In an unprecedented move, RBI today announced several measures that will have far reaching impact on the Indian economy and the slow down caused by the COVID-19 pandemic. These include loan moratorium, relaxation of asset quality norms, expansion of liquidity etc,. Though the announcement from the Apex bank wasalong expectedlines much for the relief to industry and small borrowers, today’s announcements will also provide a huge impetus in the current scenario. Here is a gist of how the announcements are likely to impact the current situation and in the Indian economy.
In an unprecedented move, RBI today announced several measures that will have far reaching impact on the Indian economy and the slow down caused by the COVID-19 pandemic. These include loan moratorium, relaxation of asset quality norms, expansion of liquidity etc,. Though the announcement from the Apex bank wasalong expectedlines much for the relief to industry and small borrowers, today’s announcements will also provide a huge impetus in the current scenario. Here is a gist of how the announcements are likely to impact the current situation and in the Indian economy.
1.REPO cut by 75 bps to 4.4%
Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds. By reducing Repo rate from5.15% by 75 basis point, the commercial banks willhave accessto more funds from RBI at a reduced interest cost. The increased liquidity available due to this, will be deployed in investment grade corporate bonds, commercial paper and non convertible debentures.
2.REVERSE REPO cut to 4%
Reverse Repo is the rate commercial banks lend to RBI. Reducing it by a considerable 90 basis points, makesit unattractive for commercial banks to passively deposit funds with the RBI instead of lending to borrowers for productive purposes. Now banks will be forced to lend the additional liquidity into the system.
3.Cash Reserve Ratio reduced from 4% to 3%
Cash reserve ratio is a specified minimum liquid cash of the total deposits of customers, which commercial banks have to hold as reserves either in cash or deposits with the RBI. By reducing the same from 4% to 3%, the commercial banks will be benefited by about Rs. 1.5 lakh cr in total which can further be deployed into commercial lending to priority sectors including MSME and small businesses.
4.Minimum daily CRR balance cut from 90% to 80%
This will enable the banks to have more flexibility and more funds will be available with them for deployment into the system
5.Moratorium of 3 months on repayment of Term loans
All banks and NBFCs have been permitted to allow a moratorium of 3 months on repayment of term loans outstanding on 1st March 2020. Moratorium meaning “ a legal authorization to debtors to postpone payment” leads to a question whether interest is waived during this period. In my opinion, simple interest has to be paid on the loan at a later date for the 3 month period. However, the loan will not be treated as NPA for non payment of principal or interest during this moratorium and the credit rating will also not be affected. EMI repayments of loans taken will not be automatically be debited from customer accounts by their bank till moratorium period is over and EMI payments will restart only after moratorium time of 3 months expires. However, you may need to get it approved from your bank. It is only a deferment and not waiver and accumulated interest has to be paid. RBI Governor has assured that this will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade.
6.Types of Loans included in moratorium
RBI policy statement explicitly mentions terms loans which includes home loans, personal loans, education loans, auto and any loans which have a fixed tenure. This includes consumer durable loans such as EMIs on mobiles, fridge, TV etc,.
7.Depositors of commercial banks not to worry about its safety
Those who have deposited with commercial banks as well as private banks need not worry about the safety of their deposits and there is no need for panic withdrawal of the same. This will infuse confidencein the depositors especially senior citizens who have deposited their life time savings in the banks.
8.CREDIT card payments
A common and general question is whether my credit card payment has any relaxation? Since credit cards are defined as revolving credit and not term loans, they are not covered under moratorium. However, subsequently RBI has clarified that credit card payments will also be under moratorium. No charges for debit card withdrawals.
9.WORKING CAPITAL FOR BUSINESS
RBI has allowed deferment of interest payment for all working capital loans taken by businesses. This is applicable for all working capital facilities outstanding as on 1st March 2020. The accumulated interest for the period will be paid after the expiry of deferment period.
In a world scrambling to handle the economic fallout of a pandemic, all central banks have a constructive role to play in supporting their respective governments and shoring up government policy with monetary policy support. These are unpredictable times. One knows not how long the pandemic’s effects will last or the depth of impact it will have on an already fragile economy. The efforts of RBI has been quantified to monetary easing to the extent of about Rs.3.75 lakh crores. One can hope that the RBI’s moves combined with packages from the government will go a long way in restoring confidence and help individuals and businesses to recoup their losses and find their feet once again.
1.REPO cut by 75 bps to 4.4%
Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds. By reducing Repo rate from5.15% by 75 basis point, the commercial banks willhave accessto more funds from RBI at a reduced interest cost. The increased liquidity available due to this, will be deployed in investment grade corporate bonds, commercial paper and non convertible debentures.
2.REVERSE REPO cut to 4%
Reverse Repo is the rate commercial banks lend to RBI. Reducing it by a considerable 90 basis points, makesit unattractive for commercial banks to passively deposit funds with the RBI instead of lending to borrowers for productive purposes. Now banks will be forced to lend the additional liquidity into the system.
3.Cash Reserve Ratio reduced from 4% to 3%
Cash reserve ratio is a specified minimum liquid cash of the total deposits of customers, which commercial banks have to hold as reserves either in cash or deposits with the RBI. By reducing the same from 4% to 3%, the commercial banks will be benefited by about Rs. 1.5 lakh cr in total which can further be deployed into commercial lending to priority sectors including MSME and small businesses.
4.Minimum daily CRR balance cut from 90% to 80%
This will enable the banks to have more flexibility and more funds will be available with them for deployment into the system
5.Moratorium of 3 months on repayment of Term loans
All banks and NBFCs have been permitted to allow a moratorium of 3 months on repayment of term loans outstanding on 1st March 2020. Moratorium meaning “ a legal authorization to debtors to postpone payment” leads to a question whether interest is waived during this period. In my opinion, simple interest has to be paid on the loan at a later date for the 3 month period. However, the loan will not be treated as NPA for non payment of principal or interest during this moratorium and the credit rating will also not be affected. EMI repayments of loans taken will not be automatically be debited from customer accounts by their bank till moratorium period is over and EMI payments will restart only after moratorium time of 3 months expires. However, you may need to get it approved from your bank. It is only a deferment and not waiver and accumulated interest has to be paid. RBI Governor has assured that this will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade.
6.Types of Loans included in moratorium
RBI policy statement explicitly mentions terms loans which includes home loans, personal loans, education loans, auto and any loans which have a fixed tenure. This includes consumer durable loans such as EMIs on mobiles, fridge, TV etc,.
7.Depositors of commercial banks not to worry about its safety
Those who have deposited with commercial banks as well as private banks need not worry about the safety of their deposits and there is no need for panic withdrawal of the same. This will infuse confidencein the depositors especially senior citizens who have deposited their life time savings in the banks.
8.CREDIT card payments
A common and general question is whether my credit card payment has any relaxation? Since credit cards are defined as revolving credit and not term loans, they are not covered under moratorium. However, subsequently RBI has clarified that credit card payments will also be under moratorium. No charges for debit card withdrawals.
9.WORKING CAPITAL FOR BUSINESS
RBI has allowed deferment of interest payment for all working capital loans taken by businesses. This is applicable for all working capital facilities outstanding as on 1st March 2020. The accumulated interest for the period will be paid after the expiry of deferment period.
In a world scrambling to handle the economic fallout of a pandemic, all central banks have a constructive role to play in supporting their respective governments and shoring up government policy with monetary policy support. These are unpredictable times. One knows not how long the pandemic’s effects will last or the depth of impact it will have on an already fragile economy. The efforts of RBI has been quantified to monetary easing to the extent of about Rs.3.75 lakh crores. One can hope that the RBI’s moves combined with packages from the government will go a long way in restoring confidence and help individuals and businesses to recoup their losses and find their feet once again.