What is COVID Loan Book?

The Reserve Bank of India recently opened an on-tap liquidity window of Rs 50,000 crores.

Note: On-tap means ready to. On-tap liquidity window is funds that are to be provided immediately. Liquidity is cash.

What is the plan?

Under this step, the banks can provide lending support to vaccine manufacturers, importers of vaccines, pathology labs, hospitals and dispensaries, suppliers of vaccines, logistics firms, etc.

COVID Loan Book

The COVID Loan book is an account of loans provided by the banks under this new window.

Technical Explanation: The banks can open COVID loan book. They can park their surplus liquidity to the size of COVID Loan Book with the RBI. This is to be done at reverse repo rate.

In Simple Terms:

Parking the funds means depositing the money in the bank. Under the new step, the banks can deposit the surplus money in RBI.

How will COVID Loan Book help in economic recovery?

RBI pays interest to these banks for the money deposited by them. In May 2020, the Indian Bank made 3.1 billion USD only by parking the funds with the RBI.

Lenders are comfortable keeping their funds in safe places even the earning from such means are meagre. This is the main reason for the banks to park their funds with RBI.

However, the banks parking funds with RBI has been increasing lately. It recently hit record high of seven lakh crores of rupees per day.

At this point of time, when economy is under recession, the banks should lend more to help in economic recovery. On the contrary, the banks are depositing the funds with RBI. Are the banks at fault? NO. The situation due to COVID-19 crisis and lock down is such that the banks are earning more by parking funds than by lending money to the people. This so called earning more is “meagre”. Still, it is higher than that earned by lending money.

Now, RBI has to push banks to lend more money. That is why the condition of “Can Park funds till COVID Loan Book” has been brought in. This will compel the banks to lend more money to the market. In turn will boost the economic growth.

Month: Current Affairs - May, 2021