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View: The pivotal role of banking in India’s covid fight

By Amitabh Chaudhry

GoI as well as state governments have responded to the Covid-19 pandemic with progressively heightened remedial stimulus steps, predominantly fiscal to counter the adverse impacts of this lockdown. The strongest response, though, has come from the Reserve Bank of India (RBI) unleashing a bazooka of measures.

These span, inter alia, from a deep 75 basis points (bps) repo rate cut, a full 100 bps cash-reserve ratio (CRR) cut, to flooding the banking system with liquidity, even using unconventional instruments, prudential relaxations and regulatory forbearance. These steps were buttressed by a strong forward guidance by Governor Shaktikanta Das on RBI continuing to do ‘whatever is necessary to shield the domestic economy’.

One of the lessons learnt during the growth slowdown that was increasingly manifest during H2 FY2020 even before the Covid-19 lockdown was the importance — even centrality — of banks in facilitating sustained and robust growth. Other than the role banks have played over the last couple of decades in funding infrastructure and corporate capex, more crucially they have continued to support micro, small and medium enterprises (MSMEs), both directly and via funding other intermediaries for on-lending. Bank credit to MSMEs (as of end-February 2020) was close to Rs11 lakh crore.

However, the banking sector, and the larger financial intermediation ecosystem, has been passing through a period of volatility emanating from multiple causes. This has led to a degree of risk aversion in extending credit. The efficacy of RBI measures will become increasingly evident in this scenario, and will help in gradually easing the credit squeeze.

The first manifestation of this has been an easing of interest rates on various shorter tenor-lending products, like working capital loans and commercial paper. Here, it is important to emphasise the role that banks will play in alleviating the distress of the MSME sector, thereafter helping them in regaining their feet and facilitating growth.

The immediate priority is to meet the working capital needs of commercial borrowers, particularly MSMEs. The fallout of the lockdown has been a cash flow mismatch for all borrowers. But the disruption has been particularly severe for small-scale businesses, whose receivables cycles have elongated with many of their buyers in the supply chain invoking the force majeure clause to delay payments. RBI’s regulatory dispensation in deferring installments on loans without being classified delinquent will help in partially alleviating this distress.

In addition, banks are now geared up to meet the massive financial needs of India’s cities as well as hinterlands. Over 1.6 lakh branches and 2.1 lakh ATMs will ensure that cash remains available and payments facilitated for the crores of online daily transactions, crucial for keeping India’s economic engine running during this stressful period. The 38 crore Jan Dhan Yojana accounts will also ensure that funds from GoI’s enhanced and timely safety net programs reach its beneficiaries, particularly women.

A disruption like this pandemic will have many implications in shaping our economic and financial behaviour and responses for the coming months, even years. Much of them will be beneficial for increasing our operational efficiencies. One of the most significant changes will be an acceleration in the already ongoing shift to digital channels for conducting everyday business. Banks and financial intermediaries, in collaboration with the fintech ecosystem and enabled by GoI digitisation initiatives, will be further empowered to extend formal access to credit and other financial services to hitherto unfunded segments of the economy.

In the coming days, we will be transitioning to a staggered opening up of the lockdown. During this critical phase, banking services will be in place and geared up to support the pent-up demand for funds to aid a smooth economic recovery.

(The writer is MD-CEO, Axis Bank)

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