Citing a contraction in global trade and an extremely weak state of the economy in light of the COVID-19 pandemic, Reserve Bank of India (RBI) Governor Shaktikanta Das said that the real GDP growth for the year 2020-21 as a whole is estimated to be negative, and that inflation levels will remain elevated in the next quarter but could ease in the second half of the fiscal.
A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks, he added.
Addressing the media after the Monetary Policy Committee meeting on Thursday, the RBI Governor announced that lending rates will be kept unchanged at 4% due to uncertainty surrounding the inflation outlook and the extremely weak state of the economy due to the ongoing pandemic. What this means is that there will be no change in EMIs that you pay for your housing, car loans, etc.
The RBI Governor also announced a series of measures during the address.
LTV ratio: In a bid to mitigate the financial impact of COVID-19 on households, the RBI has increased the permissible loan to value ratio (LTV) of loans taken by pledging gold ornaments to 90% of the value of gold ornaments and jewellery. As per existing norms, loans sanctioned by banks against pledging of gold ornaments and jewellery for non-agricultural purposes should not exceed 75% of the value of the gold ornaments and jewellery. This relaxation will be available till March 31, 2021, the Governor said.
Startups: In a boost to startups, the RBI has also given priority sector lending status to startups. What this means is that the RBI has recognised the startup industry as a sector that deserves priority over others, and all banks will give a definite portion of their lending to these sectors. Other PSL sectors include agriculture, MSMEs, housing, etc.
MSMEs: The RBI Governor also announced that Micro, Small and Medium Enterprises (MSMEs) will now be eligible to restructure their debt if their accounts with their lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021.
Liquidity: The RBI also announced additional special liquidity facility of Rs 10,000 crore, of which Rs 5,000 crore will be provided to the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions, and Rs 5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to reduce the stress faced by smaller non-banking finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity.
Corporate borrowing: The Governor said that a large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate relative to their cash flow generation abilities due to COVID-19. “This can potentially impact their long-term viability and pose significant financial stability risks if it becomes widespread,” he added.
Announcing measures to offer concessions on borrower defaults for corporates facing financial difficulty, the RBI has decided to provide a window under the June 7, 2019 Prudential Framework to enable lenders to implement a resolution plan without needing a change in ownership.
“The ‘Prudential Framework on Resolution of Stressed Assets’ dated June 7, 2019 provides a principle-based resolution framework for addressing borrower defaults. Any resolution plan implemented under the Prudential Framework, which involves granting of any concessions on account of financial difficulty of the borrower, entails an asset classification downgrade except when accompanied by a change in ownership, subject to prescribed conditions,” the RBI Governor said.