Targeted Long-Term Repo Operations are Long term repo operations (LTROs) conducted by the RBI to ensure adequate liquidity at the longer period for specific sectors.
Under LTROs, the RBI will auction funds to banks for making investment in prescribed corporate and other instruments. In the initial phase, the RBI instructed banks to invest funds availed from TLTRO to invest in investment-grade corporate debt.
Purpose of the TLTRO is to ensure that there is enough liquidity in markets like corporate market and their yield are not going up in the context of the Covid set back.
The TLTROs are exempted from regulatory requirement of the cash reserve ratio for the equivalent of incremental credit disbursed by banks as loans. Interest rate under for banks will be floating rates linked to the policy repo rate.
| Why TLTRO?
Corporate are finding difficult to mobilise funds as there are large sell off corporate bonds and other instruments in the context of the Covid 19 pandemic and the incoming economic risks. So, providing liquidity to the corporate bond market is the sharp objective of the TLTRO mission. |
On Mach 27, 2020, the RBI launched TLTRO to provide liquidity in the corporate bond market through banks. Four tranches were completed on April 17, 2020. In a similar step, the RBI also conducted a TLTRO 2.0 for supporting fund injections to NBFCs through banks.
| What is the facility? | Where does the fund comes? | Account of fund to be auctioned | Term and interest rate. | Where the banks should invest? |
| Targeted Long-Term Repo Operations (LTRO) | RBI will auction funds to banks. | For a notified amount. Total LTRO was set at Rs 1 lakh crores and completed in four traches (Rs 25000 crore each). | The term will be usually three years and interest rate will be floating rate based upon the prevailing repo rate | Banks should invest in bonds and other securities issued by corporate. |
| LTRO 2.0 | Debt instruments issued by NBFCs and MFIs. |
Where the banks must invest their funds?
Under TLTRO scheme, banks must invest the money borrowed under TLTROs in the purchase of securities from primary/secondary market. On the other and, in the case of TLTRO 2.0 which is another version of TLTRO, banks have to invest in debt instruments issued by NBFCs and MFIs.
As per the RBI guidelines, banks have to acquire up to 50 per cent of their eligible instruments from primary market issuances and the remaining 50 per cent from the secondary market, including from mutual funds and non-banking finance companies.
What is the context of the introduction of TLTRO?
In the context of the COVID-19 investors made large sell-offs in the domestic equity, bond and forex markets. This has led to higher yield or liquidity premia on instruments such as corporate bonds, commercial paper and debentures.
To counter the high cost trend in corporate fund mobilisation, the RBI provided funds to banks at concessional rate and for a higher tenure so that the banks can invest these in corporate bonds.
Under TLTROs, the RBI will be auctioning funds to commercial banks up to a certain amount based on the repo rate.
As part of the TLTRO implementation, the RBI conducted auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to Rs 100,000 crore at a floating rate linked to the policy repo rate. Four tranches of TLTRO was auctioned by the RBI; each with an auction amount of Rs 25000 crore.
On April 17, the RBI also conducted TLTRO 2.0 worth an initial amount of Rs 50,000 crore.
Whether banks have to keep any securities matching the TLTOR loan?
As part of the TLTRO, banks have to maintain the amount of specified securities for the amount received in TLTRO in its HTM (held to maturity) book at all times until the maturity of TLTRO.
What is TLTRO 2.0?
The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs/MFIs. Under the scheme, banks have to invest at least 50 per cent of the total funds in bonds issued by small NBFCs of asset size of Rs 500 crore and below, mid-sized NBFCs of asset size between Rs 500 crore and Rs 5,000 crore and MFIs.
On April 17, 2020, the RBI announced Rs 50,000 crore TLTRO auction through banks for NBFCs, MFIs.
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