Throwing light on how the coronavirus COVID-19 crisis may affect the global economy, the Managing Director of the International Monetary Fund, Kristalina Georgieva in a statement issued said, “The outlook for global growth: for 2020 is negative—a recession at least as bad as during the global financial crisis or worse. But we expect recovery in 2021. To get there, it is paramount to prioritise containment and strengthen health systems—everywhere. The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be.”
While the legislative and executive arms of India are doing all they can to curtail the spread of this pandemic, the financial institutions are also working towards helping the economy recover.
In light of this, the Reserve Bank of India has come up with a slew of measures to help the banks and the public.
Here are the key takeaways from RBI governor, Shaktikanta Das’s announcement.
1. Three-month Loan Holiday
Durin the COVID-19 crisis, RBI has asked all lenders to extend a three-month moratorium on all term loans. This includes home, car, and personal loans. This will also include working capital loans and credit card dues. All payments that fall during 1 March to 31 May will fall under this waiver. This move will bring relief to many borrowers who are under pressure to return the borrowed money within a stipulated period of time.
What happens now? While this is an advisory that the RBI has extended to the banks, it is upto the individual banks on how they implement it.
2. Reducing Cash Reserve Ratio
In reducing the Cash Reserve Ration (CRR) the intent of the RBI is to help drive more liquidity into the market. This will help infuse almost Rs 1.37 trillion into the economy.
CRR is a minimum amount of money that the commercial banks have to hold as reserves with the central bank. This is done to ensure that the banks do not run out of cash to meet their regular payment demands.
How will this help? The banks will now be at liberty to lend out more and in the process pump in more capital in the economy.
3. Deferment of Payment Interest on Working Capital
Cashflow in businesses is similar to blood flow in our body. With the COVID-19 crisis enforcing a complete lockdown on manufacturing, trading and other non-essential businesses, a significant amount of cash is stuck in the form of inventory, finished goods and receivables from other businesses which are undergoing the same stress.
In an effort to alleviate the cash crunch looming in the face of business houses, the RBI has allowed banks to defer payment of interest on working capital loans (the loans given by banks to finance inventory, receivables etc.) for a period of three months.
How will this help? The underlying assumption is that within three months, the lockdown would have been lifted and goods and cash will start moving again. This is applicable for all such loans outstanding as on 1 March 2020.
The accumulated interest for the period will be paid after the expiry of the deferment period.
You can access the entire circular here.
(Edited by Saiqua Sultan)