Reserve Bank of India (RBI) Governor and the head of the six-member Monetary Policy Committee (MPC), Shaktikanta Das addressed the media after the three-day MPC meeting. The MPC decided to keep the repo rate, the rate at which the central bank lends short term money to commercial banks, unchanged at 4% after 115 basis points reduction between March and May this year.
RBI Governor said that the real GDP growth will remain negative in FY21.
In order to understand the concept of Repo and Reverse Repo Rates better, please go through this article.
In short, an increase in Repo rate means that the banks will have difficulty in availing loans easily. This, in turn, reduces the money supply in the economy and helps in controlling inflation. On the contrary, a decrease in Repo rate means that the banks can easily get money from the Central Bank. This increases the money supply in the market and is associated with high economic growth.
RBI also eased the gold loan guidelines which will enable lenders to give more loan against jewellery. According to current RBI regulations, up to 75% of the value of the gold can be lent. According to new guidelines, 90% of the value of gold can be lent. This relaxation will be effective until March 31.
In simpler terms, if the value of the gold against which loan is issued is worth Rs 1000, then according to the previous regulation a loan amount of Rs 750 can be issued. But now a loan of Rs 900 can be issued.
Moratorium and Loan Restructuring
Reserve Bank of India (RBI) did not extend the moratorium in its monetary policy review on Thursday, it allowed banks to restructure the loans of borrowers who are in financial difficulty and are unable to repay them.
Once restructured, such loans would be considered as standard. This means that the lenders won’t report the borrower as a defaulter to credit bureaus if the borrower follows the new payment structure.
Personal loans include those given to individuals and include education loan, housing loan and loans given for investment in financial assets (shares, debentures, and so on).
According to RBI, the resolution of stressed personal loans will be available only to those borrowers who were repaying their loans regularly as on 1 March 2020.
RBI wants lenders to offer the resolution plan only to eligible borrowers. Institutions could, therefore, have the discretion to choose the borrower based on the facts of the case. The facility, hence, could be available to genuine borrowers who have lost their jobs or have faced a high pay cut, putting stress on their finances.
Rs 10,000 crores to NABARD and NHB
RBI in its monetary policy announced today announced an additional special liquidity facility (ASLF) of Rs 10,000 crore equally split between NABARD (National Bank for Agriculture and Rural Development) and the NHB (National Housing Bank) to help small financiers and home loan companies.
RBI said “In order to shield the housing sector from liquidity disruptions under the prevailing conditions and augment the flow of finance to the sector, it has been decided to provide an additional standing liquidity facility (ASLF) of Rs 5,000 crore to NHB – over and above Rs 10,000 crore already provided – for supporting housing finance companies (HFCs).“
In conclusion, the bi-monthly briefing by the RBI Governor provided some insight over the policies to maintain a financially sound ecosystem in the times of crisis. The Loan Restructuring process is a way to protect borrowers, in the time of COVID-19.
This highlights positive market sentiment as Sensex gained 362 points and Nifty 50 gained 99 points after the announcement.
You can view the RBI Governor’s statement here.