What is a TLTRO and How Does It Impact Non-Banking Financiers?

What is a TLTRO and How Does It Impact Non-Banking Financiers?

♦Trouble for NBFCs

• Many Non-Banking Financial Companies (NBFCs) give loans to the informal sector, which has been very badly affected due to the current situation.
• Other NBFCs give loans to semi-formal sectors, like loan against property, or as Small to mid-size enterprise (SME) loans etc.
• Due to the lockdown and havoc of COVID-19, many businesses are shut down and employees are not getting back to work. So they will not be able to return the amount of loan taken from the NBFCs in the due time.
• So, the NBFCs are going to see “defaults” or delays in payments from these customers. In the near time, cash flow will not be coming in to the NBFCs.
• All the borrowers, even of NBFCs, have been offered three-month payment moratorium by RBI that means many such borrower will not pay their monthly dues until after May.
• In the meantime, NBFCs will borrow money from banks, and from FDs or bonds and the Banks have refused to allow NBFCs any moratorium, and no one can delay a fixed deposit or bond payment.
• So, the main problem for the NBFCs is that they get less money from the people they have lent to, and still have to pay the whole amount what they’ve borrowed from the banks.

♦RBI Announced TLTRO

The Reserve Bank of India (RBI) wants banks to fund the NBFCs. RBI doesn’t want this market to freeze.

But the question is how?

Earlier when RBI gave banks money they just decided not to lend, or lend only to the government (buying T-Bills or government bonds). So this time, RBI had to do something else, as the bank were likely not to lend to NBFCs, viewing the previous instance.

So, the RBI came up with the idea of Targeted Long Term Repo Operations (TLTRO).

RBI cannot directly give money to these firms, so RBI lends it to the banks and in turn forces banks buy the bonds of these firms.

How the TLTRO process works, are as follows:

• RBI lends to banks in 4 tranches of Rs 25,000 Cr each (total Rs 1 lakh Cr in TLTRO).
• The 1st tranche was available on March 27, 2020 and the last tranche of Rs 25,000 Cr was up for bidding on April 17, 2020.
• Once the banks bid for an amount, they will get it at the repo rate (currently 4.4%, but the interest rate will change for subsequent periods as repo changes) for a tenure of 3 years.
• Banks need to deploy this amount in fresh acquisition of bonds (meaning, they have to buy bonds) in the next 30 days. Failing which they pay 2% higher interest.
• Bonds need to be investment grade (BBB or better).
• A bank can buy a maximum of 10% of allocated amount to one entity or group.
• Also, 50% of the allocated fund should be used for fresh issues and another 50% towards secondary market.
• There are no criteria for duration. Banks can buy bonds of any duration. Only criteria is that once the bond matures, banks need to redeploy the money in some other bonds until the TLTRO expires (three years later).
• Banks need to return the money availed from RBI after 3 years with the interest (no intermediate repayments).

Basically, these NBFCs can issue new bonds, and the banks will buy those bonds by using the TLTRO money. NBFCs can then use the money to pay back existing bond obligations.

ALSO READ: Key Point (Highlights) from RBI Governor Shaktikanta Das’ media address: 17th April 2020

♦Introduction of TLTRO 2.0

Lending have been limited by Banks from the last 3-4 quarters. They are scared. Banks are scared that, what if they buy some bond and tomorrow it defaults? So, with the TLTRO the banks went and bought high rated bonds of corporates (like Reliance etc. which have otherwise very little trouble raising money anyhow). The funds given via TLTRO to banks was meant to deploy for firms which are facing severe liquidity issues and are unable to raise cash (primarily to NBFCs). Banks are banks, they just wanted to play safe.

So RBI has started a TLTRO version 2.0 and has asked the banks to specifically allocate to NBFCs. TLTRO is designed to channel funds to NBFCs via banks.

Under Version 2.0, RBI will do an additional Rs 50,000 Cr towards NBFCs only. Banks cannot use the version 2.0 money to lend to corporates – only NBFCs. The first tranche of Rs. 25,000 Cr is due April 23^rd 2020. RBI has laid the following conditions in version 2.0.

• Minimum time to deploy the allocated funds has been extended from 30 days to 45 days.
• All the 50,000 Cr should be used to buy bonds of NBFCs only, including housing finance companies.
• 10% of the allocated fund (Rs. 5,000 Cr) should be used for Micro financiers (MFIs).
• 15% of the allocated fund should be used for NBFCs with asset size of Rs. 500 Cr and below.
• 25% of the allocated funds should be used for NBFCs with asset size of Rs. 500 Cr – Rs. 5,000 Cr.
• The rest 50% can be deployed any way which they choose.
• No criteria for primary and secondary market. Banks can buy as much as they want directly from companies (primary) or in the secondary market.
• No maximum 10% allocation for individual company rule.
• The rest of TLTRO guidelines remain same.

The main goal here is to help the NBFCs, the smaller ones too with enough liquidity by earmarking certain percentage in the above quota.  Banks get up to 45 days’ time to deploy the post allocation of funds. It’s interesting to see which NBFCs get enough attention.

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