The Reserve Bank of India (RBI) on Friday permitted all commercial banks and lending institutions to allow a three-month moratorium on all loans, in view of the ongoing 21-day lockdown in the country in the wake of the coronavirus outbreak.
"Banks should do all they can to keep credit flowing," RBI Governor Shaktikanta Das said.
The RBI asked all lending institutions to allow three-month moratorium on EMI payments in order to infuse liquidity into the system as the economy grapples with Covid-19 challenges.
The deferment on loan and interest repayments will not be classified as defaults and will not impact credit history of borrowers.
The apex bank also slashed interest rates on Friday in an emergency move to counter economic fallout from a fast-spreading coronavirus.
The RBI said it was maintaining its "accommodative" stance, and would maintain its position "as long as necessary" to revive growth, while ensuring inflation remained within target.
The bank's six-member monetary policy committee (MPC) held a meeting this week by video conference to arrive at its decision.
It cut the repo rate by 75 basis points to 4.40%, in line with expectations. The reverse repo rate was reduced 90 basis points to 4%. Repo rate is the rate at the central bank lends money to commercial banks and the reverse repo rate is the rate at which it borrows from them.
The RBI also cut the cash reserve ratio (CRR), or the ratio of deposits banks need to keep with them as cash, by 100 basis points to 3 per cent from 4 per cent.
The CRR cut, which comes into effect from March 28 for a year, is expected to release Rs 1.37 lakh crore liquidity in the market.
The RBI last slashed CRR on Feb 2013 by 25 basis points.
As part of liquidity infusion measures, the BRI will undertake repo operation of up to Rs 1 trillion to infuse liquidity into the market.
The apex bank's moves will inject Rs 3.74 trillion into the system.
Shares inched back from session highs to fall 1% on Friday despite the RBI's moves to help cope with the economic fallout from the coronavirus pandemic.
The Nifty was down 1.06% at 8,548.60 while Sensex fell 1.76% to 29,416.12.
Earlier in the session both indexes rose nearly 4%.
Financial stocks gave up most of the day's gains. The NSE Bank index which had surged nearly 8% was last up 0.8%.
India's economy weakened to at least an eight-year low this quarter and will slow even more sharply in the next six months due to the global coronavirus pandemic, a Reuters poll found.
The informal sector, the backbone of the economy, will be hardest hit as economic activity comes to a standstill.
"Just as everywhere else in the world, the Indian economy is bracing for the fallout (from) this unprecedented event. We expect the lockdown to dramatically reduce GDP in ... subsequent quarters, while there will be prolonged economic gloom throughout the rest of the year," said Prakash Sakpal, Asia economist at ING.
According to the Reuters poll of economists taken March 25-26, the economy will expand just 4.0% annually on a year ago in the quarter that ends on March 31, the weakest since comparable records began in early 2012.
That is also slower than the 4.7% recorded in the last three months of 2019.
(To be updated)