RBI measures to reduce COVID-19

effect on Indian Economy

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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy
Introduction

▪ Reserve Bank of India (RBI) ▪

Governor Shaktikanta Das on
Friday 17th April announced much-
needed relief for small and
medium-sized financial
organisations including NBFCs and
MFIs, which have been struggling to
operate in the wake of the Covid-19
pandemic.

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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy

NBFCs
❑ What are NBFCs? ❑
▪ A Non-Banking Financial Company (NBFC) is ▪
a company registered under the Companies
Act, 1956 engaged in the business of loans
and advances, acquisition of
shares/stocks/bonds/debentures/securiti
es issued by Government or local authority
or other marketable securities of a like nature,
leasing, hire-purchase, insurance business,
chit business.
▪ But does not include any institution whose
principal business is that of agriculture ▪
activity, industrial activity, purchase or sale of
any goods (other than securities) or providing
any services and sale/purchase/construction
of immovable property.
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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy

MFIs
❑ What are MFIs? ❑
▪ Micro finance Institutions, also known as ▪
MFIs. Micro Finance Institutions provide
similar services as NBFC to the
underprivileged and impoverished sections of
the society who do not have access to banking
facilities. These are institutions that provide
very small funds from Rupees 1000-20000 to
the poor to start a business.

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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy
Objective of
Measures
❑ The Measures are aimed to ❑

▪ Maintain adequate liquidity in the system ▪

and its constituents in the face of COVID-19
related dislocations. ▪
▪ Facilitate and incentivise bank credit flows ▪
▪ Ease financial stress, and
▪ Enable the normal functioning of markets
▪

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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy

❑ RBI has taken two types of Measures Type of ❑

1) Liquidity Management Measures
2) Regulatory Measures

Liquidity Management

1) Targeted Long-Term Operations (TLTRO)

2) Refinancing Facilities for All India Financial
Institutions
3) Reduction of Reverse Repo Rate
4) Raising Limit of Ways and Means Advances of
states and UTs

Regulatory Measures

5) Asset Classification
6) Extension of Resolution Timeline
7) Distribution of Dividend
8) Lowering of Liquidity Coverage Ratio requirement
9) NBFC Loans to Commercial Real Estate Projects
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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy
Detail of
Measures
1) Targeted Long-Term Operations (TLTRO)
▪ RBI has decided to undertake targeted long-term ▪
repo operations (TLTRO-2.0) for total amount of Rs
50,000 crore to begin with in tranches of
appropriate sizes. RBI might increase this amount
in future as per requirement.
▪ The funds availed by banks under TLTRO-2.0 ▪
should be invested in grade bonds, Commercial
Papers, Non-Convertible Debentures of NBFCs with
at least 50% going to mid-sized NBFCs and MFIs.

❑ How does TLTRO or LTRO work?

▪ Under LTRO, RBI provides longer term (one- to
❑
three-year) loans to banks at the prevailing repo ▪
rate. As banks get long-term funds at lower rates,
their cost of funds falls. In turn, they reduce interest
rates for borrowers.
▪ RBI on March 27 introduced the TLTROs as a tool to ▪
enhance liquidity in the system.
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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy
Detail of
Measures
2) Refinancing Facilities for All India
Financial Institutions.
▪ RBI has announced the allocation of Rs 50,000 crore as
▪
special refinance facilities to All India financial
institutions (AIFIs) such as NABARD, SIDBI, NHB to
enable them to meet sectoral credit needs. These
advances to the above organizations will be charged as
per the RBI policy repo rate of 4.40%.
▪ Out of this Rs. 50,000 crore allocation : -
▪ National Bank for Agriculture and Rural
▪
Development (NABARD) will get the amount of Rs ▪
25,000 crore for the refinancing of Regional Rural
Banks, cooperative banks and microfinance
institutions.
▪ Small Industries Development Bank of India
▪
(SIDBI) will get the amount of Rs 15,000 crore or
on-lending and refinancing to scheduled commercial
banks, non-banks and microfinance institutions. ▪
▪ The National Housing Bank will receive Rs 10,000
crore to support housing finance companies.
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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy
Detail of
Measures
3) Reduction of Reverse Repo Rate
▪ Reverse repo rate has been reduced by 25 basis
points from 4.0% to 3.75% with immediate effect, in ▪
order to encourage banks to deploy surplus funds in
investments and loans in productive sectors of the
economy.

4) Raising Limit of Ways and Means Advances of

states and UTs ▪
▪ To provide greater comfort to the states for undertaking
COVID-19 containment and mitigation efforts, the RBI
has increased the ways and means
advances (WMA) limit of states by 60% over and
above the level as on March 31, 2020. The increased
limit will be available till September 30, 2020.

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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy
Detail of
Measures
5) Asset Classification
▪ In respect of all accounts for which lending institutions ▪
decide to grant moratorium or deferment, and which
were standard as on March 1, 2020, it has been
decided that the 90-day NPA
norm shall exclude the moratorium period. It
indicates that there would an asset classification
standstill for all such accounts from March 1, 2020 to
May 31, 2020.

6) Extension of Resolution Timeline

▪ RBI decides to extend the period for resolution plan by ▪
90-days, citing the challenges faced during the
resolution of stressed assets in the current volatile
environment. Currently, scheduled commercial banks
and other financial institutions are required to hold an
additional provision of 20 per cent if a resolution plan
has not been implemented within 210 days from the
date of such default.

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18th April/ 2020 RBI measures to reduce COVID-19 effect on Indian Economy
Detail of
Measures
7) Distribution of Dividend
▪ It has been decided that scheduled commercial banks ▪
and cooperative banks shall not make any further
dividend pay-outs from profits pertaining to FY 2019-
20.
8) Lowering of Liquidity Coverage Ratio
requirement ▪
▪ To improve the liquidity position for individual
institutions, Liquidity Coverage Ratio requirement for
scheduled commercial banks has been brought down
from 100% to 80% with immediate effect. This will be
gradually restored in two phases - 90% by October 1,
2020 and 100% by April 1, 2021.

9) NBFC Loans to Commercial Real Estate Projects

▪ The treatment available for loans to commercial real
estate projects with respect to the date for
commencement for commercial operations (DCCO) has ▪
been extended to NBFCs, in order to provide relief to
both NBFCs and the real estate sector.
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