Priority sector relief for banks under TLTRO 2.01 min read . Updated: 22 Apr 2020, 02:20 AM IST
- RBI sweetens norms for banks investing in papers issued by NBFCs and MFIs
- Banks currently have to allocate 40% of their total loans to sectors known as priority sectors
The Reserve Bank of India (RBI) on Tuesday provided priority sector relief to banks investing in papers issued by small and medium-sized non-banking financial companies (NBFCs) and microfinance institutions (MFIs) under the revised targeted long-term repo operations (TLTRO) 2.0. These investments would now not be part of a bank’s adjusted non-food bank credit while calculating the priority sector commitment.
RBI had specified that under the TLTRO 2.0 scheme, banks will have to invest at least half the total funds in bonds of small NBFCs of asset size of ₹500 crore and below, mid-sized NBFCs of asset size between ₹500 crore and ₹5,000 crore, and MFIs.
Banks currently have to allocate 40% of their total loans to sectors like agriculture, small businesses, education, social infrastructure, among others, collectively known as priority sectors.
RBI clarified on Tuesday, through a revised set of FAQs, that a bank can exclude the face value of these securities in the held to maturity (HTM) category when computing the adjusted non-food bank credit (ANBC) to determine priority sector targets. In essence, additional investment by banks in these papers will not automatically result in an additional priority sector liability.
This exemption is only applicable to funds availed under TLTRO 2.0 and RBI believes that this will incentivize banks’ investment in these NBFCs and MFIs.
That apart, RBI had also extended the deadline for banks to invest these funds by 15 working days from the auction. However, if banks fail to invest the TLTRO 2.0 funds in 45 days, they will have to pay a penal interest rate of 200bps a day, over and above the repo rate.
According to Pankaj Naik, associate director, India Ratings and Research Pvt. Ltd, NBFCs with an asset size of ₹500 crore-5,000 crore are largely BBB and A rated, and may have weaker liquidity and other buffers than those rated higher. “With a large segment of NBFCs’ customer base likely to be significantly impacted by the lockdown, delinquencies could disproportionately rise for these lenders," said Naik.
He added that it could be even more challenging for NBFCs with a balance sheet size of less than ₹500 crore, especially as a large number of these would not be rated in the investment grade.