COVID-19: Reserve Bank of India’s initiative to safeguard the Economy
Mr. Shaktikanta Das, Governor of Reserve Bank of India (RBI) on 27 March 2020 came up with various initiatives and measures as listed below to address and reduce the stress in financial conditions caused by COVID-19
First initiative is to ensure that financial markets and institutions can function normally and adequate liquidity is available to all constituents so that COVID-19 related liquidity constraints are reduced. This is achieved by:
Targeted Long-Term Repos Operations (TLTROs)
In order to mitigate their adverse effects on economic activity leading to pressures on cash flows, it has been decided that the Reserve Bank will conduct auctions of targeted term repos of up to three years’ tenor of appropriate sizes for a total amount of up to INR 1,00,000 crore at a floating rate linked to the policy repo rate.
Cash Reserve Ratio
RBI has reduced the cash reserve ratio (CRR) of all banks by 100 basis points to 3.0 per cent of Net Demand and Time Liabilities (NDTL) with effect from 28 March 2020. This reduction in the CRR would release primary liquidity of about INR 1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess Statutory Liquidity Ratio. This exemption will be available for a period of one year ending on 26 March 2021.
Further, RBI has also reduced the requirement of minimum daily CRR balance maintenance from 90 per cent to 80 per cent effective from 28 March 2020. This is a one-time dispensation available up to 26 June 2020.
Marginal Standing Facility
Now banks can borrow at their discretion by dipping up to 3 per cent into the Statutory Liquidity Ratio instead of 2 per cent with immediate effect. This measure will be applicable up to June 30, 2020. This will allow Banks to avail an additional of INR 1,37,000 crore of liquidity.
These three measures relating to TLTRO, CRR and MSF will add a total liquidity of INR 3.74 lakh crore into the system.
Widening of the Monetary Policy Rate Corridor
It has also been decided to widen the existing policy rate corridor from 50 bps to 65 bps. Under the new corridor, the reverse repo rate under the liquidity adjustment facility (LAF) would be 40 bps lower than the policy repo rate. The marginal standing facility (MSF) rate would continue to be 25 bps above the policy repo rate.
Regulation and Supervision -
Along with liquidity measures, the RBI has also taken the following efforts to reduce the burden of debt servicing during the COVID-19 crisis.
Moratorium of Term Loans
All 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) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on 1 March 2020. 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.
Deferment of Interest on Working Capital facilities
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 1 March 2020. The accumulated interest for the period will be paid after the expiry of the deferment period.
Easing of Working Capital Financing
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. Such changes in credit terms permitted to the borrowers to specifically tide over the economic fallout from COVID-19 will not be treated as concessions granted due to financial difficulties of the borrower, and consequently, will not result in asset classification downgrade.
Such rescheduling of payments will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) 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.
Deferment of implementation of Net Stable Funding Ratio (NSFR)
As per the timeline prescribed by the Basel Committee on Banking Supervision (BCBS), banks in India were required to maintain NSFR of 100 per cent from 1 April 2020. It has now been decided to defer the implementation of NSFR by six months from 1 April 2020 to 1 October 2020.
Deferment of Last Tranche of Capital Conservation Buffer
As per Basel standards, the CCB was to be implemented in tranches of 0.625 per cent and the transition to full CCB of 2.5 per cent was set to be completed by 31 March 2019. It was subsequently decided to defer the implementation of the last tranche of 0.625 per cent of the CCB from 31 March 2019 to 31 March 2020. Considering the potential stress on account of COVID-19, it has been decided to further defer the implementation of the last tranche of 0.625 per cent of the CCB from 31 March 2020 to 30 September 2020. Consequently, the pre-specified trigger for loss absorption through conversion/write-down of Additional Tier 1 instruments (PNCPS and PDI) shall remain at 5.5 per cent of risk-weighted assets (RWAs) and will rise to 6.125 per cent of RWAs on 30 September 2020.
The decision in respect of financial markets is essentially of a developmental nature, intended to improve depth and price discovery in the forex market segments by reducing arbitrage between onshore and offshore markets.
Permitting Banks to Deal in Offshore Non-Deliverable Rupee Derivative Markets (Offshore NDF Rupee Market)
The banks in India which operate International Financial Services Centre (IFSC) Banking Units (IBUs) are now permitted to participate in the NDF market with effect from 1 June 2020. Banks may participate through their branches in India, their foreign branches or through their IBUs.
Source: Press Release by the Reserve Bank of India dated 27 March 2020