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In a surprise second media briefing in a month, RBI Governor Shaktikanta Das on Friday noted that the deployment of targeted TLTRO 1.0 largely went to large PSUs (public sector undertakings) or large corporations. To begin with, the central bank will conduct TLTRO 2.0 worth Rs 50,000 crore.
Under this announcement, banks would be required to invest 50 per cent of the funds in small and mid-sized NBFCs (non-bank financial companies) and MFIs (micro-finance institutions). Das said the central bank would raise the amount under the operations as and when necessary.
“TLTRO 2.0 is an important step in safeguarding the stability of the non-banks. However, it’s equally important to ensure this additional liquidity is available to a wider spectrum of NBFCs and MFIs and not limited to a few,” said Vydianathan Ramaswamy, Director- Ratings at Brickwork Ratings.
Das pointed out that TLTROs have been impactful so far as reflected by the spreads of money and bond market instruments.
Announced on March 27, RBI has so far undertook three auctions of TLTRO, injecting cumulatively Rs 75,041 crore to ease liquidity constraints in the banking system and de-stress financial markets. Another TLTRO auction worth Rs 25,000 crore is scheduled for today.
RBI announced TLTRO 2.0 specifically targeting NBFCs and MFIs as the deployment of these funds has largely been to bonds issued by public sector entities and large corporates, especially in primary issuances.
The disruptions caused by Covid-19 have, however, more severely impacted small and mid-sized companies, including NBFCs and MFIs, in terms of access to liquidity, RBI noted.
Suman Chowdhury, Chief Analytical Officer at Acuité Ratings & Research said the TLTRO 2.0 for deployment in investment grade mid and small NBFCs is expected to address the emerging liquidity crisis these sectors.
Chowdhury pointed out that additionally, another Rs 50,000 crore refinance window will be opened from NABARD, SIDBI and NHB, which is expected to partly meet the requirements of NBFC/MFIs.
Also, while RBI kept the repo rate unchanged, it slashed reverse repo rate by 25 bps to 3.75 per cent. The move will encourage banks to lend more, Das said.
RBI also slashed the reverse repo rate by 25 bps to 3.75 per cent, making it less attractive for commercial banks to park cash with the central bank.
The central bank maintained status quo on the repo rate, but the governor said the inflation trajectory is likely to fall below its target within a month or two, which will create more policy space for it to better address the challenges posed by the Covid-19 outbreak and the lockdown to check its spread.
RBI also eased the liquidity coverage ratio (LCR) requirement of scheduled commercial banks from 100 per cent to 80 per cent with immediate effect.
LCR refers to the proportion of highly liquid assets held by a bank to ensure their ongoing ability to meet short-term obligations. Its relaxation will free up more capital for the banks to deploy in the market.
Das said the announcement will be rolled back in two phases in October 2020 and April 2021.
However, economists were not sure if the moves would trigger a lending spree by banks.
According to Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers, the picture for banks is mixed.
Temporary elongation of NPA recognition period and lowering of liquidity coverage ratios are positive. Cut in reverse repo rate and continued need for provisioning on overdue credit and increased TLTRO and WMA limit for state governments should keep bond yield range bound, said Hajra.
“This should benefit PSU banks with sizeable excess reserves. Reverse repo rate cut should marginally nudge banks to lend. If credit growth does not accelerate, would expect the cut in reverse-repo to continue,” he added.
Joseph Thomas, Head of Research – Emkay Wealth Management pointed out that on a daily basis, banks are parking around Rs 6 lakh crore with RBI.
“So whatever money they have with them and whatever they are getting from RBI, the banks are giving back to the central bank instead of investing it or lending it,” he pointed.
“The reverse repo rate cut is to discourage thus reverse flow to RBI. But is doubtful whether this flow can be stemmed easily,” he expressed his concerns.
“Banks are not lending or investing because they fear that under the current conditions they may be adversely impacted if they employ the money for investments or lending. Even three months back the approach of the banks was one of extreme caution,” Thomas added.
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