RBI allows fresh moratorium for some small borrowers amid Covid19 crisis

by mehekkaoberoi

Background:-

  • Covid Second wave caused RBI to take actions as Lockdown returns due to surge in uncontrollable cases of Covid
  • It was too early to reopen everything as many social gatherings and people started going out have caused the rise of covid again
  • Even RBI took too much time to act like they did in previous years lockdown phase
  • Hospitals have limited beds, vaccines are out of stocks, oxygen plants are not in every state and that has resulted in deaths of many.
  • Many have pending loans on them which they can’t pay as lockdown is in effect which has caused them to loose their jobs etc so are unable to pay the loan

Linkages:-

  • Previous Year too similar schemes were introduced by RBI like moratorium
  • The record 3780 deaths in 24 hours as well as 382000 cases may have triggered RBI to act as many hospitals were complaining of shortages of Oxygen, bed and vaccines. It will be easier for banks to give cheap loans to hospitals, oxygen manufacturer and even patients.
  • Extending the loan moratorium for upto 2 years for both individuals and small business borrowers who had opted to restructure the loans in earlier round. Other borrowers who didn’t avail the facility last year for them a second round of loan restructure has announced.
  • Banks and private financial money lenders need not to collect any loan recoveries for the time and also to waive off the interest rates for all poor people for loans like taxi, auto, car , house loan upto 50,00,000, small finance business loans etc with immediate effect

Current Situation:-

RBI Governor Das announced a number of schemes:

  • Lending by SFBs to MFIs for on-lending to be classified as Priority Sector Lending
  • Resolution framework 2.0 for COVID-related stressed assets of individuals, small businesses and MSMEs
    In a developing country like India, MSME industries are the backbone of the economy
  • Term liquidity facility of Rs 50,000 crore to ease access to emergency health services
    Under this scheme, banks can now easily provide new credit support to vaccine producers; vaccine and priority medical device importers / suppliers; hospitals / dispensaries; pathology laboratories; oxygen and ventilator manufacturing and suppliers; importers of vaccines and COVID-related drugs; logistics firms as well as patients for treatment.
  • A special three-year long-term repo operations of Rs 10,000 crore at repo rate for the SFBs, to be deployed for fresh lending of up to Rs 10 lakh per borrower.

Impact:-

  • On Common People

    • Due to Lockdown, Many have lost jobs, many have struggled to keep up the new business going on, this pandemic is causing a lot of pain and suffering ie, financially and emotionally.
    • They don’t need more loan the thing they need is cash to use like in the USA stimulus package of 1400$ per person was given this is the step RBI should have taken cause this may have solved their financial problems
    • EMI moratorium is not healthy as interest is not waived off and have to pay additional interest
    •  People who have a WFH job and having regular income are having good times even in this lockdown as they are spending time with their families but those who don’t or those who started something new have generated losses
  • On Employment
    • In previous years lockdown, many lost jobs due to lockdown and covid and so many companies introduced WFH(Work From Home) schemes which led to increasing employment again
    • This time lockdown has happened again but not many lost their jobs as companies were already prepared with WFH
    • The daily wage earner during the previous lockdown went all to their respective states and many returned after the lockdown was over but then again this lead to a decrease in employment as again they had to leave and this has caused them a lot of travel money and survival money
    • Due to Lockdown, many companies started employing new employees via online meets like Zoom, Google, etc.
  • On Banks
    • They are getting loans from RBI at a low rate of interest so they will earn good
    • As RBI didn’t set a maximum rate for these banks to give loans will benefit the banks
    • Already provided loans may not come back for some time but eventually, it will and with more interest including the not paid period
    • Many are avoiding any more loans cause Borrowers who had opted for the loan moratorium were not required to pay EMIs during that period. During the moratorium period, the interest is not waived off and will continue to accrue on the outstanding amount. Further, individuals have to pay additional interest on the months for which the EMI moratorium was taken
  • On GDP
    • Lockdown has Affected GDPs growth rate as it declined it was too much and it was already worse due to last years lockdown
    •  Many lost jobs and this may have decreased the per capita GDP
    • Short term impact on GDP will be that it will increase as it will be easier for people to borrow money till next year as per RBI ie. Cheap loans provided
    •  when we see long term GDP may not get that affected positively as a pandemic is causing RBI to lend the money at a low rate to banks
    • But improving our Medical Industry with these loans will cause a positive impact on GDP in upcoming years as Hospitals are going to have more beds, more facilities, etc which will cause in the development of that sector
  • My views on what RBI should have done:
    • Govt instead providing loans should have brought minimum income guarantee
    • People need financial support not future burden of paying loans
    • RBI should fix a max rate for banks to lend money otherwise they will try to get benfit
    • Waiving of interest can help people and small businesses

Content contributed by – Abhijeet Dhakane

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