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March 28, 2020 location Mumbai

RBI moves to ease pressure on borrowers

A credit alert is CRISIL’s opinion on a sharp and specific development. It conveys that CRISIL will revert shortly on the impact of the development on the ratings of those affected.

The Reserve Bank of India (RBI) on Friday announced a slew of relief measures to alleviate the near-term stress in the financial markets because of the Covid-19 pandemic and the consequent 21-day lockdown.


Friday’s announcements comprised targeted long-term repo operations, or TLTRO, and system-wide liquidity support (reduction in cash reserve ratio and enhancement of limits in marginal standing facility) that will inject Rs 3.74 lakh crore into the market.


Under TLTRO, the RBI will conduct auctions of term repos of up to three years tenure for a maximum Rs 1 lakh crore at a floating rate linked to the policy repo rate. Liquidity thus availed of will have to be deployed in investment-grade corporate bonds and commercial papers – 50% in primary issuances, and 50% in secondary market securities – and be held to maturity (HTM).


Says Somasekhar Vemuri, Senior Director, CRISIL Ratings, “This move will incentivize banks to invest in corporate bonds and commercial papers, as they will be able to generate high returns (refer to Annexure). The liquidity thus generated will help investors such as mutual funds meet redemption pressures through secondary sale of corporate bonds. It will also enable borrowers to refinance their maturing liabilities in the market at lower interest rates, thereby easing liquidity pressures.”


Apart from liquidity and financial market-related measures, the RBI has permitted lenders to offer a 3-month moratorium on payment of


  • instalments on term loans falling due between March 1 and May 31, 2020, which shifts the tenure of such loans by three months; and
  • interest on working capital facilities such as cash credit and overdraft during the period from March 1, 2020 upto May 31, 2020; the accumulated interest will have to be paid later.

The RBI has clarified that the moratorium will not lead to asset classification downgrades. As for working capital (cash credit or overdraft) facilities, lenders have been permitted to recalculate ‘drawing power’ by reducing margins and/or by reassessing operating cycles. Lenders have to frame their own board approved policies for providing these relief measures.


Says Subodh Rai, Senior Director, CRISIL Ratings, “These measures are welcome because they would provide much needed support to borrowers across the economy to tide over the immediate and near-term liquidity pressure caused by the lockdown. In line with the RBI move, and subject to the relevant bank’s policy, CRISIL will not be recognising default on these bank facilities during the moratorium.”


After the moratorium, CRISIL’s default recognition policy will apply on the revised payment schedules approved by the banks.


CRISIL will continue to monitor the pandemic and its containment measures because they may have a material impact on corporate cash flows.