Finally, the ReserveBank of India (RBI) used its arsenal to fight out the economic battle in aglobal health emergency. The apex bank reduced repo rate by a massive 75basis points (bps) bringing it to 4.4 per cent and also slashed cash reserveratio (CRR) by 100 basis points to 3 per cent. The reverse repo rate, too, waslowered by 90 basis points. Notably, a cut of one per cent in CRR has unlockedRs.1.37 crore primary liquidity in the banking system.
Even as the deep cut in policy rates wouldbe translating into low interest rates, the three-month moratorium on equatedmonthly installment (EMI) payments of all term loans became centre ofattraction for borrowers. The debate on EMI holiday has already gained momentumand banks have started facing the heat as many borrowers have complained aboutthe deduction of EMIs in contravention to the standing instruction envisaged inthe COVID-19 induced ‘RBI relief package’.
Before deliberating upon the issue, let’sfirst understand the arsenal which the RBI used together to fight the economicbattle in the health emergency.
Repo rate is the rate at which the centralbank lends money to commercial banks in the event of any shortfall of funds.Monetary authorities use this to control money supply in the economy, therebyinflation.
The reverse repo rate is the rate at whichRBI borrows funds from commercial banks. It is the rate at which commercialbanks in India park their excess money with RBI usually for the short term.
CRR or cash reserve ratio is the percentageof total deposits that banks are required to keep in reserves either in thevaults or with RBI so that the same can be given to bank’s customers if theneed arises. Banks do not get any interest on this money. It is one of themajor weapons in RBI’s arsenal that allows it to maintain a desired level ofinflation, control money supply and liquidity in the economy. The lower theCRR, the higher liquidity with banks, which in turn goes into investment andlending and vice-versa.
For all practical purposes, in a pandemicsituation which coronavirus has unleashed, monetary relief of any nature is awelcome step. And such a step, of course, helps the organizations as well asthe individuals to fight economic battle in a human consuming health emergencysituation. But the question is how far this temporary relief of three-monthmoratorium is going to help the borrowers in future.
So, the moratorium period in case of loansneeds to be understood in right perspective. What does moratorium on loanmeans? It refers to the period of time during which you do not have to pay yourloan installment, in banking parlance called EMI (Equated Monthly Installment)on the loan taken. This EMI holiday is granted under extraordinary situationwhen borrower/s are caught up in financial difficulties and such EMI breaks areanticipated by the banks to help the distressed borrowers to plan theirfinances better.
Moratorium holiday, of course, will providerelief to many individuals, especially the self-employed, as they would havefound it difficult to service their personal loans, car loans, home loans etcdue to loss of income during the prevailing crisis. But their repaymentcapacity will still bear question mark once the moratorium period is over. Thethings would be more challenging for those borrowers who have lost their incomestream and are out of job.
First and foremost thing is that borrowershave to understand that moratorium is not waiver of loan. It’s simply defermentof EMI payments. India was already undergoing economic slowdown in pre-coronavirusoutbreak period. Fallout of the ongoingCovid-19 pandemic added more to the economic woes of the country as theslowdown got deeper to a common man. In fact, the health emergency caused inpost-pandemic period fuelled the slowdown deeper and brought every sector ofthe economy into a grinding halt. This immediately impacted the incomes ofindividuals as well as the organizations and there is every possibility thatthe incomes might go further down in coming times.
While anticipating the situation, the RBIused tool of moratorium in its arsenal as a ventilator, both for banks andtheir borrowers. For banks, there is every probability that most of the loanportfolio might deteriorate as borrowers won’t be able to remain committed totheir EMIs. The three-month moratorium will rescue banks from bad loanscenario. Precisely, it’s a ventilator for the banks to protect their assetclassification and avoid possible surge in non-performing assets. Forborrowers, deferment of three-months EMI will temporarily provide relief tothem as they will have more cash in hand to fund other emergencies induced byCOVID-19 outbreak. Once this ventilator is removed, the situation would be mostchallenging for banks as well as their borrowers. If current volatile situationon health front triggered by COVID -19 is taken into account, the next sixmonths are going to witness mayhem as more and more people would be strugglingto fight the virus. In this backdrop, the revival of economic activities at themoment seems a distant dream.
Will borrowers be able to continue to paytheir EMIs once the three months moratorium ends? I am sure the regulator hasthis question in mind and may be second phase of relief measures is in theoffing in June once three months moratorium period ends. Let’s wait and watch.The governments’ ability to arrest the spread of the virus would actually serveas a benchmark for the RBI to decide for how long the banking system can be puton the ventilator.
Now there are certain things which aborrower has to keep in mind. As already mentioned above, the moratorium periodon EMIs is not at all a loan waiver. You have to pay these deferred loaninstallments in future along with interest. Best would be to repay your loanEMIs if your financial position is not constrained. You can even set aside thatEMI amount even if you’re not required to pay them during the moratorium unlessdoing so will adversely impact your financial position. This would ensurespeedy lowering of loan burden once the moratorium ends. Most importantly, getcomplete clarity from your bank how it will impact your loan before taking adecision with regard to availing EMI holiday. Even as the RBI has made it clearthat non-payment of loan EMIs during the repayment holiday will not impact yourcredit score, you should still stay on top of it by checking your credit scoreregularly.
Precisely, if you can, you must keepmeeting your EMI commitments. This, along with the drastic rate reduction canensure that you prepay your loan ahead of schedule and save on substantialinterest outgo in the process. Therefore, use the facility only if you are infinancial distress.
Despite all the apprehensions, the RBIpolicy announcements are bold, decisive, compelling and with a humane touch inattenuating to the needs of the economy to fight through the pandemic. The reporate cut, the CRR cut, the moratorium on repayments and unconventionalliquidity measure of incentivising banks to support CP market are all combinedto expect the financial markets to stabilize. Here the main pillar of thesuccess of rate cuts depends upon the speed of transmission of these rates tothe borrowers at ground level. We have observed that banks have been very lazyto pass on the benefits of the rate cuts to the borrowers.
(The views are of the author & not theinstitution he works for)