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Moratorium on term-loans addresses some felt-needs

The Reserve Bank of India (RBI) Governor Shaktikanta Das today announced several measures undertaken by its Monetary Policy Committee (MPC) for various borrowers and lenders to thwart the financial adversities inflicted by the COVID-19 pandemic.

In a major relief to the borrowers, the Central Bank chief, in a press conference announced the extension of loan moratorium or deferment to 31 August 2020. This is the second extension of term-loan moratorium, the first one was announced during the last week of March 2020. Borrowers get a breather from this announcement, whose incomes have been hit due to pandemic.

“We are trying to be proactive. The central bank will take whatever measures are needed to be taken due to the COVID-19 pandemic.
Shaktikanta Das,
Governor, RBI

On 27 March, Governor had permitted all lending institutions to allow a three-month moratorium of three months on payments of all term-loans instalments effective 1 March.

“Given the continuing challenges to resolution of stressed assets, lending institutions are permitted to exclude the entire moratorium/deferment period from 1 March to 31 August from the calculation of 30-day review period or 180-day resolution period, if the review/resolution period had not expired as on 1 March 2020,” he said.

Even regarding working capital facilities sanctioned in the form of cash credit/overdraft, he said lending institutions are being permitted to allow a deferment of another three months, from 1 June to 31 August besides the three months allowed on 27 March on payment of interest regarding all such facilities outstanding as on 1 March.

The repayment schedule and all subsequent due dates and the tenor for such loans are shifted across the board by three months.  This constructive relief measure will ensure that the much-needed cash liquidity is attained by the borrowers as money will not be deducted from their bank accounts because of a three-month halt in repayment of all term-loans. The EMI payments will only start after the moratorium period expires on 31 August 2020.

“Banks may still not lend. Reverse repo could have been brought down further. Working capital should be made available without seeking drawing rights calculations. This could help as the MSMEs are all funding losses.
Sameer Kochhar,
Chairman, SKOCH Group

V K Vijayakumar, Chief Investment Strategist – Geojit Financial Services, remarked in his interview to the Economic Times that the extension of the moratorium on loans by another three months has come as a relief. “Yet, one big take away from the policy announcement is that the stress in the banking sector will continue,” he added. 

It was also announced that the RBI will reduce the repo rate to assist the nation’s banking systems in borrowing money from the central bank at a lower rate of interest. After an off-cycle meeting of the MPC over the last three days, the committee voted to reduce repo rate by 40 basis points from 4.4 per cent to 4 per cent, said RBI governor Shaktikanta Das. “Over the last three days, the MPC reviewed the implications of COVID-19 on the economy, it has been decided to reduce in repo rate to revive growth. This will be done by 40 basis points, from 4.4 per cent to 4 per cent,” said RBI chief. He further added that to maintain its accommodative stance, the central bank has decided to cut reverse repo rate to 3.35 per cent. The repo rate has, thus fallen to the lowest level since 2000. The lending institutions are being permitted to restore the margins for working capital to the origin level by 31 March 2021.

On 27 March, the reverse repo rate was cut by 90 bps to 4 per cent; by another 25 bps to 3.75 per cent on 17 April; and, now a further cut of 40 bps to 3.35 per cent – a total of 155 bps in such a brief span.

“The rare beacon of hope in current times has come from Shaktikanta Das, whose announcements provide concrete solutions to felt-needs. Further deferment of term-loan installment payments shall provide fresh oxygen to sections gasping to breathe,” said Sameer Kochhar, Chairman, SKOCH Group lauding Governor’s interventions. On the measure on reducing the repo rate, Kochhar expressed his skepticism saying that banks may still not lend and that reverse repo could have been brought down further. Working capital should be made available without seeking drawing rights calculations. This could help as the MSMEs currently are all funding losses, he said.

According to economic journalist George Mathew, the reason for the cut in interest rates was to “facilitate the flow of funds at affordable rates and revive animal spirits”. He further explains that the effects of the financial shock have been compounded by the interaction of supply disruptions and demand compression. Beyond the destruction of economic and financial activity, livelihood and health are severely affected. “The new interest rates that the RBI is offering to banks for funds parked with the central bank will prompt banks to make available funds for the productive sectors of the economy.” (https://indianexpress.com/article/explained/rbi-shaktikanta-das-repo-rate-cut-loan-moratorium-extension-covid-6422148/)

The RBI has stated uncertainty regarding the Inflation rates in the near future, saying that the rates are likely to fall below 4 per cent in Q3/Q4 of FY21. The Monetary Policy Committee (MPC) is of the view that inflation in the first half of 2020 will be intact but, by 3rd and 4th quarter it may fall below the target of 4 per cent in FY21, said the RBI Governor.

RBI’s rate-setting committee believes that the supply shock to food prices in April may persist over the next few months. It was also put forth in the conference that, given the uncertainties, GDP growth in 2021 is estimated to remain in the negative territory.

The Governor said the monetary policy transmission has continued to improve and RBI will continue to be vigilant and in battle, readiness to address the dynamics of an unknown future and will preserve the stability of financial markets. “We are trying to be proactive. The central bank will take whatever measures are needed to be taken due to the COVID-19 pandemic,” he said. 

But more reforms needed to support economy. India would need more measures continuously on both fiscal and monetary front to revive the economy from the current phase of negative growth, Financial Express was told by Rajat Rajgarhia, MD & CEO, Institutional Equities, Motilal Oswal Financial Services.

The RBI, however, did not address the issue of one-time restructuring of loans as relief measures to tackle the impact of lockdown and the slowdown in the economy because of the COVID-19 pandemic. Many suggestions regarding this key issue were put forth by the banking sector to the RBI in the past few days. There is, although, still hope for a one-time loan restructuring scheme to be announced by the central bank.

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Aakash Sharma

Aakash Sharma is a student of English Literature currently pursuing his master's degree from the University of Delhi. He is also a student of political science and is learning Mandarin Chinese language from St. Stephen's College, University of Delhi. He researches and writes on the contemporary issues of social and public policies that are set forth by the government. His writing experience consists of writing research papers, articles and essays on various socio-political, economic and literary-cultural issues.

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