RBI reduces reverse repo rate by 25 bps from 4% to 3.75%; repo rate remains unchangedThe RBI today announced a second tranche of liquidity boost for the economy wth a 25 basis point reverse repo cut taking it to 3.75 per cent from 4 per cent earlier. The move has been taken to allow banks to lend more.
A TLTRO 2.0 of Rs 50,000 crore specifically targeted at NBFCs has been announced.
It also announced relaxation of asset classification norms. Those accounts that have availed the moratorium facility, the period of moratorium will be excluded from the 90-day NPA classification norms of the RBI.
The RBI said that it will continue to monitor the situation closely and its objective is to keep the financial sector moving smoothly.
These liquidity measures are over and above the Rs 3.74 lakh liquidity boost announced in the last week of March. Those included a Targeted Long Term Repo Operations (TLTRO) window of Rs one lakh crore for banks to invest specifically in corporate bonds and commercial papers. It also reduced the repo rate by 75 basis points and the reverse repo by a larger margin of 90 basis points, thereby making it less lucrative for banks to park money with the RBI. It also reduced the CRR by 100 basis points, thereby leaving more money in the hands of the banks to lend to customers.
It had also announced moratorium of three months for term loans but a lot of NBFCs were struggling to met their obligations as the moratorium norms were being interpreted differently by different banks.
Liquidity measures:
1. TLTRO 2.0: A second tranche of TLTRO worth Rs 50,000 crore has been announced specifically targeted at the NBFC sector considering the financial pressure faced by them. Around 50% of it should go into the investment grade papers of smaller NBFCs.
Investments should be made within one month. These may be classified as HTM. Exposures not to be reckoned under large exposure framework. TLTRO of Rs 25,000 crore to be conducted today.
2. Reverse Repo cut: Amount under reverse repo window is at Rs 6.9 lakh crore as on April 15. That much of surplus is available with banks. To encourage banks to deploy these funds for lending purposes, the RBI reduced reverse repo by 25 bps from 4% to 3.75%. Policy repo rate remains unchanged at 4.4%.
More money for states
States had been demanding more funds to fight the Covid-19 pandemic. The RBI has increased the limit under Ways and Means Advances for states to avail short-term funds to 60 per cent of the existing limit. This will help states to avail more funds to fight the Covid-19 pandemic and plan their borrowings in a better way even as they grapple with a crunch in their finances owing to stalled economic operations.
For Banks & financial institutions
The Liquidity Coverage Ratio has been brought down to 80 per cent from 100 per cent earlier. This will be restored in phases by April 2021. Banks shall not make any dividen payments until further orders. The RBI also announced measures to boost liquidity of financial institutions like NABARD, SIDBI and NHB. A special refinance facility of Rs 50,000 crores to meet sectoral credit requirements has been announced for them.
This will include Rs 25,000 crore to NABARD for refinancing RRBs, co-operative banks and micro-finance institutions, Rs 15,000 crore to SIDBI and Rs 10,000 crore to National Housing Bank (NHB) for supporting Housing Finance Companies (HFCs).
Loans given by NBFCs to realty firms will hold similar benefit as given by scheduled commercial banks.
NPA classification
In respect to accounts granted moratorium, NPA norms of 90 days relaxed. The period of moratorium will be excluded from the 90 day classification norms of NPAs for those accounts which have availed the moratorium facility. NBFCs have flexibnility to give such relief to their borrowers.
“Highly anticipated liquidity measures announced to support NBFCs, HFCs, MFIs, Co-operative Banks and RRB’s through refinancing available from NABARD, SIDBI and NHB and also access to TLTRO 2.0 to be made available by Banks. A welcome immediate relief not only to these Institutions but also to their borrower base,” said Sanjay Doshi, Leader – Financial Services Advisory, KPMG in India.
On the asset classification relaxation granted to those accounts availing the moratorium window, he added that the “standstill on NPA classification on standard overdue accounts, as on 29th Feb, which will avail moratorium will be a huge relief to such borrowers. However, these accounts will attract 10 percent provision which will block Bank’s capital against existing credit and hence, will not be available for new credit. Banks will need to do a balancing act between extending moratorium and providing new credit due to this provisioning requirement”.
The RBI governor said that the objectives of today’s announcements: To maintain adequate liquidity in system, facilitate credit flows, ease financial stress, enable smooth functioning of markets.
The RBI governor Shaktikanta Das said the inflation is on a declining trajectory and could fall below the central bank’s 4 per cent target by the second half of this fiscal.
The RBI’s announcement comes in the wake of downgrading of economic growth in the current fiscal. The World Bank has forecast India’s economic growth at 1.5-2.8 per cent in 2020 while the IMF has predicted the growth to slip to 1.5 per cent. Barclays has projected zero growth for 2020.
The Governor has assured that the RBI will come up with more steps to address the challenges being faced by the economy based on evolving situations.
In Video:
RBI reduces reverse repo rate by 25 bps from 4% to 3.75%; repo rate remains unchanged
Source: indiatimes.com