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RBI liquidity push yields little as banks seek to avoid a second lightning strike

Banks are not willing to expose themselves to credit risk by lending.

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Last Updated: May 17, 2020, 01.41 PM IST
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The question is whether the measures helped improve the liquidity situation in the economy?
By Deepthi Mary Mathew

In the wake of Covid-19, RBI and the government have come up with various measures to support the economy. RBI has led the way by announcing various liquidity-boosting as well as regulatory measures. In the last MPC meeting, the repo rate was cut to 4.40 per cent, reverse repo rate to 4.0 per cent, and the CRR to 3.0 per cent. The liquidity-boosting measures to the tune of Rs 3.74 lakh crore, also included Long Term Repo Operation (LTRO) up to Rs 1 lakh crore.

In addition, as a relief to borrowers, RBI announced a three-month moratorium period on loans. The second round of liquidity boosting announced on April 17 were targeted at NBFCs and MFIs with a Targeted Long-Term Repo Operation (TLTRO) worth of Rs 50,000 crore. The central bank mandated that the funds availed by the banks under TLTRO should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 percent of the total amount availed going to small and mid-sized NBFCs and MFIs. Similarly, the reverse repo rate has been again reduced by 25 bps to 3.75 per cent.

But, the question is whether the above measures helped improve the liquidity situation in the economy? Though banks are able to avail credit at a cheaper rate, they are not willing to expose themselves to credit risk by lending. The economy is passing through an uncertain phase. The Purchasing Managers’ Index (PMI) falling to 27.4 in April from 51.8 in March came as a shocker, though a decline was expected. For the services sector, the decline was much sharper at 5.4 in April compared to 49.3 in March.

With the businesses being badly hit, the repercussions would be seen on the income growth for both businesses and individuals. And, once moratorium period ends, repayment of loans would also be negatively impacted. In such a scenario, it is unlikely that banks will go the extra mile in advancing fresh credit. The three-month moratorium on loans, though a relief to the borrowers, can affect profitability of banks.

Thus, instead of increased lending, banks are parking the excess funds with the central bank. The reduction of reverse repo rate was to disincentivise banks from parking funds with RBI. However, as per the recent data, on May 6, banks had deposited Rs 8.1 lakh crore with RBI under the reverse repo window. It could be attributed to both risk aversion among banks and lack of demand for credit.

Banks were in the process of cleaning up their balance sheets. The asset quality review (AQR) forced banks to disclose their stressed assets. The NPA ratio of the banks is now over 9 per cent, and it is likely to rise in the coming quarters. The increased lending by the banks during the Global Financial Crisis is often cited as one of the reasons for the higher NPAs in the banking sector.

In the present Covid-hit economy, banks would try to ensure that lightning never strikes the same place twice. In such a scenario, more concrete measures would be needed from the central bank and government to ensure liquidity in the market.

(Deepthi Mary Mathew is Economist at Geojit Financial Services. Views are her own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

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