Banks should immediately transmit the benefits of these measures to industry

MVIRDC World Trade Center Mumbai welcomes the bold measures taken by Reserve Bank of India (RBI) to infuse liquidity and direct banks to provide 3-month deferment on repayment of loans.

Sharing her perspectives on the relief measures,Ms. Rupa Naik, Senior Director, MVIRDC World Trade Center Mumbai said, “The RBI’s big bang liquidity easing measures and reduction in repo rate are the need of the hour. However, banks should promptly transmit these benefits to the industry by extending fresh loans at lower interest rate.”

The RBI decided to infuse Rs. 3.74 lakh crore through three liquidity measures, viz. introduction of Targeted Long Term Repo Operations (TLTRO), reduction in Cash Reserve Ratio (CRR) and hiking the limit of Marginal Standing Facility (MSF). RBI also allowed banks to reassess the working capital limits for industry.

Commenting about the leeway given to banks for extending working capital loans, Ms. Naik said, “In this period of lockdown, revenue inflow for industry has stopped completely; however, they still have to pay routine expenditure such as rents, electricity bills, wages to workers etc. Therefore, with this move by RBI, banks will be encouraged to increase the working capital limits for the industry and thereby lend more short term funds to enterprises so that they can meet their short term expenditure.”

Ms. Naik further remarked, “At this moment, we are not sure about the timeline by when the country and the world will recover completely from the COVID-19 crisis. Therefore, banks should offer lumpsum loans to industry for a period of 2-3 years so that even if the COVID-19 crisis extends beyond 21 days, companies can still operate as a going concern.”

Speaking about further measures to ease the distress of the corporate sector, Ms. Naik said, “Companies that have borrowed dollar funds need to be given relief as the Indian rupee has depreciated sharply against dollar. Therefore, the liability of these companies has increased in terms of rupees.”

Ms. Naik also suggested that RBI should subscribe to the primary issuance of central government bonds. “In these uncertain times, RBI should relax its rules of not participating in the primary issuance market of the central government. If RBI participates in the primary market for central government bonds, the bond yields will fall and drive down the interest rate in the market.”

After 1997, RBI stopped participating in the primary market for government bonds as it amounts to monetization of the fiscal deficit. Currently, the interest rate on the 10-year government bond stands at 6.09%, which is far higher than the repo rate of 4.4%. If the interest rate for government is more than 6%, the interest rate for industry will be 1.5% more than this, i.e. 7.5% (because of risk premium associated with the private sector lending). Therefore, even though the RBI’s policy rate stands at 4.4%, the interest rate for the corporate sector will be far higher than 7%.

The only wayto reduce interest rate for corporate sector is to reduce the government bond yields, which stands at 6.0%. If RBI directly purchases the bonds of the government, by participating in the primary issuance of government bonds, then the yields on government bonds will decline.

Until 1997, RBI used to subscribe to the bonds of the government in the primary market. Since 1997, this primary market participation was discontinued through an agreement signed between the central government and RBI. In this exceptional time, RBI may have to deviate from this agreement to reduce the cost of funds for the distressed corporate sector.