RBI's Targeted Long Term Repo Operations: All your questions on TLTRO answered

LTRO is a tool that lets banks borrow one to three-year funds from the central bank at the repo rate, by providing government securities with similar or higher tenure as collateral.

It is called 'Targeted' LTRO  as in this case, the central bank wants banks opting for funds under this option to be specifically invested in investment-grade corporate debt.

 

This helps banks get funds for a longer duration as compared to the short-term (up to 28 days) liquidity provided by the RBI through other tools such as liquidity adjustment facility (LAF) and marginal standing facility (MSF).

LTROs provide banks with access to cheaper capital from the RBI. This, in turn, encourages them to lend more and spur economic activity. They can also invest these long-term funds in assets that yield better returns to improve profitability.

Also, as banks provide government securities as collateral, the demand for such government bonds increases and helps in lowering yield.

No. LTRO was first introduced by the European Central Bank during its sovereign debt crisis that began in 2008. LTRO was an acronym coined by the ECB that stood for "long-term refinancing operations".

COVID-19 ignited large sell-offs in the domestic equity, bond and forex markets leading to an increase in redemption pressures. This led to a surge in liquidity premia on instruments such as corporate bonds, commercial paper and debentures and it became difficult for these instruments to access working capital through bank credit.

To counter the economic impact and subsequent pressure on cash flows, the central bank decided to conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to Rs 100,000 crore at a floating rate linked to the policy repo rate. As of April 9, it had done three such auctions of Rs 25,000 crore each.

On April 15, while announcing the fourth auction of the balance Rs 25,000 crore, the RBI said the maximum amount for a particular bank to invest in securities should not exceed 10 percent of the allotment received by it.

As part of the second COVID-19 rescue package, and specifically, to ease liquidity for NBFCs, the RBI on April 17 also announced TLTRO 2.0 worth an initial amount of Rs 50,000 crore.

Yes. The banks will have to maintain the amount of specified securities for the amount received in TLTRO in its HTM book at all times until the maturity of TLTRO.

Under TLTRO scheme, banks will have to invest the amount borrowed under TLTROs in a fresh acquisition of securities (i.e., over and above their outstanding statement in specified securities it was holding as on March 26, 2020) from primary/secondary market. However, participation in TLTRO scheme will not impinge on the existing investment of the bank and the bank may continue to operate their AFS/HFT portfolio, as hitherto, in terms of extant regulatory/internal guidelines.

There is no maturity restriction on the specified securities to be acquired under the TLTRO scheme. However, the outstanding amount of specified securities in the bank’s HTM portfolio should not fall below the level of amount availed under the TLTRO scheme.

The specified securities acquired under the TLTRO scheme will be allowed to remain in HTM portfolio till their maturity.

The specified securities acquired under the TLTRO scheme will be classified in the hold to maturity (HTM) category. However, if a bank decides to classify such securities under AFS/HFT category at the time of acquisition, it will not be allowed to later shift such securities to HTM category and it should maintain sufficient records to demonstrate and separately identify securities purchased under TLTRO scheme within the AFS/HFT portfolio. Further, all regulations applicable to securities classified under AFS/HFT including those on valuation will be applicable on such specified securities.

The banks have already been given sufficient time to deploy funds availed under the TLTRO scheme. It has now been decided to allow up to 30 working days for deployment in specified securities for those banks who have availed funds under the first tranche of TLTRO conducted on March 27, 2020. However, if a bank fails to deploy funds within the specified time frame, the interest rate on un-deployed funds will increase to prevailing policy repo rate plus 200 bps for the number of days such funds remain un-deployed. This incremental interest will have to be paid along with regular interest at the time of maturity.

The deployment of funds availed under TLTRO in primary market cannot exceed 50 percent of the amount availed. Apart from the above stipulation, the limits are fungible between primary and secondary market deployment.