RBI’S Decision to counter the corona virus impact on economy

 

    RBI’S Decision to counter the corona virus impact on economy

 

          Indian Banking industry which is almost 200 years old. Since the beginning of the reforms in 1991, it has been expanded and modernized ( KPMG 2017 ) as certain that the Banking sector is poised to become the fifth largest banking industry in the world in the year 2020 and will be the third largest by 2025.There are currently 34 Banks in India, out of which 12 are Public sector Banks. 14 Banks were nationalized in 1969 and 6 Banks were nationalized in 1980.

          The Reserve Bank of India announced in August 2019 that banks can have an exposure of up to 20 per cent of their Tier 1capital to a single NBFC. This limit was 15 per cent earlier. This helped boost credit flow as bank funding to NBFCs grew by 30 per cent year on year. The Government has taken a series of measures to generate demand and ease the liquidity by ensuring public sector banks lend further to NBFCs, introducing partial credit guarantee scheme, organizing loan mela etc.

 

    10 Decisions taken by RBI’S  During Covid19

 

        The Reserve Bank of India asked all lending institutions to allow three month moratorium on   EMI payments in order to infuse liquidity into the system amid novel corona virus crisis. RBI governor Shaktikanta Das in a press conference said these are extraordinary circumstances , and unprecedented measures are required to support the sagging economy as all the economicactivities have come to a halt

 

1. Repo Rate - is the rate at which the central bank gives loans to commercial banks against government securities. So, if the repo rate increases, it means banks are getting funds from RBI at a higher cost . 

      RBI announced that it was cutting the Repo rate by 75 bps, or 0.75% to 4.4. % .Repo rate was earlier 5.15;last being cut in October 2019. 

2. Reverse Repo Rate - . is the interest that RBI pays to banks for the funds that the banks deposit with it.

       The RBI also announced that it would cut the reverse repo rate by 90 bps, or  0.90%. on a daily average , banks had been parking Rs 3 lakh crore with the RBI. The current Reverse repo rate was 4 %. 

3. Loan Moratorium – is legally authorized period that delays the repayment of loan.

         In a massive relief for the middle class, the RBI Governor also announced that lenders could give a moratorium of 3 months on term loans, outstanding as on 1,march, 2020.

         This is applicable to all commercial banks including regional , rural, small finance, co-op bank, all India financial institutions and NBFCs including housing finance and Micro  finance. 

4.CRR- is the percentage of a bank’s total deposits that it need to maintain  as reserves with RBI

The RBI also announced that the cash reserve ratio would be reduced by 100 bps, or 1% , to 3%. This would be applicable from March 23,2020 and would inject Rs.137,00 crore 

5. LTRO -The RBI will also undertake long term Repo operations of one year; expect to bring down short-term rates, allowing further liquidity with the banks and also boost investment in corporate bonds.

         The banks however are specified that this liquidity will be deployed in commercial papers, investment grade corporate bonds and non -convertible debentures. 

6. Ease of working Capital financing- Lenders were allowed lending to recalculate drawing

power by reducing margins and / or by reassessing the working capital cycle for the borrowers.

       The RBI also specified that such a move would not result in asset classification downgrade. 

7. Working capital interest -A three month interest moratorium shall also be permitted to all

lending institutions 

8. Deferment capital interest- The net stable funding ratio, which reduces funding risk by

requiring banks to fund their activities with sufficiently stable sources of funding was postponed

to October 1, 2020.

       The NSFR was earlier supposed to be implemented by April 1, 2020. 

9. MSF-   Marginal Standing Facility (MSF) is the rate at which the banks are able to borrow overnight funds from RBI..

      MSF has also been increased to 3 % of SLR, available till June 30,2020. This measure should provide comfort to the banking system by allowing it to avail an additional 137000 crore of liquidity under the LAF (Liquidity Adjustmemt Facility) window in times of stress at the reduced said the RBI 

10. Fresh Liquidity - The impact of all the announcements today shall inject almost 3.2% of

GDP, the Governor said in his brief .The RBI also added that since February

2020 it had injected Rs 2.8 lakh crore of liquidity , equivalent to 1.4 percent of GDP. 

          The RBI has given a 3 month grace period to all banks due to corona which has brought some relief from the rules governing bad credit recognition , but banks NPA have increased. It is well known to the bankers that since the implementation of the lockdown by the government of India on 25 March,2020 RBI has taken a lot of steps in doing business in the banking sector. 

          RBI has also relaxed the deadline for bad credit rules due to corona and barred borrowers from paying dividends for the year ended 31march 2019. The situation of Banks has deteriorated due to the lockdown. But now after withdrawing the lockdown it will take loner to return to normally.

To conclude though RBI now focuses on the financial system and its context to maintain liquidity in the event of Covid-19s after the withdrawal of the lockdown , Government of India should reduce the uncertainty in the economy and financial stress and  make the economy strong enough to avoid the up coming crises.