need-to-support-the-banking-sector

Context: In Spite of the number of measures undertaken by RBI for the banking sector, still more needs to be done.

Background:

  • The Covid lockdown called for a slew of measures by RBI in order to support the dwindling banking sector in wake of a potential slowdown in the economy.
  • In the first round of measures, the Central Bank reduced the Repo rate to 11 year low of 4.4%, which now is further reduced to 4%. 
  • Similarly the Reverse repo rate was slashed to 4% which now is even lowered to 3.35%.
  • Moratoriums on loans were also given for 3 months till 31st May 2020 and this is now extended for another 3 months till 31st August 2020.
  • Cash Reserve Ratio reduced to 3% in order to inject a liquidity of 1.37 lakh crore in the economy.
  • The Net Stable Funding Ratio (NSFR), which reduces funding risk by requiring banks to fund their activities with sufficiently stable sources of funding is postponed till October 1, 2020.
  • The Insolvency and Bankruptcy Code has also been suspended for 6 months so as to protect borrowers from the hustle and bustle of insolvency process.

Current Scenario:

  • Although the measures have provided temporary relief to the businesses, their quantum might not be sufficient to revive the banking sector as -
    • Even after the lockdown is completely removed, revenues will take time to normalise and businesses might  need fresh funds and more rollovers.
    • The Banking Sector sector already has a high NPA (Non Performing Asset) with forecasts projecting it to reach 13-14% in 2020-21.

Way Ahead:

  • Debt Restructuring needs to be done so that viable business before the lockdown can get on track again.
  • This must be done on cautious criterias so that undeserving businesses should be allowed to fail and good businesses shouldn’t be left out.
  • An indirect model of ownership must be introduced for public sector banks like making them accountable through a stakeholder company which would be responsible for improved results. 
  • Apart from this, support to small and medium businesses is to be given along with employment generation so as to revive the aggregate demand in the economy and help the borrowers in honouring their loans.

Source:

https://www.livemint.com/opinion/online-views/a-debt-recast-should-go-along-with-bank-reforms-11593954447400.html

Image Source: Livemint