LTRO Part 2: Can conducting LTRO lower interest on investments and loans?

Now that you are familiar with LTRO and TLTRO and their impact on the macro-levels of the economy, here’s the next part that discusses the two tranches of TLTRO operations conducted in the country. Read on! BTW, we suggest you read the Credit crunch and LTRO Part 1 to get more context.

LTRO and TLTRO in India
In Feb this year, the RBI has announced TLTRO worth Rs 1 lakh crore to assist banks in meeting funding requirements or mismatches. This amount was to be implemented in phases, meaning the RBI would auction funds under the LTRO in parts targeted at a specific segment of the economy. Accordingly, TLTRO I was directed at commercial banks and TLTRO II was targeted at NBFCs and micro-financial institutions. Here are the deets.

TLTRO 1
Here are the salient points of the TLTRO’s first tranche:

• Under the TLTRO I, the RBI auctioned loans worth Rs 25,000 crore having a tenure of 3 years. Surprisingly, the RBI received 18 bids worth Rs 1.13 lakh crore (7.7 times more) in the auction of the tranche. The rate of interest was set at 5.15%, which was the prevailing repo rate then
• The RBI required banks to invest the funds obtained under TLTRO in commercial papers, investment grade corporate bonds, and non-convertible debentures (NCDs) issued in the primary and secondary markets (issued by NBFCs and MFIs). The ratio for investment in the markets was set at 50:50

Key takeaway
By subscribing to primary market instruments, banks infused low-cost funds in the primary market, which the issuing companies can use to ramp up commercial activities. Similarly, the funds invested by banks in the secondary market would help NBFCs and MFIs in meeting their liquidity gaps.

TLTRO 2
In contrast to TLTRO I, the RBI didn’t receive a welcoming response to TLTRO 2. Here are the details:

• NBFCs and MFIs usually meet their working capital needs by borrowing from debt markets. Given that these players had a hard time to raise working capital, TLTRO II was targeted at NBFCs and MFIs to offer liquidity
• The second tranche of TLTRO was worth Rs 25,000 crore and offered at the prevailing repo rate of 4.4%. However, out of the total liquidity available, RBI only received bids worth Rs ~12,850 crore
• The RBI required banks to invest funds availed under TLTRO 2 in investment grade bonds, commercial papers and non-convertible debentures offered by NBFCs.

The details of allotment of the funds are:
o at least 50% of the total auctioned amount to small and medium-sized NBFCs and MFIs
o 10% in securities issued by MFIs
o 15% in bonds issued by NBFCs having an asset size of Rs 500 crore or below
o 25% in bonds of NBFCs having an asset size of Rs 500 to Rs 5,000 crore

Key takeaway
The reluctance in bidding for liquidity under TLTRO II only showed that banks are not willing to lend to NBFCs and MFIs, given the high risk involved.

Continue to read how TLTRO impacts investors and borrowers.