RBI’s Targeted Long-Term Repo Operation (TLTRO): Key Things To Know.
According to Microfinance Institutions Network (MFIN) data, as on March 31st, total borrowings of MFIs were at ?53,853 crore. Of this ?35,288 crore is from banks and ?18,565 crores from non-bank institutions. While by January-end, MFI credit to borrowers was around ?95,000 crore, MFIN added.
“To be sure, Rs 1 lakh crore has been made available through the RBI’s Targeted Long-Term Repo Operations (TLTRO) window. However, only half of that is earmarked for primary issuances. Also, an expected scramble for funds means corporates and government-owned financiers will also be interested in this window. Consequently, only higher-rated NBFCs may end up benefiting,” said Kirshnan Sitharaman, Senior Director, CRISIL.
In Context- Recently, the Reserve Bank of India (RBI) introduced the Targeted Long Term Repo Operations (TLTROs) as a tool to enhance liquidity in the system in the wake of the COVID-19 crisis.
First, understand the targeted long-term repo operations (LTRO or TLTRO).
LTRO is a tool that allows banks to borrow one to three years of funds from the Central Bank at the Repo rate.
It is called ‘Targeted’ LTRO if the Central Bank wants banks to opt for funds under this option to be specifically invested in investment-grade corporate debt.
Under LTRO, RBI will conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of Rs 1 lakh crore at the policy repo rate.
History of LTRO
LTRO was first introduced by the European Central Bank (ECB) during its sovereign debt crisis that began in 2008.
The term LTRO was coined by the ECB that stood for “long-term refinancing operations”.
Different from LAF and MSF
While the RBI’s current windows of liquidity adjustment facility (LAF) and marginal standing facility (MSF) offer banks money for their immediate needs ranging from 1-28 days, the LTRO supplies them with liquidity for their 1- to 3-year needs.
Reserve Bank Announces Targeted Long-Term Repo Operations 2.0 (TLTRO 2.0)
Reason to introduce TLTRO
RBI introduced TLTRO with a view to assuring banks about the availability of durable liquidity at a reasonable cost relative to prevailing market conditions, and to further encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors
COVID-19 has triggered large sell-offs in the domestic equity, bond, and forex markets.
This led to a surge in liquidity premium on instruments such as corporate bonds, commercial paper, and debentures.
It became difficult for these instruments to access working capital through bank credit.
To counter the economic impact and pressure on cash flows, the Central bank decided to conduct auctions of Targeted Term Repos of up to three years tenure.
Objectives /Important
LTRO helped RBI ensure that banks reduce their marginal cost of funds-based lending rate, without reducing policy rates.
LTRO also showed the market that RBI will not only rely on revising repo rates and conducting open market operations for its monetary policy but also use new tools to achieve its intended objectives.
When charged with this slow transmission of rate cuts, bankers complained that repo loans constituted only a minuscule portion of their overall funds, making it difficult for them to cut lending rates. Under the LAF, banks could only bid up to a maximum of 0.75 percent of their net demand and time liabilities.
The LTRO bidding system, taken with the removal of the 0.75 percent limit on LAF borrowings, is expected to remove these constraints. The RBI believes that offering banks durable longer-term liquidity at the repo rate (5.15 percent), can help them lower the rates they charge on retail and industrial loans while maintaining their margins. The encouraging response to the first auction indicates the banks’ high appetite for cheap funds — bids were received for more than 7.7 times the amount auctioned (?25,000 crores). The LTRO will also help bring down the yields for shorter-term securities (in the 1-3-year tenor) in the bond market.
How it works?
It is a measure that market participants expect will bring down short-term rates and also boost investment in corporate bonds. These new measures coupled with RBI’s earlier introduced ‘Operation Twist’ are an attempt by the central bank to manage bond yields and push transmission of earlier rate cuts.
Here are some frequently asked questions related to TLTRO as answered by the RBI:
Frequently Asked Questions
The immediate impact of LTRO
Shorter duration government bond yields plunged on Thursday after the Reserve Bank of India announced Long Term Repo Operation.
Experts Say
Analysts termed it as a masterstroke by RBI Governor Shaktikanta Das. According to B Prasanna of ICICI Bank, besides lowering rates in the short end of the sovereign curve, LTRO is also likely to lower corporate bond yields, deposit rates, and lending rates. Lakshmi Iyer of Kotak Mahindra AMC said LTRO is a ‘masterstroke’, which is a step towards credit transmission, and demonstrates RBI’s intent towards supporting growth.
Significance
* This will help banks to get funds for a longer duration as compared to the short-term liquidity.
* Short-term liquidity is provided by the RBI through tools such as Liquidity Adjustment Facility(LAF) and the Marginal Standing Facility (MSF).
* Banks can avail one year and three-year loans at the same interest rate of the overnight repo.
* Usually, loans with higher maturity periods have higher interest rates compared to short term (repo) loans.
* There will be a clear pressure on banks to reduce their lending rates.
Why should I care?
If you are a millennial, accusations from officials about your lifestyle choices leading to a consumption slowdown in the country must have left you perplexed. After all, the interest rates on your consumer and personal loans didn’t change much despite the Monetary Policy Committee continuously trimming repo rates. The recent pause in repo rate cuts, too, may have brought you much anguish, given that it signals that rates may not dip further from hereon, despite the slowdown.
To put an end to all this, the RBI seems to have shifted its focus from trimming rates to the transmission of older rate cuts to the actual borrowers in the economy. The LTRO is a move in that direction. With an increase in the proportion of low-cost funds, banks may now be forced to bring down interest rates on loans. This may also mean lower deposit rates for savers.
The bottom line
It’s no longer about just the repo and open market operations; the RBI is adding new tools to its armory.
Thanks.
Author: Mr. Shrikant Amzare
(MFI/NBFC/BANKING/FINANCE Professional)