Lenders Allowed Moratorium on EMIs for Next 3 Months, RBI Cuts Repo Rate by 75 bps to 4.4%

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.

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    COMMENTS

    atwalmldec

    7 days ago

    [email protected]

    dailystockmarketdose

    1 week ago

    It's good for the emergency because market & gold already going down also investors are getting pain due to market fluctuation, it will impact on long term situation. - Daily Capital Market Dose

    hamungel

    1 week ago

    There will be no immediate relief to home loan, education loan and other fixed loan borrowers whose rates are tied to MCLRs of one year. RBI needs to extend the rate cut reliefs to all borrowers with immediate effect.

    REPLY

    yashomiraj

    In Reply to hamungel 1 week ago

    The moratorium on EMI is an eye wash. The interest will keep getting accrued during these 3 months and one would be required to pay interest on interest post 3 months moratorium period. How is this easing one's pain? In fact one is paying more. Bank is not losing any money. Not surprising at all

    Outlook for Financial Services Sector is Negative Due to COVID19 Impact: ICRA
    Ratings agency ICRA says due to the ongoing corona virus (COVID19) outbreak it seeks negative outlook for financial services including non-banking finance companies and housing finance companies (non-banks), brokerages and insurance companies.
     
    In a research note, the ratings agency says, "While ICRA notes that most of the key target asset segments faced subdued demand related headwinds and some non-banks also faced funding constraints that impacted growth in the current fiscal, the COVID-19 related slowdown in economic activity would further aggravate the already subdued demand environment. This would impact their business levels in March 2020, which typically witnesses robust levels of disbursements, leading to slower-than-envisaged growth in the current fiscal."
     
    "Further, since a large section of the people are facing movement and business-related restrictions and are postponing non-discretionary spending, this has led to a fall in the economic activity. The cash flow and liquidity position of many borrowers (individuals, small businesses and corporates) are likely to get affected, impacting their debt servicing capabilities. The impact would be more prominent on self-employed borrowers, the daily wage workforce, and small businesses (non-essentials)," it added.
     
    According to ICRA, non-banks' overdues and credit losses could go up about 50-100% over the next few quarters and could move up further if the impact of COVID-19 on the business activities persists for a longer-than expected period.
     
    The overall non-bank advances are estimated at about Rs35 trillion, as of September 2019, with exposures ranging from retail individual borrowers to large corporates. 
     
    Non-banks, which are already facing funding constraints and an expected increase in delinquencies, are likely to focus more on collections at least in the near term. Therefore, ICRA says, lack of supplementary credit funding could have a significant negative impact on these borrowers as their cash flow mismatches would compound with the passage of time. 
     
    "If the COVID-19-related movement and business restrictions continue for a longer period of two-three months vis-à-vis the current expectation of a few weeks, the impact would be more adverse," it added.
     
    The ratings agency says, its outlook for non-banks is, therefore, negative at present, as the business growth and all key performance parameters like asset quality, solvency, liquidity and earnings are expected to weaken over the next one-two quarters and recovery in the latter part of the next fiscal would depend on the overall economic turnaround. However, it says, during this period, the capitalisation profile is expected to remain adequate from a regulatory and solvency perspective, notwithstanding the weakening.
     
    Similarly, ICRA has a negative outlook for the brokerage industry. Over the next three to six months, the ratings agency says it expects brokerage companies to report a moderation in revenue and profitability across businesses. The outlook over a longer period would depend on the extent of the outbreak, consequent impact on the economy, the expectations of turn-around coupled with policy measures as undertaken by the government and investor sentiment. 
     
    "With markets expected to remain volatile over the near-term, brokerage entities can witness intermittent increase in funding requirement for core operations for placing margin at the exchange. Companies having strong balance sheet with sizeable own assets and adequate funding lines are expected to fare relatively better," it added.
     
    According to the ratings agency, it sees negative outlook for the insurance sector as well owing to the impact of COVID19. ICRA expects the COVID-19 event hampering business volumes of insurers in the last few weeks of March, and first few weeks of April.  
     
    ICRA sees impact of claims and solvency on general insurers during the corona virus outbreak. It says, "The impact on claims will be larger on the entities having a higher share of health portfolio, both private and group health portfolio. Companies with a larger share of group health portfolio, are expected to have higher hospitalisation expenses if the total cases increase by a magnitude of 500 times of current infection rate. If the claims ratio for the health segment would increase by about 30-40 percentage points in the event to a net loss ratio of 130-140% (net loss ratio at 97% as of FY2019), the total increase in claims could be about Rs60-80 billion higher compared with March 2019 in the health segment." 
     
    Total gross premium underwritten for the health segment was Rs371.85 billion as of first nine months (9M) of FY2020, and Rs454.89 billion as of FY2019. The net claims paid in the segment as of FY2019 was around Rs280.00 billion. 
     
    In addition to the higher claims impact, insurance companies are also impacted by the mark to market (MTM) losses on its equity investment portfolio, and may need to reflect in the solvency parameters in case the MTM is negative, the ratings agency says.
     
    "Equity investments of New India Assurance, United India Insurance, National Insurance Co and Oriental Insurance are predominantly in the public sector entities (about Rs497.51 billion as of first half of (H1) of FY2020). These investments had a cumulative fair value gain of around Rs294.23 billion. In the event of a 40% correction in the equity market, these four entities would be having a cumulative MTM loss on solvency of about Rs180.00 billion. The impact of mark to market on equity investments is much lower on the private sector as the total equity portfolio is about Rs53.47 billion with a fair value gain of Rs710 million. In the event of a 40% correction in the equity market, the net MTM loss would be Rs31.80 billion," ICRA says.
     
    According to the ratings agency, impact on COVID19 on the business of life insurance companies would be relatively higher compared to general insurance companies as tax saving insurance products are usually sold in the last two months of the financial year. The total new business premium (NBP) underwritten for first 11 months (11M) FY2020 was Rs2.33 trillion compared with Rs2.14 trillion in FY2019. Based on past trends, the total NBP collected during March ranges between 17-20% of total NBP for the year. 
     
    As of 23 March 2020, mortality rate for COVID19 after infection was 4.3%, and in the event if India reaches a world average infection rate of 100 people per 1 million population, this would result in a mortality rate which would not increase the death claims by a large margin. However, ICRA says for the savings product there could be a larger impact of surrender claims especially for ULIPS, where investors will see large erosion in their funds, because of the equity market declines. ICRA does note the relatively stronger build-up of the reserves for life insurance industry where total policy holder funds was Rs38 trillion as of first quarter (Q1) of FY2020, against which total claims paid in a three-year period was Rs8.3 trillion.
     
    "The impact on higher claims, predominantly health portfolio of general insurance companies, and a marked to market losses on the equity portfolio will have a dual shock on the solvency ratios for the industry. The public sector general insurance companies will have a higher impact on their capitalization, as they are using a part of the fair value gain on the equity portfolio for solvency requirements," the ratings agency concluded.
     
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    Coronavirus Worsens Indian Banks' Already Weak Operating Conditions: Fitch
    Fitch Ratings has revised its operating environment mid-point score for Indian banks to 'bb', from 'bb+', as increasing challenges from the coronavirus pandemic are expected to worsen an already difficult operating environment. The ratings agency's outlook on the operating environment is 'negative' due to the uncertainty surrounding the severity and duration of the pandemic and the associated effects on India's banks of restrictions on economic activity.
     
    In a report, the ratings agency says, "The banking system remains under-capitalised and saddled with bad loans despite some progress in resolving these issues. We believe recent developments will add to these issues and slow the resolution process. It will further test the underwriting standards of those banks that expanded the fastest in recent years, including the private-sector banks, as the sharp disruption in economic activity will lead to worsening asset quality."
     
    "Steps by the Reserve Bank of India have thus far focused on shoring up liquidity in the banking system and ensuring currency stability, but we believe there will be additional measures from the authorities to mitigate the impact of the outbreak," it added.
     
    India's banks already faced weak business and consumer confidence, which were among the factors that prompted Fitch to lower our operating environment score for India's banking sector to 'bb+' from 'bbb-' in 2019. 
     
    The country on 24 March 2020 entered a 21-day lockdown, which will affect industrial production and domestic demand. This will exacerbate the economic slowdown of the past few quarters that was partly caused by weaker credit availability from non-bank financing institutions (NBFIs) from September 2018. Now, global risk aversion has hurt India's financial markets despite fewer cases of infection than many other countries, although the number may increase as testing ramps up. 
     
    Fitch estimates that India's GDP growth will slow to 5.1% in the financial year ending March 2021, from a pre-pandemic forecast of 5.6%, following growth of 5.0% in FY2020. "So far, the expected impact is less severe than for other markets in Asia due to the relatively closed nature of the economy. However, developments have been rapid and downside risks to the estimates are high as Fitch's growth forecasts were published before the lockdown," it added. 
     
    According to the ratings agency, travel-related sectors (2.2% of total sector loans) along with micro and small and medium enterprises (SMEs) (5.4%) will be the hardest hit, with additional indirect exposure via NBFIs, including housing finance companies, which account for 12% of sector loans. 
     
    In addition, Fitch says, sectors that rely on supplies from China (such as auto, pharmaceuticals and electronics) will also be affected. It also believes that the impact could easily spill over into banks' retail businesses, particularly unsecured retail loans (9%, including personal loans), as unemployment rises.
     
    Fitch says it does not expect Indian banks' issuer default ratings (IDR) to face downward rating pressure in the near term as they are based on support from the India sovereign and are at their support ratings floors. However, it says, banks with Viability Ratings (VRs) that are above the operating environment score do face greater pressure compared with lower-rated peers, as Fitch believes that a bank's operating environment constrains its viability rating and other factor scores due to the environment's influence on bank's risk profile. 
     
    As per the ratings agency, ICICI Bank's and Axis Bank's VRs are rated above the operating environment mid-point score, which makes them susceptible to downward VR pressure, even though they have better income and capital buffers.
     
    Fitch says, "State-owned banks are also vulnerable as their average common equity Tier 1 capital ratio of 10% is 300bp lower than that of private-sector banks, while their income buffers are also very weak, making them highly susceptible to even moderate stress. However, most state-owned banks also have lower VRs to begin with, except for State Bank of India."
     
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