In a significant move to soften the economic impact of the ongoing coronavirus pandemic and lockdown, the Reserve Bank of India (RBI) has introduced a set of initiatives. These include extending the realisation period of export proceeds and increasing the Ways and Means Advance (WMA) limit for state governments. In addition, measures by the central bank are also aimed at alleviating the capital requirements of the banking sector.
Extended Realisation Period of Export Proceeds
The RBI’s moves come in the background of a recent 75 basis points cut in the repo rate. One of the key actions taken is the extension of the time period for realisation and repatriation of export proceeds made until July 31, 2020. This period has now been extended to 15 months from the date of export.
Before this decision, exporters were required to realise fully and repatriate the value of the goods or software exports back to the country within nine months from the date of the exports. The extended period will enable exporters to realise their receipts, particularly from those countries affected by COVID-19. It will also provide them with more flexibility to negotiate future export contracts with foreign buyers.
The pandemic and subsequent lockdowns in many countries have resulted in significant disruptions to export activities.
Raise in Ways and Means Advance Limit
Parallel to the above measure, an advisory committee has been established by the RBI to assess the Ways and Means limit of State governments and Union Territories. Until the panel delivers its final report, the central bank has raised the Ways and Means advances limit by 30% for these entities. The revised limits took effect from April 1, 2020, and are valid until September 30, 2020.
The ‘Ways and Means Advances’ is a system designed to assist governments in managing mismatches between their receipts and payments. Through this scheme, a government can acquire immediate cash from the RBI.
Earlier, the Central Government increased the Ways and Means Advance (WMA) limit with the RBI by 60%.
Postponement of Counter Cyclical Capital Buffer Implementation
In another move aimed at safeguarding the banking sector, the RBI has postponed the implementation of the Counter Cyclical Capital Buffer (CCyB) for banks. It has been determined that it isn’t necessary to activate CCyB for a period of one year or earlier, as might be needed. The CCyB is the capital a bank must maintain to counter risks associated with business cycles.
This strategy, a central aspect of the Basel III norms, is designed to protect the banking sector against potential losses arising from shifts in economic conditions, such as recession.