“In this pandemic situation, banks are trying to protect their capital and avoid problem loans. They may allow borrowers to restructure their loans, but they are reluctant to offer fresh credit at this time, at least for some sectors. Instead, they are keeping their excess funds with the central bank, despite the repo rate being at its lowest level ever historically.”
The lowering of the repo rate was just one of the measures adopted by the Reserve Bank of India (RBI) to incentivise and drive the free flow of credit to the economy. It also introduced a range of liquidity facilities, deferred implementation of capital and liquidity rules, and granted a range of regulatory reliefs to banks, among other measures. Despite these initiatives, India’s financial sector remains hesitant to supply markets with credit, which is indicative of the challenges some policymakers have faced throughout the crisis.
According to the Bank for International Settlements (BIS), restrictions on capital distributions imposed by government and regulators reduced overall 2020 dividends to less than half of their 2019 levels, resulting in higher capital levels at banks, despite falling profits during the same period. In countries where restrictions were in place, the higher capital cushions were leveraged to increase the supply of credit and boost loan growth, the analysis found.