Context: Recently, the Reserve Bank of India has extended the moratorium on loan repayments by three more months in view of Covid-19. Further, a 40 basis points (bps) cut to both the repo and reverse repo rates has been announced.
Key Point

• It reduced the key interest rate or the Repo Rate (the interest rate that the RBI charges for funds given to banks) by 40 bps to stabilize the financial system.
• Cumulatively, since the imposition of the national lockdown in March 2020, the MPC has cut rates by 115 basis points. The repo rate now stands at 4 per cent.
• These are the set of regulatory and developmental measures which will complement the reduction in the policy rate and also strengthen each other.

Reason behind this move

• The Monetary Policy Committee (MPC), was of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress.
• The impact of the shock has 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.
• Even as various measures initiated by the government and the Reserve Bank work to mitigate the adverse impact of the pandemic on the economy, this accommodative step is a necessity to revive growth and mitigate the impact of COVID-19 on the economy
• The decision was also considered keeping inflation within the target.

Other measures taken by the RBI
Refinance Facility to SIDBI extended for another 90 days:

• In order to enable increased supply of affordable credit to small industries, the RBI had, on April 17, 2020, announced a special refinance facility of Rs 15,000 crore to SIDBI at RBI’s policy repo rate for a period of 90 days.  
• This facility has now been extended by another 90 days. 

Relaxation of Rules for Foreign Portfolio Investment under Voluntary Retention Route: 

• The VRR is an investment window provided by RBI to Foreign Portfolio Investors, which provides easier rules in return for a commitment to make higher investments.  
• The rules stipulate that at least 75% of the allotted investment limit be invested within three months; considering the difficulties being faced by investors and their custodians, the time limit has now been revised to six months. 

Measures to Support Exports and Imports: 

• Exporters can now Avail Bank Loans for Higher Period 
• The maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks to exporters has been increased from the existing one year to 15 months, for disbursements made up to July 31, 2020. 

Loan facility to EXIM Bank:

• The Governor has announced a line of credit of Rs 15,000 crore to the EXIM Bank, for financing, facilitating and promoting India’s foreign trade.  
• The loan facility has been given for a period of 90 days, with a provision to extend it by one year.  
• The loan is being given in order to enable the bank to meet its foreign currency resource requirements, especially in availing a US dollar swap facility. 

More time for Importers to Pay for Imports:

• The time period for import payments against normal imports (i.e. excluding import of gold/diamonds and precious stones/jewellery) into India has been extended from six months to twelve months from the date of shipment.  
• This will be applicable for imports made on or before July 31, 2020. 

Measures to Ease Financial Stress: 

• Extension of Regulatory Measures by another 3 Months 
• The RBI has extended the applicability of certain regulatory measures announced earlier, by another three months from June 1, 2020 till August 31, 2020.  
• These measures will now be applicable for a total period of six months (i.e. from March 1, 2020 to August 31, 2020).  

The aforesaid regulatory measures are:  

• 3-month moratorium on term loan instalments;  
• 3-month deferment of interest on working capital facilities;  
• easing of working capital financing requirements by reducing margins or reassessment of working capital cycle;  
• exemption from being classified as ‘defaulter’ in supervisory reporting and reporting to credit information companies;  
• extension of resolution timelines for stressed assets; and  
• asset classification standstill by excluding the moratorium period of 3 months, etc. by lending institutions.  
• The lending institutions have been permitted to restore the margins for working capital to their original levels by March 31, 2021.  
• Similarly, the measures pertaining to reassessment of working capital cycle are being extended up to March 31, 2021. 

Provision to convert Interest on Working Capital into Interest Term Loan:

• Lending institutions have been allowed to convert the accumulated interest on working capital facilities over the total deferment period of 6 months (i.e. March 1, 2020 up to August 31, 2020) into a funded interest term loan, to be fully repaid during the course of the current financial year, ending March 31, 2021. 

Increase of Group Exposure Limit to Increase Fund Flow to Corporates 

• The maximum credit which banks can extend to a particular corporate group has been increased from 25% to 30% of the bank’s eligible capital base.  
• This has been done in order to enable corporates to meet their funding requirements from banks, in view of the current difficulties being faced by corporates in raising money from the markets. The increased limit will be applicable up to June 30, 2021. 

Measures to ease financial constraints faced by State Governments 

• States allowed to borrow more from Consolidated Sinking Fund 
• The Consolidated Sinking Fund is being maintained by state governments as a buffer for repayment of their liabilities.  
• The rules governing withdrawal from this Fund have now been relaxed, in order to enable states to enable them to repay their borrowings from the market, which become due in 2020-21.  
• The change in withdrawal norms will come into force with immediate effect and will remain valid till March 31, 2021.  
• The Governor added that the relaxation is being done, while ensuring that depletion of the Fund balance is done prudently. 

Significance of the above mentioned measures

• It will make funds cheaper for banks thus aiding them to bring down lending rates.
• EMIs on home, auto, personal and term loan rates are expected to come down in the coming days.
• It will reduce the Cost of Capital and ease the financial burden on businesses due to the extended lockdown.
• The extension of the Repayment Moratorium on loans is a welcome measure.
• The extension will provide relief to many individuals, especially the self-employed, as they would have found it difficult to service their loans such as car loans, home loans etc. due to loss of income during the lockdown period.
• Missing an EMI payment would mean risking adverse action by banks which can adversely impact one’s credit score.
• In another significant measure, the RBI has allowed borrowers and banks to convert the interest charges during the moratorium period (from March 1 to August 31) into a term loan which can be repaid by March 2021.
• This is expected to reduce the burden on borrowers who have gone for a moratorium.
• The increase in Group Exposure Limit will help large corporate borrowers who may find themselves handicapped in raising funds from the markets now.

Concerns

• The extended period given may however still not be enough as it will offer borrowers only about seven months from the end of the moratorium period during which they will have to crank up their businesses and service their loans.
• The RBI could have put off accumulated interest repayment by one year.
• There was some disappointment in the markets that the RBI did not relax norms for loan restructuring by lenders.
• The smaller Non-Banking Financial Companies (NBFCs) and corporates may remain stressed, despite liquidity being provided.
• Bankers expect a spurt in Non-Performing Assets down the road as nearly six months of non-payment of debt would likely affect credit culture.
• RBI did not permit a one time restructuring of existing loans to the seriously affected sectors such as real estate, hotels etc. as demanded by banks.

Will monetary easing help?

• Demand for credit is likely to remain low as, with continuing economic and health uncertainty, firms and households will postpone their decisions.
• Moreover, risk averse banks are likely to hold back even if there are borrowers.
• Higher-rated borrowers are likely to continue to get easy funding, while lower-rated borrowers will struggle.

Road Ahead

• Monetary measures may have been taken to ease economic stress. But there are limitations to what it can achieve. It cannot do the heavy lifting alone. Fiscal support is needed. Which means the banks are unwilling to take risks in the current scenario. Thus, there is a need to remove risk averseness in the financial system.