Summary of article on TLTRO

Here is the link to the article https://www.capitalmind.in/2020/04/what-is-a-tltro-and-why-does-it-impact-non-banking-financiers/

Due to lockdown businesses are closed and people have almost no source of income. Due to this RBI has provided moratorium to borrowers. Moratorium means borrowers can now delay their payments and pay it later with extra interest.

But problem here is with NBFC’s. NBFC’s will face liquidity problem as borrower will not pay them before 3 months and the banks from which NBFC has borrowed isn’t providing moratorium to them. This means NBFC has to pay (either through cash reserves or by issuing new bond) and if they fail to pay then this will lead to downfall in credit rating to ‘D’. This will destroy their borrowing power.

RBI intervened in between as it doesn’t want this market to freeze. Earlier RBI gave money to banks to fund this NBFC’s but this didn’t work. So RBI came with TLTRO (Targeted Long Term Repo Operations).

Under this scheme banks will borrow money from RBI at repo rate and will have to park that money into bonds. This investment is to be done within 30 days failing to which will lead banks in paying 2% higher interest.

Some key points of TLTRO:

• Banks can buy maximum 10% of allocated amount to one entity.
• 50% allocated amount should be used for fresh issues and 50% amount for secondary markets.
• Banks have to return the money (which they availed from RBI) after 3 years with interest.
• Bonds can be bought of any duration. There are no criteria for this. The only criterion is that banks have to reinvest the money until TLTRO expires.

Mutual funds can also sell under secondary markets.

NOTE: RBI DOESN’T GUARANTEE THESE BONDS.

The first phase didn’t work as banks deposited money with corporates (like Reliance Industries etc.) rather than depositing with NBFC due to risk associated with them.

So RBI came with version 2.

Some key points of Version 2 TLTRO –

• Minimum time to deploy funds is increased from 30 days to 45 days.
• Full amount should be used in buying NBFC’s bonds.
• 10% amount i.e. Rs. 5000 crores should be allocated to Microfinanciers (MFIs).
• 15% amount should be allocated in NBFC’s with asset size of Rs. 500 crore and below.
• 25% amount should be allocated in NBFC’s with asset size of Rs. 500 crore to Rs. 5000 crore.
• Rest 50% can be allocated according to their choice.
• No criteria for primary and secondary markets.
• Earlier cap of 10% with single entity removed.

According to these, large NBFC’s (with asset size more than Rs. 5000 crore) will see only Rs. 25000 crore. Also a couple of companies can eat up this whole amount. Even some NBFC’s which doesn’t need money can raise money.

The main risk is of default which has kept banks away from even large NBFC’s.  Thus TLTRO might help only large NBFC’s and RBI can step-up to take some risk.