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RBI to Conduct On-tap TLTRO Worth Rs 1 Lakh Crore for Liquidity in Banking System

A security guard's reflection is seen next to the logo of the Reserve Bank Of India (RBI) at the RBI headquarters in Mumbai. (Image: Reuters)

A security guard's reflection is seen next to the logo of the Reserve Bank Of India (RBI) at the RBI headquarters in Mumbai. (Image: Reuters)

As a special case, the central bank also announced open market operations (OMOs) in state development loans (SDL) in the current financial year.

The Reserve Bank of India (RBI) Friday said it will conduct on-tap targeted long-term repo operations (TLTRO) worth Rs 1 lakh crore to ensure comfortable liquidity condition in the banking system. As a special case, the central bank also announced open market operations (OMOs) in state development loans (SDL) in the current financial year.

It has been decided to conduct on-tap TLTRO with tenors of up to three years for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate, RBI governor Shaktikanta Das said while announcing the monetary policy earlier in the day. Liquidity availed by banks under the scheme has to be deployed in corporate bonds, commercial papers, and non-convertible debentures issued by entities in specific sectors over and above the outstanding level of their investments in such instruments as on September 30, 2020, he said.

The liquidity availed under the scheme can also be used to extend bank loans to these sectors, Das said. In view of the borrowing requirements of the centre and states in the second half of 2020-21 and the likely pick-up in demand for credit as the recovery gathers strength, on tap TLTROs are intended to enable banks to conduct their operations smoothly and seamlessly without being hindered by illiquidity frictions, the governor said. He said banks that had availed of funds earlier under TLTRO and TLTRO 2.0 will be given the option of reversing these transactions before maturity.

The scheme will be available up to March 31, 2021, with flexibility with regard to enhancement of the amount and period after a review of the response to the scheme, he said. The governor further said in order to impart liquidity to SDLs and thereby facilitate efficient pricing, it has been decided to conduct OMOs in SDLs as a special case during the current financial year.

This would improve secondary market activity and rationalise spreads of SDLs over central government securities of comparable maturities, he added. In September this year, RBI had increased the investments permitted to be classified as held-to maturity (HTM) from 19.5 per cent to 22 per cent of NDTL (net time and demand liabilities) in respect of statutory liquidity ratio (SLR) securities acquired on or after September 1, 2020 up to March 31, 2021.

The governor on Friday said, In order to provide certainty to banks as regards their investments and to foster orderly market conditions while ensuring congenial financing costs, it has been decided to extend the dispensation of the enhanced HTM limit of 22 percent up to March 31, 2022, for securities acquired between September 1, 2020, and March 31, 2021.

The move will help banks to plan their investments in SLR securities in an optimal manner, he said. Governor said the two measures — OMOs in SDL and the extension of HTM till March 2022– should ease concerns about illiquidity and absorptive capacity for the total government borrowing in the current year. Commenting on the TLTRO decision, Deepak Aggarwal, Co-founder and Co-CEO, Moneyboxx Finance said the RBI continues to provide liquidity support through TLTRO, however, the liquidity benefits have not trickled down to small non-banking finance companies (NBFCs) which need targeted support. "Given that the central bank has limited options, direct fiscal support is the need of the hour even if it meant temporarily running high deficits," he said.

Meanwhile, Sachin Chhabra, founder of B2B grocery e-commerce company Peel-Works, said RBI will be "well advised" to see what it can do to hold banks and NBFCs to account for lending. "Small traders continue to suffer poor operating environments as they choke in the absence of capital," he said.

Nitin Aggarwal, Group CFO of Religare Enterprises, opined that the decision to provide Rs 1 lakh crore to banks under on-tap TLTRO should encourage banks to lend to those sectors, which have multiplier impact on growth. It will also ensure that there is no upward pressure on interest rates due to government's large borrowing plan as well as demand from corporates, he said.

According to Richa Roy, Partner, Cyril Amarchand Mangaldas, banks may deploy the liquidity through the TLTRO operations corporate bonds, commercial papers, and non-convertible debentures and bank loans to be extended to certain sectors to be specified. "This will address the liquidity requirements in the financial sector as well as the flow of credit to sectors that require it," Roy said.


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