RBI rate cuts and loan repayment deferment brings relief to auto industry

by Shahkar Abidi 27 Mar 2020

In what should offer some relief to beleaguered India auto industry, which is witnessing a prolonged slowdown and the adverse impact of a country-wide lockdown due to coronavirus, the Reserve Bank of India (RBI) today announced a spate of measures aimed at boosting liquidity in the market apart from  providing  some breathing space to loan borrowers without affecting their credit history. These measures should help inject liquidity and elevate financial stress for industry stakeholders as well as the end-consumer.

Industry observers though are of the opinion that though lowering of interest rates in unlikely to provide any major fillip to the sector under the prevailing circumstances, RBI's moves may drive some positive sentiment apart from making loans cheaper for OEMs, supply chains, retailers and end consumers. The liquidity crunch has been one of the major challenges facing the industry since it first experienced the slowdown about 20 months ago. 

Measures to improve liquidity
Following the cue from global central banks, RBI has reduced the repo rate by 75 basis point (bp) to 4.4 percent, while the reverse repo rate was cut by 90 bp to 4 percent. Furthermore, CRR of all commercial banks is to be reduced by 100 bps to 3 percent. One bps is one hundredth of a percentage point.

Speaking at a virtual press conference, RBI Governor Shaktikanta Das said that these measures will inject liquidity of Rs 3.74 lakh crore into the system. 

In banking parlance, the repo rate is considered a rate at which a country’s central bank (RBI in case of India) lends money to commercial banks. It helps in putting a control on the amount of money supply in the economy.  The reverse repo rate is the rate at which RBI borrows from the commercial banks. Cash Reserve Ratio (CRR) is the percentage of the total deposit which a bank is mandated to keep in reserves.

Moratorium on EMIs and deferment on working capital interest
A moratorium of 3 months of EMI on all outstanding loans has been  announced, without any impact on the credit history of the borrower. “All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India financial institutions, and NBFCs (including housing finance companies and micro-finance institutions) ('lending institutions') are being permitted to allow a moratorium of three months on payment of installments in respect of all term loans outstanding as on March 1, 2020," said RBI. Also, the interest on working capital has been deferred for three months. 

Under usual  circumstances,  if a borrower defaults on his payment for a period of over 90 days (3 months), the loan gets classified as a Non-Performing Asset (NPA). 

Commenting on the announcements by the RBI governor Shaktikanta Das today, SIAM president, Rajan Wadhera said: “We are happy to see many of SIAM suggestions, like a three-month moratorium on loan repayments and repo rate reduction, have been announced by the RBI to infuse liquidity amid these unprecedented times. These measures will certainly provide relief to people and businesses. We hope banks will pass on the repo rate reduction in the form of interest rate reduction to businesses and consumers.”

Putting in an industry perspective on the RBI measures, VS Parthasarathy, group CFO, CIO and member of the Group Executive Board, Mahindra & Mahindra said, "RBI’s multi-pronged approach of addressing the interest rates, liquidity , regulatory forbearance and currency stability - will be perfectly complementing the measures taken by Govt to fight Covid-19. We hope the measures will channelise the much needed liquidity relief to the last mile."  

Commenting on the development Sridhar V, Partner, Advisory, Grant Thornton India LLP said, “ A welcome measure from RBI which, by reducing the repo rate, has made it unviable for banks to not lend and we could see banks coming up with new programs for lending. RBI has also offered a moratorium on EMI for 3 months which again benefits most business and will be a great relief for MSME and micro business. It goes without saying that the auto sector will also benefit to keep its head above water. Individual auto loan borrowers will also benefit through this measure”

According to Ashim Sharma, Group Head & Partner at Nomura Research, "Our ability to recover will greatly depend on auto ecosystem players, especially suppliers and dealers, staying afloat and also being able to retain and care for their employees in the period of the downturn ( the most severe of which will be the period of the shutdown). This certainly needs funds and some of the measures announced by the RBI today will certainly help in this."

Deepthi Mary Mathew, Economist at Geojit Financial Services, said, "It could be said that RBI has announced massive liquidity boosting measures including cuts in repo rate, reverse repo rate and CRR. The governor has also hinted about using unconventional methods if needed. In the present scenario, considering the weak sentiments in the economy, the effectiveness of monetary stimulus will be limited.”