TLTRO is acronym to Targeted Long Term Repo Operation (TLTRO). The scheme was introduced by Reserve bank of India as a tool to enhance the liquidity to sectors and entities experiencing liquidity constraints and/or hindrances to market access in the wake of the COVID-19 crisis. For a second time on April 17, 2020, RBI has decided to conduct Targeted Long-Term Repo Operations (TLTRO) 2.0 at the policy repo rate for tenors up to three years for a total amount of up to ₹ 50,000 crores, to begin with, in tranches of appropriate sizes. The Governor of RBI said that the Central Bank has taken above decisions to create a supportive financial conditions and normal functioning of financial markets and institutions by providing adequate system level liquidity as well as targeted liquidity provision to sectors and entities experiencing liquidity constraints and/or hindrances to market access.
The scheme detail:
Reserve Bank of India conducts Targeted Long-Term Repo Operations at a floating rate linked to the policy repo rate for tenors up to three years in tranches of appropriate sizes. The funds borrowed by a bank under the TLTRO scheme will have to be invested in fresh acquisition of specified securities from primary/secondary market. The amount so deployed by a bank to be maintained in its HTM book at all times till maturity of TLTRO. Fresh acquisition means participation in TLTRO scheme will not impinge on the existing investment of a bank in AFS/HFT portfolio. Banks are free to continue their AFS/HFT portfolio operation, as hitherto, in terms of extant regulatory/internal guidelines. However, once a bank decides to classify securities acquired by it under AFS/HFT category at the time of acquisition, cannot be later shifted them to HTM category. Further, banks are required to maintain sufficient records to demonstrate and separately identify securities purchased under TLTRO scheme within the AFS/HFT portfolio. Additionally, all regulations applicable to securities classified under AFS/HFT including those on valuation will be applicable on such specified securities. However, banks do not have restriction to maintain these securities till maturity. Banks may retain those securities acquired under TLTRO scheme in HTM portfolio till their maturity or dispose-off them before maturity with a condition that the outstanding amount of specified securities in HTM portfolio should not fall below the level of amount availed under TLTRO scheme.
The deployment of funds availed under TLTRO in primary market cannot exceed fifty percent of the amount availed. Earlier, the limits fixed are fungible between primary and secondary market deployment. As per RBI communication, this fungible condition will not be applicable for funds availed under TLTRO 2.0. This is in order to provide banks flexibility in investment. Banks were given up to 30 working days for deployment in specified securities for those banks that have availed funds under the first tranche of TLTRO conducted on March 27, 2020. However, Central Bank extended the time available for deployment of funds under the TLTRO 2.0 scheme from 30 working days to 45 working days from the date of the operation. 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.
As per RBI’s press release dated April 17, 2020, the funds availed under TLTRO 2.0 are to be deployed in investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs) and MFIs. The press release added that the objective of TLTRO 2.0 is to channel liquidity to small and mid-sized corporates, including NBFCs and MFIs and to be deployed in investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs) and MFIs. This is to ease any liquidity stress and/or impediments to market access that these small and mid-sized entities might be facing, it said. Further it states that, at least 50 per cent of the total funds availed under the scheme has to be deployed in specified securities issued by small NBFCs of asset size of ₹ 500 crores and below, mid-sized NBFCs of asset size between ₹ 500 crores and ₹ 5000 crores and MFIs.
Determination of priority sector targets/sub-targets in respect of investments in specified securities:
With regard to determining priority sector targets/sub-targets in respect of investments in specified securities under TLTRO, RBI states as under.
“In order to incentivise banks’ investment in the specified securities of these entities, it has been decided that a bank can exclude the face value of such securities kept in the HTM category from computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. This exemption is only applicable to the funds availed under TLTRO 2.0”.
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