The RBI has announced a series of measures to protect small borrowers and MSMEs amid the second Covid-19 wave in the country. The measures are timely and directed at certain segments. But more checks and balances are needed as risks increase for the financial system.
Ensuring flow of money to mid-sized hospitals, labs, other healthcare units
The RBI has to ensure that term liquidity facility of Rs 50,000 crore provided to banks flow at 4 percent rate to smaller hospitals, pathology labs, ventilator suppliers and others in healthcare sector.
The larger companies in these segment have the wherewithal to borrow money from various sources at a lower rate, but smaller and mid-sized companies find it difficult. Like in the previous term liquidity facility, there is a high probability that money will go to only highly-rated corporate in the healthcare space because banks are in no mood to take risk at current juncture.
End use of facility
Small Finance Banks (SFBs) have also got a boost from RBI by way of a 3-year long-term repo facility of Rs 10,000 crore for fresh lending up to Rs 10 lakh per borrower. Many small and marginal micro borrowers need money as the second wave is more lethal and local lockdowns have impacted their businesses. But banks will be cautious in lending as small businesses and micro borrowers see trade dwindle.
Transparency and disclosure of interest rates by MFIs
The RBI has also permitted small finance banks to lend to microfinance institutions (MFIs) with asset size up to Rs 500 crore as part of priority sector lending. This can be done at 4 percent for three years. Banks generally lend to MFIs at over 10 percent whereas MFIs lend it at an even higher rate, often keeping a 10 percent margin, since such loans come with greater default risks. Hence, there needs to be a mechanism of disclosure and transparency in terms of interest rates transferred to small borrowers. The whole purpose would be defeated if the SFBs, as well as MFIs, lend it at higher rates.
Higher provisioning for restructured borrowers
Higher provisioning for restructured accounts is crucial as Covid-19 second wave has significantly increased risks for banks. Earlier recovery estimates are no longer valid, and the economy is expected experience fresh jolts given the intensity of current healthcare crisis. Banking sector had already entered the crisis with a higher gross NPAs, but Covid-19 shock brought with it a new set of NPAs. The RBI has allowed further relaxation for already restructured accounts of individual borrowers and small businesses. Under Resolution Framework 1.0, the scheme permitted a moratorium of fewer than two years. Banks are now allowed to modify such plans to increase the moratorium period and extend residual tenor up to two years.
In respect to small businesses and MSMEs restructured earlier, banks are allowed as a one-time measure, to review the working capital sanctioned limits based on a reassessment of the working capital cycle, margins. Given the risks, the RBI should also insist with banks on higher provisioning from profits compared to the current 10 percent. Some banks are prudent and make provisions more than the regulatory requirement, but a large section of public sector banks (PSBs) will be exposed in case the situation deteriorates going forward.