RBI to slap 200 bps penal interest on banks if failed to invest TLTRO funds within 30 days

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The Reserve Bank on Monday warned banks that they will have to pay 200 bps additional penal interest if they fail to invest the mandated 50 per cent of the funds raised through targeted long-term repo operations (TLTRO) route in corporate bonds within a month. The apex bank announced the TLTRO on March 27 to ensure sufficient liquidity in the corporate bond market and has already conducted three such operations worth Rs 25,000 crore each.

The central bank promised to keep the market fully liquid.

In an FAQ on Monday, the RBI said banks can now take up to 30 working days to invest 50 per cent of the TLTRO funds in mandated instrument.

"Banks can take up to 30 working days to deploy their TLTRO funds in specified securities under the first tranche conducted on March 27.

However, if a bank fails to deploy funds within the specified time-frame, interest rate on un-deployed funds will increase to prevailing policy repo rate plus 200 bps for the number of days such funds remain un-deployed," the RBI warned.

The central bank further said the incremental penal interest must be paid along with the regular interest at the time of maturity. The present policy rate is 4.40 per cent.

On March 27, when the RBI went in for a pre-policy rate cut of 75 bps and a 100 bps cut in CRR, to help the debt market especially NBFCs, it also opened a new liquidity window called the targeted long term repo operations as "liquidity premia on instruments such as corporate bonds, commercial paper and debentures have surged".

To mitigate the adverse effects on the economic activity leading to pressures on cash flows across sectors, the Reserve Bank will conduct auctions of TLTROs of up to three years tenor for a total of up to Rs 1 lakh crore at a floating rate, linked to the policy repo rate.

"Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial papers and NCDs over and above the outstanding level of their investments in these bonds as of March 25.

Eligible instruments comprise both primary market issuances and secondary market purchases, including from MFs and NBFCs," the RBI said.

Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 percent of total investment permitted to be included in the HTM portfolio.

Exposures under this facility will also not be reckoned under the large exposure framework, the central bank said.

The RBI also said banks will have to maintain specified securities for the amount received in TLTRO in HTM book at all times till maturity of TLTRO.

The bank will also have to continue to hold an amount equivalent to what it was holding as on March 26 in its HFT/AFS (held for trading/available for sale) portfolio for the tenor of TLTRO borrowing as well as also make fresh acquisition of securities over and above their outstanding statement in specified securities it was holding as of March 26 from primary/secondary market.

But it said that "participation in TLTRO scheme will not impinge on their existing investment and the banks may continue to operate their AFS/HFT portfolio, in terms of extant regulatory/internal guidelines".

The RBI also clarified that though there is no maturity restriction on the specified securities to be acquired under TLTRO scheme, the outstanding amount of specified securities in the HTM portfolio should not fall below the level of amount availed under TLTRO scheme.

Banks are also allowed to keep their specified securities acquired under TLTRO scheme in HTM portfolio till their maturity and can classify the specified securities acquired under TLTRO scheme in the HTM category.

But if a bank decides to classify such securities under AFS/HFT category at the time of the acquisition, it will not be allowed to later shift such securities to HTM category and it should maintain sufficient records to demonstrate and separately identify securities purchased under TLTRO scheme within the AFS/HFT portfolio.

The deployment of funds availed under TLTRO in primary market cannot exceed 50 percent of the amount availed but for other fund investment the limits are fungible between primary and secondary market deployment, the regulator said.

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