RBI Steps In To Ease COVID-­19 Burden

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    Recently, the Reserve Bank of India (RBI) announced a series of measures to support the nation’s fight against the second wave of COVID-19 infections.

    Major Highlights Of Recent Steps 

    Term Liquidity Facility

    • RBI announced a Term Liquidity Facility of ?50,000 crores with the tenor of up to three years, at the repo rate to ease access to credit for providers of emergency health services.
      • Under this, banks will provide fresh lending support to a wide range of entities, including vaccine manufacturers, importers/suppliers of vaccines etc.

    Special Long Term Repo Operations for Small Finance Bank

    • The RBI decided to conduct special three-year long-term repo operations (SLTRO) of ?10,000 crores at the repo rate for Small Finance Banks.
    • The SFBs would be able to deploy these funds for fresh lending of up to ?10 lakh per borrower. 

    Lending by Small Finance Banks to MFIs 

    • SFBs will be permitted to reckon fresh lending to smaller Microfinance institutions (MFIs) (with asset size of up to Rs 500 crore) for on-lending to individual borrowers as priority sector lending.
    • This means there will be concessions on interest rates and repayments. This facility will be available up to March 31, 2022.

    Credit to MSME entrepreneurs

    • In February 2021, banks were allowed to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR).
    • In order to incentivise the inclusion of unbanked MSMEs into the banking system, this exemption currently available for exposures up to Rs 25 lakh and for credit disbursed up to the fortnight ending October 1, 2021, is being extended till December 31, 2021

    Overdraft (OD) facility for states

    • The RBI also announced certain relaxations and Overdraft (OD) facilities of State Governments so that they can better manage their financial situation in terms of their cash-flows and market borrowings.
    • Accordingly, the maximum number of days of OD in a quarter is being increased from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days.
    • This facility will be available up to September 11 30, 2021. The Ways and Means Advance (WMA) limits of states have already been enhanced on April 23, 2021.

    KYC rationalisation

    • The RBI has decided to rationalise certain components of the extant KYC norms
      • These include 
        • Extending the scope of video KYC known as V-CIP (video-based customer identification process) for new categories of customers such as proprietorship firms, authorised signatories and beneficial owners of Legal Entities and for periodic updation of KYC.
        • Enabling the use of KYC Identifier of Centralised KYC Registry (CKYCR) for V-CIP and submission of electronic documents (including identity documents issued through DigiLocker) as identity proof 

    Eligibility Criteria

    • The individuals and small businesses and MSMEs having aggregate exposure of up to Rs 25 crore and who has not availed restructuring under any of the earlier restructuring frameworks (including under the Resolution Framework 1.0 dated August 6, 2020), and who were classified as ‘Standard’ as on March 31, 2021, will be eligible to be considered under Resolution Framework 2.0. 
    • In the case of individual borrowers and small businesses who have availed restructuring of their loans under Resolution Framework 1.0, where the resolution plan permitted moratorium of less than two years, lending institutions will be permitted to use this window to modify such plans to the extent of increasing the period of the moratorium and/or extending the residual tenor up to a total of 2 years.

    Long Term Repo Operation (LTRO) 

    • It is basically a mechanism to inject liquidity into the banking system as well as to ensure the smooth transmission of monetary policy actions and flow of credit into the economy. 
    • Under it, the central bank provides one-year to three-year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.

    Cash Reserve Ratio (CRR) 

    • The Reserve Bank of India mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises. 
    • The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio. The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest in the money that is with the RBI under the CRR requirements.
    • The Cash Reserve Ratio in India is decided by RBI’s Monetary Policy Committee in the periodic Monetary and Credit Policy. 
    • CRR is one of the major weapons in the RBI’s arsenal that allows it to maintain a desired level of inflation, control the money supply, and also liquidity in the economy.
      • The lower the CRR, the higher liquidity with the banks, which in turn goes into investment and lending and vice-versa. 
      • Higher CRR can also negatively impact the economy as lesser availability of loanable funds, in turn, slows down investment. It thereby reduces the supply of money in the economy.

    Repo Rate

    • The repo rate is the rate at which the RBI lends money to the banking system for short durations.
    • Commercial banks sell government securities and bonds to the Reserve Bank of India with an agreement to repurchase them on a future date at a predetermined price including interest charges.

    Reverse Repo Rates

    • A reverse repo rate is a rate at which the commercial banks give a loan to the  central authority.
    •  It is a monetary instrument used to maintain supply in the market.
    •  A reverse repo is the opposite of the repo rate.

    Source :TH