This article is written by Abhinav Rana, from University School of Law and Legal Studies, GGSIPU Dwarka. This article deals with Change in overdraft facility of RBI due to lockdown.

Introduction

On 7th April 2020, Tuesday the Central bank, Reserve Bank of India relaxed for the states to take overdraft facilities now until 30th September. This was the second time in the same week when the Reserve Bank has reserved the state’s ability to borrow, before also on 30th March Reserve Bank of India has increased their ability for the short term borrowings. In a circular Reserve Bank of India says that a state or a union territory can avail the overdraft facility now 21 days from the current 14 days. Also, the Reserve Bank of India has increased the number of days for which a state or a union territory can avail overdraft in a quarter. Now its limit has been extended from 36 days to 50 working days.

Recently the Ways and Means Advances has also been increased by the central bank by 30% for all the states and union territories so that they can tide over with the crisis caused due to outbreak of the pandemic COVID-19. Ways and Means Advance temporary liquidity arrangements with the central bank of the country, it enables the centre and the states to borrow money up to 90 days from the Central bank to tide over the mismatches. In simple words, if the government wants it can take money from the central bank at the existing repo rate by the way of Ways and Means Advances. But this money has to be returned to the bank within 90 days if the time period is exceeded it would be treated as an overdraft. The Reserve Bank of India has now extended this limit by 7 days.

Significance of this Development 

The increased limit comes at a time when government expenditure is expected to rise as it battles the fallout of a spreading Coronavirus. The availability of these funds will give the government some space for short-term spending, in addition to long-term loans in the market.

The country’s consumption cycle has been decreasing for some time. Along with the current situation, it is essential to sustain the economy. According to the latest data, the household economy in India currently accounts for only 30.1% of GDP. In the current situation of reduced interest rates and falling savings, India’s macroeconomic position has weakened. It is a slippery slope and, therefore, the government must follow carefully.

What is the Facility?

The Reserve Bank of India has changed the principles for association regions and states to benefit the overdraft offices to increase the income in the midst of the lockdown due to COVID-19. More prominent adaptability to states has been given to hold over the income conflict. An overdraft is one in which the record holders can pull back more cash than they have in their financial balance for a predefined time frame. It has expanded the quantity of long stretches of overdraft from the present 14 days to 21 days in the states and the union territory. Likewise, the quantity of days has been expanded to 50 working days from the present thirty-six days in which they can be in overdraft in a quarter.

All the essentials will stay unaltered and this course of action will come into power with prompt impact and will stay legitimate till September 30, 2020.

The Reserve Bank of India has expanded the Ways and Means Advances or WMA limit by 30% for all the states and Union territory as a little advantage during the emergency brought about by the flare-up of COVID-19. Available resources Advances is a brief course of action with the Reserve Bank of India which allows the Center and the states to acquire cash as long as ninety days from Reserve Bank of India, to hold over their liquidity conflicts. The Government can profit the money from the Central Bank at the repo rate existing under the WMA office. Be that as it may, the Government needs to return it under ninety days, if the WMA surpasses ninety days, it will be considered as an overdraft. The Central Bank has expanded this overdraft office by seven days.

A week ago, the Central bank expanded WMA for the Center to 1.2 trillion for the primary portion of 2020-2021 up from 75,000 crores in the year 2019-2020 and 35,000 crores for the second 50% of 2019-2020.

The Central Bank has cut the converse repo rate by 25 to 3.75% to improve the liquidity for NBFCs as it was hard for them to raise reserves. The assets should be put into the business paper, venture bonds, non-convertible debentures of NBFCs with at least 50% of it going to little and medium NBFCs under a month of benefiting the credit from Reserve Bank of India. These ventures made by the banks under this office will be sorted as held to development (HTM) even more than twenty-five per cent of all-out speculation. The Reserve Bank of India has infused liquidity totalling 3.2% between 6 February and 27 March of GDP to de-stress the monetary markets.

Pros and Cons of the Facility 

Moratorium on term loan will not be classified as default, interest on working capital as RBI has permitted all the institutions to allow a three-month moratorium on payment of instalments. The new policy shift has opened a new front for the Central Bank to manage the changes in the Rupee which has been measured to a low record during the Coronavirus outbreak. The RBI has raised the amount which is benefitting the market. It is easing the pressure on the corporates and some top companies like Indian Oil and Power Grid and benefiting them.

The Government is relying on the Central Bank to meet the payment obligations as there are some discrepancies in the cash flow transactions. The Ways and Means Advances permits the Centre to borrow from the RBI and meet the payment requirements in cash flow discrepancies. There are limits on the WMA facility of course. But there is an increase in the reliance on WMA which indicates that the finances of the Government are under stress. Overdraft facility further adds to the cost and has become a pitfall. The Government had borrowed Rs. 73,545 crore during the last week of January under WMA. The Cash Reserve Ratio has been cut sharply by hundred bps to three per cent which has released Rs. 1.37 lakh crores into the system. 

RBI Monetary Statements

Reduction of Repo rate

The Reserve Bank of India has reduced the repo rate by 75bps and stands at 4.4% in order to revive the investment and enhance the liquidity in the market, to ensure that the reduction in repo rate is transmitted by the commercial banks to the customers, the Reserve Bank of India has decided to cut Reverse Repo Rate by massive 90bps and it stands at 4% when the Reverse Repo rate is lower than the Repo Rates then it pushes the bank to lend this excess liquidity to the customers in the form of cheaper loans, thus helping in reviving the investments. When the reduction in repo rate is transmitted by the Banks to the customers it will result in a reduction in EMIs thus creating more purchasing power which in turn helps in creating more demand thus escalating the needs for investment. Reserve Bank of India usually employs the Repo and Reverse Repo Rate on a day to day basis for the banks to manage the liquidity known as Liquidity Adjustment Funds.

A decrease in Cash Reserve Ratio

In furtherance to this, Reserve Bank of India has decided to decrease the Cash Reserve Ratio i.e. the cash in hand with the Reserve Bank of India by 100bps in order to inject an additional 1.37 lakh crore such liquidity excess will push to provide easier and cheaper loans and bring into the economy an element of liquidity, the ratio decreased from 4% to 3%.

Marginal Standing Facility

The other measure taken by the Reserve Bank of India was in consonance to Marginal Standing Facility which is similar to repo rate but the only difference between the two is that in MSF the interest is higher as compared to the repo rate. Through this instrument, the banks can borrow money from the Reserve Bank of India over and above the Liquidity Adjustment Funds. In LAF banks on a day to day basis rely on employing repo rate and reverse repo rate, if conditions arise and if it is inferred that these two measures are not sufficient then the banks can borrow money from Reserve Bank of India but by paying higher interest rates as compared to the interest of repo rate. Thus, by decreasing the interest rate in MSF of 4.65% and increasing cap from 2% of Statutory Liquidity Ratio raised to 3% will in a way provide more funds to banks amounting to Rs. 1.35 lakh crore thus raising the level of investment to a higher level.

Long Term Repo Operations

Reserve Bank of India has also announced Long Term Repo Operations in order to raise the targeted Rs. 1.37 lakh crore investment levels. This was carried out by using the method of the auction but the only condition imposed by the Reserve Bank of India was that the banks can certainly make use of this additional liquidity only to invest in Investment-grade corporate bonds, commercial papers and nonconvertible debentures.

3 months moratorium on EMIs

Significant reliefs to organizations and salaried classed people were likewise looked for by the Reserve Bank of India by declaring a 3 months ban on the instalment of EMI. Clients are presently excluded to pay the EMI for a time of 3months which is currently reached out to all sorts of advances: regardless of whether vehicle advance, home advance or individual advances like Visa contribution and furthermore included NBFC under its wide ambit. This is for the loans secured during the period of 1st March 2020 – 31st May 2020.

Critical Analysis 

To ease the financial stress being faced by the people, the Reserve Bank of India announced several steps like long term repo rate, providing refinance to financial institutions such as National Bank for Agriculture and Rural Development (NARBAD), Small Industries Development Bank of India (SIDBI) and National Housing Bank. On 17th April 2020, the Reserve Bank of India also provided asset quality relief. Reserve Bank of India stated that all the accounts which lenders decided to grant suspension will have a standstill from 1 st March 2020 to 31st May 2020. With the goal that the banks are able to maintain sufficient buffers and to help them to solve the further upcoming challenges in the outbreak of COVID-19. So the banks will have to higher 10% provisions on all the accounts under the standstill, spread over 2 quarters that is March and June 2020. Reserve Bank of India has further instructed all the commercial and cooperative banks, not to payout dividend from profits of the financial year ended on 31st March 2020 until the further directions of Reserve Bank of India.

Also, the Reserve Bank of India has supplied Rs. 1.2 Lakhs Crore fresh currency from 1sr March to 14 April 2020 to meet the increased currency demand in this pandemic outburst of COVID-19. Banks have taken care of people’s need for money by providing regular refilling of ATMs from time to time, despite the difficulties and challenges. 

Conclusion

The outbreak of COVID-19 or Coronavirus is the biggest crisis that our generation has seen till date. The goal is not only to tackle the situation but also to lay a safer world on a stronger side. Several measures have been taken by the Central and State Governments to minimise the outbreak of this virus. The government announced the lockdown of 21 days and has further extended it till May 3rd, 2020. In this phase, the central bank of our country, Reserve Bank of India has also played an important and crucial role. Reserve Bank of India Governor Shaktikanta Das announced a series of measures to “keep the financial system and financial markets, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially to those who are disadvantaged and vulnerable”. The Reserve Bank of India has come up with adequate liquidity in the system. It has introduced Rs.. 50,000 crore under the targeted long-term repo rate operations. It is rightly said Alone we can do so little; together we can do so much, so as every organisation, institutions of the country are taking the possible measures to combat the effect of COVID-19 it is very much beneficial in this phase.

However, the uncertainty of the transmission of COVID-19 cannot be denied, it may happen that the pandemic may last for months or a year so, in order to tackle this, the fiscal policy and the monetary policy created by the government and the Reserve Bank of India respectively are possibly for the attainment of the short term goals. Since there can be a phase of uncertainty to an extent, it will be wise to curb the present problems with short term measures effectively, once the stability is achieved long term plans can be devised.

References

• https://www.livemint.com/news/india/rbi-offers-more-short-term-support-for-state-governments-11586265211791.html
• https://economictimes.indiatimes.com/news/economy/policy/rbi-relaxes-overdraft-facility-norms-for-states-uts/articleshow/75027521.cms
• https://www.moneycontrol.com/news/business/rbi-relaxes-overdraft-facility-stipulations-for-states-uts-5120691.html
• https://bfsi.economictimes.indiatimes.com/news/policy/rbi-increases-flexibility-on-overdraft-facilities-to-states-and-uts/75028254