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RBI big announcement
The RBI has allowed banks to provide a 3-month moratorium on loans and EMI repayments. It has also slashed key repo rate by 75 basis points to 4.4 percent in order to revive growth as India battles Covid-19.
RBI governor Shaktikant Das on Friday announced that its Monetary Policy Committee (MPC) decided to advanced its meeting in view of the Covid-19 crisis and voted for a massive reduction in repo rate in order to mitigate economic risks.
It may be noted that the MPC meeting, which was earlier scheduled for March 31-April 3, was advanced to March 25-27 in view of the deteriorating economic situation.
MASSIVE REPO RATE CUT
The RBI's MPC has voted in favour of an interest rate cut to the tune of 75 basis points, which brings the repo rate down to 4.4 percent from 5.15 percent. The reverse repo rate has also been reduced by 90 basis points to 4 percent in a bid to maintain financial stability and revive growth.
RBI Governor said that the outlook remains extremely uncertain at the time and going forward much will depend on how India battles the Covid-19 pandemic. "The outlook is now heavily contingent upon the intensity, spread, and duration of the pandemic. There is a rising probability that large parts of the world will slip into recession," Das added.
"MPC noted that global economic activity has come to a near stand-still as Covid-19 related lockdowns and social distancing in affected countries. Expectations of a shallow recovery in 2020 from 2019's decade low in global growth have been dashed," Shaktikanta Das said.
EMI, LOANS ON HOLD
It also announced that banks are permitted to allow a three-month moratorium for on payment of EMIs on all term loans that were outstanding on March 1.
However, this means that the final decision to provide such relief is in the hands of the banks.
This is one of the key takeaways from RBI's announcements as many people have been financially affected due to the lockdown implemented to prevent novel coronavirus from spreading in India. But it remains to be seen as to what extent this helps customers.
OTHER LIQUIDITY MEASURES
Apart from reducing key rates, the RBI also announced a slew of liquidity measures related to TLTRO, CRR, and MLCR to ease mounting pressure.
"It has been decided to reduce the Cash Reserve Ratio (CRR) of all banks by 100 basis points to 3% of Net Demand and Time Liabilities with effect from the fortnight beginning March 28 for a period of 1 year," the RBI governor announced.
The announcement came just a day after the government unveiled a Rs 1.70 lakh crore relief package to shield poor people from the virus outbreak.
The RBI's relief measures announced given the Covid-19 pandemic stands at 3.2 percent of the GDP.
Das assured that the fundamentals of India's economy are sound and added that it will continue to support the economy as long as required. "Tough times never last, only tough people and institutions do. The RBI is at work and at mission mode. Will do everything required to mitigate the effects of Covid-19 pandemic," he said.
RBI: extends moratorium on home loan EMIs till August, cuts repo rate to 4%
The moratorium is for payment of EMIs, not on interest: Under the relief package, the government has instructed banks to give borrowers a grace period of three months for payment of EMIs. If you have a loan going, you need not pay the EMI for March, April, and May. However, this does not mean that three months’ EMI has been waived. It is only a grace period, not a waiver of the loan. Also, the banks are likely to charge interest for three months on the unpaid amount. However, these decisions could vary across individual lenders. Some may choose to extend the loan tenure. Others may seek a bullet payment in June or hike the EMI from June onwards.
Credit card balance: The accrual of interest gets tricky in case of credit cards. The dues payable on credit cards will also get a three month grace period, but the interest cost of this deferment could well be astronomical. In normal times, one can defer payment by paying 5% of the due amount while the unpaid amount is carried forward to the next billing cycle and charged 2-4% interest. Under the relief package, if you don’t pay for three months and the bank decides to charge as it normally does, the cumulative interest could be prohibitive at more than 6-12%. What’s more, additional spends would also accrue interest from the very first day and you might end up with hefty interest costs.
The grace period is for everybody: If you do not pay by the due date, the bank will automatically give a grace period to the payment. At the same time, if there is an ECS mandate for the EMI and there is enough balance in the account, the bank will debit the account on the due date. So you will need to inform your bank about your inability to pay. However, if you have ample liquidity and don’t want to unnecessarily incur interest costs, make sure your payment reaches your bank by the due date.
No impact on credit score: If you miss a credit card payment or an EMI, it shows up as a black mark on your credit score and jeopardises your ability to access credit in the future. But under the COVID relief package, your credit history will not get blemished by non-payment and your credit score will not be impacted. This should come as a big relief for self-employed people who could be under extreme financial stress due to the lockdown.
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