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Taking cognizance of the lockdown due to corona virus (COVID19), the Reserve Bank of India (RBI) on Friday reduced its repo rate (short-term lending) by 75 basis points (bps) to 4.4% in its last monetary policy review for 2019-2020. The RBI also permitted financial institutions to allow a three-month moratorium on monthly installments on all term loans.
In a video address Shaktikanta Das, governor of RBI says, "All commercial banks, including regional rural banks, small finance banks and local area banks, co-operative banks, all-India financial Institutions, and non-banking finance companies (NBFCs), including housing finance companies and micro-finance institutions are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding between 1 March 2020 to 31 May 2020. The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period."
Installments include payments falling due from 1st March to 31 May 2020, such as principal and/or interest components; bullet repayments; equated monthly instalments (EMIs) and credit card dues, RBI says, adding, accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.
RBI also decided to defer interest on working capital facilities provided by lenders. It says, "In respect of working capital facilities sanctioned in the form of cash credit or overdraft, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding between 1 March 2020 till 31 May 2020.
However, accumulated accrued interest on such facilities should be recovered immediately after the completion of this period, the central bank says.
According to the RBI governor, the moratorium and deferment is being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19. "However, the same will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade. The lending institutions may accordingly put in place a board approved policy in this regard," he added.
In addition, the rescheduling of payments will not qualify as a default for supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. RBI says, CICs should ensure that the actions taken by lending institutions pursuant to today's announcements do not adversely impact the credit history of the borrowers.
The reverse repo rate (short-term borrowing) is also reduced by 90 bps to 4%. It has been decided to reduce the cash reserve ratio (CRR) of all banks by 100 bps to 3% of net demand and time liabilities (NDTL) with effect from the fortnight beginning 28 March 2020 for a period of one year, the central bank says.
According to Mr Das, the country needs conventional, unconventional measures to combat virus. "Hence the monetary policy committee (MPC) has voted for a sizeable reduction in the policy repo rate and for maintaining accommodative stance of monetary policy as long as necessary, to revive growth and mitigate impact of COVID19," he added.
"Global economic activity has come to a near standstill and expectations of shallow recovery in 2020 are dashed. The outlook is heavily contingent on intensity, spread and duration of COVID19. There is a rising probability that large parts of the world will slip into recession, The RBI governor says, adding, "Our effort is to effort macroeconomic stability. We have to recognise govt took timely measures to contain intensity, duration and spread of the virus. Looking ahead food prices may soften further".
Assuring bank depositors, the RBI governor requested them not to resort to panic withdrawal of deposits from private banks. He says, "Indian banking system is safe and sound. Depositors of commercial banks including private banks need not worry on the safety of their funds."
The central bank has also allowed banks to deal in offshore non-deliverable rupee derivative markets (offshore NDF rupee market). "It has been decided, in consultation with the government, to permit banks in India which operate international financial services centre (IFSC) banking units (IBUs) to participate in the NDF market from 1 June 2020. Banks may participate through their branches in India, their foreign branches or through their IBUs," RBI says.