Since February 2020, the RBI has rolled out plans to inject liquidity equivalent to 3.2% of GDP. The RBI has also undertaken targeted long term repo operations (TLTRO), which allows banks to borrow one to three year funds from RBI at the repo rate by providing government securities with similar or higher maturity as collateral.
Here are the additional measures taken by the RBI on 17 April 2020 to maintain adequate liquidity, facilitate and incentivize bank credit flows, ease financial stress, and enable normal functioning of markets.
Liquidity management
- TLTRO 2.0: INR 50,000 crore of TLTRO in tranches of appropriate sizes. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio.
- Refinancing facilities for All India Financial Institutions (AIFIs): Special refinance facilities for a total amount of INR 50,000 crore to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and National Housing Bank (NHB) to enable them to meet sectoral credit needs. Specifically, INR 25,000 crore to NABARD for refinancing regional rural banks (RBBs), cooprative banks and micro finance institutions. INR 15,000 crore to SIDBI for on-lending/refinancing. INR 10,000 crore to NHB for supporting housing finance companies. Charges set at RBI's policy repo rate.
- Liquidity adjustment facility: Fixed rate reverse repo rate: Reduce fixed rate repo rate under LAF by 25 basis point from 4% to 3.75%, which will encourage banks to use surplus funds in investments and loans in productive sectors. Due to various liquidity enhancement measures taken by RBI, banks now have surplus liquidity. On April 15, it absorbed INR 6.9 lack crore through reverse repo operations. No change in policy repo rate (4.4%), and MSF and bank rate (both at 4.65%).
- Ways and means advances for states: WMA limit of states increased by 60% over and above the level as on 21 March 2020. On April 2, the RBI set it at 30%. This will be available till September end.
Regulatory measures
- Asset classification: Institutions granting moratorium or deferment of loans can exclude the moratorium period from the 90-day NPA norm, i.e. there would be an asset classification standstill for all such accounts from March 1 to May 31, 2020. NBFCs can provide such relief to their borrowers too. However, to reduce building up of risk in banks' balance sheets, they they will have to maintain higher provision of 10% on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.
- Resolution timeline extension: The period for resolution of stressed assets extended by 90 days. Currently, all banks, AIFIs, and NBFCs are required to hold an additional 20% if a resolution plan has not been implemented within 210 days form the date of default.
- Dividend distribution: Scheduled commercial banks and cooperative banks are not allowed to make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions. This is done to maintain enough capital to absorb losses amidst heightened uncertainty.
- Liquidity coverage ratio: LCR requirement for Scheduled Commercial Banks is being brought down from 100 per cent to 80 per cent with immediate effect. The requirement shall be gradually restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021.
- Relief for NBFCs on real estate sector loans: Date of commencement of commercial operations can be extended by one year over and above teh one-year extension permitted during normal times without treating them as restructuring. This facility was earlier available to banks only.
On 26 March, the government announced $23 billion Pradhan Mantri Garib Kalyan Yojana to targeting the vulnerable groups.
