The Reserve Bank of India (RBI) has come to the rescue of not only corporate borrowers bearing the brunt of coronavirus lockdown but also individuals facing income disruptions due to the nationwide shutdown after the spread of novel coronavirus swept the entire world. A slew of measures from reduction in the repo rate and cash reserve ratio to three-month moratorium on term and credit card loans are expected to provide immediate relief to the borrowers.
"RBI policy announcements are bold, decisive, compelling and with a humane touch in attenuating to the needs of the economy to fight through the pandemic. The large rate cut, the adjustment in capital conservation buffer, the moratorium on repayments and the bazooka of conventional CRR cut and unconventional liquidity measure of incentivising banks to support CP market all will help financial markets stabilise, lead to immediate rate transmission and address the credit needs of the real economy," says SBI Chairman Rajnish Kumar.
It will not only give a big relief to salaried employees of struggling companies, fearing a delay in the salary, pay cuts and even job loss but also self-employed individuals staring at income loss.
"The move will provide some relief to individuals, especially self-employed ones, who are facing income loss due to the ongoing lockdown. Various measures to nudge banks to lend and to inject liquidity into the system, will help in passing the benefit to the potential borrowers - people with small businesses, self-employed and so on - in dire situation right now, with everything shut-down," says Thomas John Muthoot, Chairman and Managing Director, Muthoot Pappachan Group.
We tell you how key RBI announcements will impact you:Relief on loan repayments
The moratorium is applicable on all term loans and credit card loans outstanding as on March 1, 2020 for the three months, that is, between March 1 and May 31. Note that the interest charging meter of lenders will not stop and this interest will keep adding to your loan outstanding. "Like most other things, this moratorium doesn't come free for consumers. They would need to pay the accrued interest along with their resumed payments from June onwards. However, that's a small price to pay for getting this immediate relief," says Kunal Varma, CBO and Co-Founder, MoneyTap.
Clarity is yet to emerge whether the moratorium period is optional or mandatory. However, State Bank of India has already made it mandatory for all borrowers. So, SBI borrowers will not have the option to pay their EMIs during moratorium. Other banks are yet to clarify the same.
"If you can afford to repay your loan EMIs, you should try to set aside that amount even if you're not required to pay them during the moratorium unless doing so will adversely impact other pressing financial requirements. This would ensure speedy lowering of loan burden once the moratorium ends. Most importantly, get complete clarity with your lender how it will impact your loan before reaching a conclusion and don't assume anything based on hearsay," says Bankbazaar.com CEO Adhil Shetty.
Even if your bank makes it optional, you may use this window to shore up your contingency fund if you are facing cash crunch or fearing a job loss or income disruption. "The three-month EMI moratorium is a welcome move for those customers whose short term cash flows are adversely affected by the coronavirus pandemic. It is not a waiver, but only a shift in payment schedules," explains Varma of MoneyTap.
However, if you are a government employee or working with a blue chip company with strong balance sheet and no immediate fear of job loss or income disruption, you may avoid bearing extra interest cost during the moratorium period and pay your EMIs without disruption if your bank allows.
Repo rate cut to ease home, car loan repayment burden
An added advantage for the borrowers from the RBI's move is that they may see significant reduction in their EMIs. With the RBI reducing the repo rate by 75 basis points to 4.4 per cent, your repo rate-linked home, car, education and other term loans will get cheaper. For example, if you have taken a loan of Rs 1 crore for 20 years at 8.25 per cent, your EMI will decrease by Rs 4,648 at the new interest rate of Rs 7.50 per cent (see table).
"Loans on the whole will be cheaper and consumers can save money owing to the measures. This will put more money in the hands of people and create a higher demand in the overall economy as consumption would go up," says Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani.
SBI has already passed the entire 0.75 per cent interest fall to the borrowers both for external benchmark rate-linked and repo rate-linked loans.
What it means for new borrowers
The cut in the repo rate will nudge banks to reduce lending rates for new borrowers, which is key to boost economic activity in the country. "With the RBI intervention, the probability of a V-shaped recovery has increased, that is, the annual growth rates would be able to fully absorb the shock in the long-term," says Manish Khera, Founder & CEO, HAPPY, a fintech lender.
Besides, the cut in reverse repo rate, says Hiranandani, will make it unattractive for banks to passively deposit funds with the RBI and instead lend it to the productive sectors like industry and agriculture. "The cut in cash reserve ratio together with other measures will inject greater liquidity into the market and there won't be a shortage of cash flow in the economy. However, quick transmission will be key to the huge liquidity infused by RBI," he says.
No impact on your credit score
Be assured that the three-month moratorium on loans will not impact your credit score as the RBI has clearly specified that CICs shall ensure that the actions taken by lending institutions do not adversely impact the credit history of the beneficiaries. "Non-payment of loan EMIs during the moratorium will not impact your credit score, as mentioned by the RBI Governor. As such, you should stay on top of it by checking your credit score regularly during the moratorium period," says Shetty of Bankbazaar.
Sathya Kalyanasundaram, Country Head and Managing Director of credit bureau Experian India assures the same. "RBI's decision to allow a moratorium period of three months for all outstanding loans provides relief to borrowers and their credit scores and is reassuring to all those who have been impacted financially due to the fallout of this pandemic," he says.
What it means for depositors
Depositors will feel a pinch as deposit rates will also go down. Further, the RBI Governor Shaktikanta Das assured that the banking system is safe and they should not resort to panic withdrawals as happened in the recent past amid COVID-19 related volatility in the stock market.
"Despite the lowering deposit rates along with tax on returns, FDs and RDs should continue to be the favoured investment instrument of risk-averse investors. Depositors should not worry about the safety of their deposits, as assured by the RBI Governor, and prefer digital transactions," Shetty says.
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