Repo rate cut, bad loan rules eased, liquidity to aid lending
With a clear message to banks to lend more to revive the corona-hit economy, the Reserve Bank of India (RBI) on Friday cut the reverse repo rate by 25 basis points, further eased bad-loan rules and froze dividend payment by lenders as it unveiled a second set of measures to support the economy.
The move gave an impetus to stock market, especially the banking stocks. The Sensex closed 986 points up, Nifty 273 points up, and banking index rose by nearly 1300 points.
RBI Governor Shaktikanta Das announced that the Central bank’s decision to reduced the reverse repo rate — the rate at which banks park their fund with the central bank — by 25 basis points to 3.75 per cent, and went on to say the RBI will ensure adequate liquidity in the system to ease the financial stress caused by the Covid-19 pandemic.
On other measures, Das said the RBI will begin with giving an additional Rs 50,000 crore through targeted long-term repo operation (TLTRO) to be undertaken in tranches.
Das also announced a re-financing window of Rs 50,000 crore for financial institutions like Nabard, National Housing Bank and Sidbi.
He further said surplus liquidity in the banking system has increased substantially as result of RBI’s actions.
Stating that the RBI is monitoring the situation developing out of Covid-19 outbreak, he noted that the contraction in exports in March at 34.6 per cent was much more severe than global financial crisis of 2008-09.
The RBI also debarred all commercial and cooperative banks from paying dividends to shareholders and promoter groups as the regulator fears the Covid-driven economic shocks would continue longer and may put the health of the financial system at risk.
The decision will hit the finances of the Centre, which get a lion share of the dividend from the PSU banks.
“It is imperative that banks conserve capital to retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty.
“In this regard in view of the Covid-19-related economic shocks, commercial banks and cooperative banks shall not make any further dividend payouts from the profit pertaining to FY20 until further instructions,” said the RBI Governor.
“This restriction shall be reviewed on the basis of the financial position of banks as of the September 2020 quarter,” he added.
The RBI move will be impact the Government’s non-tax revenue, further worsening the already stressed fiscal situation.
The RBI measures will revive credit flow by commercial banks and targeted long-term repo operation (LTRO) would further activate the corporate bond market and also provide much needed liquidity to NBFCs, Niti Aayog vice chairman Rajiv Kumar said on Friday.
"Kudos to the Government and RBI for announcing another bazoka like package for reviving up credit activity by commercial banks and also by NABARD. The targeted LTRO will further activate the corporate bond market and also provide much needed liquidity to NBFCs.
"The Government true to his word on doing what it takes to address the crisis brought on by the coronavirus pandemic," Kumar said in a series of tweets.