NEW DELHI: Finance Minister Nirmala Sitharaman on Friday welcomed the Reserve Bank of India’s (RBI’s) steps aimed at helping companies and individuals borrow at cheaper rates, improving non-banking finance companies’ (NBFCs’) access to low-cost funds besides assisting banks, companies and real estate firms with reclassification of norms on bad assets.
“In view of the difficulties being faced due to #COVID19, the @RBI has taken a slew of steps aimed at maintaining adequate liquidity in the system, incentivising bank credit flows, easing financial stress, and enabling the normal functioning of markets,” Sitharaman tweeted.
RBI Governor Shaktikanta Das today delivered a policy rate cut by lowering reverse repo rate by 25 basis points to 3.75%, thus telling banks to not park their excess funds with it and instead lend more to companies and individuals. In steps particularly aimed at improving liquidity for NBFCs and reducing their cost of borrowing, the RBI will launch a second round of targeted long term repo operations (TLTRO 2.0).
Das said the central bank will conduct TLTROs for an amount of ₹50,000 crore in tranches of appropriate sizes. He said the funds will have to be invested in investment grade bonds, commercial paper, non-convertible debentures of NBFCs with at least 50% of it going to small and mid-sized NBFCs and micro finance institutions (MFIs) within one month of availing the credit from RBI.
“Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25% of total investment permitted to be included in the HTM portfolio. Exposures under this facility will also not be reckoned under the large exposure framework,” Das said. The notification on TLTRO 2.0 will be released today, he said.
Das said this was being done as it was observed that funds raised via TLTRO 1.0 have been parked in bonds issued by public sector entities and large corporates. NBFCs and MFIs have thus found it hard to raise money, previous TLTROs notwithstanding.
The governor said the measures were meant to maintain adequate liquidity in the system and its constituents in the face of covid-19 related dislocations; facilitate and incentivise bank credit flows; ease financial stress; and enable normal functioning of markets.
Between 6 Feb and 27 March, RBI has injected liquidity totaling 3.2% of GDP to de-stress financial markets. He said because of these steps, financial conditions have eased considerably as reflected in yields of bond markets.
Among other steps announced to alleviate the pain of the banks, the RBI asked scheduled commercial banks and cooperative banks to not make any further dividend payouts from profits pertaining to FY20 (April-March).
“This restriction shall be reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020,” Das said.
The RBI also recognized the hit to cash flows of companies in view of covid-19 pandemic. It announced an easing of asset classification norms for all accounts where moratorium or deferment has been applied so that genuine cases do not get classified as non-performing for reasons beyond their control.
“It has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020,” an RBI release said.