RBI India — Measures To Ease Financial Stress — To Keep Real Economy As Normal As Much As It Can

RBI in its press release on Friday May 22, 2020 has announced measures to ease financial stress caused by COVID-19 disruptions.
WHY?🤷‍♂️
-To Ease repayment pressures
-Improving access to working capital
-To keep the real economy running as normal as it can
-Ensure continuity of viable businesses and households

In short all these measures will help to stay afloat businesses, industries, markets running WHO HAS OR MAY BE impacted due to COVID-19 by mitigating the burden of debt servicing🙌. Let’s dive into some of these measures.

AND WHAT ARE THESE MEASURES? ✌

A. Increase In Moratorium Period On Term Loan Installments TILL 31 August 2020. Earlier on 27 March 2020 press release RBI has granted moratorium on term loan from 1 March 2020 till 31 May 2020.

B. Deferment of Interest on Working Capital Facilities TILL 31 August 2020. Earlier on 27 March 2020 press release RBI has allowed deferment of interest on working capital from 1 March 2020 till 31 May 2020.

C. The interest accumulated over the period of moratorium on working capital facilities can be paid in one shot or can be converted into funded interest term loan. However, this loan should be paid on or before 31 March 2021.

D. Asset classification for the lenders will not be downgraded due to any of the above arrangements. No impact on borrowers credit rating as well. 90 day NPA will not include this easing financing measures arrangement for the period 1 March 2020 till 31 August 2020.

E. Easing of working capital facilities by recalculating drawing power, reducing margins till the extended period 31 August 2020. The same can be restored by lenders on or before 31 March 2021. Reassess working capital cycle.

F. Increase in exposure on group limit to 30% from currently 25% of the eligible capital base of the bank till 30 June 2020. This is to help many corporate who are finding it difficult to raise funds from the capital market due to this pandemic and are predominantly dependent on funding from the banks.

Now what does all this mean and why it is there at all at the first place. Due to COVID-19 wherein most of the businesses are shunned or facing hardships to even survive, how will they pay loans? It is very difficult for them to repay debts at the moment. To address this liquidity measures, it is very vital to bring-in right steps to keep the economy as much real as it can be. Hence, the RBI came out with these measures.

All the individuals/businesses/ corporate who would like to take benefit of these measures has to communicate with their bank for the same and decide on the revised financing arrangements/ model.

These measures actually in a way will help to keep the liquidity intact in the market. But in no ways these measures can be taken lightly by anyone. WHY, because these are only TEMPORARY RELIEF and NOT PERMANENT WAIVER OF DEBT.

With the hope that economy will start stabilizing from Q3–2020 and would be sort of normal by Q4–2020 these measures are announced. However, RBI will keep close eye on the market conditions and will keep coming up with the best possible solutions going forward.👀

Definitions :
1. Moratorium — It means no repayment of principal or interest for the period. However, interest will be accumulated/accrue for this period which had to be paid later on.

2. Reducing margins — All the working capital loans come at a cost i.e., interest. However due to pandemic banks has been asked to review the margins and adjust to the best to ensure liquidity in the market.

References :
Below is the link of full press release by RBI on “Statement on Developmental and Regulatory Policies”
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR239281035C0C72F5477589233CDB3AFDE29E.PDF