“It has now been decided to allow up to 30 working days for deployment in specified securities for those banks who have availed funds under the first tranche of TLTRO conducted on 27 March," RBI said. This is expected to deter banks from delaying their investments and help cash-starved companies to access funds.
If a bank fails to do so, the interest rate on funds that have not been deployed will increase to the policy repo rate plus 200 basis points (bps) for the number of days these funds are not deployed, RBI said. The repo rate now stands at 4.4%.
“This incremental interest will have to be paid along with regular interest at the time of maturity," said the central bank.
Under TLTRO, banks will have to invest the borrowed amount in fresh acquisition of securities (over and above their outstanding statement in specified securities held on 26 March) from the primary or secondary market.
Banks that borrowed in the last three TLTRO auctions used the money to buy only debt papers with AA rating and above, Mint reported on 12 April. This has upset the regulator’s calculation that the money would go out to several cash-starved companies.
The TLTRO was introduced by the RBI to help companies, including financial institutions, resolve their cash flow problems in the wake of the coronavirus outbreak. Under TLTRO, banks can access three-year funding and use it to invest in investment-grade corporate bonds, commercial paper, and debentures.
Of this, banks are required to buy up to 50% of their incremental holdings of eligible instruments from primary market issuances and the rest from the secondary market. The regulations also allow the exposure under this facility not to be accounted for calculating large exposure framework. Corporate bonds worth ₹91,902 crore and commercial papers worth ₹77,797 crore are coming up for maturity in May end, according to data from Prime Database. Of these, corporate bonds worth ₹47,579 crore with rating below AAA are due for maturity over the next two months.
TLTROs provide durable liquidity for three years at 4.4% to banks and given that the spread of highly-rated paper is between 80bps and 120 bps over the equivalent government security, there is a good margin for banks at 2.7-3.2% on such funds, according to Care Ratings.
“There is a boost provided to an extent to the debt market and both commercial papers and bonds would find banks as takers. The secondary market operations will help mutual funds and non-banking financial companies transfer their holdings to banks based on the latter’s preferences," Care Ratings said in a note on 6 April.
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