EMI holiday to credit card dues: RBI's top 10 moves on economy

Ten days ago, Governor Shaktikanta Das had assured that Reserve Bank of India holds enough firepower to tackle the coronavirus crisis, and will use it when the time is right. On Friday, the Monetary Policy Committee of the central bank rolled out a long list of announcements to deal with the economic impact of the pandemic. This includes a repo rate cut of 75 basis points, Rs 3.74 lakh crore liquidity boost, and deferment of loan instalments for 3 months, among other things.

The motive of Reserve Bank's liquidity boost is to arm the banks better so that they are ready to lend aggressively when the 21-day lockdown lifts. Relaxation on instalments, lower interest rates and easier access to working capital will help markets function well without financial stress as things start to settle down after a few weeks. The central bank has also lowered reverse repo rate to 4 per cent, giving banks another reason to direct their funds towards lending.

Below is a lowdown on what Reserve Bank of India (RBI) announced to tide over these times of crisis:

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Relief to retail borrowers

1. Instalments on all term loans to businesses and individuals, including principal and interest, have been deferred by 3 months. However, it is for the banks to decide who can benefit from this measure. This aspect will create confusion as each bank will take its own call.

2. In an unprecedented move, RBI slashed repo rate by 75 basis points (bps), or 0.75 per cent. This will lower borrowing costs, making home, auto, personal and other loans lucrative. But just like earlier rate cuts, interest transmission is key for this bold move to succeed. Banks are still sitting on 0.5 per cent from interest rate cuts since 2014 that is yet to be transmitted to borrowers. Add it to the 0.75 per cent rate cut announced today, and we could have a 1.25 per cent reduction in interest rates. If passed on to borrowers quickly, it will be a huge relief for them.

3. The MPC has also reduced Cash Reserve Ratio (CRR) by a steep 100 bps. The last time we saw a reduction in CRR was seven years ago, when it was lowered by 25 bps. This move will cause deposit interest rates to fall, which is not good for depositors.

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Lessening the burden of businesses

1. All commercial banks have been allowed to impose a moratorium of three months on paying instalments on term loans from March 1, 2020. The tenors will be extended accordingly.

2. Lenders have been permitted to defer interest payments on working capital loans by three months. The accumulated interest will be paid after the deferment period expires.

3. Businesses have been allowed to draw more working capital, subject to recalculation of margins or reassessment of working capital cycle by their lender.

4. Moratorium on term loan repayments and deferred interest payments on working on working capital will not cause borrowers to be classified as NPA accounts. "Hence, there will be no adverse impact on the credit history of the beneficiaries," RBI said

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More firepower for banks

1. The central bank is going to infuse Rs 3.74-lakh-crore liquidity into the economy. This is an unprecedented move and will help businesses to hit the ground running when 21-day lockdown is lifted.

2. Banks can get durable liquidity or funds up to Rs 1 lakh crore from RBI for a 3-year tenor.

3. Reduction of 100 basis points in CRR with RBI, takes it down to 3 per cent from the earlier 4 per cent with effect from the reporting fortnight beginning March 28, 2020 for a period of one year. This reduction in CRR would release Rs 1.37 lakh crore for banks.

4. Marginal standing facility has been increased to 3 per cent. This will allow banks to avail another 1.37 lakh crore from RBI.

5. Reverse repo rate has been lowered to 4 per cent, which will discourage banks to park surplus funds with RBI and use them for loans instead.

6. Delayed repayments on term loans and working capital will not be classified as NPAs for three months.

7. Last tranche of capital conservation buffer has been deferred by six months.

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