By Shivanand Pandit
The second wave of the deadly epidemic in India has distorted the economic outlook. Considering the trauma placed by the pandemic on the economy, the Reserve Bank of India (RBI) has unpacked numerous measures to enhance fund flow to the healthcare sector and inject more liquidity into the system, apart from offering one more window to individual borrowers and small firms for loan restructuring.
Industry experts hailed the move to support borrowers, given the current ambiguity. The president of the Confederation of Indian Industry (CII), Uday Kotak 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 to individual and MSME borrowers and ease of banking through digital means.”
To ramp up Covid-19 linked healthcare infrastructure and services, the RBI decided to increase the provision of instant liquidity by unlocking an on tap liquidity window of Rs 50,000 crore till March 31, 2022. According to the scheme, banks can offer fresh loans to a wide 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-19 related drugs, logistics firms and also patients for treatment. These advances will continue to be categorised under 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-19 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-19 loan book with the RBI under the reverse repo frame at a rate which is 25 bps lesser than the repo rate. The central bank also declared that under G-SAP 1.0, the second purchase of G-SEC for Rs 35,000 crore will be done on May 20, 2021.
The RBI has determined to perform special three-year long-term repo operations (SLTRO) of Rs 10,000 crore for small finance banks, to be used for fresh advancing of up to Rs 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 advancing to smaller microfinance institutions with asset volume of up to Rs 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 publicising the moves, RBI Governor Shaktikanta Das said that borrowers—individuals and small businesses and MSMEs—having a total exposure of up to Rs 25 crore will qualify for the new restructuring framework. However, if they have availed restructuring under any of the previous restructuring measures, they will not qualify. 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 have opted for 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. This relaxation, presently available for exposures up to Rs 25 lakh and for credit distributed up to October 1, 2021, is being extended to December 31, 2021 so as to further incentivise insertion of unbanked MSMEs into the banking structure.
Further, the RBI declared few relaxations in Overdraft (OD) facilities of state governments so that they could 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.
Undoubtedly the pattern of the Term Liquidity Facility of Rs 50,000 crore to banks for generating a Covid-19 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 attractive compared to facilities revealed in 2020. After the RBI’s announcement, two prominent public sector banks declared their choice to advance under this facility to Serum Institute and Bharat Biotech. Although these actions are praiseworthy, the question remains as to why these two chief vaccine producers had to wait for the RBI’s liquidity window to raise funds for backing their research and intensifying their production?
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 closer look at the effectiveness of the outline and method for restructuring or resolution of strained bank debt reveals certain hard realities.
The second version of the restructuring exhibits the simple fact that the first version of the restructuring has not thrived in India. In most circumstances, it results in good money hounding bad money together with all the associated incompetence in the utilisation of the lendable reserves of banks. The main reason is the fundamental issue in the case of any tired MSME its net worth is either very less or negative. Therefore, they cannot be revitalised without the infusion of fresh equity. After understanding this point, the government has announced Credit Guarantee Scheme for Subordinate Debt (CGSSD) 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 earmarked at Rs 20,000 crore. Even though it was a well-intentioned idea, it is doubtful whether it will go far in resolving the current economic setback. It is an open secret that advancing to 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.
Finally, the RBI has appeared to be both preemptive and prudent in its reaction to the binary wave of pandemic. Overall, the bank has done its bit to ease the pain but the government should keep its powder dry to harmonise these endeavours with fiscal help. Easy credit transmitted through banks cannot surrogate for direct income or source of revenue support measures to households shattered by the deadly virus.
—The writer is a financial and tax specialist, author and public speaker based in Margao, Goa