The Reserve Bank of India Governor needs to be complimented for coming out with a series of well thought through announcements to ameliorate the challenges that the financial ecosystem has been facing due to the outbreak COVID-19 pandemic. Apart from the measures to infuse an additional Rs. 3.74 trillion into the system, what is more reassuring is the fact that the RBI has now made the Reverse Repo rate as the operational rate. With this move, the commercial banks would now have to use the additional liquidity to be invested in corporate bonds and non-convertible debentures (NCDs). However, the decision to restrict the same to only investment-grade corporate bonds and NCDs will probably need to be revisited as that criterion will leave quite a few market players ineligible.
Allowing all banks and NBFCs to offer a 3-month moratorium on repayments of all term loans to their borrowers is a positive step. However, this being an optional move, its implementation has been left to the lending institutions. The fact that no borrower’s credit history will get affected because of this provides relief to all categories of borrowers. This will also provide the companies some breathing space to re-draw their strategies and re-invent themselves.
Since the 21-day lockdown has disrupted economic activities pan-India and this would impact the loan servicing by many borrowers, it would be prudent for RBI to allow all lending institutions to go for a one-time restructuring of loans instead of classifying those loans as NPA. Post the lockdown, lending institutions should be allowed to make their own credit assessment of such accounts based on the future cash flows and value of underlying assets and accordingly make changes in the loan structures. This would go a long way in ensuring business continuity for many firms and self-employed individuals, and at the same time relieving banks from setting aside funds for provisioning purpose.
While the India Story remains strong in the long run, the measures announced today are aimed at protecting the resilience of the Indian financial system. Banks will immensely benefit from the CRR cut of 100 bps as that will put Rs. 1.4 trillion at their disposal. Borrowers will also benefit from the reduced interest rate apart from the 3-month moratorium on payments.
While banks have now additional liquidity at their disposal, it is imperative for that money to invested in commercial paper of companies rather than getting parked in RBI under reverse repo window. RBI may provide guidance to the banks to use this money in a cross-section of companies, including NBFCs, which are in need of money. Such targeted liquidity flow, especially to NBFCs, will help in reaching the money to the entrepreneurial class who form the backbone of the India Growth Story.
The Governor’s message that RBI will continue to monitor the developments more closely and is ready to intervene with both conventional and unconventional measures is very reassuring and we look forward to more such progressive measures in order counter the COVID-19 menace.
Contributed by Mr. Hemant Kanoria, Chairman, Srei Infrastructure Finance Limited