MICROCAPITAL BRIEF: Reserve Bank of India Moves to Increase Liquidity for MSMEs, Farmers Impacted by COVID-19 via MFIs, NBFCs

In response to the COVID-19 pandemic, the Reserve Bank of India (RBI), India’s central banking authority, recently moved to increase the supply of credit to farmers and micro-, small and medium-sized enterprises (MSMEs) via microfinance institutions (MFIs) and non-banking finance companies (NBFCs). These steps include: (1) cutting the reverse repo rate by 25 basis points to 3.75 percent; (2) easing asset classification norms; and (3) encouraging banks to boost funding to NBFCs through a second targeted long-term repo operation (TLTRO 2.0) window in the amount of INR 500 billion (USD 6.6 billion).

The first TLTRO was aimed at the public sector and large corporations. TLTRO 2.0 offers banks access to three-year funding to invest in investment-grade papers issued by lenders. Banks that accept TLTRO funds must disburse them within a month, with at least 50 percent going toward small and medium-sized NBFCs and MFIs.

The lowering of the reverse repo rate is meant to encourage banks to increase lending rather than parking their excess funds.

Prime Minister Narendra Modi argued that the “announcements by RBI will greatly enhance liquidity and improve credit supply. These steps would help our small businesses, MSMEs, farmers and the poor.”

Established in 1935, RBI performs consolidated supervision of commercial banks, NBFCs and other financial institutions. It also manages accounting standards, resolves cases of banking fraud, monitors non-performing assets and supervises the rating model for the banking sector. As of January 2020, RBI reported total reserves of INR 32.7 trillion (USD 432 billion).

By Madigan Ruch, Research Associate

Sources and Additional Resources

Livemint article on RBI measures taken during COVID-19
https://www.livemint.com/politics/news/covid-19-steps-taken-by-rbi-to-help-small-businesses-farmers-says-pm-modi-11587134462228.html

Livemint article on RBI launching TLTRO 2.0
https://www.livemint.com/industry/banking/rbi-provides-liquidity-support-to-nbfcs-and-mfis-11587130027236.html

Statistics on RBI
https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=49183

Previous MicroCapital news on RBI
https://www.microcapital.org/microcapital-brief-rbi-raises-caps-on-microfinance-loan-size-microborrower-income/

Do you know that MicroCapital publishes the MicroCapital Monitor newspaper each month? Find out more at https://www.microcapital.org/products-page/.