The Reserve Bank of India (RBI) has announced the Targeted Long – Term Repo Operations (TLTRO2.0) ] in order to create conducive conditions for the functioning of financial institutions and markets. These measures attempt to ease out liquidity constraints and/or hindrances to market access faced by the sectors and entities adversely affected due to the covid19 pandemic.
Firstly, the RBI shall conduct TLTRO 2.0 at the policy repo rate to the tune of up to Rs. 50000 crore in tranches with a view to ease liquidity conditions for the small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs) for tenors up to three years. These funds are required to be deployed in investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs). At least 50 percent of the total funds availed under these operations have to be rationed out to securities/instruments issued by Micro Finance Institutions (MFIs) (10 percent), NBFCs with asset size up to Rs. 500 crore (15 percent) and NBFCs with assets size up to Rs. 5,000 crores (25 percent).
Secondly, the investments made 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. Also, exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The RBI is going to conduct the first auction under TLTRO 2.0 on April 23, 2020 for an amount up to Rs. 25000 crore.
Earlier in the day, the RBI had reduced the reverse repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 4.00 per cent to 3.75 per cent while keeping the policy repo rate and the interest rate on the marginal standing facility (MSF) under the LAF and the Bank Rate constant at their respective existing levels.
Easing out Liquidity Constraints can be a Game Changer for NBFC/ MFI sector
The RBI has continued its accommodative stance to deal with the current slow-down of economic activity due to mass lock down being followed in India. On March 27, the Reserve Bank had decided to conduct auctions of targeted term repos (TLTRO 1.0) for a total amount of up to Rs. 1,00,000 crore at a floating rate linked to the policy repo rate with a view to allow banks to deploy such funds in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds.
Further, the Banks were asked to acquire up to fifty per cent of their incremental holdings of eligible instruments from primary market issuances and the remaining fifty per cent from the secondary market, including from mutual funds and non-banking finance companies. Also, it was provided that the 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 and exposures under this facility will not be reckoned under the large exposure framework.
In this way the recent TLTRO 2.0 can be viewed upon as a booster dose for the banks many of whom are having large exposure with the NBFC sector and Micro Finance Companies. Injection of liquidity into the banking system with targeted support to the NBFC and MFI sector shall give a boost to more inclusive growth in India. Also the four balance sheet problem is addressed through such a move made by the RBI. The NBFCs supplement the banking sector’s role as they reach out even to the unorganized sector and to small local borrowers.
The Economy may Bounce Back to Normalcy
NBFCs (Non-Banking Financial Companies) largely extend support for the diverse financial needs of the commercial entities in the micro, small and medium (MSME) sector which are going to play a more important role in rebuilding the Indian economy which is currently in doldrums due to the onslaught of the corona pandemic. The MSME sector in India not only contributes substantially to the national exchequer but also contributes to providing employment to millions of Indians.
When the lock down opens may be in phased manner, there will be an increase in demand of FMCG goods as people will need to buy things they have been wanting to buy for almost a couple of months. There will be demand for transportation as the companies shall move their unsold inventories to the market place and replenish their stores with more raw material and equipment for further production.
There is an old saying “The show must go on”. The eternal fact is that there do exist mechanisms that constantly guide peoples and institutions back to normalcy. The duration of time taken though could vary depending upon how deep a shock had been or how badly they were hurt. There is a morning after every night and I think that darker nights are often followed by brighter mornings!
Focus on Winning the Covid19 War – Everything Else can Wait
The IMF has presented a gloomy outlook for the world economy. They have predicted that the global economy may experience its worst recession since the Great Depression resulting from the financial crisis about a decade ago. Although, it suggests that we may expect a partial recovery in 2021, but the GDP level may remain lower than the pre-virus level. Moreover, the IMF sees considerable uncertainty about the strength of the rebound.
The Covid19 has presented a war-like syndrome where you really can’t assess the outcome till the war is over. Without enough information about the exact duration of the war and the extent of damage that it will inflict upon the warring nations, projections about the outcome may often be not much better than hunches.
I would like to go a step further and add that covid19 is worse because every country has been drawn into this battle. It is not territories or soldiers that are going to bear the brunt of the war but it is the common folks whose lives are at stake and the magnitude of such loss is hard to assess. It does not matter what is the age, profile, gender, domicile or profession of the people died due to this disease, because every life counts and so every death is a loss to the society! The focus at this time should be to increase the expenditure on health care and maintaining the supplies of the essential goods. Everything else can wait!
Giving Boost to Micro, Small and Medium Sector is a Good Idea
At the time of the Great Lockdown, we need to focus on industries that cater to essential goods such as sanitizers, masks, towels, napkins, tissue papers, disposable paper plates, soaps, detergents, processed foods, cleaning stuffs, pickles, hair oils, cooking oils and things of that sort. These goods are available at the grocers’ shops or medicine shops. So there is demand for them and supply chains are also active to satisfy their demand. Besides the Pharma sector and medical accessories and equipment and packaging industry can also be revived quickly.
Many of these industries can work as the workers are engaged locally plus arrangements can be made for the workers within the factory premises or locations near the factories like schools, inns or vacant parking lots and community kitchen (mess) can be operated for them. School or other idle buses can be hired to ferry workers from these premises to workplaces and back.
We have seen that governments are converting stadiums and vacant hotels into hospitals. I think we can think about converting vacant hotels or inns into workers’ hostels such that only one group stays at every premise and they remain confined to their respective places of stay. Besides, the companies can operate in shifts so that social distancing can be maintained.
It may be made compulsory to maintain strict adherence to covid19 guidelines and the companies can even be asked to put a quality stamp on the product that it meets the covid19 standards for which a suitable institutional framework can be prepared. Needless to say all these efforts can generate the circular flow back into the economy besides creating jobs.
The NBFC sector plays a crucial role in supporting economic activity in the MSME and unorganised sector. RBI’s stimulus thus can prove to be a step in the right direction.