Coronavirus and banking


In January 2020, the World Health Organization (WHO) declared the Coronavirus (COVID-19) a global health emergency.
Because of COVID-19, most parts of the globe are experiencing complete lockdown. Lockdown is a period when production and trade of all goods and services other than essentials for life is halted and it is but natural that such a situation is bound to affect financial and banking all over the world. India is no exception and banks in India will have to face a difficult situation when the lockdown is completely lifted. There is imperative need to push up efforts for revival of economic activity and banking. There will be credit crunch, jump in level of NPAs, difficulties in repatriation of export proceeds and non-achieving certain mandatory requirements laid down under Basel 3 accord.

The Government of India and RBI have already visualized the upcoming hardships for banking in India and RBI has announced relief measures in view of COVID-19 crisis. The following measures are aimed at easing the credit crunch likely to be faced by banks after lifting of lockdown and to ease the impending financial crisis:

RBI has announced several measures aimed at liquidity in the banking system and to ward off impending requirement of declaring assets as NPAs and other requirements under Basel 3 commitments.
(A)Liquidity Measures
1. Reduction in CRR: To help banks tide over the disruption caused by COVID-19, it has been decided to reduce the cash reserve ratio (CRR) of all banks by 100 basis points to 3.0 per cent of net demand and time liabilities (NDTL) which has been into effect from the reporting fortnight beginning March 28, 2020 for a period of one year. This reduction in the CRR would release primary liquidity of about ₹1,37,000 crores uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR. Additionally, taking cognizance of hardships faced by banks, the requirement of minimum daily CRR balance maintenance has been reduced from 90 per cent to 80 per cent, effective from the first day of the reporting fortnight beginning March 28, 2020 – A one-time exemption available up to June 26, 2020.

2. Enhancement in accommodation under the marginal standing facility (MSF):
In view of liquidity stress and to provide comfort to the banking system, it has been decided to increase the accommodation under the marginal standing facility (MSF) from 2 per cent of the statutory liquidity ratio (SLR) to 3 per cent with immediate effect. This measure will be applicable up to June 30, 2020. This measure should provide comfort to the banking system by allowing it to avail an additional ₹1,37,000 crore of liquidity under the LAF window in times of stress at the reduced MSF rate announced in the MPC’s resolution.

3. Targeted Long-Term Repo Operations (TLTRO): Large selloffs in the domestic equity, bond and forex markets have intensified redemption pressures. Liquidity premia on instruments such as corporate bonds, commercial paper and debentures have surged. Financial conditions for these instruments, which are used, inter alia, to access working capital in the face of the slowdown in bank credit, have also tightened. To mitigate the adverse effects on economic activity leading to pressures on cash flows across sectors, the Reserve Bank will conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to ₹1,00,000 crore at a floating rate, linked to the policy repo rate. Liquidity availed under the scheme by banks must be deployed in investment grade corporate bonds, commercial paper and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 25, 2020. Eligible instruments comprise both primary market issuances and secondary market purchases, including from mutual funds and non-banking finance companies. Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility will also not be reckoned under the large exposure framework. The first auction of ₹25,000 crore will be conducted today. The relevant notification is being issued separately.

These three measures relating to TLTRO, CRR and MSF will inject a total liquidity of ₹3.74 lakh crore to the system. The following article will talk about the other measures taken by RBI and the regulatory and supervisory measures that have been undertaken.

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