By Sunil Garodia
First publised on 2020-03-27 17:49:09
After the relief package for the poor and the marginalized announced by the finance minister Nirmala Sitharaman yesterday, it was the Reserve Bank of India's turn to intervene to alleviate the sufferings of industry and loan account holders as well as try and offer a helping hand to the broader economy that is gasping for breath under the twin blows of a running slowdown and the lethal disruption caused by the Covid-19 pandemic.
The MPC meeting was scheduled to be held from March 28 to 31. But it was brought forward to March 25 to 27 as the Finance Ministry had egged the RBI to intervene at an early date. The major decisions taken by the MPC were:-
1. The repo rate was cut by a whopping 0.75 basis points to take it to 4.40 percent
2. The reverse repo rate was cut by an even larger 0.90 basis points to 4 percent
3. The CRR was cut by 100 basis points and now stands at 3 percent of net demand and time liabilities.
In addition to this, banks were advised to allow a moratorium of three months on all EMIs or loan (principal and interest) repayments. The RBI clarified that any delay in payment of EMIs and loans is not to be classified as default and will not impact the credit history of the borrowers.
As a result of the cut in repo rate, the EMIs on loans will come down if the banks pass it on to their customers. In the past, it was seen that banks did not pass the rate cut and even when they did, it was much lower than the relief granted by the RBI. But in the instant case, if the banks pass on even 0.50 basis points to the customers, it will result in a huge benefit to a large cross-section of the people. As a result of the cut, banks can now lend to industry and other borrowers at a much-reduced rate and this can spur demand for funds.
To ensure that banks do not suffer from liquidity, the CRR requirement has been relaxed. This is likely to release nearly Rs 3.74 lakh crore in the banking system. Simultaneously, the RBI has cut the reverse repo rate to just 4%. This means that banks will have no incentive to park their excess liquidity with the RBI and would be looking to lend it to borrowers to gain a better rate of interest.
This will mean that industry, grappling with disruption in income and the need to pay fixed costs like wages, salaries, rents and maintenance costs, will have access to fresh funds at cheaper rates to tide over this period. If banks listen to the RBI and allow deferment of EMIs and loan repayment, that will be an added bonus and will mean a huge relief for industrial units facing a severe liquidity crunch.
The only criticism one can genuinely make is that the RBI should not have just advised the banks to allow deferment of loan repayment. This has left the door open for them to take individual calls. Considering the stress borrowers are suffering, the RBI should have directed the bank to do so. That would have ensured an across the board compliance and immediate relief to all borrowers.
Also, the RBI should now study in detail which sectors are likely to bear the brunt of the Covid-19 related disruption. The ones that immediately come to mind are aviation, hospitality, retail (other than essential services) and services. It should study the impact they are likely to suffer and then announce sector-specific relief packages to give a lifeline to these sectors.