With banks getting a breather on priority sector lending against the funds invested via TLTRO 2.0, the response to the auction on April 23 could be better.
Typically, for every rupee lent by banks, 40 paise must be lent to the priority sector on which the yields are lower by about 60-80 basis points.
However, Reserve Bank of India (RBI) has spared banks from considering the HTM (held-to-maturity) bonds as part of the adjusted net bank credit. The TLTRO 2.0 bonds – for a total amount of Rs 50,000 crore – are to be invested in NBFCs and institutions like MFIs, RBI said last Friday.
As Kamal Mahajan, head of treasury and global markets, Bank of Baroda, pointed out, if the HTM bonds under the TLTRO 2.0 are spared from the mandatory loans to priority sector it would be more attractive for banks.”The yields on priority sector loans are lower so it would be less attractive if we needed to lend to that sector,” Mahajan explained.
Nonetheless, market participants believe the response to the TLTRO might be relatively less enthusiastic than the response to TLTRO 1.0 because of the lack of good quality assets in the NBFC space. Ananth Narayan, professor-finance at SPJIMR, pointed out that while the RBI is making it easier for banks, the core issue is still not getting addressed. “The credit-risk fear is still not being taken care of. Those NBFCs who are not getting funds because banks are not comfortable with their balance-sheets will continue to face funding issues. That core issue of credit risk aversion has to be addressed,’ Narayan said.
RBI has also increased the time available for deploying the funds under TLTRO 2.0 from 30 to 45 working days saying the penalty for not doing so would be interest at the prevailing policy repo rate plus 200 bps for the number of days such funds remain undeployed.
Vydianathan Ramaswamy, director, ratings at Brickwork Ratings, said that the extension of deployment period to 45 days gives banks a better lead time to lend to a wider set of non-banks. “It eases the pressure on banks to quickly lend. Removing the 10% investment cap without extending the deployment period could have resulted in banks investing a larger quantum in a limited few entities,” Ramaswamy said.
