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RBI Governor Shaktikanta Das launches second round of loan restructuring, other relief measures to counter Covid second wave

The RBI will continue to monitor the emerging COVID situation and deploy all instruments at its command to support the financial sector, RBI Governor Das has said.

May 05, 2021 / 11:02 AM IST
Reserve Bank of India (RBI) Governor Shaktikanta Das

Reserve Bank of India (RBI) Governor Shaktikanta Das


Reserve Bank of India Governor Shaktikanta Das on May 5 announced a Rs 50,000-crore on-tap liquidity facility to ramp up health infrastructure and additional loan restructuring schemes amid a series of measures to help the financial services industry tide over the second coronavirus wave that threatens economic recovery.

Borrowers with exposure up to Rs 25 crore who didn’t avail earlier facilities and where loans are standard as on March 31, 2021 will be eligible for restructuring in the second round, Das said in his unscheduled speech. The restructuring under the proposed framework can be invoked up to September 30, 2021 and banks have to implement it within 90 days of invocation.

Lenders can review the working capital limits of small businesses and MSMEs as a one-time measure. Those who availed earlier window of restructuring can be given additional two years of moratorium, he said.

"India has mounted a valiant defence against Covid.  The RBI will continue to monitor the emerging situation and deploy all instruments at its command. The RBI will monitor data closely," Das said.

In the past few days, the governor has held a series of meetings with representatives from banks, non-banking finance companies (NBFCs), small finance banks (SFBs) and microfinance institutions (MFIs) on the emerging coronavirus crisis. During the meetings, industry officials had sought another round of loan restructuring and other measures from the central bank.

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 Last year, the impact of the lockdown was not seen on banks’ earnings because of the emergency measures announced by the central bank and the government. The RBI announced a six-month moratorium and a subsequent one-time restructuring facility for banks.

This helped banks to escape a huge spike in their non-performing assets (NPAs). A loan becomes an NPA if there is no repayment of interest or principal for 90 days. Once a loan becomes an NPA, banks need to set aside money to cover the potential losses from such accounts. High provisions hurt banks’ profitability.

Compared to the first wave, the financial services industry is better prepared this time. Most banks have steadily increased the amount of provisions to counter any possible COVID shock and have ramped up their digital capabilities to reach out to the customers as physical contact is risky.

Banks have also addressed the stress on the mid and large corporate book, at least a significant part of it, either by pushing them to NCLT or using the one–time restructuring facility announced by the RBI last year.

Also read: Hit hard by second COVID wave, MFIs seek loan restructuring and fresh liquidity support from RBI

Yet, there is a sense of uneasiness among bankers following the return of lockdowns in many states, including Maharashtra. One can’t blame them. In the last year, the banking sector has gone through enormous stress due to the onset of COVID. The gross NPAs of most banks have shown a notable jump if one includes the amount of stressed assets.

Some bankers are of the view that any big impact on asset quality is unlikely for big banks as they have already addressed much of the corporate bad loans. Also, the lockdowns are more calibrated in the second wave. Hence, the impact on asset quality will not be big, going by the comments of officials of large banks.

A few days ago, ratings agency Moody’s, too, had a similar view. It, too, flagged the risks to the economy on account of fresh infections. “The second wave of infections presents a risk to our growth forecast as the reimposition of virus management measures will curb economic activity and could dampen market and consumer sentiment,” the rating agency said.

It cited Google mobility data to show that retail and recreation activity across India had dropped by 25 percent as of April 7 compared to February 24. “This was mirrored in the Reserve Bank of India’s March Consumer Confidence Survey, which showed a deterioration in perceptions of the economic situation and expectations of decreased spending on non-essential items,” Moody’s said. "However, given the focus on `micro-containment zones’ to deal with the current wave of infections, as opposed to a nationwide lockdown, we expect the impact on economic activity to be less severe than that seen in 2020," the rating agency said.

Last year, when the Centre announced a nationwide lockdown to fight COVID-19, banks faced huge pressure on their asset quality and fresh business acquisition. But the actual impact on asset quality wasn’t much due to the timely intervention of the central bank to avert an immediate shock.

Within the financial services industry, smaller lenders such as microfinance institutions and small finance banks are more susceptible to a COVID shock. This is because of the nature of their client profile. The low-income borrowers are more vulnerable to shocks in an economic downturn as their livelihoods get impacted and income streams dry up. Though the RBI announced various liquidity measures in the previous rounds, the benefits hardly reached the small firms.
Dinesh Unnikrishnan
first published: May 5, 2021 10:50 am

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