Highlighting the nascent and slow revival of the Indian economy, the Reserve Bank of India (RBI) extended its on-tap Targeted Long Term Repo Operations, commonly known as TLTRO, till December 31, 2021, augmenting its duration by around 3 months. We delve deeper into the nitty-gritty of the scheme, originally introduced by the apex bank in October 2020
Flow of credit
Apart from staying steady on its accommodative economic stand and its unchanged forecasts of the repo rate (4 percent) and GDP outlook for 2021-22 (9.5 percent), significant announcements were made with regards to the liquidity-infusion scheme, which initially included three economically strained sectors, namely construction, real estate, and microfinance.
Eventually, the scheme was extended to 26 more distressed sectors as identified by the Kamath committee and banks lending to NBFCs, which had been adversely affected by the perils and slowdown of the pandemic.
In essence, the scheme allows banks to borrow funds from the RBI at the prevailing repo rate (4 percent) for a period of one to three years, with government securities that have an equivalent or higher tenure serving as collateral. Consequently, the banks can invest these funds in designated sectors only through various debt instruments like corporate bonds, non-convertible debentures, commercial papers, and more, since the ultimate objective is to increase the flow of credit in the economy.
With a capital of up to Rs 1 trillion to support liquidity measures, the TLTRO will have a total duration of 3 years, with the rate determined on a floating basis, deriving directly from the prevailing repo rate of the moment. Notably, this liquidity can also be employed to provide bank loans and advances to these identified, troubled sectors.
As per the RBI press note, investments made under this facility will be classified as held to maturity (HTM). This, even in excess of 25 percent of total investments which are permitted to be included in the HTM portfolio. Exposures under this facility will also be exempted from Large Exposure Framework (LEF), which is the sum of all exposure values a bank has with a counterparty or a group of such counterparties and is equal to or more than 10 percent of the bank’s valid capital base.
But while it provides a ready-access to inexpensive capital and exempts banks from maturity duration worries, it also decrees that the outstanding amount of securities in their HTM (Held to Maturity) portfolio should, at no point, be below the amount borrowed under TLTRO The scheme’s ambit also calls for banks to invest the amount borrowed in acquiring fresh securities from primary and secondary markets. However, this will be over and above their existing holdings as of March 26, 2020, and will not hamper their existing holdings. The bank has also mandated that at least half of the funds should be apportioned in the following manner:
10 percent in securities by Microfinance Institutions (MFIs)
15 percent in securities by NBFCs with an asset size of up to Rs 500 crore or below 25 percent in securities by NBFCs with an asset size between Rs 500 crores and Rs 5,000 crores.
As per data disclosures, under the on-tap TLTRO scheme, banks had borrowed almost Rs 5,000 crore as of March 2021 and Rs 320 crore, as of June 2021.
What are some of the other financing options with banks? They are primarily short-term, with the most prominent one being MSF (Marginal Standing Facility). MSF is an emergency, short-term financial resort of sorts in case the bank has completely exhausted all its liquidity and borrowing aid. Under this, banks can borrow funds up to one percent of their net demand and time liabilities (NDTL). Presently, the MSF rate is 4.25 percent, since the rate is conventionally pegged about 100 basis points or a percentage above the prevailing repo rate.