COVID-19 Bazooka: RBI Allows Banks to Put Retail Loan EMIs on Hold for 3 Months

The central bank’s MPC has also effected an emergency 75 bps rate cut, even as most international rating agencies have deeply slashed India’s FY 21 growth forecast.

New Delhi: The Reserve Bank of India on Friday morning unleashed a wave of measures at tackling the COVID-19 pandemic’s effects on the Indian economy.

The central bank’s monetary policy committee (MPC) slashed the key policy rates by 75 basis points, from 5.1% to 4.4%, to help arrest the projected economic slowdown.

The reverse repo rate now stands at 4%, down 90 basis points. Repo rate is the rate at which a country’s central bank lends money to commercial banks, and reverse repo rate is the rate at which it borrows from them.

Crucially, the RBI also announced that it would permit all banking institutions within India, including housing finance companies and other NBFCs, to allow a three-month moratorium on payment of instalments on term loans in view of the disruption caused by the coronavirus outbreak.

Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.

Deferment of loan repayment will not impact the credit history of the borrower, the RBI added.

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Finance minister Nirmala Sitharaman was quick to tweet that the three-month moratorium on payment of term loan EMIs and interest on working capital loans would give “much-desired relief”.

A RBI spokesperson later clarified that the moratorium would extend to all retail loans, thus providing relief for individuals who have taken out home or auto loans.

It is, therefore, now up to individual banks to act on the central bank’s leeway and pass on the benefits to their customers.

The RBI also clarified in a late Friday afternoon press release that the moratorium relief will also be applied to credit card dues that had to be paid from March 1, 2020 to May 31, 2020.

In a somber address to the media and country through digital channels, central bank boss Shaktikanta Das said that the MPC had voted 4-2 in favour of reducing the repo rate by 75 basis points.

“We are living through an extraordinary and unprecedented situation. Everything hinges on the depth of the COVID-19 outbreak, its spread and its duration. Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode,” Das said.

“Need of the hour is to do whatever is necessary to shield the domestic economy from pandemic.”

Meanwhile, the liquidity adjustment facility (LAF) has also been reduced by 90 bps to 4% while the cash reserve ratio (CRR) has been slashed by 100 bps to 3%.

The RBI’s moves comes even as multiple international rating agencies have slashed India’s growth projections for the next year. The national lockdown is expected to take a significant hit on economic activity.

Moody’s Investors Service for instance on Friday slashed its estimate of India’s GDP growth during 2020 calendar year to 2.5%, from an earlier estimate of 5.3% and said the coronavirus pandemic will cause unprecedented shock to the global economy.

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The estimate for 2020 compares to 5% economic growth in 2019.

In its Global Macro Outlook 2020-21, Moody’s said India is likely to see a sharp fall in incomes at the estimated 2.5% growth rate, further weighing on domestic demand and the pace of recovery in 2021.

“In India, credit flow to the economy already remains severely hampered because of severe liquidity constraints in the bank and non-bank financial sectors,” it said.

Meanwhile on Thursday, ratings agency Crisil cut its FY’21 growth estimate for India to 3.5%.

The agency had earlier predicted an economic growth of 5.2% for the next financial year.

“ The pandemic in India and the consequent lockdown for 21 days pose a material risk to our India economic outlook. The adverse effects that will follow can dwarf the gains from the sharp drop in crude oil prices, and the anticipated monetary and fiscal stimuli,” it said.

Crisil chief economist Dharmakirti Joshi said the estimate of 3.5% growth in 2020-21 assumes a normal monsoon and also a subsidising of the pandemic’s economic impact in the June quarter.

“The slump in growth will be concentrated in the first half of the next fiscal, while the second half should see a mild recovery,” he said.

(With inputs from PTI)