RBI actions prudent, but it also has to keep its guard up

The RBI has once again pinch-hit for the government. Confirming that the COVID-19 crisis was still unfolding and threatening to derail the recovery seen in the March quarter, Governor Shaktikanta Das has pressed into action.

On Wednesday, he announced measures catering to individuals, small businesses and MSMEs, taking the RBI’s pandemic-related monetary generosity to over Rs 14 lakh crore. Last year too, it was the central bank that spearheaded the economic stimulus and markets aren’t ruling out fiscal stimulus should COVID-19 infections rise disproportionately.

But despite Das' prudent actions and assurances, banks and borrowers aren’t completely enthused as the former sought an extension of classification of bad loans, while the latter was anticipating a blanket loan moratorium, whose levy of interest on interest landed at the Supreme Court. 

Small businesses and MSMEs are a critical cog in the economy, but also are the most-affected due to the pandemic. Sensing the need, the RBI announced the Rs 10,000 crore special long-term repo operations for small finance banks to ensure credit flow to small businesses and categorised credit to MFIs as priority sector lending.

Similarly, the Rs 50,000 crore liquidity support to healthcare infrastructure including vaccine makers, diagnostics and healthcare companies is timely. Above all, the extension of loan restructuring to individuals, small businesses and MSMEs by six months, permitting reassessment of working capital needs of already restructured accounts and extending moratorium period by up to two years prevent the possibility of mass liquidations. 

Even though the proportion of restructured loans will be lower, it underscores the re-emergence of risks to asset quality of banks.

Some also believe that the announcements allaying potential concerns around MSMEs or MFI credit quality stress aren't that significant like last year when the RBI slashed policy rates to record lows and infused a copious amount of liquidity.

Right now, the problem is one of demand, as reflected in the dismal credit offtake. It means the central bank not only has to put its normalisation policy on hold, but also keep its guard up for the next few quarters.