By Sunil Garodia
First publised on 2020-04-17 19:27:46
The RBI governor held a press conference today to announce
further measure to shore up the financial system that is burdened, like the
rest of the economy, by the Covid-19 crisis. He announced a slew of measures
like cutting the reverse reporrate by 25 basis points to make it 3.75%, releasing Rs 50,000 crore
liquidity support for NABARD (Rs 25000 crore), Sidbi (Rs 15000 crore) and National
Housing Bank (Rs 10000 crore), declaring that moratorium granted on existing
loans by banks will mean that they would not fall under the 90-day non-performing
asset norm, bringing down the liquidity cover ratio requirement of banks from
100% to 80%, and asking banks not to make any further dividend payouts until
the situation improves.
these are all good measures that will bring additional liquidity in the market
and ease the situation a bit, the economy is now tottering on the edge and
these macro measures are not going to help much. It is true that reducing the
reverse repo rate will make it unattractive for the banks to park their money
with the RBI and they will try to lend it to businesses. But since businesses
are facing tough times, new projects or additions to existing projects will not
happen in a hurry. Most firms will borrow now for only working capital needs as
devoid of cash, many are finding it difficult to make payments for salaries,
rents and other monthly expenses.
There is no doubt that these measures will ease the pressure on the financial system, but liquidity by itself is not the panacea for the troubles being faced by companies or individuals now. As the pandemic shows no signs of abating, the RBI would do well to extend the moratorium period from 90 days to 180 days. It should also direct banks not to charge usurious rates of interest for the delay as the situation is extraordinary and beyond the control of anyone. It should be recognized that this is not willful default but one that is forced by circumstances. Despite recent measures to restart some economic activity, the economy as a whole is not likely to return to any kind of normalcy before December, if not later. The RBI should keep that in mind when it announces any further relief measures.