RBI on 27.03.2020 issued a press release on STATEMENT ON DEVELOPMENT AND REGULATORY POLICIES which states the following policy announcement.
- LIQUIDITY MANAGEMENT.
- Targeted Long-Term Repos Operations (TLTROs).
- Cash Reserve Ratio.
- Marginal Standing Facility.
- Widening of the Monetary Policy Rate Corridor.
- Moratorium on Term Loans.
- Deferment of Interest on Working Capital Facilities.
- Easing of Working Capital Financing.
- Deferment of Implementation of Net Stable Funding Ratio (NSFR).
- Deferment of Last Tranche of Capital Conservation Buffer
- Permitting Banks to Deal in Offshore Non-Deliverable Rupee Derivative Markets (Offshore NDF Rupee Market)
- REGULATION AND SUPERVISION.
“Alongside liquidity measures, it is important that efforts are undertaken to mitigate the burden of debt servicing brought about by disruptions on account of the fall-out of the COVID-19 pandemic. Such efforts, in turn, will prevent the transmission of financial stress to the real economy, and will ensure the continuity of viable businesses and provide relief to borrowers in these extraordinarily troubled times”.
- FINANCIAL MARKETS.
“The decision in respect of financial markets is essentially of a developmental nature, intended to improve depth and price discovery in the forex market segments by reducing arbitrage between onshore and offshore markets. This measure assumes greater importance in the context of the increased volatility of the rupee caused by the impact of COVID-19 on currency markets”.
While the measures taken by RBI are in the right direction pumping in more liquidity for the banks to lend and to take care of the emerging emergency anticipated liquidity crisis to some extent, the lowering of repo rates may lead to lowering of the lending rates by the bank which may reciprocate in reducing the deposit rates also which is a natural corollary of the market behaviour. Under the existing market conditions and the financial volatility, no body can predict the future market behaviour and financial situation and liquidity. It may take two to three years for the market to stabilise for growth of business and the liquidity crisis to ease leading to better and sufficient cash flow to meet the financial commitments. In this connection let us not forget what happened after the collapse of Lehman Bros in U S in the year 2008 and its effect on the global economy. What is happening now is the worst calamity and tragedy unprecedented so far affecting the global economy.
Taking into account the uncertainty prevailing with regard to the spread of the deadly decease of corona virus and its longevity, how the liquidity and more so the burden of servicing of debt and interest are going to be ensured in the absence of any signs of abetting of this ranging pandemic catastrophe. The repayment of debt and servicing of term loan depend on the cash flow. Hence, mere moratorium on the repayment of debt / or EMI for three months will not give any relief to the borrowers unless the adequate cash flow is ensured. Same with deferment of interest on working capital. The only way to give relief will be to reassess and re-appraise the cash flow and fix the repayment of installments and servicing of interest with adequate moratorium and extended tenure to repay the loan and servicing of interest based on the revised cash flow. The revised repayment terms will not be uniform for all the loans and it will vary from account to account depending on the revised cash flow. Even staggering of margin money requirement also may be considered.
It can be observed that RBI Governor’s statement shows that RBI has announced its policy but the methodology of implementation is left to the banks which have given the loans to formulate their policy at their discretion. Instead if RBI had announced the methodology of implementing the regulatory policy in a uniform way and mandatory for all the banks to implement it, it would have ensured equality of reliefs without any distinction and discrimination. Besides, it would have also given the benefit of reduction in interest uniformly to all the borrowers. However, it is to be seen how the banks are going to implement the RBI development and regulatory policies for the benefit of the customers.
T. R. Radhakrishnan
(The Author invites comments from readers and he can be contacted through his e-mail [email protected])