RBI Cushions The Economic Blow Of Covid-19

In the current pandemic situation, banks globally are hesitant to transmitting money to businesses considering it a risky proposition. The central bank to ensure adequate liquidity in the system has reduced the reverse repo rate - the rate at which banks park their fund with the central bank - by 25

BY Realty Plus
Published - Jun 8, 2020 4:23 AM

In the current pandemic situation, banks globally are hesitant to transmitting money to businesses considering it a risky proposition. The central bank to ensure adequate liquidity in the system has reduced the reverse repo rate - the rate at which banks park their fund with the central bank - by 25 basis points to 3.75 per cent. Banks borrow from the RBI at the repo rate, which is 4.4% right now. The current cut has increased the difference between the borrowing rate and the lending rate to 65 basis points. This will encourage banks to lend to the smaller and medium firms, NBFCs and MFIs, enabling last-mile funding. As a matter of fact, MSMEs sector where delinquency is very low will be the gainers of this move as the banks will now shy away from lending the money to RBI and rather earn more money by lending to small business owners. In case of real estate and infrastructure sector, suffering due to liquidity crunch, such a move will help both segments tide over the current dismal market scenario with the availability of surplus liquidity in the banking system. Now the onus lies on the banks and the NBFCs to ensure smooth transition of the benefits to the consumers. Som Mandal, Managing Partner, Fox Mandal said, “In the current depressing scenario marred by the total lockdown due to COVID-19 outbreak, the 25 basis points reduction in repo rate announced by the RBI will encourage banks to help productive sectors of the economy to meet their credit requirements through the surplus funds since the banks will now have more money to lend to the customers.”   Additional Measures For Growth  RBI has put another ?50,000 crore as part of TLTRO 2.0. Banks can only get this money if they lend to NBFCs and MFIs. RBI has also announced a re-financing window of Rs 50,000 crore for financial institutions like Nabard, National Housing Bank and Sidbi that reach the small-scale firms, rural sector and housing finance firms Of this, Rs 10,000 crore will be for National Housing Bank (NHB) which will ease some of the liquidity challenges for housing financing companies to get bank financing. RBI has also allowed NBFC loans to delayed commercial real estate projects to be extended by a year without restructuring. In a move that will bring much-needed relief to cash-starved developers, the RBI has further extended the date of commencement of commercial operations (DCCO) of project loans for commercial real estate projects which are delayed for reasons beyond the control of promoters. It will help in easing out time for maintaining and managing cash flows for these developers. Sanjay Gupta, Chairman and Managing Director APL Apollo on a positive note stated, “At a time when the Coronavirus outbreak has literally thrown a spanner in the wheels of India’s economic growth, RBI’s measures bring much needed relief for all industries. We expect the interest rates on all types of loans will come down immediately which will boost consumer demand and in turn prompt industries to ramp up their productions.” Clearly, the Reserve Bank of India (RBI) current move shows that it is not in favour of banks parking huge amounts of funds at its reverse repo window, and would rather take hard steps to ensure systemic liquidity translates into credit for industry. While it is for the banks to decide whom they want to lend, they would surely now are discouraged to continue to park huge amounts at the reverse repo window. The real estate sector is hopeful that the banks will immediately transmit rate cuts to consumers and bring down home loan interest rates. This will help to push home buying and prevent instances of NPA. Also, additional measures such as oneyear moratorium for commencement of business operations (DCCO) of project loans for real estate projects that are delayed for reasons beyond the control of promoters, is a major relief and will provide much-needed aid to cash-starved developers across the country.  

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