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Banks to defer EMIs -measures announced by RBI

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Banks to defer EMIs and Ease up working capital requirements- RBI announcements on 28 March 2020

In this article we bring you clarity around major announcements by RBI on 28 March 2020 which are around EMIs, Working capital loans. In addition, understand what is Repo rate and how does it impact you as a home loan, car loan, personal loan, business loan customer. What are other liquidity measures taken by RBI. How safe are our deposits, especially with private sector banks amid the corona virus crisis?

Major announcements

  • Repo rate cut by 75 basis points to 4.4 per cent
  • Reverse repo rate was cut by 90 bps to 4 per cent, creating an asymmetrical corridor

What does repo rate impact on?

Did you know that the repo rate is most significant rate for a common man! Yes, don’t be surprised!
Everything that you pay interest on like

  • car loan,
  • home loan,
  • personal loan or
  • OD facility,
  • short term loans or
  • long terms finances

is governed and affected by these rates and any movement in repo rates and reverse repo rates will affect the rates at which we as a common man borrow and deposit amounts and pay EMIs and deal with the banking system. Hence even the interest you get on your deposits is linked to these key rates called repo rates set by RBI.

What is repo rate?

Repurchase rate or the repo rate is the rate at which RBI lends short term money to bank. Check out the below diagram to understand flow of money from RBI to Banks to common public and vice versa. So the rates at which RBI lends or take deposits from banks also has bearing on the Banks rates at which banks lend and borrow money to general public. Banks have the money from deposits but they go to RBI also and taken short money from RBI to do its business. So, in times of liquidity crisis and inflation, RBI controls it through repo rate. Primarily this is a monetary tool.

Repo rates

What is the impact of above measures taken?

During the month of March 2020, the banks have been parking Rs 3 lac crore on a daily average basis under reverse repo. The purpose of these rate cuts to make it relatively unattractive for banks to passively deposit funds with RBI and instead to use these funds for on lending to the productive sectors of the economy.

Four broad categories of measures taken:

  • Monetary measures to expand liquidity in the system to ensure the financial markets and institution can function normally amid Covid disruption.
  • Steps to re-enforce monetary transfusion so that bank credit flows on easier terms.
  • Efforts to ease stress caused by covid 19 by relaxing the repayment pressure and improving access to working capital.
  • Endeavor to improve the markets in view of high volatility of markets with the onset of pandemic.

Measures taken to achieve above objectives are as follows:

Liquidity measures

1. Liquidity in money markets
Targeted Long-term Refinancing Operations: Money markets were facing pressures from redemptions by mutual funds. The Targeted Long-term Refinancing Operations (TLTRO) will give cash to banks, which they are supposed to invest in investment-grade bonds, commercial paper etc. This will be reassuring for the money markets, ensuring they don’t seize up.

2. Cash reserve ratio
CRR reduced by 100 basis points to 3 % of net time &demand liabilities.The 100 basis point cut in cash reserve ratio (CRR) means more money with banks, especially private sector banks. Some of them had to access the wholesale funding markets, making CD rates go up. Greater access to MSF (Marginal Standing Facility) will also give banks more access to funds. The move will ensure financial stability.
This would release approx. 137 K crore of liquidity in the banking system

3. MSF
In view of high volatility in domestic financial markets which brings in the liquidity stress, MSF has been increased from 2 % to 3 % of SLR. This measure should provide comfort to banking sector by allowing to avail an additional 137k Crore of liquidity at the reduced MSF rate.

RBI clarified these above 3 measures will infuse a total of 374 k crore worth of liquidity to the system.

Monetary policy measures

“In view of persistent excess liquidity, it has been decided to widen the existing policy rate corridor from 50 bps to 65 bps. Under the new corridor, the reverse repo rate under the LAF would be 40 bps lower than the policy repo rate against the existing 25 bps. The marginal standing facility rate would continue to be 25 bps above the policy rates,” Das said.

Regulatory measures

4. Moratorium on term loans
All lending institutions have been permitted a three-month moratorium on payments of instalments of all term loans outstanding as of March 1, 2020.
Moratorium on payment of instalments on term loans will help people to postpone payment of EMIs and help their cash position. This will support cash flows of firms too. The same goes for deferment of interest on working capital loans. However, it is to be noted that this is just the deferment and not wavier of EMIs, thus the interest clock will keep on ticking and you will have to bear interest later.

5. Deferment of interest on working capital facilities
Lending institutions can defer by three months payment of interest outstanding as on March 1 on working capital facilities sanctioned in the form of cash-credit and overdraft and such. The accumulated interest for the period will be paid at the end of the deferment period.
The moratorium on term loans and the deferment of interest on working capital will not result in asset classification downgrade, the RBI governor said.

6. Easing of working capital financing
In respect of cash credit and overdraft the lending institutions can recalculate the drawing power by reducing margins and reassessing the working capital cycle of the borrowers.

Regulator urged that the deposits of people are safe and they should not panic. it would be wrong to link the shares prices to deposits. Regulator said that these are extra ordinary times and thus need extraordinary measures but with the cumulative efforts of all this too shall pass!
For a detailed analysis please click on the video link below.

https://www.youtube.com/watch?v=lldBSzAbmVo

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