Banks fear HTM hit, investment limits with repayment under TLTRO

Banks are reluctant to return money taken under the targeted long-term repo operations (TLTRO), even as they can do that to raise cheaper funds from the Reserve Bank of India (RBI). 
 
The prime contention is that if banks return the money, they will have to remove that from the held-to-maturity (HTM) basket. So far as bonds are in the HTM category, there is no need to mark them to market.
 
Banks don't want to let that go since this money has been used to buy high yielding papers of non-banking financial companies (NBFCs). At the initial stages, the fund raised under LTRO and TLTRO have been used to buy 'AAA'- and 'AA'-rated papers.
 
Later the RBI specified that any further money raised must be used to buy bonds from lower quality NBFCs in need of money. The idea was that the liquidity provided by the central bank must be used to fund those in actual need of funds. 
 
But banks used up the money to buy top-rated corporate bonds and earned a spread over the repo rate at which the TLTRO money was raised. Since they have already earned a spread, they have no reasons to return the money already invested. 
 
The second important consideration is that the funds they are going to raise under the on-tap TLTRO would come with restrictions and will have to be used to buy papers of distressed companies from specific sectors.

 
For example, the RBI said on October 22 that the funds raised under the on-tap TLTRO should be invested in papers issued by companies in agriculture, agri-infrastructure, secured retail, micro, small and medium enterprises, pharmaceutical, and health care.
 
There were no such sector-specific restrictions in the earlier set of TLTRO and banks could invest anywhere. The restrictions, therefore, have soured the mood for banks, and they are requesting the central bank to have a relook at their conditions. 
 
"If the HTM and the sector issues are sorted out, then most banks would return the money and borrow at a cheaper rate," said a banker.
 
As a result, the central bank had to postpone the final date for submission of request for repayment of TLTRO twice — the latest being on November 6. 
 
The on-tap TLTRO scheme will remain operational till March 31, and all banks will be eligible to participate. The RBI will be aggregating all requests received from banks for the funds, and release funds every Monday by initiating a three-year repo contract with the requesting bank. Multiple requests by a bank in a week will be clubbed into a single repo contract.
 
"In case the requested amount exceeds the remaining amount under the scheme on the date of operation, the remaining amount will be distributed on a pro-rata basis among all the eligible requests," the central bank had said on its website.
 
The central bank had originally announced the on-tap TLTRO aggregating Rs 1 trillion in the monetary policy on October 9.
 
At the same time, the RBI allowed banks to reverse their TLTRO money taken between March 27 and April 23. The date of repayment is between November 2 and 6. This is done so that banks can unspool the TLTRO money and borrow under the cheaper on-tap TLTRO plan.