RBI’s loan plan

INDIAN economy has been battered by the Covid-19 pandemic and the lockdown that continues in several states nearly five months after it was first imposed nationwide. Some rating agencies have forecast that the country’s GDP will shrink by as high as 10 per cent in the ongoing financial year, revising their earlier estimate of a contraction of 5 per cent. Amid the uncertainty over reviving growth, the Reserve Bank of India (RBI) has permitted banks to go for one-time restructuring of loans of corporate and retail borrowers who are facing stress due to the coronavirus crisis. Though there were expectations of another cut in the repo rate — the rate at which the central bank lends money to commercial banks in case of a shortfall of funds — the Monetary Policy Committee has cautiously left it unchanged at 4 per cent.

The debt restructuring scheme has been extended till March 2021 for businesses in the MSME (Micro, Small and Medium Enterprises) sector, which contributes around 30 per cent of the GDP and provides employment to about 11 crore people. Such enterprises have been crippled more by a slump in demand than by a financial crunch. Unless demand is revved up, these units will continue to gasp for survival despite the repayment breather. The RBI has proposed a separate resolution mechanism for personal loans. With the moratorium on EMIs set to end on August 31, this plan holds out hope for the salaried class, which has been hit hard by pay cuts and job losses.

In a populist move aimed at providing much-needed liquidity to small borrowers, the RBI has hiked the loan-to-value ratio of gold loans from 75 per cent to 90 per cent. As the prices of the yellow metal are currently on the upswing, many people would be tempted to take loans now. However, this is a risky proposition in the event of a sharp drop in gold rates. Pushing loanees deeper into the debt trap is a recipe for disaster, not a silver bullet to rebuild the economy.

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