RBI Unleashes Liquidity Booster for Economy to Heal Covid Wounds

The Reserve Bank of India on Wednesday unleashed a host of measures aimed at boosting the liquidity conditions in the Covid-hit economy.

In a virtual address on Wednesday morning, RBI Governor Shaktikanta Das shared the liquidity enhancement measures to ease the strain on the economy. "The Reserve Bank of India will continue to monitor the emerging situation and deploy all resources and instruments at its command in the service of the nation, especially for our citizens, business entities and institutions beleaguered by the second wave," he said.

"The devastating speed with which the virus affects different regions of the country has to be matched by swift-footed and wide-ranging actions that are calibrated, sequenced and well-timed so as reach out to various sections of society and business, right down to the smallest and the most vulnerable."

Accordingly, the RBI will conduct a second purchase of G-Secs worth Rs 35,000 crore on May 20. "Domestic financial conditions remain easy on abundant and surplus system liquidity. The average daily net liquidity absorption under the liquidity adjustment facility (LAF) was at Rs 5.8 lakh crore in April 2021," Das said.

"The G-SAP has engendered a softening bias in G- sec yields which has continued since then... With system liquidity assured, the RBI is now focusing on increasingly channelising its liquidity operations to support growth impulses, especially at the grassroot level."

The first auction under G-SAP 1.0 was conducted on April 15, 2021 for a notified amount of Rs 25,000 crore.

The RBI also announced a targeted on-tap liquidity window of Rs 50,000 crore to set up Covid-related healthcare infrastructure till March 31, 2022. "Under the scheme, banks can provide fresh lending support to a wide range of entities, including vaccine manufactures, importers or suppliers of vaccines and priority medical devices, hospitals or dispensaries, pathology labs, manufactures and suppliers of oxygen and ventilators, importers of vaccines and Covid-related drugs, logistics firms and also patients for treatment," the governor said in the address.

"Banks are being incentivised for quick delivery of credit under the scheme through extension of priority sector classification to such lending up to March 31, 2022. These loans will continue to be classified under priority sector till repayment or maturity, whichever is earlier."

According to Das, banks may deliver these loans to borrowers directly or through intermediary financial entities regulated by the RBI. "Banks are expected to create a Covid loan book under the scheme. By way of an additional incentive, such banks will be eligible to park their surplus liquidity up to the size of the Covid loan book with the RBI under the reverse repo window at a rate which is 25 bps lower than the repo rate or, termed in a different way, 40 bps higher than the reverse repo rate."

The Reserve Bank will allow restructuring for borrowers with exposure of Rs 25 crore, who have not been beneficiaries of RBI's previous loan restructuring schemes.

Additionally, in order to further incentivise inclusion of unbanked MSMEs into the banking system, the current exemption available for exposures up to Rs 25 lakh and for credit disbursed up to the fortnight ending October 1, 2021 is being extended till December 31, 2021.

In February, the regulator had allowed banks to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR).

Lending by Small Finance Banks (SFBs) to Micro-Finance Institutions (MFIs) for on-lending has now been classified as priority sector lending (PSL). "In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs for on-lending to individual borrowers as priority sector lending. This facility will be available up to March 31, 2022," Das said.

The worsening situation of the second Covid wave has forced state governments to implement local lockdowns and travel restrictions which have started to slow down economic activities.

“The three-year facility, which the banks can advance, to the of Rs 50,000 crore, is a good measure to immediately help ramp up medical and healthcare facilities. The benefits of this will help enhance capacity for the longer term as it covers diagnostic, preventive as well as combative aspects of healthcare. The smaller entities like microfinance institutions also benefit from the current package, which will bring some relief to them which is one of the worst affected sectors as of now,” said Joseph Thomas, Head of Research at Emkay Wealth Management.

The relief measures announced by the central bank include:

• Rs 50,000 crore priority lending by banks for hospitals, oxygen suppliers, vaccine importers and Covid drugs, with the liquidity window open till March 31, 2022.
• Special long-term repo operations for small finance banks to provide further support to micro, small, and other unorganised sector entities, 3-year repo operations of Rs 10,000 crore at repo rate, for fresh lending up to Rs 10 lakh per borrower. This facility will be available up to 31 October this year.
• A second window to individual, small borrowers having up to Rs 25 crore loans for restructuring.
• Small Finance Banks allowed fresh on-lending to micro-finance institutions (MFIs) with asset size up to Rs 500 crore, as priority sector lending till March 31, 2022.
• The second purchase of government securities for an aggregate amount of Rs 35,000 crore under G-SAP 1.0 to be conducted on May 20.
• Rules for availing overdraft facility for state governments relaxed up to September 30.
• Rationalisation of KYC compliance norms.