Steps taken by the RBI to tackle the second wave of COVID-19 Pandemic

Introduction

In these testing times, Myriad of individuals, small business is dealing with an uncertain situation, their livelihood, and many businesses, and education have been affected due to the sudden surge of the aggressive resurgence of the Covid-19 virus. As a result, Govt. authority is working pro-actively and coming up with strategies, relaxation, and measures to deal with the situation arising due to the COVID-19 pandemic. The RBI Governor on May 05, 2021, has announced various measures to be taken by the RBI in the second wave of a pandemic as the Small businesses and financial entities are bearing the biggest brunt of the second wave of infections. The measures include an up to Rs 50000 crore term liquidity facility which qualifies for a repo at the rate of 4%, and priority sector tag, additional liquidity for small finance banks, overdrafts to state governments, and, version 2.0 of the Resolution Framework originally announced on August 06, 2020.

The following measures have been discussed in the RBI’s Governor Statement are:

Term Liquidity Facility of Rs.50,000 crores to Ease Access to Emergency Health Services

To boost COVID-related healthcare infrastructure and services in the country, an on-tap liquidity window of ₹50,000 crores with tenors of up to three years at the repo rate is being proposed to open till March 31, 2022.

Under the scheme, banks can provide fresh lending support to a wide range of entities including vaccine manufacturers; importers/suppliers of vaccines and priority medical devices; hospitals/dispensaries; pathology labs; manufacturers and suppliers of oxygen and ventilators; importers of vaccines and COVID related drugs; logistics firms and also patients for treatment

Special Long-Term Repo Operations (SLTRO) for Small Finance Banks (SFBs)

In order to provide support to small business units, micro, and small industries, and other unorganized sector entities which adversely affected during the current wave of the pandemic, the RBI has decided to conduct special three-year long-term repo operations (SLTRO) of ₹10,000 crores at a repo rate for the SFBs, to be deployed for fresh lending of up to ₹10 lakh per borrower. This facility will be available till October 31, 2021.

 Lending by Small Finance Banks (SFBs) to MFIs for on-lending to be classified as Priority Sector Lending

Because of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to ₹500 crores) for on-lending to individual borrowers as priority sector lending. This facility will be available up to March 31, 2022.

Credit to MSME Entrepreneurs

With a view to incentivize credit flow to the micro, small, and medium enterprise (MSME) borrowers, in February 2021 Scheduled Commercial Banks were allowed to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR). In order to further incentivize the inclusion of unbanked MSMEs into the banking system, this exemption currently available for exposures up to ₹25 lakh and for credit disbursed up to the fortnight ending October 1, 2021, is being extended till December 31, 2021.

Rationalization of Compliance to KYC Requirements

In order to rationalize certain components of the extant KYC norms, RBI has decided to include the following in KYC norms:

1. 1. extending the scope of video KYC known as V-CIP (video-based customer identification process) for new categories of customers
   2. conversion of limited KYC accounts opened on the basis of Aadhaar e-KYC authentication in non-face-to-face mode to fully KYC-compliant accounts;
   3. enabling the use of KYC Identifier of Centralised KYC Registry (CKYCR) for V-CIP and submission of electronic documents (including identity documents issued through DigiLocker) as identify proof;
   4. introduction of more customer-friendly options, including the use of digital channels for the purpose of periodic updation of KYC details of customers.

Utilization of Floating Provisions

In order to mitigate the pandemic related stress on banks and as a measure to enable capital conservation, banks are being allowed to utilize 100 percent of floating provisions/counter-cyclical provisioning buffer held by them as of December 31, 2020, for making specific provisions for non-performing assets with prior approval of their Boards. Such utilization is permitted with immediate effect and up to March 31, 2022.

Relaxation in Overdraft (OD) facility 

In order to mitigate the pandemic related stress on banks and as a measure to enable capital conservation, banks are being allowed to utilize 100 percent of floating provisions/counter-cyclical provisioning buffer held by them as on December 31, 2020, for making specific provisions for non-performing assets with prior approval of their Boards. Such utilization is permitted with immediate effect and up to March 31, 2022.

Resolution Framework 2.0 for COVID Related Stressed Assets of Individuals, Small Businesses, and MSMEs.

• Who are Eligible Borrowers?

The Borrowers i.e. individuals and small businesses and MSMEs having aggregate exposure of upto₹25 crores and who has not availed restructuring under any of the earlier restructuring frameworks (including under the Resolution Framework 1.0 dated August 6, 2020), and who were classified as ‘Standard’ as on March 31, 2021, shall be eligible to be considered under Resolution Framework 2.0. Restructuring under the proposed framework may be invoked up to September 30, 2021, and shall have to be implemented within 90 days after invocation.

• What are the eligibility conditions?

In respect of individual borrowers and small businesses who have availed restructuring of their loans under Resolution Framework 1.0, where the resolution plan permitted moratorium of fewer than two years, lending institutions are being permitted to use this window to modify such plans to the extent of increasing the period of the moratorium and/or extending the residual tenor up to a total of 2 years. Other conditions will remain the same.

• Invocation of resolution process

Within 4 weeks of this circular, the lending institutions shall frame Board-approved policies for implementation of viable resolution plans for eligible borrowers under this framework, ensuring that the resolution under this facility is provided only to the borrowers having stress on account of Covid-19.

The Board approved policy shall, inter alia, detail the eligibility of borrowers in respect of whom the lending institutions shall be willing to consider the resolution, and shall lay down the due diligence considerations to be followed by the lending institutions to establish the necessity of implementing a resolution plan in respect of the concerned borrower.

The resolution process under this window shall be treated as invoked when the lending institution and the borrower agree to proceed with the efforts towards finalizing a resolution plan to be implemented in respect of such borrower.

• Permitted features of resolution plans

The resolution plans implemented under this window may inter alia include rescheduling of payments, conversion of any interest accrued or to be accrued into another credit facility, revisions in working capital sanctions, granting of the moratorium, etc. based on an assessment of income streams of the borrower. However, compromise settlements are not permitted as a resolution plan for this purpose.

Conclusion

With the introduction of this restructuring framework, it is clear that defaulting borrowers are altogether ineligible for opting the scheme, whereas the Scheme will help the non-defaulting borrowers to sustain their businesses in view of the option of restructuring their loans. Moreover, they can raise additional capital for their business.