Moratorium extension of 3 months by RBI has two sides; the second one is ugly for banks

Governor Das had announced a three-month moratorium for all term loan repayments between March 1 and May 31 at his last address in April.

The loan moratorium will be extended till August 31, says RBI governor Shaktikanta Das. This makes it a six-month moratorium. He added that the lending institutions are being permitted to restore the margins for working capital to the origin level by March 31, 2021.

"The surprise move by the RBI to reduce repo rate to 4 percent from 4.4 percent followed by an extension of the loan moratorium by another three months is a welcome step and can provide solace to the ailing economy whereby EMI burden for the borrowers would be somewhat lowered and would also allow them to defer EMI payments by another three months. For corporate borrowers too, the increase in group exposure limit of banks to 30 percent from 25 percent will bring some relief," said Rajesh Agarwal, Head of Research at Aum Capital.

"The fall in bold yield after the announcement is positive news, the committee's decision to continue with its accommodative stance is further good news but the point remains that even after so much of liquidity, the banks are reluctant to take additional risk and that has resulted in a muted credit growth," he added.

"RBI, which has been proactive in recent times, has risen to the occasion by advancing the policy meet to cut policy rates by 40bp. Also, the unequivocal statement that monetary policy will continue to be accommodative till growth revives sends positive signals. The fact that the central bank has refrained from giving a GDP growth figure is a reflection of the complexity in giving projections with the present growth models," said VK Vijayakumar- Chief Investment Strategist at Geojit Financial Services.

"Extension of the moratorium announced earlier by another 3 months is a relief. A takeaway from the policy announcement is that the stress in the banking sector will continue," he added.

For banks, the extension of moratorium by another three months has two sides. A clear picture on the asset quality of the lenders will now emerge only by March 2021, instead of September 2020. There is a risk of the moral hazard issue creeping in, as borrowers who have the ability to pay, may even opt for moratorium. And for MFIs and NBFCs catering to the bottom-of-the-pyramid customers, the risk of repayment behaviour getting disturbed is higher.

On the positive side, the moratorium extension gives more time to customers (professionals, small businesses, MSMEs and corporates) for recovery in earnings/repayment capacity in an easing lockdown scenario. Thus, the probability of them slipping buckets after the end of moratorium on August 31 diminishes, and therefore the NPL spike for lenders could be lower than what is anticipated now.

The moratorium extension also gives time to lenders to strengthen their collection infrastructure for retail products as restrictions on physical collection/follow-up eases out and collection agencies would have had their migrant workforce back.

For working capital facilities, interest payment has been deferred by another three months, in line with extension of moratorium on terms loans. The accumulated interest for the deferment period can be covered into a funded interest term loan payable be end of the current fiscal. Thus borrowers need not pay accumulated interest in one shot immediately after the deferment period, which is a big relief for them.

While the RBI governor Shaktikanta Das announced that the three-month term loan moratorium has been extended till August 31, it is to be noted that individual banks have the right to take a decision on whether this will be allowed for all borrowers. It is only an enabling provision and not a mandate.

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RBI's surprise announcement : 10 things to know

Reserve Bank of India (RBI) Governor Shaktikanta Das slashed the key lending rate by 75 basis points (0.75 percentage point) in an emergency move on Friday, to counter the economic fallout from the rapid spread of the deadly coronavirus pandemic. The move came as the country entered the third day of nationwide lockdown to curb the spread of the virus, following an unscheduled meeting of its Monetary Policy Committee, which was originally scheduled to conduct a bi-monthly review early next month. Four out of the six members of the Monetary Policy Committee voted in favour of the move. "The economic outlook globally is uncertain and obviously negative... Financial stability is the topmost priority of the RBI in this crisis," said Shaktikanta Das.

Here are 10 things to know about the RBI's announcement:

1.   The magnitude of the cut in repo rate - the key interest rate at which the RBI lends short-term funds to commercial banks - was the highest under Shaktikanta Das so far. The largest cut he had delivered was of 35 basis points in August last year.

2.  The RBI Governor also announced a cut of 100 basis points in the cash reserve ratio(CRR) for a period of one year, a step he said will ensure sufficient liquidity in the system. CRR or cash reserve ratio is the amount of cash commercial banks have to mandatorily park with the Reserve Bank of India. "This would release liquidity worth Rs 1,37,000 crore within banks," the RBI Governor said.

3.  It also permitted all commercial banks and lending institutions to allow a three-month moratorium on all loans, in view of the ongoing lockdown to protect the 130 crore people in the country from the deadly virus. "Banks should do all they can to keep credit flowing," Mr Das added. 

4.  The priority is to undertake "strong and purposeful action" to protect the economy, and there is a need for all stakeholders to fight against the coronavirus pandemic, Mr Das said. 

5.  The surprise moves came as India entered the third day of a 21-day countrywide lockdown to curb the rapid spread of the coronavirus pandemic. The RBI Governor-headed Monetary Policy Committee was originally scheduled to meet early next month.

6.  "Indian banking system is safe and sound... In spite of the challenging environment, I remain optimistic," the RBI Governor said. 

7.   The RBI has already infused Rs 2.7 lakh crore into the country's financial system since the February policy meeting, the Governor said. The central bank's overall liquidity injection stands at 3.2 per cent of GDP, he said.

8.  He said the RBI will continue to be vigilant and take "whatever steps necessary" to mitigate the impact of the coronavirus on the economy.

9.   On Thursday, Finance Minister Nirmala Sitharaman had announced a Rs 1.7 lakh-crore fiscal package to support the poor through direct cash transfers and food security measures, without giving details on how the programme will be funded.

10. India is staring at the worst annual rate of gross domestic product (GDP) expansion recorded since the 2008-09 global financial crisis, and many economists have anticipated a further blow to the economy thanks to the COVID-19 outbreak.

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Latest Policy Rates (Bank rate,CRR,SLR,Repo rate,Reverse repo rate,MSF) in Indian Banking

Bank Rate	5.40%
Cash Reserve Ratio   (CRR)	4.00%
Statutory Liquidity Ratio (SLR)	18.50%
Repo Rate under  LAF	5.15%
Reverse Repo Rate under LAF	4.90%
Marginal Standing Facility (MSF)	5.40%

                                                          Updated in Oct,2019

To control inflation and the growth, RBI uses certain tools like CASH RESERVE RATIO, STATUTORY LIQUIDITY RATIO, REPO RATE, REVERSE REPO RATE etc.,

What is CRR (Cash Reserve Ratio)?

It is the ratio of Deposits which banks have to keep with RBI. Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI. Banks don’t earn anything on that.
Banks will not have access to this amount. They cannot use this money for any of their economic or commercial activities. Banks can’t lend this portion of money to corporate or individual borrowers.
Example – You deposit say Rs 1000 in your bank. Then Bank receives Rs 1000 and has to put some percentage of it with RBI. If the prevailing CRR is 6% then they will have to deposit Rs 60 with RBI and they are left with Rs 940. Your bank can not use this Rs 60 for its commercial activities like lending or investment purpose. This Rs60 is deposited in current account with RBI.

The current CRR is 4%. If RBI cuts CRR in its next monetary policy review which is scheduled on 2nd, December then it means banks will be left with more money to lend or to invest. So, more money can be released into the economy which may spur economic growth.

What is Statutory Liquidity Ratio (SLR)?
Besides CRR, Banks have to invest certain percentage of their deposits in specified financial securities like Central Government or State Government securities. This percentage is known as SLR.
This money is predominantly invested in government securities which mean the banks can earn some amount as ‘interest’ on these investments as against CRR where they do not earn anything.
Example – You deposit say Rs 1000 in your bank. Then Bank receives Rs 1000 and has to put some percentage of it with RBI as SLR. If the prevailing SLR is 20% then they will have to invest Rs 200 in Government securities.

So to meet both CRR and SLR requirements, bank have to earmark Rs 260 (Rs 60 + Rs 200).

What is Repo Rate?
When we need money, we take loans from banks. And banks charge certain interest rate on these loans. This is called as cost of credit (the rate at which we borrow the money).
Similarly, when banks need money they approach RBI. The rate at which banks borrow money from the RBI by selling their surplus government securities to the central bank (RBI) is known as “Repo Rate.” Repo rate is short form of Repurchase Rate. Generally, these loans are for short durations (up to 2 weeks).
It simply means the rate at which RBI lends money to commercial banks against the pledge of government securities whenever the banks are in need of funds to meet their day-to-day obligations.
Banks enter into an agreement with the RBI to repurchase the same pledged government securities at a future date at a pre-determined price. RBI manages this repo rate which is the cost of credit for the bank.

Example – If repo rate is 5% , and bank takes loan of Rs 1000 from RBI , they will pay interest of Rs 50 to RBI. So, higher the repo rate higher the cost of short-term money and vice verse. Higher repo rate may slowdown the growth of the economy. If the repo rate is low then banks can charge lower interest rates on the loans taken by us.

If RBI cuts Repo rates in its next monetary policy review which is scheduled on 2nd, December then it means the cost of short-term credit can come down.
So whenever the repo rate is cut, can we expect that both the deposit rates and lending rates of banks to come down to some extent?
This may or may not happen every time. The lending rate of banks goes down to the existing bank borrowers only when the banks reduce their base rates, as all lending rates of banks are linked to the base rate of every bank. In the absence of a cut in the base rate, the repo rate cut does not get automatically transmitted to the individual bank customers. This is the reason why you might have observed that your loan EMIs remain same even after RBI lowers the repo rates.
Banks check various other factors (like credit to deposit ratios etc.,) before reducing the Base rates.
( Base Rate is the minimum rate below which Banks are not permitted to lend)

What is Reverse Repo Rate?
Reverse repo rate is the rate of interest offered by RBI, when banks deposit their surplus funds with the RBI for short periods. When banks have surplus funds but have no lending (or) investment options, they deposit such funds with RBI. Banks earn interest on such funds.

Impact of Repo Rate cut or CRR cut :
Currently crude oil (petrol/fuel) prices, commodity prices and inflation have eased.  Against this backdrop, there is a high expectation of RATE CUT this time. So, if there is a rate cut what is the general impact on the economy?

Hope you liked this post. Do track the RBI’s next Monetary Policy review. 

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Key points from RBI policy meets

Reserve Bank of India (RBI) is currently on a rate cutting spree as the central bank has reduced the repo rate -- the rate at which it lends to banks -- for the fifth time in a row. After this reduction of 25 basis points (bps), which overall translates into 135 bps or 1.35 percentage points this year, the repo rate now stands at 5.15 per cent.

Here's are the key takeaways from the monetary policy committee (MPC) meet:

Rate cut may bring cheer among borrowers:

When the RBI cuts rates, banks are expected to pass on the benefit to consumers and reduce interest rates on home, auto, personal or other loans which may result in lower EMIs (equated monthly instalments).

As the RBI has compelled banks to align all their retail loans to external benchmarks, and a majority of lenders have adopted the repo rate as the benchmark, the cut will likely bring cheer to borrowers.

Any scope for another rate cut?

The central bank has maintained its "accommodative" stance. "The Reserve Bank will continue the 'accommodative' stance as long as it is required to revive the growth," RBI governor Das said .

This leaves borrowers with a hope that that the key lending rate may fall further.

Shaktikanta Das on PMC Bank crisis:

"As soon as this issue came to the central bank's notice, the RBI has acted very swiftly. One incident should not be used to generalise the state of all cooperative banks. Banking system sound, stable and there's no reason to panic," Das stated on Punjab and Maharashtra Cooperative (PMC) Bank crisis.

RBI governor on 'single-use plastic ban':

Just seconds before the MPC media briefing was about to get over, the RBI governor was congratulated for opting "plastic free folder and water bottle". To which the governor smiled and replied: "We've decided and we've in fact issued a circular internally for doing away with single-use plastic."

Fall in economic growth projection:

The Reserve Bank sharply cut its economic growth projection for this fiscal to 6.1 per cent from 6.9 per cent earlier, but expressed hope that the growth will recover in the second half of 2019-20.

The central bank's estimates come in the wake of GDP growth sliding to a six-year low of 5 per cent in the June quarter, on a massive slowdown in consumption and private sector investments.

Micro-lenders' borrowers:

On the regulation and supervision front, the RBI decided to increase the household limits for micro-lenders' borrowers, and also raise the cap to Rs 1.25 lakh per eligible borrower from the previous Rs 1 lakh.

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RBI cuts repo rate by 35 basis points

Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Wednesday lowered its repo rate by an unconventional 35 basis points to 5.4%. This is the fourth reduction in a row of its key policy rate since Shaktikanta Das took over as the governor of the central bank in December last year.

All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy. Four members — Ravindra H. Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das — voted to reduce the policy repo rate by 35 basis points, while two members — Chetan Ghate and Pami Dua — voted to reduce the policy repo rate by 25 basis points.

The path of CPI inflation is now projected at 3.1% for the second quarter of FY20 and 3.5-3.7% for second half of FY20, with risks evenly balanced. Consumer price index (CPI) inflation for the first quarter of FY21 is projected at 3.6%. The MPC also revised downwards GDP growth for FY20 from 7% in the June policy to 6.9% in August in the range of 5.8-6.6% for the first half of FY20 and 7.3-7.5% for the second half–with risks somewhat tilted to the downside. GDP growth for the first quarter of FY21 is projected at 7.4%.

The central bank also said that liquidity in the system was in large surplus in June-July 2019 due to return of currency to the banking system; drawdown of excess cash reserve ratio (CRR) balances by banks; open market operation (OMO) purchase auctions; and RBI’s foreign exchange market operations.

RBI said it absorbed liquidity of Rs.51,710 crore in June, Rs.1.30 trillion in July and ₹2.04 trillion in August (up to 6 August, 2019) on a daily net average basis under the LAF.

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RBI Monetory policy 2019 - RBI cuts repo rate by 25 bps to 5.75%

The Reserve Bank of India (RBI) Monetary Police Committee Thursday unanimously cut repo rate — the rate at which it lends to banks — by 25 basis points from 6 per cent to 5.75 per cent. The bank also changed the monetary policy stance from neutral to accommodative. The reverse repo rate and bank rate have been adjusted at 5.50 and 6.0 per cent respectively. The bank also lowered the Gross Domestic Product (GDP) growth forecast for 2019-20 to 7 per cent from 7.2 per cent in earlier projection. On the other hand, inflation projection has been raised to 3-3.1 per cent for April-September and 3.4-3.7 per cent for the second half of the year.

RBI has decided to do away with charges levied on RTGS and NEFT transactions, banks will be required to pass this benefit to their customers.

This is the third straight interest-rate cut under RBI Governor Shaktikanta Das, who also heads the Monetary Policy Committee (MPC).

In its first meeting in FY’20, the MPC on April 4 had cut the key lending rate by 25 basis points from 6.25 per cent to 6 per cent. Reverse repo rate had been adjusted to 5.75 per cent and the committee had kept the monetary policy stance at ‘neutral’. The RBI had projected a GDP growth of 7.2 per cent for 2019-20, a revision from its February view of 7.4 per cent. It had also said that the consumer inflation was 2.57 per cent in February.

In February, the committee had cut repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. The MPC had then shifted its stance to ‘neutral’ from ‘calibrated tightening’.

When the RBI cuts its benchmark lending rate, banks typically pass on the benefit to the customers. As and when the banks decide to pass on the rate cut, consumers could see home, auto and other loans getting cheaper. For retail consumers, a cut in rates could have a two-pronged impact. For depositors, new deposits will earn a lower rate and thereby lower returns. For borrowers, though, a downward movement of interest rate would bring down the interest outgo in the near future. For floating rate home loans, however, a new rate becomes effective on the reset date of the loan.

India is among central banks across Asia shifting to looser monetary policy to boost their economies amid risks from the US-China trade war.

As the country heads into an economic downturn, the new government’s focus would be on reviving consumption demand, pushing investments and exports, and resolving the liquidity issues in the financial sector to help India get back on the 7%-plus growth trajectory in the long term.


Bullet points -

➡ Repo rate Cut = 0.25%

➡ Reverse Repo Rate cut = 0.25%

➡ Prediction in Slow down in Inflation & Growth

➡ Lowered charges on ATM usage

➡ 6:0 voting for rate cut this Stance is saying next policy also have rate cut 

➡ RTGS & NEFT (Net banking) is now free. All banks should transfer this benefit to customers.

➡ Small Finance bank (NBFC) licenses will be given more

➡ GDP prediction reduced from 7.2% to 7.0%

➡ World most EM currency in Depreciate 


➡ US - China Trade war big Worry for World Economy..

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Home, auto loans set to be cheaper as RBI Governor Shaktikanta Das cuts interest rates by 0.25%

RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, car loan and corporate borrowers.

This is Das' first monetary policy review after taking charge as the RBI Governor, replacing Urjit Patel.

The 6-member Monetary Policy Committee (MPC), headed by Patel, reduced repo rate or the short term rate at which central bank lends to banks, to 6.25 percent. Consequently, the reverse repo rate has also come down by a similar percentage point to 6 percent. The MPC voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.

The central bank also changed its monetary policy stance to 'neutral' from the earlier 'calibrated tightening', signalling further softening on its approach towards interest rates.

The RBI cut its estimates on headline inflation which cooled off to a 18-month low of 2.2 per cent in December for the next year, and expects the number to come at 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in third quarter of FY20.

Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Das and three others voted for a cut in interest rates.

The RBI had maintained status quo on the key lending rate (repo) in its last three bi-monthly policy reviews after raising the rate twice by 25 basis points each in the fiscal.

Das, in his maiden monetary policy review, has moved away from the usual practice of announcement 2:30 pm. Earlier, when Urjit Patel took charge as the RBI Governor, he shifted from the usual practice of announcement at 11 am and presented the fourth bi-monthly (his maiden) monetary policy review at 2:30 pm after the MPC meeting.

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Reserve Bank of India (RBI) hikes repo rates by 25 basis points

The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) has decided to increase the repo rate by 25 basis points to 6.5% due to inflation concerns.

Repurchase rate or the repo rate is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds. Reverse repo — the rate at which the RBI borrows money from commercial banks within the country — is adjusted to 6.25 per cent.Five members of the MPC voted for the rate hike. 


While raising the key policy rates, the RBI, however, has maintained the neutral policy stance.“Uncertainty around domestic inflation needs to be carefully monitored in the coming months,” the central bank said while increasing its inflation projection.

According to the RBI, inflation outlook is likely to be shaped by several factors, including the government’s decision to increase the minimum support price (MSP) for kharif crops.The RBI has projected the inflation at 4.6 per cent in Q2, 4.8% in H2 of 2018-19 and 5.0% in Q1 of 2019-20 “with risks evenly balanced”.“The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis,” the RBI said.

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