Understanding the Steps Announced by the Reserve Bank to Combat the Economic Impact of Coronavirus

In response to the economic challenges posed by the Coronavirus pandemic, the Reserve Bank of India (RBI), under the leadership of Governor Shaktikanta Das, has implemented a series of measures to support the financial sector and individuals. This article will simplify these measures to make them more accessible to the public.

Who Benefits from Each Measure?

The measures can be broadly categorized into different beneficiaries, including businesses and individuals facing financial hardships.

3-Month Moratorium on Loan Repayment

One of the most discussed announcements was the 3-month moratorium on loan repayment. This measure is designed to assist businesses and individuals who are facing a temporary financial crunch due to lockdowns and business closures. It's important to note that the moratorium only provides a break in repayment, not a waiver of EMI (Equated Monthly Installments). Borrowers are still required to pay theirEMI later, with interest. For more details, visit this link.

Reduction in Cash Reserve Ratio (CRR)

Another measure announced was the reduction of the Cash Reserve Ratio (CRR). CRR is the percentage of net deposits that banks are required to hold in the form of cash. The reduction from 4% to 3% was intended to provide banks with more liquidity to meet the needs of depositors in case of a prolonged lockdown and reduced loan repayments.

Reduction in Repo and Reverse Repo Rates

The Reserve Bank also reduced the Repo and Reverse Repo rates. The Repo Rate, which is the interest rate at which banks borrow from the Reserve Bank for short-term purposes, was reduced to 4.40%. The Reverse Repo Rate, the interest rate at which banks can deposit funds with the Reserve Bank, was reduced from 4.05% to 3.75%. These rate reductions are aimed at encouraging banks to invest and lend more in the market rather than parking funds with the Reserve Bank.

Deferment of Capital Conservation Buffer (CCB)

In line with the Basel III framework, which aims to strengthen financial sector regulation, the Reserve Bank deferred the deadline for the creation of the Capital Conservation Buffer (CCB) from March 31, 2020, to September 30, 2020. This extension provides more time for banks to build up the required reserve buffer.

Targeted Long-Term Repo Operations (TLTRO)

The Reserve Bank introduced Targeted Long-Term Repo Operations (TLTRO), which allows banks to borrow up to Rs. 100,000 crore over a 3-year period for investing in corporate bonds, commercial papers, and non-convertible debentures. To further support Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs), a version 2.0 of TLTRO was launched. This version allocates up to Rs. 50,000 crore for investing in bonds, commercial papers, and debentures of MFIs and NBFCs.

Refinancing of All India Financial Institutions (AIFIs)

To support NABARD, SIDBI, and NHB, the Reserve Bank committed to lend Rs. 25,000 crore, Rs. 15,000 crore, and Rs. 10,000 crore, respectively. These financial institutions play crucial roles in extending loans to rural banks, cooperative banks, microfinance institutions, small industries, and housing finance companies.

Increasing the Limit of Ways and Means Advances (WMA)

To address the financial needs of states, the Reserve Bank increased the limit for Ways and Means Advances (WMA) for states by 60% and extended it till September 2020. This measure helps states manage any temporary financial crunches caused by the pandemic.

Conclusion

These measures collectively aim to support the economy by ensuring that banks have adequate liquidity, providing relief to businesses and individuals, and supporting financial institutions that cater to specific sectors of the economy.