The Covid-19 pandemic has wreaked havoc across the world. Global
economic growth has collapsed with several countries expected to witness a
recession in 2020-21. To control the spread of the disease, the Indian
government had to extend the nationwide lockdown for the fourth time, albeit
with certain exemptions.
Both the government and the Reserve Bank of India have announced
several measures to provide relief to borrowers and financial institutions amid
the Covid-19 crisis. The Reserve Bank of India Governor Shaktikanta Das, today,
announced a fresh set of measures to provide additional relief to borrowers.
The announcement comes on the heels of an Rs-20-lakh-crore economic package
announced by the finance minister in five tranches.
Moratorium Extension
The Reserve Bank of India allowed the extension of the moratorium
on monthly payments for term loans by three months till August 31. The fresh
announcement extends the moratorium granted in March, which was slated to end
on May 31. It essentially allows a six-month moratorium on loan EMIs from March
1 to August 31.
The extension is expected to provide major relief to borrowers,
especially self-employed individuals, who were facing a liquidity crunch due to
loss of income. Missing monthly payments in the normal course of business would
mean a negative impact on the borrowers’ credit profile. All term loans such as
home loans and car loans granted by commercial banks, co-operative banks,
all-India financial Institutions and Non-Banking Financial Companies, including
Housing Finance Companies and Micro Finance Institutions can qualify for the
moratorium.
The Reserve Bank of India has categorically stated that the
extension will not lead to any changes in the terms and conditions of the loan
agreements. It means if a borrower decides to defer monthly payments during the
moratorium period, it will not be categorised as a default by the lender and
hence will have no impact on the credit score of the borrower. On the other
hand, the central bank has also eased the asset classification norms for
lending institutions and has allowed the exclusion of the deferment period from
the 90-day NPA norms.
The moratorium announced by the central bank is not a waiver and
borrowers will have to pay the interest on the outstanding loan amount. The RBI
has also allowed lenders to convert the accumulated interest on working capital
facilities over the period of moratorium into a funded interest term loan. The
funded interest term loan will have to be paid during the current financial
year. In March, the central bank allowed lending institutions to recalculate
the working capital cycle of all borrowers who had availed working capital by
way of cash credit or overdraft facilities.
Additional Read - Highlights from all 5 tranches of COVID Relief package by the Finance Minister of India
Repo Rate Reduction
The RBI governor has often spoken of taking calibrated measures
to ease the liquidity pain in the economy. With the finance minister already
announcing a slew of fiscal measures, it was time for RBI to step in. Along
with the extension in the moratorium, the central bank today announced a
40-basis-point cut in the repo rate to 4% from 4.4%. The monetary policy
committee held an out-of-cycle review meeting to decide on the reduction in the
policy rate. In line with the reduction in repo rate, the reverse repo rate has
been cut to 3.35% from 3.75%. The reduction in the repo rate is expected to
spur financial institutions to lend more and increase liquidity in the market.
It will also help banks lower interest rates on term loans like home loans,
which will help in attracting undecided customers into the market.
Other Announcements
With the spread of the infectious disease refusing to slow down,
RBI expects growth to be negative in the current fiscal. The central bank
expects growth to pick up gradually in the second half of the fiscal year with
the trajectory depending on the progress of the pandemic.
The RBI expects headline inflation to fall below its medium-term
target of 4% in the third or fourth quarter of the fiscal year.
The central bank announced a line of credit worth Rs 15,000 crore
to EXIM Bank for 90 days with a rollover of up to one year.
The RBI has provided a special refinance facility worth Rs 15,000
crore to SIDBI for 90 days for lending and refinance operations in one of its
earlier announcements. The central bank announced a further rollover of 90 days
for the refinance facility at the end of the initial 90-day period.
The rules for withdrawal from the Consolidated Sinking Fund has been eased by RBI, resulting in the release of an additional Rs 13,300 crore for the states.
27 May 2020
4 mins read
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