The Reserve Bank of India (RBI) has already initiated macro-economic and financial sector policy measures to ease the impact and pain of the lock-down caused by COVID-19. Key among these are the two interest rate cuts, reduction of reserve requirements for banks to infuse liquidity into the financial system and most importantly, the creation of a Rs50,000 crore directed lending facility (using the Small Industries Development Bank of India (SIDBI), the National Bank For Agriculture & Rural Development (NABARD) and the National Housing Bank (NHB)) to channelise funds into agriculture, micro, small and medium enterprises (MSMEs) and microfinance, among others.
RBI must be congratulated for these swift policy actions taken so far but it still needs to undertake several key steps (related to implementation) so that the economic fight against COVID-19 is conducted in a robust manner. So, what more should be done by RBI?
First, as a primary strategy here, the RBI has cut interest rates twice, to the best extent possible. But a key task remains—that of the RBI ensuring that its rate cuts are passed on to the ultimate end users immediately by the banks and financial institutions (FIs). Surely, customers cannot be left to the mercy of banks & FIs (i.e., non-banking finance companies (NBFCs), micro finance institutions and other FIs) in this regard. In other words, merely providing interest rate cuts won’t help—the RBI must mandatorily facilitate its effective implementation in real time, so that the end customers get the benefit of the rate cuts.
Second, the RBI has reduced reserve requirements for banks and enabled greater liquidity into the financial system so that banks and FIs may lend more. Additionally, RBI has also created a specialised and innovative funding line through development finance institutions (DFIs) such as NABARD, SIDBI and NHB, for agriculture, and (m) SMEs, microfinance among other customers.
Two points are in order here. Channels for this directed lending window created by RBI must not just be limited to microfinance banks, NBFCs, NBFC MFIs, small finance banks and/or payment banks alone. Rather, it should also include the wider microfinance sector so that the vulnerable and poorest groups are adequately reached in a quick time frame. The key is to ensure greater access, enhance outreach now and put money in the hands of these people for their livelihoods and sustenance.
Thus, well run alternative financial institutions (using mutual benefit and not-for-profit legal forms) such as cooperatives and societies must also have access to RBI’s targeted and specialized lines of funding. This has to be undertaken on a war footing as grass-roots nodes are very critical for the revival of the economy.
Third, liberal working capital support and term loans (to cover higher costs of physical distancing and various supply chain disruptions) must be available on flexible and easy to procure terms with all interest rate cuts done by RBI being passed on fully to the (intermediaries as well as) end consumers. This is for the directed lending of RBI’s Rs50,000 crore through SIDBI, NABARD and NHB to agriculture, MSME and microfinance customers. Furthermore, these customers should not have to run from pillar to post seeking development finance institutions (DFIs), banks and other financial institutions (FIs) including NBFCs, MFIs, cooperatives etc. This is a very crucial aspect.
Another point deserves mention here. Let us face it. Banks and FIs will see a lot of credit risk in lending in the present environment (and I don’t blame them) and that is where the RBI must step in and ensure that its directed lending facility is properly and fully utilised by those concerned in a responsible manner. If by being risk averse, banks and FIs don’t lend, all will be lost and the economy will come to grinding halt. And that is not what we want. If that were to happen, the whole purpose of the RBI directed lending facility would be lost.
Fourth, the RBI must actively encourage and incentivize DFIs, banks and all kinds of FIs to introduce specialised vulnerability reducing financial products to enhance the staying power of SME, agriculture and microfinance customers. This is of paramount importance today. For example, merely enhancing credit may not help in some cases. You may need more of the right kind of loan products that will enhance the staying, bargaining and negotiating power of customers in these sectors across different supply chains. In other words, vulnerability reduction should be one of the key objectives of this directed lending facility created by RBI.
Fifth, for SME customers with excellent prior record and no delinquency or default (prior to the occurrence of COVID-19), specialised term loans can be provided from this directed lending facility. These term loans must have the option of being converted to equity after three years but before five years. The RBI can thus facilitate DFIs, banks and FI to create what would be called as a “COVID quasi equity term loan product” whose principal need not be repaid but can be converted into equity by the borrowers, if they so desire and provided they also meet certain minimum standards of performance during the life of the loan. Interest (as applicable) will have to be paid on a quarterly or six month basis.
Sixth, the interest moratorium offered by banks and FIs must become an interest waiver. The RBI has asked banks and FIs to defer interest for a period of three months for various kinds of credit facilities. Merely postponing the payment of interest by three months will hardly make a difference and in fact, customers will land up paying more interest because of three extra months of interest being paid eventually. RBI must immediately send out a notification waiving off interest for three months for all customers—especially, (m) SMEs and others. This is not the time to be bound by convention and it can be easily done because the crisis is huge and unprecedented and its duration still uncertain.
Seventh, loans apart, care must be taken by RBI to ensure complete safety of the depositors’ money. RBI must ensure that FIs and banks take immediate steps to enhance customer confidence seamlessly. This should include “Duty of CARE” messages by bank and FI boards and also immediate customer (online and digital) outreach to assure depositors and other customers that all is, and will be well and that their money is safe and sound. Providing confidence to the public on safety of savings deposits is very, very critical at this juncture. This must be immediately ensured by RBI. Customers must also be allowed to (prematurely) break fixed deposits (without penalty) and where applicable, higher (than normal) loans on fixed deposits must be provided as needed by the depositors.
Eighth, RBI must ensure that there is higher and flexible coverage by deposit insurance schemes to provide assurance to depositors—this is a must in the present times. The limit per account must be enhanced to at least 25% of the account value, subject to a minimum deposit insurance coverage of Rs10 lakh (at the least, where applicable).
And how can RBI ensure effective implementation of all of the above in real time?
Regarding the Rs50,000 crore directed finance facility and other measures mentioned above, given lessons from India and other countries, it also seems necessary for RBI to appoint a broad based (special) national COVID implementation committee (with executive powers and comprising RBI board members, civil society, independent domain experts and other stakeholders). The purpose of this committee would be to monitor and evaluate the effectiveness of RBI’s various policy measures to combat COVID and also ensure better implementation by identifying and removing bottlenecks in real time. This committee must be headed by a non-executive independent director of the board of RBI. It should provide regular feedback and valuable independent insights from the field to enhance the governance of implementation of the various RBI policy COVID-related measures so that there is no gap between “intended RBI policies” and “realized implementation strategies”. It is one thing to have a great policy measure. It is entirely a different matter to have sound implementation of the same on the ground—without the latter, no policy measure will be able to really combat the economic impact of COVID-19!
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Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years.)
