RBI throws a lifeline to covid ravaged businesses

Economic activity has slumped in the wake of the second wave of the Covid-19 pandemic. Animal spirits that seemed to be on revival in the first three months of this year, once again, took a beating and are now nearly moribund. Revenues of not just listed large corporations but also hole-in-the-wall shops and mom-and-pop stores across India have drastically plummeted. Meanwhile, several state governments are coming to terms with the grim reality of their crumbling medical infrastructure which, in the first place, was woefully ill-equipped to deal with the deluge of cases set loose by the pandemic.

Amidst such a demoralising tableau, RBI Governor Shaktikanta Das stepped up to the plate and unveiled another set of economic measures aimed at easing the pressure on the small and medium industry. This sector of all sectors in India has been the worst hit and had pressed the panic button quite some time back thanks to the disruption unleashed by the lockdown in March last year and its persistent overhang. Just when things were starting to look promising for this sector, the second wave forced it to down its shutters.

Assistance to the health sector

Given the destructive sweep of Covid in the country currently, the central bank has astutely realised that the right economic stimulus lies in strengthening the existing medical infrastructure in the country. To that end, the RBI has kicked off an on-tap liquidity window worth Rs 50,000 crore for the health sector. Under the scheme, banks can provide fresh lending support to a wide range of entities including vaccine manufacturers; importers and suppliers of vaccines and priority medical devices; hospitals and dispensaries; pathology labs; manufacturers and suppliers of oxygen and ventilators; importers of vaccines and Covid related drugs; logistics firms and also patients for treatment.

Under the scheme, the central bank has encouraged banks to create a Covid loan book and is offering 40 basis points higher than the current reverse repo rate of 3.35% as an incentive for them to park their surplus liquidity with it. This initiative will help banks mobilise a larger quantum of credit to the health sector at lower interest rates.

To the rescue of small businesses and MSMEs

Additionally, the RBI in its bid to help the individuals and small businesses will boost the operations of Small Finance Banks (SFBs) by conducting special three-year long-term repo operations (SLTRO) of ₹10,000 crore at repo rate for the SFBs. These SFBs have been directed by the RBI to deploy these funds for fresh lending amounting to Rs ₹10 lakh per borrower. The repo rate currently is 4%.

With a view to give a fillip to the business of Micro-Finance Institutes in India, the RBI has now classified lending to MFIs with an asset base of Rs 500 crore by SFBs as priority sector lending. The idea here is to revive small business entities which run the risk of dying in the current antagonistic economic environment.

The banking regulator also vouchsafed for MSME businesses whose exposure does not exceed Rs 25 crore and those that have not opted for restructuring last year. These businesses can now opt-in for the one-time restructuring scheme that was released by the RBI last year. The one-time restructuring scheme intended to rescue businesses whose financial stability was marred by business disruptions engendered by the pandemic.

Will the measures work?

While all these measures are surely praiseworthy, their efficacy is under a cloud. Economists have often spoken about how the Indian banking system fails miserably in terms of rate transmission for the customer on the ground. Further, there is always the chance that these measures could lead to a sudden stoking of non-performing assets by unscrupulous players if banks do not implement these guidelines dispassionately and thoroughly.

To be fair, the RBI has done its best to allay a number of concerns on the economic front. A major determinant of how India battles and eventually overcomes the pandemic and its consequences will heavily depend on the adept administrative handling by state governments and spirited assistance on procurement of resources by the central government. Failing this, RBI’s measures can turn out to be a salve that will soothe but only for some time while the wound keeps bleeding.