Covid-19: RBI Wants Banks to Lend, Gives Relief From Bad Loans To encourage banks to lend, RBI has further cut reverse repo rate (RRR) by 25 basis points to 3.75 per cent

The Reserve Bank of India on Friday announced second tranche of measures to support the economy amidst the covid-19 virus crisis. The central bank governor Shaktikanta Das in the second fiscal package announced some more liquidity measures and relief for banks from bad loans.

"Based on our continuing assessment of the macroeconomic situation and financial market conditions, we propose to take further measures to (i) maintain adequate liquidity in the system and its constituents in the face of COVID-19 related dislocations; (ii) facilitate and incentivise bank credit flows; (iii) ease financial stress; and (iv) enable the normal functioning of markets," he said in a statement.

Liquidity Measures

To encourage banks to deploy available funds in the system, the reverse repo rate (RRR) has been further cut by 25 basis points (bps) to 3.75 per cent. The repo rate is unchanged at 4.4 per cent.

Earlier in the first set of measures announced on 27 March, RRR was slashed by 90 bps from 4.9 per cent to 4 per cent. A lower RRR makes it unattractive for banks to deposit their funds with the RBI.

To free up more capital for lending, fresh targeted long term repo operation (TLTRO) of INR 50,000 crore has also been announced. Naming it TLTRO 2.0, Das said banks should give at least half of the availed amount to non-banking finance companies (NBFC) and Micro Finance Institutions (MFIs).

"The latest TLTRO announcement from RBI aimed at injecting additional liquidity into the banking system, specifically via banks to small and mid-sized NBFCs and MFIs came at a much needed time when NBFCs are suffering from a significant business impact and liquidity stress due to the COVID-19 pandemic," said Kunal Varma, CBO and Co- founder, MoneyTap.

Earlier, INR 1 lakh crore was dedicated to TLTROs of three year tenure.

In a separate measure, special re-finance facility of INR 50,000 crore will be given to All India financial institutions (AIFIs) such as the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB). Of the total amount, INR 25,000 crore will go to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs), INR 15,000 crore to SIDBI for on-lending/refinancing and INR 10,000 crore to NHB for supporting housing finance companies (HFCs).

"Since the NBFCs were left out in the previously announced benefits (on 27 March), today's announcement of treating their role as SCBs is a positive signal," says Meghna Suryakumar, Founder and CEO, Crediwatch.

Financing under this facility will be charged at the RBI's policy repo rate, as per the central bank.

Relief From Bad Loans

In a major relief to banks, the three-month moratorium announced on 27 March will be excluded from the 90-day period of non-performing asset (NPA) classification. However, Das said the banks will have to maintain an additional provisioning of 10 per cent on such accounts.

For loans given by NBFCs to commercial real estate projects, the "Date of Commencement of Commercial Operations' can be extended by one year without attracting a downgrade in asset classification. This relief was already available to banks and was extended to NBFCs and HFCs in today's announcement.