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Are RBI’s COVID-19 measures good enough for smaller lenders?

Are RBI’s COVID-19 measures good enough for smaller lenders?

We have completed a year of battling the Covid-19 pandemic, and now small lenders find themselves precisely in the same situation as they were in last year. As small lenders face an uncertain business environment due to lockdowns across states, they are apprehensive about another set of asset as these. In this article, we shall find out the RBI’s COVID-19 measures and announcements for businesses in 2021.

Lockdown across the country- Dilemma of small lenders

Due to the intense impact of the Covid-19 pandemic, many states in India have quality stress. In this article, we shall find out whether a slew of RBI’s Covid-19 measures, announced recently, is good enough to help small lenders in times such announced either full or partial lockdowns. This has worried small lenders terribly as it will impact their collections and livelihoods. As per industry official’s in the Microfinance and banking sector, lockdown have hit small and medium business owners tremendously, thus forcing them to shut down shops and stop collections by micro-lenders.

Now may I quote the words of Mr. Samit Ghosh, Founder of Ujjivan Financial Services, who expressed his views in this regard and said the Covid-19 impact has been seen for a year now, and the second wave is spreading thus, it’s both a medical and economic problem. He further said it is one of the biggest crises to hit the sector.

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However, the positive here is that the lockdown may not last long. Last year the lockdown continued to an extended time in different phases, and the economic loss of the lockdowns were immense. There is no accurate estimate as to how many shops were closed down, but the numbers are definitely beyond expectations. The resultant economic stress affected households and consumer demands. 

RBI’s Covid-19 measures during First Wave

Banks managed to avoid a huge upsurge in the Non-Performing Assets as with the timely intervention of the Reserve bank and the government, it is possible to avoid. The government announced a Covid-19 relief package of 20 lakh crore rupees, a significant part of which were measures announced by the Reserve Bank.

Overall, the Reserve bank infused liquidity to the tune of 1.27 lakh crore rupees. Further, the Reserve bank also announced a six month loan moratorium and a one-time loan recast facility under Covid resolution framework.

Liquidity assistance provided was through targeted long term repo operations and special open market operations. These measures from the RBI helped banks and micro-finance institutions to prevent a big asset quality shock.

New round of RBI’s Covid-19 measures

In what was an unscheduled address, the Governor of the RBI, Shaktikanta Das, notified a host of measures on May 5, 2021[1]. Among these measures, one of the crucial ones is the scheme- resolution framework 2.0 that allows small companies to restructure their loans who didn’t do so. Further borrowers with an exposure of up to 25 crore rupees who did not avail earlier facilities and loans are standard as on March 31, would be eligible for loan restructuring.

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The restructuring under the resolution framework 2.0 can be invoked up to 30th September 2021. Banks are required to implement it within 90 days of invocation. Lenders may review the working capital limits of small businesses and Micro, Small and Medium Enterprises as a one time measure. Those that have availed the earlier window of loan restructuring can be provided with two additional years of moratorium, said Mr. Shaktikanta Das. He further announced a 50 thousand crore rupees liquidity facility for banks to lend to beef up Covid infrastructure.

The RBI allowed loans from small finance banks to micro finance institutions to be tagged as priority sector lending loans. This means mandatory lending by banks to economically weaker section. Banks must lend 40% of their loans to such category. 

Currently, lending by small finance banks to micro finance institutions for on-lending is not reckoned for priority sector lending classification. However, the RBI Governor said that due to the fresh challenges and to address liquidity position of smaller micro finance institutions, small finance banks have now been allowed to reckon fresh lending to smaller micro finance institutions for on-lending to individual borrowers as PSL.

How did the industry respond to these measures?

Large banks might not be having any immediate concerns due to the extensive provisioning done on Covid impact however, these measures may not assist small lenders to survive the second wave of Covid-19 if the situation does not get better on ground. Unlike big banks, smaller MFIs don’t have huge cash reserves.

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The RBI’s Covid-19 Measures have been embraced by the industry, but if the lockdowns continue to be longer, then the sector may face a huge crisis.

Micro finance institutions have started seeing disruptions already in their usual operations because of lockdowns, as the biggest issue has been to reach out to the customer. The customers of micro finance institutions are primarily small businessmen who are first to be affected during lockdowns.


Small lenders are expecting more measures from the Reserve Bank in the coming days or week. In these uncertain times, these people are looking forward to authorities to come up with announcements that can keep their businesses alive and active. However, the present situation of Covid-19 must improve, which will be the primary expectation apart from the RBI’s Covid-19 measures. But for now, things look gloomy for small lenders.

Read our article: Supreme Court disallows Charging of Compound Interest/Penal Interest during Moratorium

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