TLTRO 2.0 needs to be open-ended and on-tap with change in structure

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Published: April 29, 2020 5:10 AM

“Keeping it open-ended and on-tap would be a better idea than conducting the operation on a pre-decided date. Banks should get enough leeway in deciding how much they want to borrow and when to borrow,” said an expert.

Moreover, a potential tweak in the asset size range could encourage banks that do not have enough appetite to lend a significant quantum of funds to smaller NBFCs.Moreover, a potential tweak in the asset size range could encourage banks that do not have enough appetite to lend a significant quantum of funds to smaller NBFCs.

The lukewarm response to the first tranche of TLTRO 2.0 for NBFCs and MFIs, which received bids worth only Rs 12,850 crore against the notified amount of Rs 25,000 crore, has prompted experts to call for some changes. They believe the scheme should be open-ended and the funds should be available on on-tap.

MS Gopikrishnan, an independent market expert, said there is a need for an open-ended scheme for the TLTRO 2.0 to be successful rather than the RBI conducting it in a tranche-wise auction. “For the funding to NBFCs to be successful, the banks need some sort of freedom as has been provided in the latest credit line extended to mutual funds by the RBI where the funds are available on-tap. Another bottleneck is the asset size limits of the mid and small size NBFCs as prescribed by the central bank in TLTRO 2.0 as many banks feel they don’t have the risk appetite to fund such smaller firms. If the central bank comes out with changes regarding some of these aspects, I believe the next tranche of TLTRO 2.0 may be successful,” Gopikrishnan said.

“Keeping it open-ended and on-tap would be a better idea than conducting the operation on a pre-decided date. Banks should get enough leeway in deciding how much they want to borrow and when to borrow,” said an expert.

Moreover, a potential tweak in the asset size range could encourage banks that do not have enough appetite to lend a significant quantum of funds to smaller NBFCs. The RBI had prescribed that 10% of the funds availed under TLTRO 2.0 has to be invested in debt instruments issued by MFIs, 15% in debt instruments issued by NBFCs with asset size of Rs 500 crore and below; and 25% in debt instruments issued by NBFCs with asset size between Rs 500 crore and Rs 5,000 crore.

“If the RBI decides to tweak this prescribed asset size ranges and increase it, that may be a welcome move,” said a source.

Banks believe some NBFCs would be staring at a potential rating downgrade due to spike in NPAs after the Covid-19 led slowdown. “Banks themselves have been coming out of NPAs in recent times. It does not make sense to take on more risk on our books,” said a treasury head at a bank.

Some experts are of the view that the a special purpose vehicle (SPV) by the government that could house the papers of mid and small sized NBFCs or a partial credit guarantee on these papers could help. “The government will have to step in at some time. I believe the RBI itself may not be able to resolve the issue as the issue is not about providing liquidity, rather it is about credit-risk aversion,” said an expert.

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