RBI incentivises lenders to create Covid loan book for contact-intensive sectors

SS Mallikarjuna Rao, MD and CEO, Punjab National Bank, said: “The announcement of on tap-liquidity facility of Rs 15,000 crore will ensure credit flow to the contact-intensive sectors and MSMEs, including hotels, tourism, aviation, etc. which have been adversely impacted.”

The Reserve Bank of India (RBI) on Friday announced a special liquidity window of Rs 15,000 crore for lenders to incentivise them to create a ‘Covid loan book’ by lending to contact-intensive sectors hit by the pandemic.

Further, banks will be eligible to park their surplus liquidity up to the size of the Covid loan book at 40 basis points (bps) higher than the reverse repo rate. Currently, the repo rate stands at 4% and the reverse repo rate at 3.35% after the regulator kept rates unchanged on Friday. The window encourages banks to provide fresh lending support to hotels, restaurants, tourism, aviation ancillary services, private bus operators and car repair services, among others.

“In order to mitigate the adverse impact of the second wave of the pandemic on certain contact-intensive sectors, a separate liquidity window of Rs 15,000 crore is being opened till March 31, 2022, with tenors of up to three years at the repo rate,” said governor Shaktikanta Das.

The regulator has also specified that banks which do not wish to avail funds from the regulator will also be eligible for the incentives announced by the RBI. This scheme is over and above the liquidity window of Rs 50,000 crore for ramping up Covid-related healthcare infrastructure and services announced in May 2021. Banks need to create a separate Covid loan book for lending to the pandemic-hit sectors specified by the RBI. Bankers believe on-tap liquidity facility will ensure credit flow to the contact-intensive sectors.

SS Mallikarjuna Rao, MD and CEO, Punjab National Bank, said: “The announcement of on tap-liquidity facility of Rs 15,000 crore will ensure credit flow to the contact-intensive sectors and MSMEs, including hotels, tourism, aviation, etc. which have been adversely impacted.”

Experts believe many banks may not avail the liquidity facility provided by the central bank. Karthik Srinivasan, senior vice president and group head, ICRA, said given the surplus liquidity in the banking system, banks are unlikely to directly borrow under the liquidity window from RBI. However, an additional incentive of 40 basis points over the reverse repo rate could provide some incentive to lenders to provide credit to these sectors, he said. The lenders, however, could remain watchful of the underlying stress in these sectors, as the credit risk will continue to be with them, Srinivasan said.