Indian central bank’s monetary policy panel concluded an unscheduled meeting earlier this week to decide on measures it can take to tackle the fallout of the COVID-19.
- RBI cuts repo rate by 75 basis points to 4.40% and Reserve repo rate by 90 basis points to 4%to mitigate Covid-19 impact. That means that now commercial bank will able to take loan form RBI at 4.4% that increase the flow of money in economy?
Note: 1 basis points is equivalent to 0.01 %( 1/100th of a percentage) or 0.0001 in decimal form.
- Economists are forecasting a steep fall in growth in the fourth quarter of the current fiscal year and in the financial year beginning April 2020.Estimates of India shows GDP growth during 2020 to 2.5% from an earlier estimate of 5.3%
- The GDP growth of the last quarter of fiscal year 2019-20 and FY 20-21 is likely to be affected. Economists said that Indian economy will face recession due to COVID-19 outbreak it going to reduce Aggregate Demand due to reduce in spending of Indians.
- Cash Reserve Ratio of all banks reduced by 100 basis points to 3% of net demand and time liabilities with effect for one year from March 28. CRR has been cut to unlock liquidity.
- The banking regulator deferred interest payment on working capital loans by three months. “The accumulated interest for the period will be paid after the expiry of the deferment period,” the RBI statement said. And such deferment not to be considered for Non performing assets.
- The banking regulator announced that banks and other lending entities, including non-banking finance companies and microfinance companies, are permitted to allow borrowers a three-month moratorium on payment of installments of all term loans outstanding as of March 1, 2020.and the same will not be treated as non performing assets. These measures have been put in place to mitigate debt servicing burden to prevent transmission of financial stress to the real economy, provide relief to borrowers.
- The liquidity has to be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020.
- Banks shall be required to acquire up to 50 percent of their incremental holdings of eligible instruments from primary market issuances and the remaining 50 percent from the secondary market, including from mutual funds and non-banking finance companies.
According to the RBI, these measures will result in total liquidity injection of Rs 3.74 lakh crore to the system. RBI Governor Das also assured that the Indian banking sector is safe and sound. RBI governor Shaktikanta Das added that the depositors of commercial banks including private banks need not worry about the safety of their funds. RBI has injected liquidity of Rs 2.8 lakh crore through various instruments equal to 1.4 per cent of the GDP, the Governor added.
Along with today’s measures liquidity measures equal to 3.2% of GDP. RBI will take continuous measures to ensure liquidity in the system,” Shaktikanta Das added.
FAQ’s on the Policy to understand the concepts in a better manner have been concluded below:
Q: My EMI is due soon. Will the payment not be deducted from my account?
A: The RBI has only allowed banks to allow a moratorium. Individual banks will have to allow suspension of EMIs. The borrower will have to request the bank and show that his or her income has been impacted by the coronavirus disruption. This means that unless you have specific approval from your bank, your EMIs will still be deducted from your account.
Q. Is this a waiver of EMIs or a deferment of EMIs?
This is not a waiver, but a deferment. You will have to pay the EMIs at a later as decided by the bank. The RBI has told banks to have board-approved policies in place on moratorium/deferment.
Q. Which banks can offer this deferment to their customers?
All commercial banks (including regional rural banks, small finance banks, and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) included
Q: Does the moratorium cover both principal and interest?
A: Yes. It does. If announced by your bank, you can forego payment of your entire EMI, including payment and interest.
Q. What kind of loans does the moratorium cover?
The RBI policy statement explicitly mentions term loans, which includes home loans, personal loans, education loans, auto and any loans which have a fixed tenure. The also include consumer durable loans, such as EMIs on mobiles, fridge, TV etc
Q: Does the moratorium cover credit card payments?
A: Since credit cards are defined as revolving credit and not term loans, they are not covered under the moratorium.
Q: I have taken a business loan. Can I not pay my EMI?
A: The moratorium has been allowed on retail loans.
Q: What has the RBI announced for businesses?
A: The RBI has allowed deferment for interest payments for all working capital loans taken by businesses. The accumulated interest for the period will be paid after the expiry of the deferment period. Moratorium/deferment will not be treated as change in terms and conditions of loan agreements and will not result in asset classification downgrade.
