The Reserve Bank of India (RBI) on 6 August 2020 announced several developmental and regulatory policy measures to enhance liquidity support for financial markets and other stakeholders. This will further help in easing of financial stress caused by COVID-19 disruptions while strengthening credit discipline, improve the flow of credit, deepen digital payments, augment customer safety in cheque payments, and facilitate innovation across the financial sector by leveraging on technology through Innovation Hub.

 

In order to strengthen liquidity management and financial markets, RBI announced additional liquidity facility for the National Housing Bank (NHB).  Special refinance facilities for a total amount of Rs 65,000 crore were provided to All India Financial Institutions (AIFIs) in order to support their role in meeting funding requirements of various sectors. In order to shield the housing sector from liquidity disruptions under the prevailing conditions and augment the flow of finance to the sector, it has been decided to provide additional standing liquidity facility (ASLF) of Rs 5,000 crore to NHB – over and above Rs 10,000 crore already provided – for supporting housing finance companies (HFCs). The facility will be for a period of one year and charged at RBI’s repo rate.

 

Liquidity support of Rs 25,000 crore was extended to the National Bank for Agriculture and Rural Development (NABARD) in April 2020 to back agricultural operations in the wake of challenges posed by COVID-19. In order to ameliorate the stress being faced by smaller NBFCs and micro-finance institutions in obtaining access to liquidity, it has now been decided to provide an Additional Special Liquidity Facility (ASLF) of Rs 5,000 crore to NABARD for a period of one year at RBI’s policy repo rate for refinancing NBFC-MFIs and other smaller NBFCs of asset size of Rs 500 crore and less to support agriculture and allied activities and the rural non-farm sector.

 

The Reserve Bank of India will introduce an optional facility to provide banks more flexibility/discretion to manage their day-end cash reserve ratio (CRR) balances. Using this facility in e-Kuber system, banks will be able to set the amount (specific or range) that they wish to keep as balance in their current account with RBI at the end of the day. Depending upon this pre-set amount, marginal standing facility (MSF) and reverse repo bids, as the case may be, will be auto-generated at the end of the day.

 

With regard to MSMEs, a restructuring framework is already in place for MSMEs that were in default but ‘standard’ as on 1 January 2020, subject to the restructuring being implemented up to 31 December 2020. The scheme has provided relief to a large number of MSMEs. However, the stress in the MSME sector has got accentuated on account of the fallout of COVID-19.

 

Recognising the need for continued support to MSMEs’ meaningful restructuring, it has been decided that in respect of MSME borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may restructure the debt under the existing framework, provided the borrower’s account was classified as standard with the lender as on 1 March 2020. This restructuring will be implemented by 31 March 2021.

 

RBI also announced a slew of measures for advances made against gold ornaments and jewellery. As per the extant guidelines loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 percent of the value of gold ornaments and jewellery. With a view to further mitigate the economic impact of  COVID-19 pandemic on households, entrepreneurs and small businesses, it has been decided to increase the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75 percent to 90 percent. This relaxation will be available till 31 March 2021.

 

The Priority Sector Lending (PSL) guidelines issued by the Reserve Bank of India were last reviewed in April 2015. With a view to align the guidelines with emerging national priorities and bring sharper focus on inclusive development, the guidelines have been reviewed after wide ranging consultations with all stakeholders. The revised guidelines also aim to encourage and support environment-friendly lending policies to help achieve Sustainable Development Goals (SDGs).

 

Other changes include broadening the scope of PSL to include start-ups, increasing the limits for renewable energy, including solar power and compressed biogas plants and increasing the targets for lending to ‘Small and Marginal Farmers’ and ‘Weaker Sections’.

 

The Reserve Bank of India has constantly endeavoured to encourage responsible innovation by entities in the financial services sector. The Regulatory Sandbox framework was one such recent initiative in which Digital Payments were the first cohort. Six proposals were accepted under the Sandbox. The pilot studies/trials of which have been delayed on account of the COVID-19 situation. Areas such as cyber security, data analytics, delivery platforms, payments services, etc remain in the forefront when we think of innovation in the financial sector. To promote innovation across the financial sector by leveraging on technology and create an environment which would facilitate and foster innovation, RBI will set up an Innovation Hub in India. 

 

The Innovation Hub will act as a centre for ideation and incubation of new capabilities which can be leveraged to create innovative and viable financial products and/or services to help achieve the wider objectives of deepening financial inclusion, efficient banking services, business continuity in times of emergency, strengthening consumer protection, etc. The Innovation Hub will support, promote and hand-hold cross-thinking spanning regulatory remits and national boundaries.

 

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at four percent. Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 percent and the marginal standing facility (MSF) rate and the bank rate at 4.25 percent. 

 

The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.