Gov Das tells banks to give Shakti to loan-borrowers: rates slashed, EMI-relief and 10 key things inside

Source :Sify
Author :Finance Desk
Last Updated: Fri, Mar 27th, 2020, 12:19:24hrs
Governor Shaktikanta Das

Mumbai: Governor Shaktikanta Das on Friday answered the anxious prayers of millions of banking customers in the country. In a major policy announcement crucial lending rates have been slashed by 0.75 percent to 4.4 percent. The monetary policy committee took a 4-2 decision to announce the cut in the wake of rising covid-19 cases in the country. "the liquidity adjustment facility (LAF) corridor, was reduced by 90 basis points (0.90 percent) to 4.0 per cent, thus creating an asymmetrical corridor," said an official release from the apex bank.  

In a sweet announcement that itself will act as an anti-dote, the governor reminded all banks to allow a moratorium of 3 months across term loans. After the televised conference, the RBI also announced a clarification stating that the moratorium will be extended to "all retail loans including EMIs" for a period of 3 months.  

He 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."

With this announcement bankers in the country could offer several sops to customers who could be reeling under financial stress in meeting their EMI obligations. The Governor also reminded banks to offer relief on working capital, overdraft facilities to ensure easing of working capital financing for several businesses. The deferment on interest payments on term loans and working capital financing will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs). " Hence, there will be no adverse impact on the credit history of the beneficiaries."

In much simpler words, banks have been advised to refrain from passing negative reports to CICs, which majorly include enterprises such as CIBIL Transunion, CRIF HighMark and Equifax.  

Here are the key highlights from Governor Das's announcement on the 7th Bi-monthly Monetary Policy Committee Statement: 

1. Toughness on Covid-19: The Governor said that we are living in extra-ordinary times. "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."

2. Normal Functioning of markets: "It is our effort to ensure normal functioning of markets, nurture the impulses of growth and preserve financial stability."

3. Global Activity & Recession: "Expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed. The outlook is now heavily contingent upon the intensity, spread and duration of the pandemic. There is a rising probability that large parts of the global economy will slip into recession."

4. Indian Economy: Did not offer an estimate of the estimates on GDP, however said "the implied real GDP growth of 4.7 per cent for Q4:2019-20 in the second advance estimates of the National Statistics Office, released in February 2020, within the annual estimate of 5 per cent for the year as a whole is now at risk from the pandemic’s impact on the economy."

5. Covid linked Inflation: "As regards inflation, the prints for January and February 2020 indicate that actual outcomes for the quarter are running 30 bps above projections, reflecting the onion price shock."

6. Liquidity Measures: Cash Reserve Ratio of all banks has been reduced to 3 percent from March 28 onwards for a period of one year. Also, minimum daily CRR balance maintenance from 90 per cent to 80 per cent, effective from the first day of the reporting fortnight beginning March 28, 2020. This is a one-time dispensation available up to June 26, 2020.

The governor also highlighted that TLTRO (Targeted Long Term Repo Operations), CRR and MSF (Marginal Standing Facility) will inject a total liquidity of Rs 3.74 lakh crore to the system.

7. Banks have been advised to lend instead of parking funds: The governor highlighted that lower reverse repo rates sets the floor for banks to actively lend instead of parking funds with the RBI. "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."  

"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," said Gov Das.  

8. Additional Liquidity Measures: Since the last MPC meeting of February 2020, the Reserve Bank has injected liquidity of `2.8 lakh crore through various instruments, equivalent to 1.4 per cent of our GDP. Together with the measures announced today, RBI’s liquidity injection works out to about 3.2 per cent of GDP

9. NDF Markets: Banks allowed to participate in NDF markets to trade in currency swaps. For those uninitiated, a non-deliverable forward (NDF) is a bi-party currency derivative contract to exchange cash flows between NDF and prevailing spot rates. Governor Das noted that banks weren't allowed to participate in this market although the benefits of participation were widely recognised. He said, "banks in India which operate International Financial Services Centre (IFSC) Banking Units (IBUs) are being allowed to participate in the NDF market with effect from June 1, 2020."

10. Message: "We need to remain careful and take all precautionary measures. I leave you with this comforting thought. Stay clean. Stay safe. Go digital."

The detailed notification of the Reserve Bank of India's statement can be read here


The immediate reactions came from the markets. The thirty scrip sensitive BSE Sensex was up by 1,100 points on hopes of a large relief. At 9.33 a.m., it was trading at 31,050.05, higher by 1,103.28 or 3.68 per cent from 29,946.77 points. The Nifty50 on the National Stock Exchange was trading at 8,985.95, higher by 344.50 points or 3.99 per cent from its per cent.

At 11:45 AM, the Sensex barometer read 29,737.51 - down by 325.15 or 1.09 percent down. Nifty50 traded to 8,660.20 - up marginally by 18.75 points or 0.22% in intra-day trading so far.  

At about 9:45, the Indian Rupee gained against the US Dollar to quote rates of 74.5 against the greenback. It is still not clear whether the impact was owing to a relief hope or that the US greenback itself had taken a hit after lower jobs data.  

Dr Joseph Thomas, Head of Research at Emkay Wealth said in a note, "This is a direct and targeted approach to the fluid situation in the face of an uncertain inflation and growth trajectory. This scaffolds the positive impact of the fiscal measures and strengthens our response to the adverse economic impact of the pandemic. "

Upasna Bhardwaj, Sr. Economist, Kotak Mahindra Bank said, "The measures should help in tiding through the end of the year issues which many banks/institutions were fearing and will go a long way in cushioning the dislocations in various markets. We expect additional scope for 40-50bps of rate cut with any further easing and extension of measures depending on the nature of spread of COVID-19."

Sujan Hajra, Chief Economist of Anand Rathi Shares and Stock Brokers called it as "RBI’s whatever it takes moment."

Hajra observed that the key implications were:

"- There would be no freeze in credit/debt market
- Banks get some (e.g. CRR cut, more funding at low cost, no provisioning for 90 days) and lose some (e.g. lower lending rate, pressure to lend, future asset quality deterioration)
- Most positive for leveraged sectors and companies
- This would not necessarily promote growth but avert a collapse, so a big positive"

Here are some twitter reactions: