RBI eases investment norms under TLTRO 2.0; issues FAQs

The Reserve Bank on Tuesday eased some regulatory norms for investments in the second round of Targeted Long Term Repo Operation (TLTRO 2.0) to provide relief to banks investing in papers issued by small and medium sized non-banking finance companies (NBFCs) and microfinance institutions (MFIs) under the scheme.

The central bank said banks may deduct their investments in instruments issued by NBFCs from their Adjusted Net Bank Credit (ANBC) while calculating their priority sector commitment.

Under the TLTRO 2.0 scheme, banks have to invest at least 50 per cent of the total funds in bonds 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.

Besides, the banks will get 30 days to deploy money drawn under the TLTRO 2.0 in specified securities. This will be applicable for those lenders who have availed funds under the first tranche of TLTRO conducted on March 27, 2020. "However, 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," the RBI said.

Also Read: TLTRO 2.0: RBI announces Rs 50,000 crore for NBFCs, MFIs

The RBI Governor Shaktikanta Das on April 17, in his second media briefing within a month, announced TLTRO 2.0 of Rs 50,000 crore to ensure that small and mid-sized corporates, including NBFCs and MFIs get enough liquidity. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. These investments have to be made within one month of the availability of liquidity from the RBI.

Also Read: RBI allows extension of NBFC loans to delayed commercial real estate projects by 1 year

Here are some frequently asked questions related to TLTRO 2.0 as answered by the RBI:

Question 1: What happens if a bank fails to deploy the funds availed under the TLTRO 2.0 scheme in specified securities within the stipulated timeframe?

Answer: Based on the feedback received from banks and taking into account the disruptions caused by COVID-19, it has been decided to extend 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. Funds that are not deployed within this extended time frame will be charged interest at the prevailing policy repo rate plus 200 bps for the number of days such funds remain un-deployed. The incremental interest liability will have to be paid along with regular interest at the time of maturity.

Question 2: Under the TLTRO 2.0 scheme, will the specified eligible instruments have to be acquired up to fifty per cent from primary market issuances and the remaining fifty per cent from the secondary market. Is this limit fungible between primary and secondary market?

Answer: In order to provide banks flexibility in investment, this condition will not be applicable for funds availed under TLTRO 2.0.

Question 3: The Reserve Bank while announcing the fourth TLTRO on April 15, 2020 advised that the maximum amount that a particular bank can invest in the securities issued by a particular entity or group of entities out of the allotment received by it under the TLTRO shall be capped at 10 per cent. Is this condition also applicable to TLTRO conducted before April 15, 2020? Will this condition apply for deployment of funds under TLTRO 2.0?

Answer: This condition applies only to the fourth TLTRO conducted on April 17, 2020. It does not apply to the TLTROs conducted before April 17, 2020. It also does not apply to TLTRO 2.0.

Question 4: Will the specified securities acquired from TLTRO funds and kept in HTM category be included in computation of Adjusted Net Bank Credit (ANBC) for the purpose of determining priority sector targets/sub-targets?

Answer: 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 crores and below, mid-sized NBFCs of asset size between Rs 500 crores and Rs 5,000 crores and MFIs. The objective is to ease any liquidity stress and/or impediments to market access that these small and mid-sized entities might be facing. 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.