Loans are getting cheaper, but are they available?
The Great Lockdown | Volume 1 | Issue 6
With the announcement on 22nd May 2020, Governor of the Reserve Bank of India, added to the measures for reviving the economy that has come to a standstill due to coronavirus pandemic citing that “the top six industrialised states that account for about 60 per cent of industrial output are largely in red or orange zones”. From cut in repo rate to extension in loan moratorium, here are the key aspects of the announcement.
What’s the Deal?
40 bps cut in repo rate, reverse rate, marginal standing facility and bank rate:
1. Repo Rate now at 4.0% from 4.4%.
2. Reverse Repo Rate now at 3.35% from 3.75%.
3. Marginal Standing Facility Rate now at 4.25% from 4.65%.
Additional three months (31st May 2020 to 31st August 2020) moratorium for borrowers.
The Caveats…
The funded interest term loan to be repaid during the course of the current financial year ending March 2021.
Borrowers opting for extended moratorium post relaxation in lockdown might lead to subjective inferences being made when evaluating the credibility of the borrower. This may impact the debt raising capabilities of the borrower in the short term.
The transmission of the benefit of the rate cuts may be delayed in case of MCLR-linked loans as compared to repo-rate linked loans.
What’s in it for you?
Debt funding should get cheaper with reduced equated monthly instalments (EMIs). Companies should negotiate with the lenders for revisions to interest rate.
If cash position doesn’t improve soon after lockdown, companies should convert accumulated interest rate into funded interest term loan. While this may increase the finance cost, it has the potential to help in better management of the cash flow.
Companies should explore feasibility of moving to RLLR (Repo Rate Linked Lending Rate) by restructuring existing debt.
The Banker’s view….
NPAs have been on the rise with INR 3.12 lakh cr. in March 2015 to INR 9.4 lakh cr. in September 2019. Albeit cheaper borrowing for banks with repo rate being slashed from 6.0% in April 2019 to 5.15% in February 2020, results are not as desired by the RBI. The credit growth in the country has fallen from 6.9% in April 2019 to 1.4% in March 2020. Additionally, the moratorium is adding pressure to the collections of financial institutions and commercial banks.
In an attempt to discourage banks from parking surplus funds with RBI, the reverse repo rate has been slashed by 155 bps post Covid-19 outbreak. Despite these rate cuts, surplus cash deposited by banks under the reverse repo rate has increased from INR 11,488 crore (30th April 2020) to INR 2.93 lakh crore (28th February 2020) and further to INR 7.17 lakh crore (21st May 2020).
Overall the moratorium and auxiliary measures protect the borrowers from adverse impact on their credit worthiness with the CIBIL and other agencies. But availing the moratorium may still be considered as shortcoming in the credit evaluation of the borrowers and can be one of the reasons for highly selective lending by the bankers.
