Measures by RBI to boost Liquidity and Lending – FAQs

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LIQUIDITY

1. Repo rate reduced by 75 basis points to 4.40%. What does that mean and how does it impact banks/borrowers?

Repo Rate refers to the rate at which commercial banks borrow money by selling their securities to the central bank of our country i.e. Reserve Bank of India (RBI) to maintain liquidity, in case of shortage of funds or due to some statutory measures.
Reduction in Repo Rate is a measure by RBI to boost liquidity and lending that will allow the commercial banks to borrow funds from RBI for meeting its shortage of funds for at a reduced rate. It will lead to reduction in the benchmark rate of interest of all banks i.e. MCLR.

Many home loans by few banks in recent times (w.e.f. October 2019) were benchmarked directly to the Repo rates. Interest on such loans will now be at a reduced rate.

2. Reverse Repo reduced by 90 basis points to 4.00%. What does that mean and how does it impact banks/borrowers?

Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. It is an instrument that can be used to control the money supply in the country.

By reducing this rate, RBI is dis-incentivizing the commercial banks to lend to RBI and rather lend to the general public. In other words, if commercial banks lend to RBI, they will earn 4.00% on it. This leaves no incentive for the banks to lend to RBI.

3. CRR reduced by 100 basis points to 3.00%. What does that mean and how does it impact banks/borrowers?

Cash Reserve Ratio (CRR) is the minimum amount of deposit that the commercial banks must hold as reserves with the central bank. Its purpose is to safeguard the interest of depositors because the banks cannot lend this money to others. Hence, it ensures that banks do not run out of cash to meet the payment demands of their depositors.

By reducing the CRR the liquidity of the commercial banks will increase by 1% of their entire deposits. The impact of this is that the RBI will immediately release funds of Rs. 1.37 lakh crores in the commercial banks. This will enhance the liquidity of the banks.

4. What is the impact on the overall liquidity of all the above measures?

Rs. 3.74 lakh crore of liquidity is injected into the banking system to incentivize lending to the General Public, SMEs and Corporates.

TERM LOANS

1. A three-month moratorium on payment of installments of Term Loan outstanding. Who can give a moratorium? Is the moratorium in respect of all term loans?

All lending institutions including commercial banks including regional rural banks, small finance banks and local area banks, co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) are being permitted to allow a moratorium of three months on payment of installments in respect of all term loans outstanding as on March 1, 2020.

Kindly note there is no waiver on the repayments of term loan. In our opinion, the word ‘installment’ should be interpreted to include interest as well as principal. Therefore, interest will accrue and the payment of the same will be deferred.

2. How does this moratorium take an effect on the tenure of the term loan?

As per RBI guidance to banks, the repayment schedule and all subsequent due dates will get extended by three months. Hence, the tenor for such term loans may be shifted across the board by three months.

It may be noted that the moratorium granted is effectively forward looking for a period of three months starting 1^st March 2020 and the account will be continued to be classified as standard.

3. What happens to EMIs debited by banks after 1^st March 2020?

Since the measure is retrospective from 1^st March 2020, in case of the EMI has already been debited to your account during the intervening period from 1^st March 2020 till date, one may approach the lending institution to grant relief under these announcements.

4. What happens to overdue EMIs?

Already overdue EMIs i.e. those EMIs due prior to 1^st March 2020 will not be covered in the relief granted by RBI. In other words, the account will be classified as an NPA for the non-payment of EMIs due prior to 1^st March 2020 if they become overdue for more than 90 days.

However, on 17^th April 2020, the RBI has clarified that the lockdown period would be excluded from calculating the 90-day default period for classification of the loan account as an NPA. Hence for EMIs due, the counter of number of days of default will stop on 25th March 2020 (first day of lockdown) and restart on the end of lockdown (4th May 2020 or any later date, as decided by government).

5. How will I know if my EMI has been suspended?

The RBI has not yet issued detailed guidelines on this. Once guidelines are issued, there will be more clarity on this.

6. How will the process work at the bank level?

All banks will have to discuss the moratorium and get a decision approved at their board level. Once approved, they may reach out to customers informing them of the moratorium.

7. Is this a waiver of EMIs or a deferment of EMIs?

This is not a waiver, but a deferment. You will have to pay the EMIs at a later date as decided by the bank. The RBI has informed banks to have board approved policies in place on moratorium/deferment.

8. Does the moratorium cover both principal and interest?

Yes. It does. If announced by your bank, you can forego payment of your entire EMI, including payment and interest.

9. What kind of loans does the moratorium cover?

The RBI policy statement explicitly mentions term loans, which includes home loans, personal loans, education loans, auto and any other loans which have a fixed tenure. They also include consumer durable loans, such as EMIs on mobiles, fridge, TV, etc.

10. Does the moratorium cover credit card payments?

Yes. Credit card payments will be covered under the moratorium.

WORKING CAPITAL LOANS

1. Interest on working capital facilities to be deferred by 3 months. How will it be paid?

In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period.

Practically, March month’s interest on outstanding CC will be debited by the banks, say on 31^st March 2020. Under normal circumstances, this interest must be serviced by the first week of April. However, because of the lockdown and social distancing, etc, there may be no inflows into the CC account, the CC account could become illiquid and the interest may not be served.
RBI has permitted that the servicing of interest can be deferred for 3 months. The accumulated interest (i.e. for the month of March, April and May 2020) for the three months period will be paid after the expiry of the deferment period.

2. What happens to non-fund-based limits like LCs, etc?

We expect some clarity to come from RBI on this. RBI’s circular is silent on this. The LCs on due dates will hit the CC account and the CC account may be overdrawn. We believe that many banks have/will come up with additional special lines of credit of 10% of their existing working capital limits for their existing clients. Banks will use this as a tool to liquidate the LC liabilities that are due. This will ensure that no accounts are shown overdrawn.

3. What happens to export credit lines/bill discounting?

We expect some clarity to come from RBI on this. We believe this will get covered under the working capital facilities like a CC/Overdraft and a 3-month deferment on the same will be allowed.

4. What happens to forex loans?

We expect some clarity to come from RBI on this. As of now, the RBI release is silent on this matter.

5. Revised DP calculations by reassessing the WC cycle. How does this impact a borrower?

In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions may recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers.

GENERAL

1. Will such deferment / re-scheduling / revision not to be considered as default for classification as NPA? Will it affect the credit history of the borrowers?

All the aforementioned measures are being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19. Hence, the same will not be treated as a change in terms and conditions of loan agreements due to the financial difficulty of the borrowers will not result in asset classification downgrade or classification as NPA. The lending institutions may accordingly put in place a Board approved policy in this regard.

All the above including the rescheduling of payments will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) like CIBIL, etc. by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.

2. What is the impact of the above measures on businesses?

These measures are a much-needed breather to all the business houses given by RBI. This along with the special line of credit granted by several banks will help many businesses and individuals to tide over the current scenario and streamline their finances over the next few months.

In this lockdown period as well, our team at In.Corp will always be available to assist you in any banking or financial guidance you may need for your businesses. For assistance, do get in touch with us at info@incorpadvisory.in.