Highlights:

• RBI cuts reverse repo rate from 4% to 3.75%, repo rate remains unchanged
• RBI announces a slew of measures to tackle COVID-19 crisis
• LTRO-2.0 to involve Rs.50,000 crore
• Rs.50,000 crore special finance facility to be provided to financial institutions such as NABARD, SIDBI, NHB.
• 90-day NPA norm not to apply on moratorium granted on loans by banks
• Scheduled commercial banks and Co-operative banks can’t declare the dividend till the end of September 2020
• LCR requirement of banks reduced to 80% from 100%; to be restored in phases by April next year
• Banks will need to maintain additional provisioning of 10% on standstill accounts
• NBFCs’ loans to delayed commercial real estate projects can be extended by a year without restructuring
• Loans are given by NBFCs to real estate companies to get similar benefits as given by scheduled commercial banks

The Reserve Bank of India has slashed the reverse repo rate by 25 bps from 4% earlier to 3.75% now, making it less attractive for commercial banks to park cash with the central bank. This will encourage banks to lend to the productive sectors of the economy. The central bank has also announced a host of measures, including a special Rs.50,000 crore targeted long-term repo operation, called TLTRO 2.0, to address the liquidity needs of the NBFCs and microfinance institutions. Banks availing these funds will be required to deploy the same within one month and 50% of the money has been earmarked for midsized NBFCs and MFIs.

However, earlier on March 27, RBI had slashed the repo rate by 75 basis points to 4.40% from 5.15% to help the economy fight the Covid-19 pandemic. Simultaneously, the reverse repo rate was cut by 90 basis points to 4% from 4.90% to ensure that banks don’t passively park funds with RBI and start lending to the productive sectors of the economy.

Key Measures to Tackle Covid-19

These measures are aimed at softening the impact of Covid-19 pandemic on the financial markets, RBI Governor Shaktikanta Das said, adding that the central bank is closely monitoring the developments and is vigilant.

The other measures unveiled by the RBI include providing Rs.50,000 crore refinance to all India financial institutions, Rs.25,000 crore to NABARD, Rs.15,000 crore to SIDBI and Rs.10,000 crore to NHB, and also increasing the Ways and Means Advances (WMAs) limit to 60% to allow States the flexibility to borrow and ensure that their borrowings are not bunched up in the early part of this financial year.

More Relief

Among the regulatory measures, the RBI has allowed the three-month moratorium period on loans (from March 1, 2020 to May 31, 2020) to be excluded by banks from the counting of days past due (90 days) when it comes to asset classification by banks. However, during this standstill period on asset classification, banks have to make a provision of 10% and the same can be reversed if there is no slippage.

Given the challenges in resolution, the RBI has extended the resolution time period by 90 days. Emphasizing the need to conserve capital during the current challenging times, the Governor said scheduled commercial banks and co-operative banks cannot declare dividends till September-end 2020.

In a bid to provide succor to NBFCs with exposure to the commercial real estate sector, the RBI has aligned the date of commencement of commercial operations with that of commercial banks so that delays in execution of projects in the current environment doesn’t result in the projects becoming non-performing.

Assuring that the RBI will act as and when the need arises, the Governor said with retail inflation expected to go down to about 4% in the second half of FY21, it will open up space for rate action. 

Banks Need to Act Fast

According to experts, the reduction in LCR limits for banks to 80% from 100% is a good liquidity measure in the current economic situation. However, banks need to act fast in extending credit to India Inc.

TLTRO 2.0 is an important step in safeguarding the stability of the non-banks. However, it’s equally important to ensure this additional liquidity is available to a wider spectrum of NBFCs and MFIs and not limited to a few. The refinancing measures through NHB, SIDBI, NABARD, etc is a welcome relief to HFCs and NBFCs. Non-banks with limited incremental funding options were facing increasing risks of default.