The Reserve Bank of India (RBI) on Friday introduced a barrage of relief measures to alleviate financial difficulties arising due to Covid-19 restrictions.
From boosting banks’ liquidity to providing relief to their customers, RBI seems to have come out all guns blazing to tackle the economic disruptions caused by the novel coronavirus outbreak.
The measures announced today also had a fair bit of firepower to get companies kickstarted after the lockdown in place to restrict the virus from spreading further.
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Banks, too, were given massive leeway by the RBI to stabilise themselves in the wake of the deepening economic crisis.
Let’s dive into the details.
3-MONTH MORATORIUM ON LOANS, EMIs
The most important takeaway from RBI’s press conference was about the 3-month moratorium on term loans and equated monthly instalment payments.
RBI Governor Das said, “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) (lending institutions) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020.”
“Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, maybe shifted across the board by three months.”
This directive to all banks in the country could help millions of people who have exiting term loans and EMIs as they will not have to pay any instalments on them for a period of three months.
Finance Minister Nirmala Sitharaman lauded the move soon after Das addressed the nation.
“Appreciate RBI governor Shaktikanta Das’s reassuring words on financial stability. The 3-month moratorium on payments of term loan instalments (EMI) and interest on working capital give much-desired relief. The slashed interest rate needs quick transmission,” she added.
On observing Das’s statement closely, it can be determined that RBI has “permitted” banks to extend this facility to customers and the final discretion, therefore, lies with the bank which has given the loan.
Further clarity is awaited as banks are yet to offer a statement on the fresh relief measures announced by the central bank.
Another important but expected announcement was about slashing repo rate by 75 basis points or 0.75 per cent from 5.15 per cent to 4.4 per cent.
A complete transmission of the fresh rate cut will significantly help the country in boosting growth and ensuring financial stability.
RBI Governor said the Monetary Policy Committee held its policy meeting on March 24, 25 and 27 ahead of the scheduled date in view of the current economic outlook.
“MPC voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of Covid-19 while ensuring that inflation remains within the target,” Das said.
“The MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4 per cent.”
The fixed-rate reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF) corridor, has also been reduced by 90 basis points to 4 per cent.
“The purpose of this measure relating to reverse repo rate is to make 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,” Das explained.
“It may be recalled that during the month of March so far, banks have been parking close to Rs 3 lakh crore on a daily average basis under the reverse repo, even as the growth of bank credit has been steadily slowing down,” he added.
MAJOR LIQUIDITY, CRR PUSH
RBI also pushed for more liquidity in the system to help banks increase liquidity to help businesses when the lockdown is removed.
“A multi-pronged approach, comprising both targeted and system-wide liquidity provision, has been adopted to ensure that COVID-19 related liquidity constraints are eased,” Das said.
He announced that the central bank will conduct an auction of Targeted Long Term Repo Operations (TLTRO) of up to three years for Rs 1 lakh crore at a floating rate, linked to the policy repo rate.
“Liquidity availed under the scheme by banks 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 25, 2020. Eligible instruments comprise both primary market issuances and secondary market purchases, including from mutual funds and non-banking finance companies,” the RBI governor said.
Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio.
The central bank also offered further help to banks by reducing the cash reserve of all banks by 100 basis points to 3 per cent of net demand and time liabilities (NDTL).
“This reduction in the CRR would release primary liquidity of about Rs 1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR,” Das said.
He also announced increasing the accommodation under the marginal standing facility (MSF) from two per cent of the Statutory Liquidity Ratio (SLR) to three per cent with immediate effect.
This was done to reduce the “exceptionally high” volatility seen in the market over the past month. The measure will be applicable up to June 30, 2020
Therefore, RBI announced three broad measures to help banks shore up more liquidity to tackle the post-corona slowdown blues. The measures taken will help inject total liquidity of Rs 3.74 lakh crore to the system.
‘ROUGH TIMES NEVER NEVER LAST’
RBI Governor Shaktikanta Das left no stone unturned to instil some confidence to a battered financial system that had been awaiting a sound economic relief package to battle the crisis.
Das said, “Life in the time of Covid-19 has been one of unprecedented loss and isolation. Yet, it is worthwhile to remember that tough times never last; only tough people and tough institutions do.”
“Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode.”
The fact that RBI has shown its intent to battle the long-term effects of the crisis, along with the fresh relief measures, is likely to lift moods of financial markets in coming days. However, the present volatility is expected to continue until the period of the lockdown.
“Let me assure all that the Reserve Bank is at work and in mission mode, monitoring the evolving financial market and macroeconomic conditions; and calibrating its operations to meet any need for additional liquidity support as well as other measures, as may be warranted,” Das said.
“It is our effort to ensure the normal functioning of markets, nurture the impulses of growth and preserve financial stability.”
While several other measures were announced, RBI’s message is also a strong booster for the market and the population at large as Governor Das assured Indians that the fundamentals of the Indian economy are stronger than what they were in the aftermath of the global financial crisis.
“The fiscal deficit and the current account deficit are now much lower; inflation conditions are relatively benign, and financial volatility measured by the change in stock prices from recent peaks and average daily change in the exchange rate of the rupee is distinctly lower,” Das said.
“COVID-19 is upon us, but this too shall pass. We need to remain careful and take all precautionary measures. I leave you with this comforting thought. Stay clean. Stay safe. Go digital, he concluded.”