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    RBI Announces Regulatory Measures to Ease Impact of COVID-19 Crisis

    April 17, 2020

    RBI released a statement that sets out various developmental and regulatory policies to ease the impact of COVID-19 crisis on banks, households, and businesses. These policies consist of relief measures in terms of relaxing the capital buffer requirements, easing liquidity requirements under Basel III framework, expanding liquidity in the system, relaxing repayment pressure, improving access to working capital, and restricting dividend distribution by banks.

    Measures Related to Capital Buffers

    • Deferment of last tranche of Capital Conservation Buffer—As per Basel standards, the Capital Conservation Buffer was to be implemented in tranches of 0.625% and the transition to full Capital Conservation Buffer of 2.5% was set to be completed by March 31, 2019. It was subsequently decided to defer the implementation of the last tranche of 0.625% of the Capital Conservation Buffer from March 31, 2019 to March 31, 2020. The implementation of the last tranche of 0.625% will be deferred from March 31, 2020 to September 30, 2020. Consequently, the pre-specified trigger for loss absorption through conversion or write-down of Additional Tier 1 instruments shall remain at 5.5% of the risk-weighted assets and will rise to 6.125% of the risk-weighted assets on September 30, 2020.
    • Implementation of Countercyclical Capital Buffer or CCyB—The framework on CCyB was put in place by RBI as part of guidelines issued on February 5, 2015. The framework stipulated that CCyB would be activated as and when the circumstances warranted and that the decision would normally be pre-announced. Based on the review and empirical analysis of CCyB indicators, it has been decided that it is not necessary to activate CCyB for a period of one year or earlier, as may be necessary.

    Basel III Framework on Liquidity Standards

    • Deferment of Implementation of Net Stable Funding Ratio (NSFR)—As per the prescribed timeline, banks in India were required to maintain NSFR of 100% from April 01, 2020. It has now been decided to defer the implementation of NSFR by six months from April 01, 2020 to October 01, 2020.
    • Liquidity Coverage Ratio (LCR)—To ease the liquidity position at the level of individual institutions, the LCR requirement for Scheduled Commercial Banks is being brought down from 100% to 80% with immediate effect. The requirement shall be gradually restored back in two phases—90% by October 01, 2020 and 100% by April 01, 2021.

    Liquidity Management

    • Targeted Long Term Repo Operations—It has been decided that RBI will conduct auctions of targeted term repos of up to three-year tenor of appropriate sizes for a total amount of up to INR 10 million at a floating rate linked to the policy repo rate. 
    • Marginal Standing Facility—Under the marginal standing facility, banks can borrow overnight at their discretion by dipping up to 2% into the Statutory Liquidity Ratio. It has been now decided to increase this limit of 2% to 3%, with immediate effect. This measure will be applicable up to June 30, 2020.

    Relaxing Repayment Pressure

    • Moratorium on Term Loans—All commercial banks, co-operative banks, "all-India financial institutions," and non-banking financial 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 01, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.
    • Deferment of Interest on Working Capital Facilities—In respect of working capital facilities sanctioned in the form of cash credit or overdraft, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 01, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period. The rescheduling of payments, including interest, will not qualify as a default for the purpose of supervisory reporting and reporting to Credit Information Companies by the lending institutions. 

    Other Measures

    • Asset Classification—In line with the recent announcement by BCBS on asset classification, RBI has issued its own guidelines. All accounts for which lending institutions decide to grant moratorium or deferment and that were standard as on March 01, 2020, there would be an asset classification standstill from March 01, 2020 to May 31, 2020. To ensure that banks maintain sufficient buffers, banks will be required to maintain a higher provision of 10% on all such accounts under the standstill, spread over two quarters—that is, March 2020 and June 2020.
    • Extension of Resolution Timeline—Recognizing the challenges to resolution of stressed assets in this volatile environment, RBI decided to extend resolution plan period by 90 days. 
    • Distribution of Dividend—Scheduled commercial banks and cooperative banks shall not make any dividend payouts from the profits of financial year that ended on March 31, 2020. This restriction shall be further reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020.

    Keywords: Asia Pacific, India, Banking, COVID-19, Capital Buffers, CCyB, Basel III, LCR, NSFR, Liquidity Risk, Dividend Distribution, Regulatory Capital, Resolution Framework, Credit Risk, RBI

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