TLTRO 2.0-Targeted Long Term Repo Operation
TLTRO 2.0 (Targeted Long-Term Repo Operations) was announced by RBI on April 17, 2020. RBI intended that the funds raised by the banks through TLTRO 2.0 be utilised for investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs) and MFIs. Announcement of TLTRO 2.0 in addition to the LTRO and TLTRO announced earlier.
Why was TLTRO 2.0 announced?
India has been undergoing an economic slowdown since the second half of FY 2020. The position was aggravated consequent to the rapid spread Covid-19 across the globe. The impact was felt in the domestic equity, bond and forex markets as well. Rapid redemption and lack of fresh investors eroded the value of capital market instruments. Though liquidity was introduced through LTRO and TLTRO routes by RBI, the main beneficiaries were established players and leaders in the markets. There was no immediate liquidity relief to NBFCs and MFIs, especially the smaller ones. Mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs) have been receiving severe blows due to lack of liquidity and sufficient support from banks and financial institutions. Through the announcement of TLTRO 2.0, RBI targeted rescue of players coming under such categories.
What were the conditions stipulated for TLTRO 2.0?
1. At least 50 per cent of the total funds availed under TLRO 2.0 shall be deployed in specified securities issued by small NBFCs of asset size of Rs. 500 crores and below, mid-sized NBFCs of asset size between Rs. 500 crores and Rs. 5000 crores and MFIs.
2. A bank can exclude the face value of such securities kept in the HTM category (investments made from TLTRO 2.0 funds only) from computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets.
3. No specific ceilings for investment in primary / secondary market
4. Funds shall be deployed within 45 working days from the date of the operation. Interest at the prevailing policy repo rate plus 200 bps will be charged for the period, for which funds remained un-deployed.
Why should banks borrow from RBI under TLTRO 2.0?
TLTROs provide banks with access to cheaper capital (at the Repo rate) from the RBI. These cheap funds can be invested to earn much higher returns thereby improving profitability.
How was the response of banks to TLTRO 2.0 auctions?
The targeted segments, NBFCs and MFIs, are facing unprecedented circumstances that are capable of questioning their survival itself. Lack of visibility on liquidation of investments also exists. Hence, many banks have been afraid of taking fresh exposures on them. Hence, banks have not been that keen on borrowing from RBI and investing, resulting in muted response to TLTRO operations.
