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View: It’s important to keep the money flowing during a crisis

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Delays and errors can weaken the ‘support’ that the economy badly needs.


WorldIndiaConfirmed8,447Deaths273Confirmed1,771,514Deaths108,503We are living in times when the quantum of money means little, and even the price of money is beginning to lose its relevance. What is critical is the velocity of money — the pace at which it changes hands.

That speed is slowing by the day as families and businesses cut down spending, hold back payments, and conserve cash. The crisis of 2008 had boiled over from the financial districts of the world to shopfloors. The virus of 2020 has directly hit the real economy, crept into money markets, and now threatens to bring transactions to a standstill.

Money Needs a Map
In such a world, blindly throwing money may not keep the wheels moving. It could distort a faltering system. As the lockdown prolongs, what counts is not just stimulus, the catchword of 2008-09. Fiscal and monetary authorities must lend support to soften the blows from Covid-19. That support rests on when the money is spent, who receives the fund, and the clarity with which the message is communicated. That support is often lacking — as is evident from struggling companies and a skewed money market.

Over the past one week, companies gasping for funds are realising how money ostensibly meant for them is moving around from banks to corporates (who may not need the money), and from bank to bank. A handful of big companies and public sector utilities (PSUs) have cornered more than half the money that the Reserve Bank of India (RBI) released since end-March 27 as cheap long-term loan to banks for ‘targeted’ subscription of corporate bonds. It’s aimed to help businesses raise money in a frozen market. But as banks are free to lend the money to whomever they want, the measure is missing the ‘targets’.

One of the largest corporates will have the lion’s share, with banks ready to invest Rs 10,000 crore (out of Rs 37,500 crore meant for investment in primary bond issues). No rules are broken. It’s natural for risk-averse banks to look for safe borrowers in uncertain times, and corporates to use their size and standing to raise cheap funds to refinance old loans, or simply play around with the money. It’s a case where new money created to tackle a crisis is going to borrowers that RBI may not have targeted.

Banks are unwilling to offer moratorium on loan interest and repayments to non-banking financial companies (NBFCs) and microfinance institutions (MFIs) that have borrowed from them — even though RBI had announced that the relief would be offered to all borrowers. It’s an instance of unclear communication.

As states spending to tame the coronavirus outbreak rushed to borrow, there was a recent surge in yields on state government securities. This, it’s widely believed, could have been partly avoided if RBI (in consultation with GoI?) had proactively announced a higher limit on temporary loans it gives to enable the Centre and states to tide over mismatches in receipts and payments — a mechanism known as ways and means. Delayed communication can bring further distortions in a market that has dried up — a case of wrong timing.

Heal the Economy
Delays and errors can weaken the ‘support’ that the economy badly needs. We don’t know when the Covid-19 contagion curve will flatten, how many businesses would stay afloat, and how long it would take for the economy to stabilise once the lockdown is lifted. Till then, there should be clearly laid-down priorities and sequencing of measures. While GoI will, in likelihood, have to cut income-tax and goods and services tax (GST) to revive consumption — India’s biggest story — it has to first use every rule (and even change some) to enable fund flow to central and state governments.

It’s a bitter, yet unavoidable, step to avoid starvation deaths, food riots, minimise job losses, and send a signal to businesses that it cares through easier rules and access to finance. Without these, a recovery could take far longer.

All this may call for higher ways and means advances, direct purchases of securities by RBI for lending to the government, government guarantee for servicing of bank loans to MSMEs up to a year, opening credit lines to bank for on-lending to NBFCs, lowering RBI’s rules on provisioning cover ratio for banks, and loosening the norm that identifies a corporate loan as a non-performing asset (NPA) — steps that would help the lenders as well as borrowers.

Any relaxed rule — particularly that aims to smoothen funding to MSMEs, NBFCs or MFIs — has to be simple and unambiguous. Most importantly, RBI and GoI must come together to decide on the degree of monetisation and the level of additional risk to the sovereign emanating from a scheme like partial loan guarantee.

Some of the relaxations would be misused, particularly in the absence of data, while past experiences of fiscal irresponsibility may act as a deterrent to a hawkish regime. But it may not open the floodgates of profligacy if the ‘support’ matches the ‘stimulus’. That would require getting the target, timing and transmission of the message correct.


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