This article may be utilized to understand various terms contained in the article. Questions will be asked on this terms but may not be on actual figures

Context: Recently, Reserve Bank of India governor announced TLTRO 2.0 of ?50,000 crore to ensure that different segments of financial markets such as A non-banking financial companies (NBFCs) and microfinance institutions (MFIs) to get enough liquidity.

• States and UTs allowed to borrow more to manage COVID-19.  
• Reverse Repo rate reduced from 4.0% to 3.75%.  
• India is projected to turn around and grow at 7.4% in 2021-22. 

The RBI Governor said that the additional measures are aimed 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 the normal functioning of markets. 

Key Points
Liquidity Management

1) Targeted Long-Term Operations (TLTRO) 2.0 

• A second set of targeted long-term repo operations (TLTRO 2.0) for an initial aggregate amount of Rs. 50,000 crore will be conducted. 
• This is being done to facilitate funds flow to small and mid-sized corporates, including NBFCs and MFIs. 
• The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of non-banking financial companies (NBFCs), with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and micro finance institutions (MFIs). 

2) Refinancing Facilities for All India Financial Institutions 

• Special refinance facilities for a total amount of Rs. 50,000 crore will be provided to National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB) to enable them to meet sectoral credit needs.  
• This will comprise Rs. 25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs); Rs. 15,000 crore to SIDBI for on-lending / refinancing; and Rs. 10,000 crore to NHB for supporting housing finance companies (HFCs). 

3) Reduction of Reverse Repo Rate under Liquidity Adjustment Facility 

• Reverse repo rate has been reduced by 25 basis points from 4.0% to 3.75% with immediate effect, in order to encourage banks to deploy surplus funds in investments and loans in productive sectors of the economy. 

4) Raising Limit of Ways and Means Advances of states and Uts 

• Ways and Means Advances (WMAs) Limit of states and union territories has been increased by 60% over and above the limit as on March 31, 2020, in order to provide greater comfort to states for undertaking COVID-19 containment and mitigation efforts, and also to help them plan their market borrowing programmes better. 
• WMAs are temporary loan facilities provided by RBI to help governments tide over temporary mismatches in receipts and expenditure. The increased limit will be available till September 30, 2020. 

Regulatory Measures 

• In addition to the measures announced by RBI on March 27, 2020, the bank announced additional regulatory measures to lessen debtors’ burden in wake of the pandemic. 

5) Asset Classification 

• With respect to recognition of Non-Performing Assets (NPAs), the central bank has decided that the payment moratorium period, which lending institutions have been permitted to grant as per RBI’s announcement on March 27, 2020, will not be considered while classifying assets as NPAs. i.e., the moratorium period will be excluded while considering 90-day NPA norm for those accounts for which lending institutions decide to grant moratorium or deferment and which were standard as on March 1, 2020. This means that there will be an asset classification standstill for such accounts from March 1 - May 31, 2020.  
• NBFCs will have the flexibility under the prescribed accounting standards to provide such relief to their borrowers. 
• Simultaneously, banks have been asked to maintain higher provision of 10% on all accounts whose classification has been put on a standstill as above, so that banks maintain sufficient buffers. 

6) Extension of Resolution Timeline 

• Recognizing challenges to resolution of stressed assets or accounts which are or are likely to become NPAs, the period for implementation of resolution plan has been extended by 90 days.  
• Currently, scheduled commercial banks and other financial institutions are required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default. 

7) Distribution of Dividend 

• It has been decided that scheduled commercial banks and cooperative banks shall not make any further dividend pay-outs from profits pertaining to FY 2019-20. 
• The decision will be reviewed based on the financial position of banks at the end of the second quarter of the financial year 2019-20.  
• This has been done in order to enable banks to conserve capital so that they can retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty. 

8) Lowering of Liquidity Coverage Ratio requirement 

• To improve the liquidity position for individual institutions, Liquidity Coverage Ratio requirement for scheduled commercial banks has been brought down from 100% to 80% with immediate effect.  
• This will be gradually restored in two phases - 90% by October 1, 2020 and 100% by April 1, 2021. 

9) NBFC Loans to Commercial Real Estate Projects 

• The treatment available for loans to commercial real estate projects with respect to the date for commencement for commercial operations (DCCO) has been extended to NBFCs, in order to provide relief to both NBFCs and the real estate sector.  
• As per the current guidelines, DCCO in respect of loans to commercial real estate projects delayed due to reasons beyond the control of promoters can be extended by an additional one year, over and above the one-year extension permitted in normal course, without treating the same as restructuring. 
• Making an assessment of the current economic situation, the Governor informed that the macroeconomic and financial landscape has deteriorated, precipitously in some areas; but light still shines through bravely in some others. 
• According to IMF’s global growth projections, in 2020, the global economy is expected to plunge into the worst recession since the Great Depression, far worse than the Global Financial Crisis.  
• In this situation, India is among the handful of countries that is projected to cling on to positive growth (at 1.9%). He noted that this is the highest growth rate among the G-20 economies. 

Implications of these measures:

• Cutting reverse repo more than the repo, and thereby increase the gap between the two rates: On the one hand, the RBI is incentivising banks to borrow from it at low rates and lend it forward to businesses, yet, on the other, it is disincentivising them from coming back and parking these funds with the RBI.
• LTRO benefits: It provides more liquidity. More importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves and boost economic activity at the bottom of the pyramid (that is, the poorest customers).
• With reduced Liquidity Coverage Ratio(LCR) banks would have more cash to deal with.

About Targeted Long-term Repo Operations

• LTRO is a tool that lets banks borrow one to three-year funds from the RBI at the repo rate, by providing government securities with similar or higher tenure as collateral.
• It is called 'Targeted' LTRO as in this case, the RBI wants banks opting for funds under this option to be specifically invested in investment-grade bonds.
• The TLTRO was introduced by the RBI to help companies, including financial institutions, manage their cash flow issues in the wake of the Covid-19 outbreak.