In response to the COVID-19 pandemic, the Reserve Bank of India’s (RBI) Monetary Policy Committee has made several decisions intended to ease the economic burden of businesses affected by lockdown. These include the extension of the moratorium on loan repayments by a further three months, and a 40 basis point decrease to both the repo and reverse repo rates. These measures were announced ahead of the committee’s scheduled meeting in early June.
Repo Rate and Reverse Repo Rate Cut: Decisions and Impact
The RBI has lowered the repo rate to 4% and the reverse repo rate to 3.35%. This reduction will make borrowing cheaper for banks, encouraging them to reduce their loan lending rates. The repo rate is the interest rate at which the central bank lends money to commercial banks, while the reverse repo rate is the rate at which it borrows from them. By reducing the reverse repo rate, the RBI is motivating banks to lend more instead of storing their funds with the central bank.
Extension of Moratorium on Loan Repayments: Decisions and Impact
Borrowers have been granted a further extension on their term loan repayments. Lenders can now postpone these repayments for an additional three months, from 1st June 2020 to 31st August 2020. This should benefit companies that have had to halt production due to the lockdown, providing them with more time to reboot their operations. In March, the RBI had originally announced a three-month moratorium period lasting until 25th May.
Loan Extension Conditions Remain Unchanged
All conditions related to the moratorium extension remain the same. Accordingly, loans will not be classified as a ‘non-performing asset’ (a loan or advance for which the principal or interest payment remained overdue for over 90 days) and there will be no implications for the creditworthiness of any individual or firm.
Conversion of Interest Charges into a Term Loan
The RBI has allowed borrowers and banks to convert the interest charges accumulated during the moratorium period (from 1st March to 31st August) into a term loan. This loan can be repaid by March 2021. Such a measure should alleviate the financial strain on borrowers who have opted for the moratorium.
Increased Group Exposure Limit
Until 30th June 2021, banks’ group exposure limit – the maximum amount a bank can lend to one business house – has been temporarily raised from 25% to 30% of their capital base. This decision aims to facilitate the flow of resources towards companies that are mainly dependent on bank funding as they cannot raise funds from capital markets.
Measures to Boost Foreign Trade
To stimulate foreign trade, a Rs. 15,000 crore line of credit for 90 days will be extended to the Exim Bank, India’s primary export finance institution. Furthermore, banks are now allowed to lengthen the maximum permissible period of pre-shipment and post-shipment export credit from one year to 15 months. This will support exporters in their production and realisation cycles.
Views on GDP and Inflation
The RBI declined to provide a Gross Domestic Product growth forecast for the year or a trajectory for inflation. However, it expects GDP growth to fall into negative territory based on decreased private consumption due to the COVID-19 lockdown. It does predict growth may pick up again in the latter half of the financial year 2020-21.
Criticism of the Measures
Critics suggest that the rate cut may merely boost sentiment as economic activity is at a nadir, with few new investment proposals poised to benefit from the lower interest rate. Smaller Non-Banking Financial Companies and corporates may also continue to struggle, despite increased liquidity. Bankers anticipate an increase in Non-Performing Assets due to the lack of loan repayments for nearly six months. Additionally, the RBI has not permitted a one-time restructuring of loans for sectors severely affected by the pandemic, such as real estate and hospitality, despite banks’ requests.
Way Forward
The economic stress in India is likely to persist. The government could provide subvention on existing loans, but banks are currently unwilling to take risks. Consequently, there is a urgent need to remove risk averseness in the financial system.