Home » Central bank (RBI) measures to prop up economy, ease lending

Central bank (RBI) measures to prop up economy, ease lending

by MD Samsuzzaman Siyam

An Indian naval officer walks past the logo of India’s central bank, the Reserve Bank of India (RBI), in Mumbai on November 9, 2016.

Punit Paranjpe | AFP | Getty Images

Indian banking shares jumped on Wednesday after the central bank introduced measures to boost lending as the coronavirus crisis continues to take its toll on the country.

The Nifty Bank index was up 1.36% while the Nifty PSU index — which captures the performance of India’s public sector banks — rose 1.38%. They outperformed the benchmark Nifty 50, which was up only 0.61%.

Shares of major lenders jumped after the announcement. Bank of Baroda traded 2.2% higher, IndusInd Bank added about 2%, HDFC Bank gained 0.8%, Axis Bank was up 2.05% while the State Bank of India advanced 0.85%.

RBI announces measures to facilitate lending

The central bank governor announced plans to inject 500 billion rupees ($6.78 billion) of liquidity to ease access to emergency health services. The move would allow commercial banks to borrow money from the central bank through repurchase agreements, or repos, and lend it out to Covid-19-related businesses.

To boost provision of immediate liquidity for ramping up Covid-related health-care infrastructure and services in the country, the central bank will open a liquidity window of 500 billion rupees ($6.78 billion), with tenors of up to three years at the repo rate that will be available until March 31, 2022, Das said.

The repo rate is the key lending rate at which the RBI lends to commercial banks. It is currently at 4%.

Das explained that under the scheme, banks can provide fresh loans to a variety of businesses and entities including vaccine manufacturers, importers and suppliers of vaccines and Covid-related drugs, as well as manufacturers and suppliers of oxygen and ventilators.

Banks would be able to lend to borrowers directly or through intermediary financial institutions that are regulated by the central bank and the lenders are expected to create a “Covid loan book” under the scheme, according to the central bank governor.

The RBI also announced other measures targeted at helping India’s micro, small and medium-sized businesses and financial entities at the grassroot level that are bearing the “biggest brunt” of the second wave of infections. That includes allowing certain small borrowers with exposures of up to 250 million rupees to restructure their loans by Sept. 30, 2021 — provided they did not restructure their loans last year under earlier programs and were classified as “standard” accounts as of March 31.

Uncertain economic recovery

The South Asian nation is currently facing a devastating second wave that has forced several states to go into lockdowns while others have stepped up social restrictions. On Tuesday, India crossed 20 million Covid-19 cases and its official death toll exceeded 222,000 fatalities.

Economists have warned that the ongoing crisis will likely delay India’s economic recovery. Last year, a two-month national lockdown derailed growth and pushed the South Asian economy into a technical recession.

Local media reports, citing sources, said that banks have been looking to the RBI for relief measures to help borrowers battle the second wave of Covid-19 and provide relief to lenders’ balance sheets in light of a potential surge in bad loans.

Das also virtually met CEOs and managing directors of selected non-banking financial institutions and microfinance institutions on Monday to discuss, among other things, the potential stress on balance sheets of those firms.

India’s central bank last cut its repo rate in May 2020 during an emergency meeting to counter the economic fallout from the month national lockdown.

The RBI reduced the repo rate by 40 basis points in May and 75 basis points in March last year, reducing the benchmark lending rate by 115 basis points in 2020. In 2019, the central bank slashed rates by 135 basis points.

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