Liquidity in Lockdown – Update: Surviving the Pandemic

Estimating the magnitude of the liquidity shortfall for small finance banks in India resulting from the COVID-19 six-month moratorium

The moratorium for borrowers enabled by the Reserve Bank of India in response to the economic disruption of the lockdown has created challenges all along the micro-lending value chain.

This Advisory Note estimates the magnitude of the liquidity shortfall for small finance banks (SFB) resulting from the current six-month moratorium. It shows that even with improvements in the microloan recovery rates over the past two weeks investors and lenders will need to provide funds of the order of INR 1,500-2,500 crore ($200-330 million) per large SFB equivalent to 20 percent of the overall funds currently managed by each of them for such SFBs not just to survive but also to revive their businesses after the moratorium period. This is important ultimately to facilitate the livelihoods of the low income families they serve. Bankers who provide wholesale loans to SFBs and microfinance institutions need to shed their conservatism and step up with a dynamic response to the current situation.

Access the latest version of this Note "Liquidity in Lockdown – Update 2: India’s SFBs & MFIs Coping With the Pandemic".

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By Sanjay Sinha