OAuth 2.0 Password Grant flow (and all other OAuth flows) are not considered Basic authentication.
Microsoft disabled Basic authentication for IMAP and POP3.
They haven't disabled Basic authentication for SMTP (or rather it is possible to turn it on).
Sometimes SMTP AUTH term is used as an equivalent of Basic authentication - this is not correct. SMTP AUTH is a command that allows client to provide a user/password combination to the server, however password may be an OAuth access token.
All OAuth 2.0 flows use SMTP AUTH command to provide an access token.