The outbreak of COVID-19 is a challenging time for the whole country. All of us are contributing in the fight against COVID-19 either at sitting at home or by becoming CORONA frontline warriors. We are donating in various funds of state government or central government or through various NGOs. But, is it enough?
Let’s discuss a different way of contributing.
RBI has allowed the Banks for a moratorium of 3 months. When banks give moratorium to its customers, then they need not repay the loan during the moratorium period consequently their loan repayment period will increase. It means inflows for the Banks during the moratorium period will come down.
Now the question comes in our mind, once the moratorium period will complete, everything will be fine then why RBI has taken very bold steps to maintain liquidity in the system.
The reason is very simple. Many corporates/individuals might not be able to repay their loans resultant NPAs in banks book will get increase and accordingly inflows of banks will be impacted. Once inflows of banks started decreasing banks will not be able to cater to the credit requirement of our industries and individuals. It means banks need funds for new credits.
That’s why RBI has focused on liquidity and lots of relief given to the Banks such as reducing CRR requirement, giving relief in liquidity coverage ratio and introducing Targeted Long Term Repo Operations.
As we all aware the wheel of the economy has halted due to lockdown therefore there is no additional money that will flow in the economy, it will just change the hand. Now we can sum up the impact on the Bank liquidity -
- Very least inflow of loan repayment during the moratorium period.
- Withdrawal of corporate deposits to meets their expenses as they also in no inflow mode.
- Withdrawal of retail deposits to meet their daily necessities.
- Post moratorium significantly increases in NPAs.
- New disbursement of loan to alive industries.
How we can help the Banks:
We deposit our savings in the banks either in the form of fixed deposit, Recurring deposits or in saving accounts. We might have some deposits in small banks which offer an attractive rate of interest, but in this crisis time we also worried about the safety of our deposits and we start to move our deposit to public sector banks or big private sector banks. In the process of moving deposits from one bank to other, the small bank has a huge pressure to maintain the liquidity. Firstly due to unavoidable withdrawals and the second reason is all of us who just simply withdraw deposit due to safety.
Your deposit is safe in a small bank as it is safe in private banks. Your deposit is insured by deposit insurance and credit Guarantee Corporation. We can help to banks by “not just simply withdrawing money due to safety. Our JUST withdrawal may cause disruption in the economy.