RBI’s Decision On EMI Moratorium Is A Big Relief

Mumbai, 27th March 2020: The Reserve Bank of India (RBI) on Friday announced among other reliefs, moratorium of three months on all kinds of loans taken by individuals as well as by the companies. This three-month moratorium applies for EMIs on all outstanding loans, except loans taken against use of credit cards.

Among other things, RBI announced a massive 75 basis points cut in repo rate to counter the economic slowdown caused by COVID-19 pandemic. The reverse repo rate has been cut by 90 basis points to 4 per cent. This has been done to make it unattractive for banks to passively deposit funds with the RBI and instead lend it to productive sectors.

Measures announced by RBI post the three-day Monetary Policy Committee (MPC) meeting, will play  a significant role in reducing the financial stress on all types of borrowers including home buyers and consumers who have opted for personal loan. 

RBI statement says, "All commercial, regional, rural, NBFCs and small finance banks are being permitted to allow a three-month moratorium on payment of instalments in respect of all term loan EMIs outstanding on March 31."

For the next three months, no EMI would be deducted from the account of anyone who has a loan outstanding. And all these without any hit on credit score. EMIs will resume after the moratorium period gets over.

This is going to be a huge relief for all EMI payers, especially for those — such as the self-employed — whose income had become uncertain in the wake of the lockdown.

The moratorium will apply to corporate loans, home loans and car loans. Personal loans will also qualify for this.

However, the category of borrowers that will be excluded from this relief is credit card holders as loan taken against use of credit cards is not a term loan. The outstanding balance on credit cards will have to be cleared by the cardholder on a regular basis and will not enjoy any relief announced by the RBI for other categories of borrowers.

As a result of RBI announcement, liquidity flow of Rs 3.74 lakh crore will come into the economy. This means the banking system will have about Rs 3.74 lakh crore in addition to current money supply in the system. The additional liquidity was needed as the economy has undergone a 21-day lockdown in order to fight and contain the spread of COVID-19. 

The impact of RBI’s measures on the Mutual Funds (MFs) sector will be positive to the tune that with interest rates falling, the financialisation of savings will pick up the pace n absence of other relevant asset classes (like real estate) facing severe slow down and bank FDs becoming unattractive from the returns point of view. The size of the SIP book will continue to grow, which is currently estimated at around Rs 8,500 crore per month.