Context: The Reserve Bank of India (RBI) provided priority sector relief to banks investing in papers issued by small and medium-sized NBFCs and microfinance institutions (MFIs) under the revised targeted long-term repo operations (TLTRO) 2.0.
- These investments would not be calculated as part of a bank’s adjusted non-food bank credit while assessing the priority sector commitment.
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- RBI had specified that under the TLTRO 2.0 scheme, banks will have to invest at least half the total funds in bonds of small NBFCs of asset size of ₹500 crore and below, mid-sized NBFCs of asset size between ₹500 crore and ₹5,000 crore, and MFIs.
- Banks currently have to allocate 40% of their total loans to sectors like agriculture, small businesses, education, social infrastructure, among others, collectively known as priority sectors.
- This exemption is only applicable to funds availed under TLTRO 2.0 and RBI expects that this will incentivize banks investment in these NBFCs and MFIs.
Long-Term Repo Operations
- The LTRO is a tool under which the RBI provides one-year to three-year loans to banks at the prevailing repo rate.
- To keep short-term interest rates in sync with the policy repo rate.
Difference from LAF and MSF
- The Liquidity adjustment facility (LAF) and marginal standing facility (MSF) offer banks money for their imminent needs ranging from 1-28 days.
- While the LTRO fulfills their liquidity needs for 1- 3 year.
Significance of LTRO
- As banks get long-term funds at lower rates, their cost of funds falls.
- In turn, the interest rates for borrowers are reduced .
- All in all, LTRO facilitates RBI in ensuring that banks reduce their marginal cost of funds-based lending rate, without reducing policy rates.
Targeted long-term repo operations (TLTRO)
The TLTRO was introduced by the RBI.
- Under TLTRO, banks can access three-year funding and use it to invest in investment-grade corporate bonds, commercial paper, and debentures.
- Of this, banks are required to buy up to 50% of their incremental holdings of eligible instruments from primary market issuances and the rest from the secondary market, including from mutual funds and NBFCs.
- LTROs are conducted on e-KUBER platform that is the Core Banking Solution of RBI.
Significance of TLTRO
- It was introduced by the RBI to help companies, including financial institutions, resolve their cash flow problems in the wake of the coronavirus outbreak and imposed lockdown.
Priority Sector Lending
- PSL was introduced with an objective to ensure access to credit, adequate flow of credit to employment intensive sectors like agriculture and MSME, especially for vulnerable sections of society.
- Priority Sector Lending Certificates (PSL-Cs) were introduced in 2016 to support comparative advantage of different banks in their respective areas of specialization.
Domestic scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) and Foreign banks with 20 branches and above
Foreign banks with less than 20 branches
Total Priority Sector
40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, to be achieved in a phased manner by 2020.
- 18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
- Within the 18 percent target for agriculture, a target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers.
- 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
Advances to Weaker Sections
- 10 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher
- Priority Sector includes the following categories
- Agriculture - Farm credit, Agriculture infrastructure and Ancillary activities.
- Micro, Small and Medium Enterprises
- Export Credit
- Social Infrastructure
- Renewable Energy
Source: Mint, RBI
Image Source: Business Standard