid 2.0 head on with a clear focus on protecting lives and livelihoods. CII welcomes the support given to individuals and MSME borrowers and ease of banking through digital means.”

Nitty-gritty of the scheme

To ramp up Covid-linked healthcare infrastructure and services, the RBI decided to increase the provision of instant liquidity by unlocking an on-tap liquidity window of `50,000 crore unlocked by the RBI with tenors of up to three years at the repo rate of 4% till March 31, 2022. According to the scheme, banks can offer fresh loans to a widespread variety of firms embracing vaccine manufacturers, importers and suppliers of vaccines and priority medical devices, hospitals and dispensaries, pathology labs, manufactures and suppliers of oxygen and ventilators, importers of vaccines and Covid-related drugs, logistics firms and also patients for treatment. These advances will continue to be categorised under the primacy sector till repayment or maturity, whichever is earlier. Banks may deliver these loans to borrowers directly or through intermediate financial firms regulated by the RBI. Banks have to create a Covid loan book under the arrangement and through an additional incentive, such banks will be qualified to park their excess liquidity up to the volume of the Covid loan book with the RBI under the reverse repo frame at a rate which is 25 bps lesser than the repo rate or 40 bps more than the reverse repo rate. The central bank also declared that under G-SAP 1.0, the second purchase of G-SEC for `35,000 crore will be done on May 20, 2021.

The RBI has decided to perform a special three-year long-term repo operation (SLTRO) of `10,000 crore at repo rate for small finance banks to be used for fresh advances of up to `10 lakh per borrower. This is to offer additional backing to small business firms, micro and small industries and other unorganised sector organisations badly disturbed during the present wave of the pandemic. Small finance banks will be allowed to consider fresh advances to smaller microfinance institutions with asset volume of up to `500 crore for on-lending to individual borrowers as primacy sector loaning and there will be markdowns on rates of interest and settlements. This facility will be obtainable up to March 31, 2022.

While publicizing the actions, RBI Governor Shaktikanta Das mentioned borrowers - both individuals and small businesses and MSMEs, having total exposure of up to `25 crore will be qualified for the new restructuring resolution framework. However, if they have availed restructuring as per any of the previous restructuring frameworks included under the Resolution Framework dated August 6, 2020 and who were not grouped as ‘Standard’ as on March 31, 2021, will not be qualified under the new solution framework. Restructuring under the intended framework may be invoked up to September 30, 2021, and will have to be executed within 90 days after invocation. If individual borrowers and small businesses who have opted restructuring of their loans under the earlier resolution framework, where the resolution plan allowed moratorium of less than two years, lending entities will be allowed to utilise this window to alter such plans to the extent of rising the moratorium period and/ or lengthening the remaining time period up to an aggregate of two years. Earlier in February 2021, for computation of cash reserve ratio (CRR) banks were authorised to subtract credit distributed to new MSME borrowers from their net demand and time liabilities (NDTL).This relaxation presently available for exposures up to `25 lakh and for credit distributed up to October 1, 2021 is being stretched up to December 31, 2021 so as to further incentivise insertion of unbanked MSMEs into the banking structure.

Furthermore, the RBI declared few relaxations in Overdraft (OD) facilities of state governments so that they can effectively handle their financial situation in terms of their cash-flows and market borrowings. Hence, the maximum number of days of OD in a quarter is being enhanced from 36 to 50 days and the number of successive days of OD from 14 to 21 days. This facility will be open up to September 30, 2021. Earlier on April 23, 2021 the Ways and Means Advance (WMA) limits of states have already been increased. The RBI also decided to streamline several elements of the extant KYC norms.

Few things need re-look

Undoubtedly the pattern of the term liquidity facility of ₹50,000 crore to banks for generating a Covid loan book as a portfolio of advancing support to a wide variety of firms involved in the nation’s battle against the pandemic is creative. The two inducements offered to banks in this regard will make this facility more charming compared to facilities revealed in 2020. After the RBI’s announcement, two prominent public sector banks each declared their choice to advance under this facility to Serum Institute and Bharat Biotech. Although these actions are praiseworthy, the question remains unanswered is why these two chief vaccine producers had to wait for the RBI’s distinct liquidity window to raise funds for backing their research and intensifying their production?

While more accumulation to the pot of surplus liquidity is achievable in view of the RBI’s G-Sec buying plan under G-SAP, considering the probability of the fiscal deficit of the Central government beyond 6.8% in 2021-2022 and subsequently its aggregate borrowing necessity becoming more than the estimated ` 12.05 lakh crore, increase in the G-SAP target further than ` 1 lakh crore seems a divergent possibility, particularly because of the government’s wish that its borrowing cost should not be permitted to go upper.

The Resolution Framework 2.0 has been invented to address the issue of significant pressure generated by the epidemic and also to ease the stress to some extent for individuals, small businesses and MSMEs almost across the board. However, a deeper look at the effectiveness of the outline and method for restructuring or resolution of strained bank debt reveal certain hard realities. The second version of the restructuring exhibits the simple fact the first version of the restructuring has not thrived in India. In most circumstances, it results in ever-greening and/or good money hounding bad money together with all the associated incompetence in the utilization of the lendable reserves of banks. The main reason is the fundamental issue in the case of any tired MSME is that its net worth is either very less or negative. Therefore, they cannot be revitalized without the infusion of fresh equity. After understanding this point the government has announced Credit Guarantee Scheme for Subordinate Debt in 2020. As per the scheme the government decided to offer assurances to bank advances to the promoters of MSMEs to invest in the equity or quasi equity of their respective entities. The total amount of equity or quasi equity fusion has been marked at ₹20,000 crore. Even though it was a well-intentioned idea, it is doubtful to go too far in resolving the setback on hand. It is an open secret that advancing MSMEs in India is a high-risk venture, whose return rarely delivers satisfactory return. Loaning to promoters under CGSSD will also encompass a very high risk, which banks are not well-equipped to measure or judge.

As a final point, the RBI has appeared itself to be both preemptive and prudent in its reaction to the binary wave of the pandemic. Generally, though the RBI has done its bit to ease pain, the government should keep the powder dry to harmonize these attempts or endeavours with fiscal help. Easy credit transmitted through banks cannot surrogate for direct income or source of revenue support measures to households shattered by deadly virus.