As the global economy reels from a complete lock down on all but the most essential economic activities, almost all governments have begun analyzing the economic fallout of an unprecedented pandemic. The countries hardest hit such as China, USA, UK etc. have already announced various support and stimulus packages. India has also begun a similar stimulus exercise in phases.
As the global economy reels from a complete lock down on all but the most essential economic activities, almost all governments have begun analyzing the economic fallout of an unprecedented pandemic. The countries hardest hit such as China, USA, UK etc. have already announced various support and stimulus packages. India has also begun a similar stimulus exercise in phases.
The first announcement by the FM related to relaxation of statutory due dates for GST, TDS and compliance matters. This was followed by a second announcement that outlined a 1.7 lakh crore( $22.6 billion) economic stimulus plan providing direct cash transfers and food security measures to give relief to millions of poor/daily wage dependent populace – the worst affected by the current lockdown.Concurrently, the RBI also came out with a loan moratorium for 3 months and reduction of CRR, REPO and REVERSE REPO which had the effect of easing to the extent of Rs.3.75 lakh crore. The Government has made a fervent request to employers to pay wages to workers during the shutdown period. A number of representations from various parts of the country have been made to the FM seeking relief measures in depositing statutory dues, waiver of interest during the currency of COVID, reduction of interest, deferment of loans till the end of this financial year, extension of time for NPA classification etc., in addition to soft loans for payment of wages to employees during this testing period.
Most of the countries including UK, USA, Germany, Canada, Australia, and Singaporehave come out with stimulus packages. These packages comprise various measures such as extension of time for depositing statutory dues and filing of returns, low interest loans for additional working capital, subsidy on employee payments etc.,. USA’s SBA (Small Business Administration) has provided “Forgivable loans” to small businesses wherein loans can be used to meet payroll commitments, pay rent and utilities and would not need to be repaid if certain pre-specified conditions are met.
The RBI today announced a second round of measures meant to improve liquidity and ensure adequate funds with banks and NBFCs. These will go a long way in cushioning the economic impact of COVID 19. The INR has weakened 2% since the last policy announcement on Mar 27th while the 10 year bond yield has gone up from 6.22% to 6.44%. India is among a handful of countries expected to grow albeit at a low rate. However, a sharp turnaround is expected in FY 22. Current forex reserves will cover 11.80 months of imports. Systemic liquidity surplus has averaged about Rs.4.6 lakh crore between Mar 27 and Apr 14.
The additional measures include TLTRO (Targeted Long Term Refinancing Options) of Rs.50,000 crores to be invested in bonds, CPs, NCD, of NBFCs with at least 50% going to mid- sized NBFCs and MFIs. RBI will provide refinance facilities to NABARD, SIDBI, and NHB to address sectoral needs, revive RRB and microfinance institutions. The reverse repo has been slashed to 3.75%. The Repo remains the same. The reduction of reverse REPO will induce bankers to lend money instead of depositing it with RBI. Liquidity coverage Ratio (LCR) requirements have been brought down to 80% from 100% with immediate effect. There will be an asset classification stand still for all accounts where moratorium has been granted. This means “standstill clause” will be applicable from 1st March 2020 to 31st May 2020 for all borrowers and no further action will be taken by banks in terms of asset classification. The additional good news is the declining trajectory in inflation which fell 170 basis points from its peak in Jan 2020. This will provide more maneuvering space for policy at this critical juncture. Further NBFCs and Banks cannot announce any dividend for 31-03-20 until further orders – this also adds more liquidity and makes more funds available.
In a nutshell the RBI measures announced today may be expected to:
• Increase liquidity and make more funds available for priority lending and sectoral lending
• NBFC fund crunch has been addressed
• States will be able to borrow at cheaper rates with the increase in WMA limits and this is crucial since states are at the forefront of the COVID battle and will need to augment their finances.
• Reduction in reverse repo incentivizes banks to lend more
Overall the RBI’s liquidity improvement measures 2.0 have sought to provide enough liquidity in the banking system to avoid a funds crunch both for governments (central & state) as well as various sectors dependent on banking. A second fiscal stimulus package may also be expected to help the needs of the industries especially MSME sector as the PM is known to have assessed the impact of COVID on the economy yesterday.
Key Announcements by RESERVE BANK OF INDIA in a Nutshell
- NPA classification will now not include the 90- day moratorium on loans. asset classification- “90 day classification will exclude the moratorium period”. The bank willhave to maintain additional 10% provisions on these standstill accounts over next 2 quarters- these provisions can later be adjusted against the provision requirement for slippage.
- Another liquidity boost through Targeted Long Term Repo Operations 2.0 worth Rs 50,000 crore to begin with for NBFCs, HFCs and MFIs with refinance through NBARD, SIDBI and NHB - ( NABARD –Rs. 25000 Crores, SIDBI –Rs. 15000 Crores and balance to NHBRs. 10000 Crore) - additional requirement if any by them may be met by RBI. The advances will be charged at repo rate.
- Liquidity coverage ratio requirement for Scheduled Commercial Banks to be brought down from 100 percent to 80 percent with immediate effect
- Fixed reverse repo rate under LAF cut by 25 bps to 3.75 percent from 4 percent with immediate effect
- For all accounts where moratorium or deferment has been applied, there would be an asset classification standstill
- Date of Commencement of commercial operations (DCCO) delayed for reasons beyond the control of promoters, can now be extended by one year without asset classification downgrade. This relief is now also allowed for NBFCs.
- the Ways and Means Advance (WMA) limit has been increased for states by 60% to plan their market borrowing program better over period of time. This will be available till September 2020
- For large accounts under default, additional provisioning of 20 percent is required for not implementing resolution in 180 days. This has now been relaxed.
- Banks shall not declare dividends until further notice.