The Reserve Bank of India (RBI) has maintained status quo on key policy rates and kept the repo rate unchanged at 4%. The Monetary Policy Committee (MPC) of the RBI unanimously voted to keep the rates unchanged and maintain an accommodative stance till growth revives. After substantially slashing the rates by 115 basis points since the beginning of 2020, the RBI has paused on the rate cuts citing inflationary pressures.
Take a look at key takeaways from the RBI MPC that will have an impact on your money.
Repo Rate Unchanged
The RBI decided to press the pause button on the rate cut in its latest monetary policy review. The central bank has reduced repo rate from 6.50 at the start of 2019 to 4.00 at the last bi-monthly review, including 115 basis points in 2020 alone. The central bank has also acknowledged that the transmission of rate cuts has remained substantial in the March to June period. The lending rates have fallen to historic lows recently. So this makes it an apt time for taking a new loan, refinancing your existing loans or making a substantial pre-payment. At this juncture, you should also be well-informed that the RBI has made it mandatory for commercial banks to link their interest rates with an external benchmark such as the repo rate. The RBI has paused the repo rate cut for now but it has announced steep cuts in the repo rates in the past. You can consider switching from a marginal cost of funds-based lending rate (MCLR) loan or a base lending rate (BLR) loan to a repo-linked loan to reduce your EMI burden. However, do remember that the interest rate of a repo-linked loan will rise whenever the RBI decides to hike the repo rate in the future.
Restructuring of Retail Loans
The big announcement today was the proposed restructuring of personal loans for borrowers struggling with repayments due to economic or pandemic-related reasons. The RBI used the term “personal loans” to describe the loans eligible for restructuring. Clarity is awaited on whether other retail products such as car or home loans are also eligible. The RBI said those borrowers who had been repaying regularly till March 2020 can be provided a restructuring of their loan through a framework to be decided by the bank. The framework will need to be fixed by December 31 and implemented within 90 days from then. With it, a retail loan tenure can be extended by up to two years with or without the option of a new moratorium. The operational details of the restructuring are now awaited from banks. Borrowers who have had difficulties making EMI payments need to be in touch with their lenders.
Contactless And Digital Payments
For the first time, the RBI Governor Shaktikanta Das has used the word “contactless” in an MPR announcement while talking about ways to face the economic challenges arising out of the ongoing pandemic. I have emphasized the use of contactless and digital financing during the crisis. Digital transactions and availing financial products such as loans and credit cards in a contactless manner are crucial in the current times when there is greater stress on reducing human interactions.
The RBI also made another important announcement for digital payments. To enable digital payments, the RBI has been encouraging the development of payment solutions that enable the use of mobile phones, cards, wallets, etc., even in places with low or no internet connectivity. Going forward, we can expect to see card- and wallet-based solutions similar to UPI and mobile payment transactions using USSD code that are possible even without internet or smartphones.
Loan To Value Raised For Gold Loans
The ongoing Covid-19 crisis has posed economic challenges for many households. In a bid to mitigate the economic impact of the Covid-19 pandemic on households, entrepreneurs and small businesses, the RBI has increased the loan-to-value ratio from 75% to 90% for loans against gold jewellery and ornaments for non-agricultural purposes. This is a welcome move that will enable households to borrow more to manage ongoing liquidity challenges. The latest RBI decision enables you to use your idle gold for getting a higher loan amount to meet your short-term liquidity needs. However, do a thorough comparison of the lenders’ offering gold loans before going for this option. Do remember that gold ornaments pledged for the loan can be used by the lenders to recover their dues in case of a default. This can bring in a huge loss for you.
The RBI had announced a moratorium on loan payments till August 31 to help people deal with the financial challenges of the Covid-19 crisis. The RBI has not announced an extension of the moratorium in the latest MPC meet. This could mean that regular loan payments may resume from September 1. Availing the moratorium leads your loan becoming bigger due to unpaid interest. Therefore, to erase the additional debt you’ve incurred, aim to pre-pay within the next 12 months about 120% of the EMIs you had to defer. For example, if you deferred five EMIs, pre-pay six additional EMIs over the next 12 months. This will help you bounce back in your repayment plan and get out of debt quicker.
Positive Pay On Cheques
The introduction of Positive Pay is an automated way to check frauds. This facility has been introduced for cheques of Rs. 50,000 where if you issue a cheque of this amount, you can upload its details (such as front and back images) to the bank. When the bank receives the cheque from your beneficiary, it will verify the details uploaded by you.
The RBI’s move to keep the repo rate unchanged would also mean deposit and small savings schemes’ interest rates will remain low for now. However, this is also a time when capital protection has become as important as capital appreciation, especially for risk-averse investors who do not want to take undue risks by investing in market-linked products. That being said, investors can still look to maximise FD benefits by breaking their corpus into multiple deposits with different tenures and create an investment loop to benefit from any upward trend in interest rates in the future while maintaining a higher level of liquidity to better tackle any unexpected cash-crunch situation. This is also called the FD laddering technique.
Grievance Redressal For Online Payments
The RBI mandating Payment System Operators will introduce Online Dispute Resolution (ODR) Systems to make grievance redressal for online payments easier going forward. The implementation would be in a phased manner, starting with ODR systems for failed transactions. This acts as the first step for customers in case of a dispute or grievance regarding a payment transaction and simplifies the process of registering a complaint in such cases. Such a measure will give people greater confidence while transacting digitally.