Banks may stay with AAA paper to invest TLTRO money

By: |
April 14, 2020 5:30 AM

RBI clarified that any amount that is not used within the given time frame would attract a penal interest – the prevailing policy repo rate plus 200 basis points for the number of days the money remained unused.

Banks must maintain the bonds, in their held-to-maturity (HTM) books, till the TLTRO matures.Banks must maintain the bonds, in their held-to-maturity (HTM) books, till the TLTRO matures.

While banks are permitted to buy investment-grade bonds under the TLTRO (targeted long-term repo operations) scheme, market participants believe they will stay with AAA paper whether in the primary or in the secondary market. “With some top-tier companies looking to raise funds, banks would be inclined to play it safe, ignoring even AA plus paper,” an executive from an intermediary said.

Reserve Bank of India (RBI) clarified on Monday that banks can use up to 50% of the funds to buy corporate bonds in the primary market and the rest in the secondary market. A mutual fund executive said that given the likelihood of several companies hitting the market – Reliance Industries for instance – banks would be able to deploy the borrowings faster and delays are unlikely. Moreover, given the shortage of liquidity with some mutual funds and NBFCs, these players too are likely to offload assets, he said.

RBI clarified that any amount that is not used within the given time frame would attract a penal interest – the prevailing policy repo rate plus 200 basis points for the number of days the money remained unused. Banks have up to 30 working days to use the money borrowed in the first t tranche of TLTRO conducted on March 27.

Banks must maintain the bonds, in their held-to-maturity (HTM) books, till the TLTRO matures. If a lender classifies the bonds under the available for sale (AFS) or the held for trading (HFT) categories at the time of purchase, these cannot be shifted to the HTM category later. Even if banks invest in a bond that has a longer-tenor than that of the borrowing via the TLTRO, they will be allowed to be classified them in the HTM category till their maturity, the RBI said.

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