Economy
RBI Governor Shaktikanta Das.
The Reserve Bank of India (RBI) delivered a surprise on Friday (27 March) as it announced a series of measures that would be critical in assisting the micro small and medium enterprises (MSMEs) through the present lockdown caused by coronavirus pandemic.
These measures include substantial rate cuts (75 basis points for the repo and 90 basis points for the reverse repo) along with liquidity enhancement measures such as long term repo operations, a reduction in cash reserve ratio (CRR) levels to the lowest since 1962 and more significantly, advising banks to announce a moratorium on all term-loans for three months.
Let us first begin with the moratorium, since it affects everyone who is paying EMIs on their borrowings. RBI Governor Shaktikanta Das said:
Therefore, nearly all formal sector lending institutions have been permitted to allow a moratorium of three months so even those who have borrowed from non-banking financial companies (NBFCs), co-operative banks or micro-finance institutions will benefit from this moratorium.
The boards of these institutions will now have to approve the decision post which borrowers will have a choice to avail this moratorium if desired.
The move is important as it provides the option, especially for firms to defer their loans and increase the tenure of the same. This addresses the issue of cash-flow disruption which has affected MSMEs due to the ongoing lockdown.
Many have asked whether home loans will be covered under the proposed scheme, since the statement by RBI explicitly states all term loans, therefore, they will be covered. The key issue is that there has been a waiver on interest for working capital for MSMEs and that deferral of EMIs will not result in any impact on your credit score.
Therefore, it is evident that the RBI is extensively focusing on revival of credit.
There will indeed be demand for credit as people would require working capital and additional loans to finance their projects going forward. The relaxation of non-performing assets (NPA) norms is also important at this juncture as we witness a substantial decline in growth rate over the coming two quarters.
The Governor was right in calling this an unprecedented situation and the measures announced will play a key role in limiting the extent of this decline.
The move to further augment liquidity to the tune of Rs 3 lakh crore along with a cut in reverse repo windows and a reduction in CRR were done with the intention of augmenting liquidity in the system. The reduction in the reverse repo rate was to encourage banks to lend to consumers rather than parking excess liquidity with the RBI.
This excess liquidity will be critical in improving transmission, lowering cost of capital and ensuring banks have adequate money to lend.
Many have been asking whether people would indeed be borrowing at a time when economic activity is shut. The answer is that firms may indeed borrow to enhance their working capital and to stay afloat, while consumers may borrow to continue financing their consumption.
There will be a more cautious approach by both firms and consumers, however, lower costs can act as an incentive to revive discretionary consumption soon after the lockdown is lifted.
The two press conferences earlier this week by Finance Minister Nirmala Sitharaman combined with the press conference today (27 March) by the RBI Governor will address major part of the issues that several businesses will face.
There is, however, still a need to address the issue of wage support and one hopes that the same would be considered.
But for now, the takeaway is that RBI Governor is seriously doing whatever it takes to meet the Covid-19 challenge, and that the announcements made today has even made a critic like me appreciate the sheer magnitude of decisions that have been taken by the RBI.
One hopes that the same will continue going forward until the time our economy fully recovers.
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