Banks get 45 days breather to invest TLTRO 2.0 funds
Like in the case of the first TLTROs, the central bank has retained the penal clause of paying an additional 200 bps interest over the 4.40 repo rate for the unutilised fund.
The move will help more small and medium non-banking financial companies (NBFCs), housing finance companies (HFCs) and micro-finance institutions (MFIs) -- which typically have lower ratings -- enter the debt market and raise cheaper funds as the debt supply from these companies are far and few.
In the TLTRO, the maximum time frame to invest in debt instruments like corporate bonds, commercial papers and NCDs was 30 days and a failure would involve them paying additional penal interest of 200 bps over the repo.
Giving 45 days to use the funds, the RBI in an FAQ on Tuesday said, "based on the feedback from banks and taking into account the disruptions caused by Cvoid-induced lockdowns, it has been decided to extend the timeline to deploy funds under the TLTRO 2.0 scheme from 30 working days to 45 working days from the date of the operation".
Funds that are not deployed within 45 days will be charged interest at the prevailing policy repo rate plus 200 bps for the number of days the fund remains un-deployed and the incremental interest liability will have to be paid along with regular interest at the time of maturity, the regulator said.
Under the TLTRO 2.0 scheme announced on April 17, 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 Rs 500 crore and below, mid-sized NBFCs of asset size between Rs 500 crore and Rs 5,000 crore and MFIs.
The objective is to ease liquidity stress and their impediments to market access.
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 for the purpose of determining priority sector targets/sub-targets.
This exemption is only applicable to the funds availed under TLTRO 2.0.
In another significant move, RBI said under the TLTRO 2.0 scheme, there is no specification of the quantum of money to be invested in debt papers as against the earlier prescription of 50 percent of the TLTRO fund in fresh papers and the rest 50 percent to be invested in secondary market instrument.
The RBI said the relaxation is to provide banks flexibility in investment and that the limit is fungible between primary and secondary market.
In another significant relaxation, the RBI said eased the 10 percent cap on TLTRO 2.0 funds in one single company/group saying the "cap applies only to the fourth TLTRO conducted on April 17. It does not apply to the TLTROs conducted before April 17 or to TLTRO 2.0."
But under the TLTRO 2.0, to0, the specified securities acquired with this fund has to be kept in HTM (held to maturity) category for computation of adjusted net bank credit for the purpose of determining priority sector targets/sub-targets. This has to be maintained throughout the life of the investment.
Also, banks will have to necessarily continue to hold an amount equivalent to what it was holding as on March 26, 2020 in their HFT/AFS (held for trade/available for sale) portfolio for the tenor of TLTRO borrowing.
There is no maturity restriction on the specified securities to be acquired under TLTRO scheme. However, the outstanding amount of specified securities in bank's HTM portfolio should not fall below the level of amount availed under TLTRO scheme and that the specified securities acquired under TLTRO scheme will be allowed to remain in HTM portfolio till their maturity. BEN MKJ