The rapidly expanding COVID-19 pandemic and the resulting lockdown to slow the spread of the infection has led to severe pain for the economy. With factories closed, businesses shut and construction halted, several sectors are in dire need of help. The Indian financial sector was already reeling under a burden of non-performing assets when the pandemic struck. Considering the stress in the financial sector, which includes banks and non-banking finance companies, the Reserve Bank of India has been announcing a slew of relief measures.
Continuing with the trend, the RBI governor Shaktikanta Das today announced a number of liquidity boosting measures targeted at NBFCs and other financial intermediaries. The focus was on providing much-needing funds to NBFCs and Micro Finance Institutions which have been suffering due to a liquidity crunch. The RBI has taken a two-pronged approach to help shadow bankers in need. The central bank announced a Targeted Long Term Repo Operation (TLTRO) worth Rs 50,000 crore to boost the overall liquidity in the market. Let us briefly understand TLTRO to get a clear idea of how it will help financial intermediaries.
The TLTRO is a tool that helps banks access long-term credit ranging from one to three years from the central bank at the repo rate. In lieu of the funds received under the TLRTO scheme, banks have to provide government securities of equal or longer tenure as collateral. In normal circumstances, the RBI offers short-term liquidity through tools like liquidity adjustment facility (LAF) and marginal standing facility (MSF). Through TLRTO, banks get access to cheaper capital which, in turn, incentivises them to lend and boost economic activity.
The TLRTO announced today is specifically aimed at helping NBFCs and MFIs. The RBI has mandated that banks availing the facility should provide at least half of the amount to small NBFCs and MFIs. The RBI will release the amount in tranches and also signalled that the amount to be disbursed through TLRTO could be increased in the future if required. Banks will have to make the investments mandated under the conditions of TLRTO within a month of RBI auction. By specifying a timeframe and mandating availability for NBFCs, RBI has ensured relief for shadow banks suffering from a liquidity crunch.
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The injection of funds into the market through TLRTO has been accompanied by several other measures like a special refinancing facility, relaxation in asset classification norms and reduction in the reverse repo rate.
The central bank announced a special refinance facility worth Rs 50,000 crore for all India financial institutions like NABARD, SIDBI and NHB. The fund made available is expected to boost liquidity and help the institutions meet sectoral lending requirements. NABARD will receive Rs 25,000 crore for refinancing regional rural banks, co-operative banks and micro-lending institutions. The NHB will get Rs 10,000 to support housing finance companies, while SIDBI will get the balance Rs 15,000 crore. The Rs 10,000 crore exclusively made available for the NHB will provide liquidity to fund-starved HFCs and will eventually trickle down to cash-strapped developers.
The relaxation in asset classification norms will help banks give relief to borrowers. As per existing norms, lenders have to classify accounts that miss payments for 90 days as non-performing and make provisions. RBI today allowed relaxation in classification by excluding the 3-month moratorium period from the classification. It has essentially increased the period for classification of an account as NPA from 90 days to 180 days. However, banks will have to maintain 10% provision even for accounts that avail moratorium so as to maintain sufficient buffers. Earlier, there was some confusion on banks offering moratoriums to NBFCs due to the asset classification requirements. With the relaxation in asset classification rules, NBFCs will also have more flexibility to provide relief to borrowers.
The RBI has been trying to boost credit availability for borrowers for a long time. The central bank had reduced the repo rate on multiple occasions in 2019, but the transmission by banks was limited. With the risk of worsening economic slowdown, banks were reluctant to lend. The central bank has reduced the reverse repo by 25 basis points to 3.75%. This comes on the back of a 90 basis point cut in the reverse repo in March. A lower reverse repo rate makes it less lucrative for banks to deposit money with the RBI and incentivizes lending. As of April 15, funds under the reverse repo window was at Rs 6.9 lakh crore. The cut in the reverse repo rate will encourage banks to deploy the funds for lending purposes.
All the measures announced today when considered together are expected to ease financial stress and boost liquidity. The measures were clearly aimed at helping NBFCs. HFCs, MFIs and co-operative banks. NBFCs are one of the biggest lenders to small businesses, while HFIs are crucial for the health of the real estate industry, which is the second-largest employer in the country. Similarly, MFIs cater to nearly 5.6 crore borrowers, a bulk of them from the lowest strata of the society.
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Overall the measures will help financial intermediaries tide over the liquidity crunch in the market. Most of the measures announced today will have an indirect impact on customers. NBFCs and HFCs will be able to offer the three-month moratorium permitted by the RBI last month to their borrowers. Several NBFCs, HFIs and MFCs were wary of offering the moratorium due to the strict asset classification requirements. They are likely to offer relief to borrowers with the relaxation of norms and the availability of ample liquidity. Easing of the liquidity crunch is expected to have a trickle-down effect. With no dearth of funds, financial intermediaries will actively help borrowers in need of credit facilities. The RBI had already reduced the repo rate in March, reducing the cost of capital for banks. The central bank has also allowed lenders to offer a three-month moratorium to borrowers. When combined with the measures announced today, the RBI has taken adequate confidence-building measures to stabilize the financial sector and boost economic activity.