Covid-19 Threats to Cooperative Financial Institutions (CFIs): India’s Policy and Regulatory and Response

The spread of COVID -19 in India has impacted the normal functioning of all financial institutions, their customers, borrowers, and the continuation of agricultural/farming activities. Because of the mandatory shutdown of non-essential businesses and the confinement of people to their homes, the effects of COVID-19 are unevenly distributed among households, workers, businesses, and communities.

In this environment, the role and active participation of CFIs at all levels, and particularly the Rural Cooperative Credit and Banking structure (RCCBs), assumed special significance in facilitating changes and reversing the adverse impact of the pandemic. CFIs have strived to keep open their banking channels during the entire lockdown period, while ensuring social distance, and their compliance with all regulatory, supervisory and statutory provisions.

Support Measures

Policy measures to contain and mitigate the pandemic effects, including general economic recovery actions, regulatory adjustments, and specific liquidity support are outlined below.

Economic recovery measures

• Taxation. An ordinance issued in March provides for extension of various time limits under the Taxation and Benami Acts.
• Subsidies. A provision effective April 1, 2020 has determined that short term crop loans by CFIs, eligible for 2 percent Interest Subvention Scheme and 3 percent Prompt Repayment Incentive be extended only through Kisan Credit Cards (KCC), thus making KCCs a prerequisite for farmers to claim these benefits.
• Atmanirbhar Bharat (self-reliant India). As part of this vision, an economic package amounting to about 10 percent of India’s GDP, has been allocated to the recovery of key sectors. The measures include: (1) collateral-free automatic loans for businesses, including MSMEs, and a Special Liquidity Scheme for NBFCs, HFCs/MFIs; (2) direct support to farmers and the rural economy, migrants and the urban poor, returning migrants and other workers; and (3) policy reforms to fast track investment. CFIs, however, are not eligible Member Lending Institutions under Credit Guarantee Fund Trust for Micro and Small Enterprise, hence are not allowed to extend collateral-free loans to their MSME customers, who are constrained to approach the commercial banks for credit under the MSMEs facility.

Regulatory Response

• Moratorium for loan payments. The Reserve Bank of India (RBI) issued a directive to all Banks, including CFIs, to grant a moratorium on payments of all term loans installments falling due until August 31, 2020. In view of the same, the asset classification of term loans shall be determined on the basis of revised due dates and the revised repayment schedule.
• Liquidity Management. The RBI has undertaken measures to target liquidity provision to sectors and entities facing liquidity constraints.
• Monetary Policy and Prudential Norms. As a one-time measure, the RBI reduced the cash reserve ratio of all banks to 3.0 per cent of net demand and time liabilities, in order to release primary liquidity. The policy repo rate, reverse-repo rate, and bank rate stand reduced, under the RBI’s Liquidity Adjustment Facility. The capital adequacy ratio remains unchanged.

Supporting the CFIs

• A special refinance facility of USD 5 billon was set up by the RBI to enable NABARD to meet credit needs of CFIs. This is in addition to their additional short term seasonal agricultural policy (in the absence of regular annual policy).
• Special efforts have been made to support CFIs at all three levels of the structure to continue normal banking business with adequate staff, cash and other facilities.
• NABARD assured to consider a lower eligibility norm, of capital adequacy and non-performing assets, with adequate security during the spread of pandemic.
• The timely measures taken by Government of India, RBI and NABARD have helped to curtail and contain the negative impact of COVID-19 on the functioning of CFIs.

CFI Outlook

Structural changes in India’s CFI sector are anticipated, more importantly among Rural CFIs. The RCCBs structure in India is well conceived with a three-tier structure in major states and two-tier structure in smaller states. Proposals to delayer the structure have been opposed by member-driven cooperatives.

The CFIs in the urban cooperative banking sector, on the other hand, may be brought under direct control of the regulatory authority and may lose their cooperative character. This measure would not be in response to adverse implications of COVID-19, but rather the RBI exercising its power under the The Banking Regulation (Amendment) Ordinance 2020.

CFIs will work towards ensuring adoption of technology, digitization, formulation and compliance of risk management guidelines, information security guidelines, cyber security, and fraud monitoring guidelines. The sector will also be in a position to concentrate on the important pillars of corporate governance namely accountability, transparency, responsibility and fairness. The agriculture loan portfolio will continue to be unaffected due to its large rural network and well-established structure. The leadership in financial cooperatives structure will make all efforts towards building their capabilities to be healthy, viable and democratic. The Urban Coop Banking (UCB) sector appears to be well equipped especially the Scheduled UCBs / Multi state UCBs with the support of RBI. Nationalized banks will continue to be supported by Government with infusion of capital on a regular basis. Well deserving CFIs, however, will continue to be deprived of needed capital infusion to comply with prudential norms, and wipe out the accumulated losses resulting from external factors.