RBI Asks Banks To Create ‘Covid Loan Book’ To Support Health Sector
A nurse uses a stethoscope while attending to a patient in a pathology lab in Chennai. (Photographer: Dhiraj Singh/Bloomberg)

RBI Asks Banks To Create ‘Covid Loan Book’ To Support Health Sector

The Reserve Bank of India will provide a special liquidity facility to enable banks to step up lending to the healthcare sector as India battles a severe second wave of Covid-19 infections.

The central bank hopes to incentivise banks into create a ‘Covid loan book’, which can meet emergency funding needs of hospitals, vaccine manufacturers, medical equipment importers and even patients.

  • The RBI has opened a Rs 50,000-crore on-tap liquidity window with tenor of up to three years. Banks can borrow from this facility at the repo rate of 4% till March 31, 2022.
  • Banks can borrow from this facility and lend to a range of entities within and linked to the healthcare sector.
  • These loans will be classified under priority sector till repayment or maturity, whichever is earlier.
  • Further, banks can park liquidity equal the size of the ‘Covid loan book’ with the RBI at a rate which is 40 basis points above the reverse repo rate of 3.35%

“In our fight against the second wave, alleviating any constraints from the financing side for all stakeholders— governments, hospitals, pharmacies, vaccine and medicine manufacturers and importers, medical oxygen manufacturers and suppliers, private operators engaged in critical health care supply, and above all, the common man—who maybe facing spikes in health care expenditure, all require a comprehensive targeted policy response,” RBI Governor Shakitkanta Das said in an unscheduled announcement on Wednesday.

The special liquidity facility could help ramp up health infrastructure and services, making it a welcome move from the central bank, said Rijo M John, health economist and adjunct professor at Rajagiri College of Social Sciences. However, it does seem too little and too late, he said. “This, too, should have been done an year ago, or at least when India saw a fall in cases after the first wave, and should have ramped such infrastructure to battle a prospective second wave,” he said.

All banks will take their own decisions as far as the special liquidity window is concerned. The spread available looks great and the provision for us to place our excess liquidity at a higher return is a big incentive. Already we have been providing funding to entities in the healthcare sector whenever they approach us. This kind of a window and the priority sector tag will enhance that effort.
Ashwani Bhatia, Managing Director, SBI

Sachin Gupta, chief rating officer at CARE Ratings said that larger entities will benefit more from the RBI’s new window.

“There is no distinction between large and small borrowers on the basis of size. But, drawing by last years example, smaller borrowers may not have strong banking relations or strong banking channels,” said Gupta. “As such, initially at least, the scheme will benefit larger companies early and then benefit smaller pharmacies, suppliers and others.”

Also read: RBI Reopens Covid-19 Restructuring Scheme For Retail, Small Business Borrowers

Economic Outlook

Commenting on the economic outlook, Governor Das said the situation has altered “drastically” in a few weeks. The localised lockdowns are likely to impact demand, said Das, adding that the impact will be more modest than last year.

Aggregate demand conditions, particularly in contact-intensive services, are likely to see a temporary dip, depending on how the Covid situation unfolds. With restrictions and containment measures being localised and targeted, businesses and households are learning to adapt. Consequently, the dent to aggregate demand is expected to be moderate in comparison to a year ago .
Shaktikanta Das, Governor, RBI

The inflation trajectory, too, will be shaped by the Covid-19 infections and the impact of localised containment measures on supply chains and logistics, he said.

Das did not alter the RBI’s existing growth or inflation forecasts, saying the Monetary Policy Committee would review the situation when it meets in June. The RBi has projected a real GDP growth rate of 10.5% for FY22.

Economists are predicting a sequential contraction in the April-June quarter but see the economy rebounding thereafter. High frequency indicators, available for April, have shown a decline in movement of goods and some increase in unemployment, even though other indicators like electricity consumption remain steady.

Also read: RBI Reopens Covid-19 Restructuring Scheme For Retail, Small Business Borrowers

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