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Coronavirus Crisis: RBI Announces Moratorium On Loans, Targeted Liquidity Measures

From Bank Loans To Corporate Bonds, RBI Presents A Coronavirus Relief Plan

Reserve Bank of India Governor Shaktikanta Das addresses a press conference, at RBI headquarters in Mumbai, on March 16, 2020. (Photographer: Mitesh Bhuvad/PTI)
Reserve Bank of India Governor Shaktikanta Das addresses a press conference, at RBI headquarters in Mumbai, on March 16, 2020. (Photographer: Mitesh Bhuvad/PTI)

India’s central bank announced several measures, including special lines of liquidity, loan moratorium, and easier asset quality norms, to help the economy tide over the crisis stemming from the novel coronavirus pandemic. This came along with an emergency rate cut of 75 basis points by the Monetary Policy Committee.

These policies directly address the stress in financial stress caused by Covid-19 pandemic, the Reserve Bank of India said in its statement.

‘They consist of:
(i) expanding liquidity in the system sizeably to ensure that financial markets and institutions are able to function normally in the face of Covid-related dislocations;

(ii) reinforcing monetary transmission so that bank credit flows on easier terms are sustained to those who have been affected by the pandemic;

(iii) easing financial stress caused by Covid-19 disruptions by relaxing repayment pressures and improving access to working capital; and

(iv) improving the functioning of markets in view of the high volatility experienced with the onset and spread of the pandemic.’

Bank Loan Forbearance

The banking regulator announced that banks and other lending entities, including non-banking finance companies and microfinance companies, are permitted to allow borrowers a three-month moratorium on payment of instalments of all term loans outstanding as of March 1, 2020. Such changes will not affect the asset quality of the underlying borrowers nor affect their credit histories, RBI Governor Shaktikanta Das said in his briefing.

Term loans include all loans other than working capital credit and non-funded exposures.

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.   
RBI Statement

Even ahead of the announcement, some states like Tamil Nadu had asked lenders to stop collecting loan repayments. MFIs had also stopped collections following an advisory from its industry body.

Apart from this, the banking regulator deferred interest payment on working capital loans by three months. “ The accumulated interest for the period will be paid after the expiry of the deferment period,” the RBI statement said.

Lenders can also reduce their margins on working capital loans under the RBI’s new scheme. Similar to term loans, these changes will not impact the credit quality or history of borrowers.

The RBI also deferred the implementation of the net stable funding ratio and countercyclical capital buffers.

Special Liquidity Measures

The RBI has announced targeted long-term repo operations up to three years for a total amount of Rs 1 lakh crore. These will be issued at a floating rate linked to the benchmark repo rate. The repo rate has already been cut by 75 basis points to 4.4 percent.

  • The liquidity has to be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020.
  • Banks shall be required to acquire up to 50 percent of their incremental holdings of eligible instruments from primary market issuances and the remaining 50 percent from the secondary market, including from mutual funds and non-banking finance companies.
  • Exposures under this facility will also not be reckoned under the large exposure framework.
The bonds purchased via the targeted LTROs will be in the held-to-maturity portfolio of banks and not subject to mark-to-market gains or losses.

Investments made by banks in debt papers under this facility can be in excess of 25 percent of the total investment permitted to be included hold-to-maturity portfolio.

For at least the last one week, primary corporate bond issuance has been at a virtual standstill. At the same time, yields on corporate bonds in the secondary market have risen significantly between 100 to over 200 basis points for various issuers, This despite the RBI providing ample liquidity over the past three months through long-term repo operations and open market operations.

These announcements by the MPC and RBI come a day after the government announced a Rs 1.7-lakh-crore relief package for poor, workers and those who need immediate help amid the nationwide lockdown to combat the virus, which has so far killed 16 and infected nearly 700 people in India.