To help common man and businesses combat stress in the financial system caused by COVID-19, Reserve Bank of India has cut repo rate and provided other policy measures.
On the broader level, the policy measures will ensure that:
- There is ample liquidity so that the financial institutions and markets are able to function smoothly.
- Easing financial stress by relaxing repayment pressures on loans
The RBI has reduced the Repo rate by 0.75 percent (from 5.15 percent to now 4.40 percent) with immediate effect.
This means your loans (home, auto & personal) are about to get cheaper by 0.75 percent if the banks pass on the whole of the benefit of the Repo rate reduction.
The Cash Reserve Ratio (CRR) which the banks are required to maintain with RBI has been reduced by 1% (from 4% to now 3%) up till 26th March 2021.
So now the bank which kept Rs. 4000 Cr as CRR is now required to keep Rs. 3000 Cr (hypothetical example). Banks can lend the extra Rs. 1000 Cr to individuals, companies and industries.
The 1% CRR reduction will as a whole release Rs. 1,37,000 Cr for the bank to lend.
Targeted Long Term Repos Operations (TLTROs) with tenure of up to 3 years will allow banks to borrow from RBI at a floating rate linked to the policy repo rate.
In turn, the Bank needs to deploy the money in investment-grade corporate bonds, commercial paper and non-convertible debenture.
This ensures that the rates of these instruments in the debt market do not rise and the companies get ample funds to tide their working capital requirements.
- RBI to conduct up to Rs. 1 Lakhs Cr of TLTROs
- Repo rate cut by 0.75 percent
- Reverse Repo rate reduced by 0.90 percent
- MSF Limit of Banks increased to 3%
- MSF rate and the Bank rate reduced to 4.65% from 5.40%
Bank and financial institutions can now grant a moratorium of three months on payment of all term loan installments falling due between March 1, 2020, and May 31, 2020.
This means that the companies and businesses need not worry about the cash flows & repayment in mid of pandemic.
So, if any person or company does not pay EMIs till May 2020 then it will not be treated as default and your credit score will not get impacted.
The loan installments will include agricultural term loans, retail loans, crop loans and credit card dues also.
For common people, the RBI relief measures also include a 3-months moratorium on their credit card dues.
So you can defer the credit card bill payment if you are facing a financial problem for now, but the interest charged on the outstanding amount shall accrue till you pay the full amount.
The benefit you get is that there will be no late payment fees charged on your card. But you should clear your dues, if possible, to avoid paying high-interest charges later.
To ease the immediate interest repayment burden on companies RBI has permitted banks and financial institutions to defer the recovery of interest on working capital facilities.
The relief measure is for working capital facilities sanctioned in the form of cash credit/ overdraft and the deferment period is from March 1, 2020, up to May 31, 2020.
However, the accumulated accrued interest shall be recovered by the Banks immediately after the completion of the above period.
The companies facing stress on account of the economic fallout due to COVID-19 can now approach the bank for an easement in the WC facility without a downgrade in rating.
RBI has permitted banks and financial institutions to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers.
The measure will help companies get more working capital money to run their businesses without impacting their credit ratings.
- The borrower availing relief will not be classified as SMA or NPA
- Asset Classification of term loans to be determined based on revised due dates.
- Rescheduling of payments not to be classified as default by Credit Information Companies