Manoranjan Sharma

May 5, 2020

16 min read


Dr. Manoranjan Sharma

Chief Economist, Infomerics Ratings, Delhi


These are trying times for the global economy in general and the emerging market economies, including India in particular. The World Economic Outlook of the International Monetary Fund (IMF) reveals that the global economy is going through its worst phase since the Great Depression because of massive dislocations in global production, supply chains, trade, and tourism. Global financial markets are experiencing extreme volatility; global commodity prices, especially of crude oil, have declined sharply.

Despite a deeply disturbing global landscape because of real and worrisome fault-lines and a distinct deterioration in the macroeconomic landscape since March 27, 2020, India is one of the few countries, where GDP growth is projected to be 1.9 percent. The data on monsoon, sowing, fertilizers augur well for agriculture and rural outlook but the situation is grim in the industrial sectors. India is, however, expected to stage a smart recovery to grow at the pre-Coronavirus pace of 7 per cent in FY 21 both because of a flat base in FY 20 and growth gaining traction.

There is no doubt across the development spectrum that the fault-lines are real and worrisome. This time is certainly different! This is why the IMF has made a compelling case for enhancing fiscal stimulus when the coronavirus contagion starts to abate to prevent a recurrence of the Great Depression-era mistake of slashing the budget deficits. IMF’s Chief Economist Gita Gopinath cogently argued on April 14, 2020 “once the recovery has happened and we are past the pandemic phase, for advanced economies it would be essential to undertake a broad-based stimulus”. “This would be even more effective if it were coordinated across all the advanced economies”.

On the basis of a close and careful analysis of the rapidly unfolding disconcerting global realities, it is manifestly clear that this kind of globally synchronized unconventional Policy would facilitate a global recovery from the deepest recession in almost a century this year. The IMF is expecting a severe deterioration in global budget balances and public debt ratios based on spending to contain the health and economic impact of the pandemic. Global fiscal deficits will more than double to 9.9 percent of GDP this year from 3.7 percent in 2019. Global debt will jump 13.1 percentage points to 96.4 percent of GDP, with the figure jumping to 122.4 percent of GDP in advanced economies from 105.2 percent in 2019.

The Global Financial Stability Report justifiably argues that fiscal policies must occupy the centerstage at the present juncture. Fiscal measures can save lives, protect the vulnerable persons and firms from the economic impact of the pandemic, and prevent the health crisis from turning into a deep long-lasting slump. The IMF calculates that governments around the world have taken fiscal actions amounting to about $8 trillion, including more than $2 trillion in the U.S. This has caused understandable concern about the unsustainable nature of debt of major industrial nations. It is sometimes feared that unsustainable debt will hamper future growth, or even worse, sow the seeds of an eventual sovereign-debt crisis. This doomsday scenario necessitates a shared endeavor to reduce the red ink once green shoots emerge.


COVID-19 has impacted economic activity in India directly due to lockdowns, and indirectly through second-round effects operating through global trade and growth. Going ahead, heightened risk aversion, pronounced macro-economic slowdown, wholesome impact on the balance of payments because of the free-fall in oil reaching hitherto inconceivable levels, and greater uncertainty because of marked domestic slowdown and negative global cues would be increasingly important in the growth narrative. India announced an economic stimulus package worth 1.7 trillion rupees ($22.5 billion) on March 26, 2020, designed to help millions of low-income house-holds withstand a 21-day lockdown due to the coronavirus outbreak.


George G. Kaufman and Kenneth E. Scott define ‘systemic risk’ as “the risk or probability of breakdowns in an entire system, as opposed to breakdowns in individual parts or components, and is evidenced by co-movements (correlation) among most or all the parts” (2003). In other words, systemic risk, which drives most crises, refers to the possibility that a highly non-linear event, such as, the failure of an individual firm, will seriously impair other firms or markets and even negatively impact the broader economy with high social costs on those completely irresponsible for causing the crisis. This debilitating process could trigger a vicious cycle of eroded confidence in financial markets and regulators, stringent regulation, the expansion of the state, and move towards protectionism. The vulnerability of the banking sector of developing countries is starkly reflected in macroeconomic fluctuations, excessive exposure to sensitive sectors, inadequate capitalization, mounting non -performing assets (NPAs), and poor profit and profitability.


The present national situation is characterized by an increase in Kharif output was up by 37 percent, forex reserves of $476.5 billion estimated to meet almost 12 months of imports, the surge in surplus liquidity in the banking system post-March 27, 2020 and decline in inflation by 170 bps to from the January 2020 peak.

The Flexible Inflation Targeting Framework (FITF) was introduced in India post the amendment of the Reserve Bank of India (RBI) Act, 1934 in 2016. In accordance with the RBI Act, the Government of India sets the inflation target every 5 years after consultation with the RBI. While the inflation target for the period between 5 August 2016 and 31 March 2021 has been mandated to be 4 percent (+/- 2 percent). The inflation target can be missed when:

· The average inflation exceeds the upper tolerance level of the inflation target as predetermined by the Central Government for 3 quarters in a row.

· The average inflation falls short of the lower tolerance level of the target inflation fixed by the Central Government beforehand for 3 consecutive quarters.

The Governor pointed out “inflation could recede even further, barring supply disruption shocks and may even settle well below the target of 4% by the second half of 2020–21”. “Such an outlook would make policy space available to address the intensification of risks to growth and financial stability brought on by Covid-19.”

This is why the dialectics, dilemmas, and challenges of the process and pattern of development make it important in these difficult Coronavirus times not to lose hope and to exhibit a sense of flexibility and resilience, which India displayed even in the long-drawn, protracted struggle for India’s independence. This trial of adversity-this ‘agni pareeksha’ (trial by fire)- is ours. Meeting the onslaughts of this trial of adversity in a synchronized and resolute manner would enable us to be successful in the trial of prosperity in the future. The RBI Governor did well to quote Mahatma Gandhi, who justifiably maintained “in the midst of death life persists, in the midst of untruth, truth persists, in the midst of darkness, life persists”. This is how things should be -even in the most difficult days, we should never lose a sense of balance and proportion, an ability to look at the larger picture without in any way being oblivious of the ground-level realities. In its pursuit of addressing unsettled issues, emerging challenges, cognizable dilemmas, and unfolding scenarios, the RBI took several important decisions on 17 April 2020 in its aggressive attempt for a ‘whatever it takes’ programme.


In his second televised address since the nationwide lockdown was clamped on March 25, 2020, the RBI Governor Shaktikanta Das pledged to boost liquidity and expand bank credit. This was the second time that the Governor addressed the media since the nationwide lockdown was clamped on March 25, 2020. This was, however, the Governor’s first address since the extension of the lockdown by the Prime Minister till May 3, 2020. Essentially the decisions announced on April 17, 2020, are aimed at maintaining liquidity in the system, facilitating and incentivizing bank credit flows, easing financial stress, and enabling formal working of markets. These decisions are based on a clear understanding of the structure, spread, and repercussions of the underlying macro-economic issues. What makes these decisions welcome is the fact that they were taken in quick succession of the unscheduled pre-term MPC (monetary policy committee) meeting, wherein the Cash Reserve Ratio (CRR) was slashed by 100 basis points (bps) (together with the reduction in the requirement of minimum daily CRR balance from 90 per cent to 80 per cent till June 30, 2020 ), the Repo rate was reduced, in its steepest cut since October 2004, to a 15-year low of 4.40 per cent. There were also measures like a three-month moratorium on payment of installments of Term Loan outstanding and deferment of interest on working capital (WC) facilities by three months. This deferment will not be considered for computation of NPAs and revised drawing power (DP) calculations will be done by reassessing the credit history of the borrower.


The RBI governor stressed “the mission is to minimize the epidemiological damage in the country due to coronavirus. I want to convey the RBI’s resolve and the way forward”. He also clarified that this is not the last of the announcements on financial support during the crisis and “the central bank will monitor the evolving situation continuously and use all its instruments to address challenges posed by the pandemic”.

The policy measures announced are as under:

1. TLTRO of Rs. 50,000 crore. The LTRO is a tool through which banks get funds from the RBI for a longer duration (1–3 years), at a cheaper rate, by providing government securities with a similar tenure as collateral. With TLTRO, this lending operation gets ‘targeted’ towards channeling funds to NBFCs and MFIs, whose collections have, of late, dried up due to the COVID-19-linked EMI moratoriums. The earlier targeted long-term repo operation scheme (TLTRO 1.0) had benefited mostly larger corporations and PSUs. Accordingly, RBI will conduct auctions of targeted term repo operation (TLTRO 2.0) of up to three years tenor for a total of up to Rs. 50,000 crore ($6.54 billion) at the policy repo rate. The funds availed must be deployed in investment-grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs) both small and large as also the micro-finance institution. Banks availing these funds will have to lend at least 50% of it to medium and small NBFCs and Micro Finance Institutions (MFIs).

These investments will be classified as held-to-maturity even in excess of the 25 percent of total investments that are permitted to be categorized under HTM and these exposures won’t be reckoned under the large exposure framework. The funds availed need to be deployed within 30 working days from the date of the auction. This measure would provide the much-needed relief to finance companies, who are confronted with a severe resource crunch.

But of late, it has been observed that liquidity with the banking sector has never been an issue as it could be seen that banks parked their surplus liquidity with the RBI. While this earmarking would certainly be helpful, perhaps an innovative mechanism of directly financing these finance companies instead of going through banks could have been considered to reduce their costs in these stretched times. True, this has never been done in the past but then extraordinary times call for extraordinary and bold measures and a departure from the past. There is also the issue of ALM mismatches of NBFCs- lending by banks to all NBFCs even if their rating is BBB plus if they have good quality assets.

2. Refinancing Measures of Rs. 50,000 crore to All India Financial Institutions (AIFIs). The RBI also announced refinancing measures of Rs. 50,000 crore for All India Financial Institutions (AIFIs) such as NABARD, SIDBI, and National Housing Bank (NHB). This measure, which comprises (i) Rs. 25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and microfinance institutions (MFIs). (ii) Rs.15,000 crore to SIDBI for on-lending/refinancing. (iii) Rs.10,000 crore to NHB for supporting housing finance companies (HFCs) will benefit farm lenders, small businesses, and housing finance companies. Advances under this facility to all India financial institutions (AIFIs) will be charged at the RBI’s policy repo rate at the time of availment.

3. Reduced reverse repo rate. Drawing comfort from the surplus liquidity in the system because of government spending and various liquidity enhancing measures of the RBI, the Governor slashed the reverse repo rate by 25 basis points to 3.75 percent from 4.0 percent with immediate effect. Given that a humongous sum of Rs. 4.9 lakh crore has been parked by the banks with the RBI, this reduced reverse repo rate would induce banks to increasingly deploy these surplus funds for lending to mid-sized and smaller companies and thus give a boost to the flagging economy. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility (MSF) rate and the Bank Rate remain unchanged at 4.65 per cent.

4. Ways and Means Advance for States: On April 1, 2020 the RBI had announced an increase in the ways and means advances (WMA) limit of states by 30 percent. The WMA limit of states has now been increased by 60 percent over and above the level as on 31 March 2020 to provide greater comfort to the states for undertaking COVID-19 containment and mitigation efforts, and to better plan their market borrowing programmes. Since the increased limit will be available until September 30, 2020, this measure would ensure that the state governments do not incur high-interest costs by concentrating their borrowings at the start of the year.

Several States have, however, expressed a concern that the RBI decision to allow 60 percent higher borrowing under Ways and Means Advances (WMA) from the March 30, 2020 level (Rs 51,600 crore, roughly Rs 20,000 crore more over the March 30 level) is both grossly inadequate and temporary. It has been strongly urged that the Central government must raise their fiscal borrowing limits currently capped at 3 percent of the GSDP (Gross State Domestic Product) under the Fiscal Responsibility and Budget Management (FRBM)Act. The WMAs are short-term loan facilities, which allow the Centre and states to borrow funds from the RBI at repo rate (4.4 percent now) and bridge the mismatch between expenditure and receipts. These loans have a three-month tenure, and states are allowed an overdraft of 21 days.

5. Moratorium Period. The asset status freeze on loans granted moratorium or deferment on interest/principal payment effectively means that bad loans or NPA classification will now happen after 180 days instead of the current policy of 90 days of a payment default. In respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020, to May 31, 2020. Thus, banks will not have to classify some (non-NPA) stressed borrowers as defaulters, who may be finding it difficult to adhere to the prescribed repayment schedule prior to the moratorium period. This would cover the borrowers of both banks and NBFCs. The moratorium period will not lead to a systemic spurt in NPAs and will allow the borrowers across retail, small and medium-sized enterprises (SMEs) and corporates availing the moratorium to access additional funding from banks or non-banking financial companies (NBFCs). Lenders, however, will have to make an additional provision of 10 per cent for those exposures under moratorium. The requirement on the part of the banks to maintain the higher provision of 10 percent on moratorium loans over two quarters will ensure that banks distinguish the borrowers facing temporary cash flow problems from those with basic long-term issues. Such additional provisions at this time would, however, impact growth capital, affecting the lending capacity of some of the banks. Given the past track record of banks, there is also the distinct possibility that post-moratorium, there could be a spike in NPAs.

In respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020, to May 31, 2020. Thus, banks will not have to classify some (non-NPA) stressed borrowers as defaulters, who may be finding it difficult to adhere to the prescribed repayment schedule prior to the moratorium period. NBFCs, which are required to comply with Indian Accounting Standards (IndAS), would be guided by the guidelines duly approved by their boards and as per advisories of the Institute of Chartered Accountants of India 10 (ICAI) in recognition of impairments. In other words, NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers.

6. Extension of Resolution Timeline. Under RBI’s prudential framework of resolution of stressed assets dated June 7, 2019, in the case of large accounts under default, Scheduled Commercial Banks, AIFIs, NBFC-ND-SIs and NBFCD are currently required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default. Given the challenges to the resolution of stressed assets in the current volatile environment, the period for resolution plan has been extended by 90 days to provide relief to banks on finalizing resolution plans.

7. Distribution of Dividend. In an effort to strengthen the financial system of the country’s financial institutions, the RBI decided to freeze dividend payments by scheduled commercial banks (SCBs) and cooperative banks for the financial year 2019–20. This prudent restriction, which shall be reviewed on the basis of the financial position of banks for the quarter ending 30 September 2020, will help banks conserve capital and absorb credit losses.

8. Liquidity Coverage Ratio (LCR). To ease the liquidity position at the level of individual institutions, the LCR requirement for Scheduled Commercial Banks has been reduced from 100 per cent to 80 per cent with immediate effect. The requirement, which shall be gradually restored back in two phases — 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021, will provide an impetus to lending.

9. NBFC Loans to Commercial Real Estate Projects: At present, if the Date for Commencement for Commercial operations (DCCO) in respect of loans to commercial real estate projects gets delayed for reasons beyond the control of promoters, it can be extended by an additional one year, over and above the one-year extension permitted in the normal course, without treating the same as restructuring. Extension of a similar treatment to loans given by NBFCs to commercial real estate will provide relief to both the NBFCs and the real estate sector in the sense that developers will get more time and the NBFCs classification will get delayed.


RBI Governor’s Address of April 17, 2020, coming as it does quickly on the heels of the March 27, 2020 Policy is contextually significant in countering the economic slowdown. Towards this end, the Governor identifies and isolates critical success factors and dissects an innovative policy option transcending the conventional framework of allocation of risks in these extraordinary times reminiscent of the old Chinese curse “may you live in interesting times”. The present times are certainly interesting with not many options to overcome the travails of transition.

Financial stability in India implies ensuring uninterrupted settlements of financial transactions — both internal and external, maintenance of a level of confidence in the financial system among all the participants and stakeholders, and absence of excess volatility that unduly and adversely affects real economic activity. All these aspects are not just a random or disconnected set of activities but constitute a ‘system’, where different constituents form parts of an organic whole. The RBI Governor Shaktikanta Das justifiably stressed: “the overarching objective is to keep the financial system and financial markets sound, liquid, and smoothly functioning so that so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable”.

The second set of RBI measures to further ease bad-loan rules, freeze dividend payment by lenders, and discouraging banks from parking funds with the RBI instead of directly lending to the productive sectors by cutting the reverse repo rate by 25 basis points would help partly to revive growth. Wide-ranging liquidity infusion measures include a cut in the reverse repo rate, Rs 50,000-crore targeted long-term repo operations (TLTRO) and refinancing facilities for NABARD, SIDBI, and NHB; targeted liquidity provision to liquidity poor sectors with hindrances to market access; and supply of fresh currency of Rs 1.2 lakh crore from March 1 till April 14, 2020, to nation-wide currency chests.

Simply put, the increased liquidity together with a cut in the reverse repo rate will incentivize banks to actively lend to those institutions most in need of funds and make it affordable for businesses to borrow. Thus, on the whole, it is a good Policy and would go some way in nudging banks to move away from ‘narrow banking’- what Dr. Rakesh Mohan characterized as ‘lazy banking’. But some distressed segments and market players clearly expected much more from the RBI to revive growth. As a Hindi film punch line has it “yeh dil maange more” (this heart yearns for more, much more). But it has to be realized that this is not a one-off Policy- this is part of a continuum starting from the Finance Minister’s economic stimulus package of March 26, 2020, the RBI’s unscheduled Monetary Policy of March 27, 2020, and now the measures in the Monetary and Credit Policy announced on the package of April 17, 2020.

The measures spelt out by the RBI to boost liquidity and ease bad loan rules in the wake of the pandemic challenge provide an explicit recognition of the tightening financial conditions of small and mid-sized corporates, NBFCs and MFIs (microfinance institutions) and will certainly improve the situation. Further, both the Government of India and the RBI have repeatedly stressed that they are alive to the situation, particularly for mid-size and small companies, constantly monitoring the ground realities and would proactively deal with the situation within their overall constraints. This too shall pass!


IMF. 2019. India: 2019 Article IV Consultation-Press Release; Staff Report; Staff Statement and Statement by the Executive Director for India. December 23, 2019

IMF. 2020. World Economic Outlook. April 6, 2020

IMF. 2020. Global Financial Stability Report. April 14, 2020

Kaufman, George G., and Kenneth E. Scott. 2003. “What Is Systemic Risk, and Do Bank Regulators Retard or Contribute to It?”. The Independent Review, Volume VII, №3, Winter.

Darbha, Gangadhar, and Urjit Patel. 2012. “Dynamics of Inflation Herding, Decoding India’s Inflationary Process”. Global Economy & Development. Working Paper 48. January

RBI. 2019. Financial Stability Report. December.