A gush of cash, courtesy RBI
Three-month moratorium relief for borrowers, but financial services industry not all that happy
- Published 1.04.20, 12:03 AM
- Updated 1.04.20, 12:03 AM
- 2 mins read
The policymakers of Mint Street huddled in absolute secrecy last week and took a raft of decisions to try and sandbag the Indian economy from the withering effects of the coronavirus pandemic. The unscheduled meeting — the first since the six-member committee started directing the course of monetary policy in October 2016 — triggered a two-step tango, punctuated by cuts in both the repo rate and the cash reserve ratio. The last time the Reserve Bank of India undertook such an uncharacteristic policy hustle was on January 29, 2013. The repo, which has been the sole policy rate signalling instrument since May 2011, has been cut to a 16-year low of 4.4 per cent while the CRR has been pruned by a full percentage point to 3 per cent of incremental deposits. There has been a lot of debate over whether or not the CRR has become an anachronistic, liquidity-soaking monetary tool in a liberalized economy where policy permeation through the financial system operates more efficiently through market-based instruments. The CRR helped neutralize the sharp surge in inflation as a result of widening budgetary deficits in the 1980s. Inflation has cooled significantly from the astronomical levels back then. The CRR unnecessarily drains cash from banks that they could otherwise lend. Still, a reduction in the rate after a gap of just over seven years is a step in the right direction.
The RBI adopted two other liquidity-enhancing measures: it threw open a new borrowing window for banks through the Targeted Long Term Repo Operations permitting banks to access funds for up to three years at a floating rate linked to the repo, and also allowed them to draw down more funds through the marginal standing facility, an emergency cash hatch. Together, the three streams will give banks access to a liquidity pool of Rs 3.74 trillion. The big relief for borrowers — both corporate and retail — is that there is a three-month moratorium on loan repayments till May 31. Home loan borrowers will not have to fret over their equated monthly instalment payments in the near term. The bonus is that they will not hurt their credit scores if they do not repay their loans during this period. The financial services industry, however, may feel upset with the blanket moratorium since experts had only been asking for regulatory forbearance on bad loan classification rules. Under the forbearance principle, the RBI would have granted banks and shadow banking entities the discretion to grant such a relief. A blanket moratorium tends to compromise credit discipline. Conservative private banks, which have been able to put a lid on their bad loans, may have some reservations. They would have preferred to grant such a facility only to the really stressed borrowers.