RBI holds rates but home, auto loans to get cheaper

The move will reduce their cost of funds and help them cut their lending rate, thus lowering the EMI burden on borrowers

Complementing Nirmala Sitharaman's budget, the RBI on Thursday took more steps to boost the economy by ensuring cheaper loans for housing, automobile and MSME sectors and, extended a helping hand to the stressed real estate, saying their unpaid genuine loans will not turn into NPA for next one year – all of that without cutting the interest rate.

An unprecedented spike in inflation and faltering economic growth did not allow RBI to cut the policy interest rate but analysts said, the central bank handed out more than expected through other measures.

To ensure cheaper retail loans to borrowers, it relaxed regulatory requirements of lenders and promised to extend long term (1-3 years) funds of upto Rs 1 lakh crore to them at a concessional rate of 5.15%.

Those lending to housing and small businesses, will not need to set aside a portion of their deposits that they mandatorily keep with the RBI, to the extent of their loans to these sectors.

Under a regulatory levy called cash reserve ratio (CRR), the lenders, at present have to keep Rs 4 with the RBI each time their deposits increase by Rs 100.

“This a step towards credit transmission and demonstrates RBI intent towards supporting growth. Also, CRR exemption for incremental lending to auto, residential housing, MSME is a good way to chanelise credit in area where demand has not met with commensurate supply..,” said Lakshmi Iyer of Kotak Mutual Fund.

The RBI, however, maintained a status quo on the policy repo rate for the second time in a row as inflation rose much higher than its mandate of 4%, with a two percentage point margin on either side. Retail inflation in December rose to a five-year high of 7.34%.

The central bank also pegged the economic growth forecast for the upcoming financial year at 6%, lower than the government's projection of 6.5% and said downside risk to global growth has increased due to rapidly spreading coronavirus. It said the virus may impact tourist arrivals in India and global trade.

Announcing relief to real estate sector, it said no loan of the real estate sector will turn into an NPA for the next one year, if the borrower faced repayment pressure because of situation beyond his control.

“We believe RBI Policy announced today will ease the norms to give relief to commercial real estate developers... provide comfort to companies developing such projects and also their lenders. It will benefit the banks as they will not need to downgrade the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector,” Siddhartha Mohanty, MD & CEO of LIC Housing Finance said.