RBI’s Plan on Maintaining Financial Stability During The COVID – 19 Outbreak

rbi press conference

The times are turbulent and even though riskier is the constant nature of the economy and financial market, the outbreak of COVID-19 has made the patch ahead more slippery. In India, when the 21 days lockdown got extended further, the assurances of a stable economy were called for. Thus, to the rescue comes the Reserve Bank of India (RBI) when the Governor of RBI, Shaktikant Das, summoned a second press conference on 17th April, Friday. The RBI Governor announced about the second tranche of liquidity boost to stable the financial market and let the banks lend more. However, this is also notable that this is the second tranche of liquidity boost promised by the Governor as the first set of Rs 3.74 lakh crores had already been injected into the market through various instruments, as per the announcement in the last week of March.

This was the second conference in one month that has been organised by the RBI. Here are the following objectives mentioned in this conference:

1. To maintain adequate liquidity in the system
2. To facilitate and incentivise bank credit flows
3. Ease the financial stress
4. Enable the formal functioning markets

The measures taken are as such:

Liquidity Management:

As a measure to manage the liquidity of the market, the RBI will be conducting TLTRO 2.0 which is Targeted Longer-Term Refinancing Operations under which about Rs 50,000 crores of starting tranches will be invested in NBFCs and MFIs. Among these about 50% of the investments will go to smaller NBFCs and MFIs, thus ensuring the flow.

Special Refinance Package for institutions like SIDBI and NABARD:

Since these institutions are finding it difficult to raise the amount from the market, thus a special refinance facility of about Rs 50,000 crores will be floated to SIDBI, NABARD and NHB to enable them to meet sectoral credit needs. This will ensure the credit flow reaches to the MSMEs.

Reduction of Reverse Repo Rate by 25 basis points:

With relation to the Liquidity Adjustment Facility and to ensure that the banks lend more, the RBI has decided to cut down the reverse repo rate by 25 basis points i.e., from 4% to 3.75% with immediate effect. Although the policy repo rate, the marginal facility rate and bank rate remain unchanged.

60% increase in WMA limits for States:

RBI has increased the WMA limit by 60% for the states which are over and above the level on the 30th March 2020. As quoted by the RBI Governor, it has been done “to provide greater comfort to the states for undertaking COVID-19 containment and mitigation efforts and also to plan their market borrowing programs better.” However, this facility is said to be available only until September 30th, 2020.

● Lending institutions shall exclude the 90-day moratorium norm on loans from NPA Classification

● Large Accounts under default are required to maintain an additional provision of 20%

● Banks and Cooperative Banks shall not declare dividends until further notice

● The Liquidity Coverage Ratio(LCR) requirement of scheduled commercial banks has been brought down from 100% to 80% with immediate effect. The requirement will be restored back in two phases:

1) 90% by October 1st 2020
2) 100% by April 1st 2021

● NBFCs can extend real estate loans by 1 year if situations are beyond the control.

Although this is a situation of heightened uncertainty, the Governor ensured that RBI will be devising more measures to keep the financial system sound and liquid. He ensured that we shall overcome and cure together.

Categories RBI

Leave a Comment