SMEs to gain the most from RBI's liquidity boost to HFCs, NBFCs & MFIs under TLTRO 2 and other initiatives

As of September 2019 the bad loan rate in India was 9.1%, around the same time the bad loan rate in Public sector banks was at 11%. With the fall of financial institutions such as DHFL, IL&FS and Yes Bank fiasco due to aggressive lending strategies, banks are now wary of return of capital than return on capital and are hence directing loans to over funded borrowers or to save havens like RBI under the Liquidity Adjustment Facility (LAF). As of 28th February 2020 banks had deposited INR 38,000 crores with RBI and as of 15th April 2020 this went upto INR 6.9 lakh crores. Banks are clearly unwilling to lend money out.

RBI's recent announcements towards utilising existing liquidity and directing it towards the lockdown impacted SMEs and MSMEs:

• Reverse repo rate is the rate at which banks park money with RBI. RBI has reduced the reverse repo rate to on 27th March by 90 basis points and again now by 25 basis points from 4% to 3.75% thus sending a signal to banks that parking money with RBI is not beneficial.
• RBI under the Targeted Long Term Repo Operation (TLTRO) 2.0 is allowing banks to access 3 year funding from RBI to invest in investment grade corporate papers of small and mid-sized NBFCs and MFIs thus facilitating additional liquidity of 50,000 Crores. This move is particularly directed towards small and mid sized NBFCs and MFIs (distressed due to lock down) who were earlier left out under the earlier TLTRO scheme and banks were directing funds to high rate commercial papers.
• RBI has also lowered the Liquidity Coverage Ratio (LCR) requirement for banks to 80% from 100% with immediate effect. LCR is the proportion of high liquid assets that banks have to keep to meet their short-term liabilities.
• RBI also waived any further dividend payouts by banks and cooperative banks from profits pertaining to the fiscal year 2019-2020.
• Refinance facility for NABARD, SIDBI, SIDBI, NHB of INR 50,000 crores. The funds will be available at the RBI’s policy repo rate at the time of availing the loans.

REAL ESTATE SECTOR: RBI has allowed for extension of date for commencement for commercial operations in respect of loans given by banks and NBFCs to commercial real estate projects delayed for reasons beyond the control of promoters by one year and this extension will not be treated as restructuring.