ASSESSMENT OF RBL’S RESPONSE TO COVID 19: BY SHREYA MAHESHWARI

Introduction

As the world is battling on all fronts against the outbreak of COVID-19. Effect of Pandemic significantly affected India. Therefore, to contain the spread of the pandemic, Government of India proclaimed a nationwide lockdown ranging from March 25, 2020. The ongoing pandemic has posed a sizeable impact on life as well as business of the world's largest democracy. However, the magnitude of impact on different sectors varies; none of the sectors is completely out of the reach of its repercussions.

The battle with COVID-19 is not solely to save the country and its people but also individuals however additionally to confirm that the banking channels are operating around the clock to cater to the wants of the general public furthermore as money market. Gratuitous to mention, that banking industry is the backbone of any country and its failure or lag could lead on to multiple problems for developing countries like Asian nation. That banking system is the backbone of any country and its failure or slowdown could lead to multiple issues for developing countries like India. Hence, in order to ease out the unforeseen difficulties facing by numerous sectors, Reserve Bank of India (RBI) being the central bank of the country came up with a number of measures and reliefs post nationwide lockdown.

Measures

The Reserve Bank of India Governor announced a new set of measures in response to the current growth and financial market stress. These measures mostly aimed at easing some pressures on the lower-rated/smaller participants of the financial markets. For the general bond and money markets, the major announcement pertains to a further widening of the liquidity adjustment facility corridor with the reverse repo rate being cut by a further 25 basis points to 3.75 percent. The repo rate—the mandates of the Monetary Policy Committee—and the marginal standing facility rate have been kept constant. The ways and means advance facility for states enhancing by 60 percent, instead of the 30 percent announced earlier, available till Sept. 30. In addition, the liquidity coverage ratio temporarily reduced to 80 percent.

 

Assessment

The new measures are welcome and will serve to ease financial conditions on the margin. However, it is possible that the RBI is still somewhat underestimating the fact that the real problem, in our view, is that of inadequate availability of risk capital in the system. Thus, some of the “push” measures may likely have limited impact. As an example, banks may still hesitate to lend to we hesitate to lend to weaker credits under the new TLTRO since the dispensation is on market risk and not credit risk.

As another, while the lower reverse repo is a good push incentive, a more powerful one could have been general time-bound HTM relaxations for banks investment in government bonds.The Reserve Bank of India (RBI) announced a slew of measures in order to provide relief for the ongoing Coronavirus outbreak in India.

These include:

1) Repo Rate – RBI announced that it was cutting the repo rate by 75 bps, or 0.75% to 4.4. The Repo Rate was earlier 5.15; last being cut in October 2019.

2) Reverse Repo – The regulator also announced that it would cut the Reverse Repo rate by 90 bps, or 0.90%. On a daily average, banks had been parking Rs 3 lakh crore with the RBI. The current reverse repo rate was 4%.

3) Loan Moratorium – In a massive relief for the middle class, the RBI Governor also announced that lenders could give a moratorium of 3 months on term loans, outstanding as on 1 March 2020. This is applicable to All Commercial Banks including Regional, Rural, Small Finance, Co-Op Bank, All India Financial Institutions, and NBFCs including Housing Finance and Microfinance.

4) CRR – The RBI also announced that the Cash Reserve Ratio (CRR) would be reduced by 100 bps, or 1%, to 3% . This would be applicable from March 28, and would inject Rs. 1, 37,000 crore.

5) LTRO – The RBI will also undertake Long Term Repo Operations (LTRO); allowing further liquidity with the banks. The banks however are specified that this liquidity will be deployed in in commercial papers, investment grade corporate bonds, and non-convertible debentures.

6) Ease of Working Capital financing – Lenders were allowed lending to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. The RBI also specified that such a move would not result in asset classification downgrade.

7) Working Capital Interest – A Three month interest moratorium shall also be permitted to all lending institutions.

8) Deferment of NSFR- The Net Stable Funding Ratio (NSFR), which reduces funding risk by requiring banks to fund their activities with sufficiently stable sources of funding, was postponed to October 1, 2020. The NSFR was earlier supposed to be implemented by April 1, 2020.

9) MSF – Marginal Standing Facility (MSF) has also been increased to 3% of SLR, available till June 30, 2020. “This measure should provide comfort to the banking system by allowing it to avail an additional ` 1, 37,000 crore of liquidity under the LAF window in times of stress at the reduced” said the RBI.

10) Fresh Liquidity – The impact of all the announcements today shall inject almost 3.2% of GDP, the Governor said in his brief today. The RBI also added that since February 2020 it had injected Rs 2.8 lakh crore of liquidity, equivalent to 1.4 percent of GDP.

Impact of the steps taken by RBI[1]

As RBI maintains its accommodative stance signaling to go for further rate cuts if needed. The steps taken were to address the liquidity issue in the economy. However, all the steps taken by the RBI in the aftermath of coronavirus crisis have resulted in liquidity surplus in the banking system, which implies there is enough money in the banks but there are very few takers. As a result, banks have parked Rs 7.29 lakh crore worth of funds with the apex bank because in these times of crisis when all economic activities have come to standstill no company and business are borrowing money from the bank.

 

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[1] Rajat Mishra, What all RBI did during COVID19?, Outlook Money, (6^th August, August 2020) https://www.outlookindia.com/outlookmoney/banks/what-all-rbi-did-during-covid-19-4828