Covid-19 impact: Banks ignore RBI's TLTRO in order to avoid NBFC exposure

In a development that seems to substantiate the notion that banks are just not willing to lend to non-bank financial companies (NBFC), the RBI received bids of only about half of the Rs 25,000 crore it was offering under its revised Targeted Long-Term Repo Operation (TLTRO).

The scheme had been designed to enable half the money to flow to small NBFCs.

 
Banks put 14 bids worth Rs 12,850 crore for the three-year money offered. In a similar auction on April 9, some 18 bids were received for Rs 1.14 trillion against Rs 25,000 crore on offer. In the first version of TLTRO, there were no conditions attached, except that the money had to be deployed within 30 days.
 
The latest auction was part of the TLTRO 2.0, through which RBI had planned to infuse up to Rs 50,000 crore, to begin with. The central bank had said half of the money in TLTRO 2.0 should go to small NBFCs. This was necessitated after it was found that banks used the first lot of TLTRO money worth Rs one trillion to buy bonds of AAA-rated companies, including those issued by public sector units. Top-rated companies don’t need emergency liquidity support anyway, and so the entire purpose of helping those in need was defeated.

 
TLTRO 2.0 was introduced on April 17 in which the RBI put conditions that 10 per cent of the money should be used to buy securities issued by microfinance institutions (MFI), 15 per cent for NBFCs with asset size of Rs 500 crore and below, and 25 per cent to buy securities of NBFCs sized between Rs 500 crore and Rs 5,000 crore.
 
Banks simply ignored the auction and did not even care to raise the full money.
 
“Banks are generally wary of funding NBFCs, since ILFS crisis, mainly due to perceived risk.  Hence, as long as perceived credit risk is higher than TLTRO spread, banks would not invest,” said Abizer Diwanji, head of financial services at EY.
 
Such cold shoulder by banks also indicates a credit freeze that is hard to overcome, unless the government comes out with credit guarantee schemes for loans given by banks. Since that is not happening, and there is no indication of that too, banks are not willing to listen to RBI prodding, experts say.  
 
“This auction was a kind of a litmus test for banks’ risk appetite. This shows that banks are extremely risk-averse due to the uncertain credit environment,” said Soumyajit Niyogi, associate director, India Ratings and Research.

 
According to a senior economist, it is time that the RBI forces banks to lend by tweaking its liquidity rules. A reverse repo cut by 115 basis points since March 27 has clearly not discouraged banks from parking their huge liquidity with the central bank.
 
“Maybe they should make the reverse repo rate negative and start charging banks for keeping money with the RBI instead,” said the economist requesting anonymity.


Banks continue to park over Rs 7 trillion of their surplus liquidity with the RBI on a daily basis. Yet, they are not ready to extend the three-month moratorium to NBFC, forcing the para banking units to move to the court.