Time will tell whether the Reserve Bank of India’s slew of unscheduled measures to tackle the fresh crisis perpetrated by the surging second wave of the Covid pandemic end up actually alleviating the acute distress currently being felt by the economy in general and small businesses and individual borrowers in particular. But its targeted response, particularly the Rs 50,000 crore liquidity window opened up to assist the healthcare system, which has come under extraordinary stress following the unmanageable surge in infections and hospitalisations, demonstrates an acute awareness of the ground realities, a willingness to take decisive action and fleet-footed response, which has been largely missing from the overall reaction to the Covid crisis on part of the government at all levels, Centre, state and local.
Take the case of small businesses. While there has been some recovery in some sectors after the lifting of lockdown restrictions earlier, many small and medium enterprises were still struggling with the impact of the crisis. The new loan restructuring facility offered to small businesses – those with loans up to Rs 25 crore, which had not been declared as NPA as of March 31, 2021, will help micro, small and medium enterprises (MSMEs) tide over the current crisis.
The RBI’s move to allow banks to review – read increase – the working capital needs of MSME borrowers as a one-time measure will help address one of the biggest challenges faced by such businesses. Since many MSMEs supply to other businesses or governments, and since payments for past services have been stuck, the pipeline of payments has been clogged. The RBI must be commended for putting lives and livelihoods at the forefront of its response.
As RBI Governor Shaktikanta Das said in his statement: “In the fight against the second wave, alleviating any constraint from the financing side for all stakeholders requires a comprehensive targeted policy response.” That targeted response is visible in the Rs 50,000 crore facility opened up for the healthcare sector to ramp up its infrastructure, from vaccine and medicine manufacturing to adding hospital beds. Banks have got a dual incentive to lend – they can borrow from this corpus at the repo rate for on-lending, while parking an amount equivalent to the borrowings in reverse-repo at 40bps above repo, which is an effective 0.4 per cent discount in the cost of funds, while all such lending will also be classified as priority sector lending.
The creation of a ‘Covid loan book’ – aggregating all loans extended by banks and financial institutions as an immediate response to Covid – will also help this targeted response, as will the additional low-cost liquidity of Rs 10,000 crore being made available to small finance banks for providing loans up to Rs 10 lakh per borrower, as well as for financing microfinance lenders. Between them, small finance banks and MFIs deal with the bottom-of-the-pyramid borrowers, particularly in rural areas, who have been hit hardest by the pandemic.
The RBI has also stepped in to assist state governments which have been hit by an acute scarcity of funds caused by the increased spending caused by the Covid response, as well as decreased disbursals from the Central pool, as well as the Centre’s inability to meet its constitutional obligation to compensate states for GST. By easing overdraft limits – as well as the number of days a state government can stay overdrawn – the RBI has moved to ease some of the acute liquidity pressure on states. Easing KYC requirements for individuals and businesses and increasing the scope of video-KYC measures are also steps to address the mobility and social interaction restrictions precipitated by the pandemic and rolling lockdowns.
While the Central bank has shown commendable speed in responding to the extraordinary challenges precipitated by the sudden onset of the second wave surge, and has targeted its response to address the weaker and more vulnerable sections of the economy instead of the blanket one-size-fits-all approach seen in the first wave, it must be noted that making lending easier, or loans cheaper, or even allowing borrowers more time to repay, will not by themselves address the challenges posed by the pandemic.
For instance, only finance cannot meet the challenges of scaling up healthcare and pharma infrastructure substantially in a short span of time. Likewise, it must be noted that all loans have to be repaid and have a cost attached to them. Since it is the private sector which is expected to fill the gaps exposed in the healthcare system by the pandemic, it remains to be seen whether private players are willing to take that kind of risk.
Further, as the response to the previous ‘stimulus’ measures announced by the finance minister during the first wave has shown, loans, or the promise of loans cannot be the answer to the need for cash on hand, particularly for the poorer sections of the economy like migrant labour, who have been hardest hit. But when it comes to timely action, it has set a valuable precedent for the government to follow.