Big announcement by RBI today – Owing to the corona-virus outbreak RBI governor Shaktikanta Das today on 27/3/2020 announced the massive measures providing the required desperate relief for all working and middle class. As per RBI, the measures are intended to mitigate the negative effects of the virus, to revive the growth, and to preserve the financial stability.
Important Highlights of the Announcement
1) In order to increase the liquidity in the systems:
- The cash reserve ratio (CRR) of all banks is reduced by 100 basis points to 3% of net demand and time liabilities (NDTL) for 1 year with effect from the fortnight beginning March 28, 2020.
- The accommodation under the marginal standing facility (MSF) has been increased from 2% of the statutory liquidity ratio (SLR) to 3% with immediate effect.
- Will be conducting auctions of targeted term repo of up-to 3 years tenor.
2) Repo rate cut by 75 bps, bringing the repo rate to 4.4% from the earlier 5.15%.
3) Reverse repo rate cut down by 90 bps to 4%.
4) 3 months of EMI moratorium on all term loans outstanding as on March 1, 2020.
5) Allowed 3 months deferment of interest on working capital facilities outstanding as on March 1, 2020.
6) Loans moratorium and working capital interest payment deferments will not result in asset classification downgrade.
7) Loans moratorium and working capital interest payment deferments will not impact the credit history of the beneficiaries.
8) Exemption on incremental credit disbursed by banks between January 31 – July 31, 2020, on retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) from the maintenance of cash reserve ratio (CRR).
9) Deferred installments under the moratorium will include the following payments falling due from March 1, 2020, to May 31, 2020:
(i) Principal and/or interest components;
(ii) Bullet repayments;
(iii) Equated Monthly installments;
(iv) Credit card dues.
- In addition to the CRR cut to 3 % the RBI has also reduced the minimum requirement of daily CRR balance maintenance from 90% to 80 %, with effect from March 28, 2020. (It is a one-time dispensation available up to June 26, 2020, to unlock the liquidity.)
1, 37,000crores of liquidity is expected to be released uniformly across the banking system with a reduction in the CRR of the banks.
The MSF measures taken will boost an additional 1, 37,000crore of liquidity into the banking systems.
In Targeted Long Term Repo Operations (TLTRO) the RBI will conduct auctions of targeted term repos of up-to 3 years tenor of appropriate sizes for a total amount of up to 1,00,000crore at a floating rate, linked to the policy repo rate. This is intended to reduce cash flow pressures across the sectors especially seen due to large sell-offs in the domestic equity, bond and forex markets.
Combining the CRR + MSF+TLTRO measures, 3.74 lakh crore of liquidity in total is expected to be injected into the system.
- Repo rate is a rate at which RBI lends money to commercial banks. The reduction in the repo rate by 75 basis points is the lowest ever since 2009. With its reduction to 4.4%, the banks now can borrow money at much lower rates and as such will pass on the benefits of lower rates to the customers by reducing the interest rates for the loans they offer. It means that the housing loan now will become cheaper for the home buyers.
- Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the banks. It is the short term borrowing rate at which RBI borrows money from banks. With the reduction in the reverse repo rate by 90 basis points to 4% by RBI, it intends to maintain liquidity balance in the banking systems by making it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy.
- All commercial banks (including regional rural banks, small finance banks, and local area banks), public sector & private sector banks, co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are permitted to allow a 3 months deferment of interest payment on working capital facilities such as cash credit, overdraft, term loans. The accumulated interest can be paid after the expiry of the deferment period.
- All the borrowers of the term loans i.e. corporate loans, home loans, car loans, mortgage loans, educational loans, personal loans as well as consumer durable loans and agriculture term loans, retail and crop loans will get EMI holidays for coming 3 months on all term loans outstanding as on March 1, 2020, by all banks. No EMIs will be deducted from their bank accounts till the moratorium period is over. EMIs will resume after the moratorium period.
Please note that it is not an EMI waiver for the borrower. Though the borrower is not required to pay the EMI, the loan amount will still continue to incur interest during this period. In general, the interest charged during this period gets added to the loan amount and gets adjusted through higher EMIs during the repayment period. However, the actual conditions of moratorium may vary depending on how different banks may implement it.
With EMI holidays RBI attempts to reduce the number of NPAs of the banks which otherwise would have increased due to this pandemic lockdown.
CONCLUSION: The RBI has announced a comprehensive package, including measures to expand liquidity, steps to reinforce monetary transmission, efforts to ease financial stress by relaxing repayment and endeavor to improve the functioning of the market.
The implemented drastic measures were the need of the country in the current situation of pandemic lockdown. These measures will be a great relief for all working and the middle class as well as for small business owners and self-employed.
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