E-Paper
From reverse repo rate to dividend move: Understanding RBI’s announcements
RBI has cut the reverse repo rate by 25 basis points — from 4% to 3.75% — encouraging banks to “deploy surplus funds” and lend more, a move that will in turn result in cash in the hands of the borrower.
The Reserve Bank of India (RBI) announced a series of measures on Friday to infuse liquidity in the system and provide relief to borrowers amid the coronavirus disease (Covid-19) outbreak.
WHAT ARE THE SIGNIFICANT STEPS?
To begin with, RBI has cut the reverse repo rate by 25 basis points — from 4% to 3.75% — encouraging banks to “deploy surplus funds” and lend more, a move that will in turn result in cash in the hands of the borrower. One basis point is a hundredth of a percentage point.
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The reverse repo rate is the rate at which RBI borrows from commercial banks. Broadly speaking, a cut in the reverse repo rate means banks are discouraged to park their excess money with RBI since they will get more incentives by giving loans to other institutions/individuals at a higher rate.
WHAT ELSE IS THERE FOR THE BANKS?
In order to ease the liquidity position at the level of individual institutions, the liquidity coverage ratio (LCR) requirement for scheduled commercial banks is reduced from 100% to 80% with immediate effect. The LCR requirement will, however, be gradually restored in two phases – 90% by October 1, 2020 and 100% by April 1, 2021. LCR is the proportion of high liquid assets set aside to survive an acute stress scenario and meet its short-term obligations.
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RBI has asked scheduled commercial banks and cooperative banks not to make any further dividend payouts from profits pertaining to FY20 (April-March) in order to ensure that they preserve capital during the coronavirus crisis. The curbs will be reviewed in the quarter ending September 30.
IS THERE A LOAN RELIEF?
All loan accounts for which lending institutions decide to grant a three-month moratorium or deferment (as decided by the government in the wake of the crisis) and which were standard accounts as of March 1, the usual 90-day non-performing asset (NPA) norm shall exclude the moratorium period of March 1-May 31, 2020. In the normal course, borrowers are declared NPAs only after 90 days of overdue. Until then, they are called standard accounts.
WHAT ELSE HAS RBI DONE?
The central bank has made available an additional Rs 50,000 crore liquidity for National Bank for Agriculture and Rural Development (Nabard), Small Industries Development Bank of India (Sidbi) and National Housing Bank (NHB) at a time these institutions are facing difficulties.
These bodies play an important role in meeting the long-term funding requirements for agriculture and the rural sector, small industries, housing finance companies and non-banking financial companies (NBFCs).
SO THERE IS NO CHANGE IN REPO RATE?
The benchmark repo rate remains unchanged at 4.4%, for now. Changing the policy rate is the prerogative of the Monetary Policy Committee (MPC), which sharply reduced the repo rate by 75 basis points to 4.4% late last month.
Repo rate is the rate at which RBI lends to commercial banks. A lower repo rate would mean availability of cheaper loans to industries and consumers.
IS THERE ANYTHING FOR THE STATES?
RBI has offered enhanced temporary loan facilities to cash-strapped states from its system through ways and means advances (WMA). It has doubled the WMA limit to provide greater comfort to states for undertaking Covid-19 containment and mitigation efforts. The increased limit will be available till September 30, 2020.
IS THERE SOMETHING IN THE PIPELINE?
The central bank has indicated that it might take more monetary measures to help the economy tide over the crisis. Late last month, RBI infused an additional Rs 3.74 lakh crore of liquidity into the system and said it would do “whatever it takes” to handle the crisis.
