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RBI says 10% cap for banks to invest TLTRO funds applies only to the fourth tranche


Date: 23-04-2020
Subject: RBI says 10% cap for banks to invest TLTRO funds applies only to the fourth tranche
The Reserve Bank of India (RBI) has clarified that the 10 percent cap stipulated for banks to invest in a particular company or a group of companies applies only to the fourth round of the targeted long term repo operation (TLTRO). The latter is part of the special liquidity measures announced by the central banks to help banks lend to productive sectors during the novel coronavirus, or COVID-19, phase.

Also, the 10 percent cap will not apply to TLTRO 2.0 announced by the central bank for Rs 50,000 crore, RBI said. “This condition applies only to the fourth TLTRO conducted on April 17. It does not apply to the TLTROs conducted before April 17. It also does not apply to TLTRO 2.0,” the RBI said in an updated FAQ on April 22.

Also Read: All you need to know about TLTROs

On April 16, Moneycontrol had reported about the confusion in the markets on whether this rule applies to all rounds of TLTRO. RBI conducted Rs 100,000 crore worth TLTROs in the first round. This was done in four tranches. The fourth round auction was for Rs 25,000 on April 17.

The concern in the market was that if this rule applies to funds raised from earlier auctions as well, this could create a problem for further deployment. “There are undeployed funds in the Rs 75,000 crore availed so far (in the first three TLTRO tranches) by banks. Given the new rule, banks may have to rework the funds deployment strategy,” said SV Sastry, MD and CEO, SBI DFHI.

For instance, if a bank has availed Rs 10,000 crore from TLTRO window, it can invest only Rs 1,000 crore in a company or a group of companies now. Beyond this, if the bank wants to invest in the papers of the same company, the bank will have to borrow more under the TLTRO window,” Sastry said. This means any particular bank will not be able to consider the same company, which has already benefited from the window for further funding unless the bank borrows more to stay within the limit.

This confusion is addressed with the RBI clarifying the rule now.

The RBI has given banks 30-45 working days for deployment of funds under the TLTRO 2.0 scheme. Funds that are not deployed within this extended timeframe will be charged interest at the prevailing policy repo rate plus 200 bps for the number of days such funds remain undeployed. The incremental interest liability will have to be paid along with regular interest at the time of maturity.

The RBI decided to launch TLTROs to cushion the banking system and ensure continuous lending to productive sectors. This is to make sure banks have enough money to invest in companies that are struggling to raise funds on account of the COVID-19 lockdown.

Source:- moneycontrol.com

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