RBI cuts Reverse Repo to combat COVID-19 impact

The RBI Governor, Shaktikanta Das addressed the media yesterday and took several steps to combat the economic fall-out of the coronavirus outbreak.

The COVID-19 pandemic and the consequent lockdown has severely impacted economic activities across the world. As per the IMF’s World Economic Outlook, the global economy is expected to contract sharply by –3 percent in 2020. This makes it the worst recession since the Great Depression, and far worse than the Global Financial Crisis of 2008.

[Read: The Global Financial Crisis 2008 Explained]

The IMF has estimated India’s GDP growth to be around 1.9 % in 2020 while the World Bank has forecast growth at 1.5 % to 2.8%. Barclays has projected 0 growth for 2020.

Therefore, policymakers in various countries have been implementing various fiscal and monetary policies to provide support to the economy. India is no different.

In response to the lockdown, the Indian Government had announced an economic stimulus worth Rs.1.7 trillion rupees for the most vulnerable sections of the society. The RBI had also announced a slew of measures on 27th March 2020 to unleash liquidity worth Rs.374000 crores in the financial market.

[Read: RBI cuts rates to mitigate COVID-19 impact (27th March 2020) ]

Yesterday, the RBI governor announced further measures to maintain adequate liquidity in the system and ease the flow of credit to the affected sectors.

Reduction in Reverse Repo Rate

• Reverse repo is the rate at which a bank deposits its funds with the RBI.
• [Read: Repo, Reverse Repo, CRR, SLR Explained]
• It has been decided to reduce the reverse repo rate by 25 basis points from 4.0 % to 3.75 %
• The amount deposited by banks under the reverse repo window is at Rs 6.9 lakh crore as on April 15.
• The RBI wants to reduce the incentive for banks to park excess funds with the RBI and instead lend more.

Targeted Long-Term Repo Operations (TLRTO) 2.0:

• The RBI will conduct auctions of long term repos for a total amount of Rs.50000 crores in tranches (phases).
• [Read: What is Long Term Repo Operations (LTRO?]
• It will be auctioned at the repo rate.
• At least 50 % of the funds acquired by the banks through LTROs will have to be deployed in investment-grade corporate bonds, Commercial Papers, and non-convertible debentures of Non-Bank Financial Corporations (NBFCs) and Microfinance Institutions (MFIs).
• This is because the deployment of TLTRO 1.0 funds has largely been to bonds issued by public sector entities and large corporates. The money has not flown to NBFCs and MFIs, which have been severely impacted by the disruptions caused by the coronavirus pandemic.
• [Read: Impact of COVID-19 on NBFCs]

Refinance facility for All India Financial Institutions (AIFIs)

• It has been decided to provide special refinance facilities for a total amount of ₹50,000 crores to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India  (SIDBI), and National Housing Bank (NHB).
• These institutions are facing difficulties in raising resources from the market.
• These institutions usually lend to agriculture and the rural sector, small industries, housing finance companies, NBFCs, and MFIs. 

Ways and Means Advances (WMA) for State Governments

• On 27th March 2020, the RBI had announced an increase in the ways and means advances (WMA) limit of states by 30 %.
• [Read: What is WMA?-Explained]
• It has now been decided to increased the WMA limit for states by 60 % over and above the level as on March 31 to provide borrowing space to states to undertake COVID-19 containment and mitigation efforts
• The increased limit will be available until September 30, 2020

Asset Classification

• On 27th March 2020, the RBI had permitted banks and NBFCs to grant a moratorium of three months on payment of loan installments falling due between March 1 and May 31, 2020. 
• It has been decided that in respect of the above accounts, the 90-day NPA norm shall exclude the moratorium period of three months (March-May)
• [A loan is usually classified as NPA if the interest or any installment on the loan remains unpaid for a period of more than 90 days. [Read: What is NPA?]]
• They will be classified as NPA only if it remains unpaid for 90 days after May 31
• Though, the banks will have to maintain a higher provision of 10 % on the above accounts, spread over two quarters, i.e., March 2020 and June 2020.
• These provisions can be adjusted later on.

Extension of Resolution Timeline

• Under existing guidelines, lending institutions like banks, NBFCs. etc are required to hold an additional provision of 20 %, if a resolution plan of large accounts undergoing insolvency proceedings, has not been implemented within 210 days from the date of default.
• [Read: The ultimate guide to understanding the Insolvency and Bankruptcy code]
• It has been decided that the period for resolution plan shall be extended by 90 days

Distribution of Dividend

• It has been decided that scheduled commercial banks and cooperative banks shall not make any further dividend payouts until further instructions.

Liquidity Coverage Ratio (LCR)

• The LCR requirement for Banks has been being brought down from 100 % to 80 %.
• The requirement shall be gradually restored back to 100 % by April 1, 2021.
• The liquidity coverage ratio (LCR) refers to the proportion of highly liquid assets held by financial institutions, to ensure the ability to meet short-term obligations. Hence, banks have to maintain adequate liquid assets to meet repayment obligations for 30 days.

NBFCs loans to commercial real estate projects

• The loans by non-bank financial companies (NBFCs) to delayed commercial real estate projects can be extended by a year.
• The above will not be treated as restructuring
• The banks were already allowed to do it. It has now been decided to extend similar treatment to loans given by NBFCs to commercial real estate.
• This will provide relief to NBFCs as well as the real estate sector.

References:

1. RBI notification
2. Business today