When the spread of Covid-19 was on the verge of hurting the Indian economy in early 2020, the central bank quickly moved to protect the country’s banking system. The Reserve Bank of India provided relief to banks as well as borrowers by offering the option of halting loan repayments for six months (March-August). It slashed the repo rate to a record low and opened up a special credit line for banks to encourage them to lend more. It also allowed lenders to restructure some loans.
All these steps gave much-needed temporary respite to India’s banking system. While the moratorium on loan repayments protected them against the shock of rising bad loans, the availability of cheap credit flushed the banking system with liquidity.
But these moves have merely kicked the can down the road, and the moment of reckoning could arrive in 2021. The RBI, in its latest report, warned that “as policy support is rolled back, the impact of the Covid-19 pandemic may dent the health of the…