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RBI Announces INR 50,000 Crore TLTRO to Improve the Health of NBFCs & Microfinance Institutions

Highlights

  • RBI announces INR 50,000 Crore Relief Package for NBFCs & MicroFinance Institutions
  • Reverse repo rate cut by 0.25% to 3.75%, liquidity coverage ratio norm eased and much more

Taking stock of the economic pressures triggered by the COVID-19 pandemic, the Reserve Bank of India (RBI) has announced a fresh INR 50,000 crore Targeted long-term Repo Operation (LTRO 2.0) to uplift the health of non-banking finance companies (NBFCs)and microfinance institutions struggling with liquidity issues. The latest announcement from the RBI is aimed to help maintain liquidity in the system, ensure smooth credit flow and enable the functioning of the financial markets.

How Will the TLTRO Pan Out?

The RBI will route the massive INR 50,000 crore through banks which are needed to deploy the same in one month. Further, they are required to earmark around 50% of the fund they receive towards mid-sized NBFCs and microfinance institutions. RBI Governor Shaktikanta Das has even gone on to say that the TLTRO operation can be enhanced if the need to make more capital available for NBFCs and microfinance institutions arise. He also clarified that the 90-day non-performing assets norm won’t apply to moratorium granted by banks on existing loans.

Reverse Repo Rate Cut by 0.25% to 3.75% – How Will it Affect You?

The RBI has cut the reverse repo rate by 25 basis points (100 basis points =1%) to 3.75%. As reverse repo rate is the rate at which the RBI borrows from the commercial banks, the latest cut in the same has made it less attractive for the banks. This could be due to the heavy 75 basis point cut of the repo rate made by the RBI a few weeks back on March 27, 2020. As a result, the repo rate fell to 4.40%, making floating loan rates fall in the same proportion. Now, the lowest home loan interest rate in India stands just a shade above 7%, 7.15% to be precise. The governor has hinted at the possibility of more repo rate cuts in the future citing that the inflation trajectory is likely to fall within a month or two, giving the central bank more space to ease repo rates and allowing banks to ease the lending rates further.

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Liquidity Coverage Ratio Norm for Scheduled Commercial Banks Eased

As a part of relief measures, the RBI also announced the easing of liquidity coverage ratio norm for scheduled commercial banks. The ratio is brought down to 80% from 100% with immediate effect. This ratio signifies the proportion of highly liquid assets held by banks to meet their short-term obligations. The relaxation in the norm frees up more capital for banks to lend in the market. However, the announcement will be rolled back in two phases with the ratio requirement getting raised to 90% in October 2020 and 100% in April 2021, said the governor. Further, the banking regulator has asked banks to do away with the dividend payout in view of the financial pressures caused by the ongoing pandemic.

50,000 Crore Special Finance Facility Announced for All-India Financial Institutions

The RBI has also announced a special finance facility worth INR 50,000 crore to all-India financial institutions such as NABARD, NHB, SIDBI, etc. This comes as a relief for these institutions which have been struggling to raise fresh funds from a seemingly tight market.

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