By Amarendu Nandy & Prasenjit Chakrabarti
In the war against Covid-19, RBI threw in the gauntlet by announcing a “squeeze-out liquidity” program for commercial banks. It opened a loan window of Rs 50,000 crore, with tenors of up to three years at the prevailing repo rate (4%). The central bank expects the targeted on-lending of credit to manufacturers and healthcare service providers to strengthen India’s anti-Covid infrastructure. Loans are classified as Priority Sector Loans (PSLs) until repayment or maturity, whichever comes first. The program has some positive aspects. First, it indicates that RBI sees merit in a targeted intervention policy and is aware of the emerging financial needs of the healthcare sector which has been at the forefront in tackling challenges related to COVID. The increase in liquidity of 50,000 rupees represents about 9% of the total health expenditure of 6 trillion rupees in 2019-2020.
Second, the explicit directive on the rapid disbursement of cash is laudable. However, it remains to be seen whether the on-lending terms result in any real gains for borrowers relative to prevailing market rates. In this regard, the PSL label is likely to facilitate concessional lending, being exempt from the statutory requirements of CRR and SLR.
Third, the system creates additional income incentives for banks, especially those with excess liquidity, which can be parked with an RBI of 3.75% (repo rate minus 25bp) up to the amount of disbursed loans. as part of the “ Covid loan portfolio ” (which they need to create as part of the scheme). With the current repo rate at 3.35%, banks could earn 40bp more on some of their excess liquidity.
However, serious concerns remain. First, the program is well intentioned, but untimely. In the midst of the current crisis, the healthcare sector needs an immediate boost to strengthen medical facilities and emergency services. The intervention will not solve urgent medical infrastructure problems because the transmission of credit will take time. Even if the disbursement deadlines (30 days) are strictly adhered to, capacity expansion cannot happen overnight, as manufacturers and service providers could face political, bureaucratic and regulatory hurdles at all. the stages of capacity planning and implementation. The intervention, which is reactive rather than proactive, is unlikely to be effective at this point, as precious time has been lost between the first wave and now.
Second, if the loan term is three years for banks, there are no such restrictions on on-lending, which could lead to asset-liability mismatches. To avoid the same, if the lenders, in turn, offer loans for a shorter term, this may not encourage many targeted borrowers to avail of the credit under the program. RBI’s implicit assumption appears to be that loan demand will only be for brownfield projects. In this case, the impact on health infrastructure, economic activity and income will only be marginal.
Third, the intervention seems redundant because there is already excess liquidity in the system. As of April 2020, RBI’s average daily net liquidity absorption under the Liquidity Adjustment Facility (LAF) amounts to Rs 4.09 lakh crore. The year-over-year growth in bank lending and deposits was 5.7% and 10.3%, respectively, through April 23, 2021. The widening credit-deposit spread may indicate be that banks are not confident enough to lend to a large number of borrowers, including those in the healthcare sector, who were in dire need of the desired liquidity even before RBI’s current intervention. Creating incentives to increase interest income on excess liquidity is unlikely to induce banks to lend more in the current uncertain and volatile environment, unless the fundamental issues plaguing the risk aversion problem. banks’ risk are not properly handled.
Finally, the diagram does not elucidate the prior credit profile of borrowers. This can potentially create adverse selection issues for lenders if they do not perform due diligence due to time and resource constraints at this point.
Thus, the RBI initiative is untimely, but it can facilitate the expansion of health care capacity in the medium to long term, provided the associated concerns are addressed within a limited time frame.
The authors are respectively, assistant professor (economics) and assistant professor (accounting and finance), IIM Ranchi