Everyone knows C’s reactions are global and everyone is affected by its strong hold on humanity. RBI governor, rightfully, came again with his statement yesterday which dealt with broadly the following four areas:

(i) Maintain adequate liquidity in the system and its constituents in the face of COVID-19 related dislocations;

(ii) Facilitate and incentivize bank credit flows;

(iii) Ease financial stress; and

(iv) Enable the normal functioning of markets.

Full speech can be assessed as under: (Explanation for a common man is as usual available in my article along with my observations.)

https://taxguru.in/rbi/rbi-governors-statement-april-17-2020-relief-covid-19.html

Maintenance of liquidity in the system

All eligible financial institutions participated in 3-year Targeted Long-Term Repo Operation (TLTRO), April 17, 2020 as per information available in RBI web site:

Today, the Reserve Bank conducted the fourth Targeted Long Term Repo Operation (TLTRO) for a notified amount of ₹ 25,000 crores with a 3-year tenor in pursuance of the TLTRO announced vide press release dated April 15, 2020.

2. The total bids that were received amounted to ₹ 61,415 crores, implying a bid to cover ratio (i.e., the number of bids received relative to the notified amount) of 2.46.

3. Allotment was done for all bids on a pro-rata basis as given below:

Tenor 3-year
Date of Reversal April 13, 2023
Notified Amount (in ₹ crore) 25,000
No of bids received 11
Total amount of bids received (in ₹ crore) 61,415
Amount allotted (in ₹ crore) 25,009
Pro-rata Allotment Percentage (%) 40.71

Let us analyze what does one understand from above exercise of RBI.

Text book definition says that cheaper 3-year loans were made available to financial institution which bid for Rs 25000 Crores and got allotted on pro-rata allotment of 40.71%. Obviously, this was done by RBI.

RBI governor in his statement rightfully expresses his expectation that the financial institutions which availed this cheap fund to be repaid over 3 years would invest in the following manner:

The funds availed by banks under TLTRO 2.0(totaling Rs 50,000 Crores) would be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. (One easily has the understanding of NBFC or MFI.) Unfortunately, RBI governor rued that the earlier investments were done in primary bond issues of public sector understandings defeating the purpose of this new initiative.

One can easily recollect that during the national crisis of Italy when virtually the country failed to honor its commitments to international bond holders, European Central Bank offered TLTRO to tide over the crisis. Carrying very low of interest and for a period of 3 years, an unknown departure from 3 months earlier, this exercise set new path of monetary policy for the whole world.

To add clarity to the above matter, RBI governor explained that as done so far, banks’ investment under this facility will be classified as held to maturity (HTM) even in excess of 25 % of total investment permitted to be included in the HTM portfolio.

As promised by RBI governor, the circular has been issued on 17th April 2020 itself as per the web address given below:

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49689

a. The press release clearly mentions the following strict adherence. 50% of the total funds availed shall have to be apportioned 10 per cent in securities/instruments issued by Micro Finance Institutions (MFIs);

b. 15 per cent in securities/instruments issued by NBFCs with asset size of ₹ 500 crore and below; and

c. 25 per cent in securities/instruments issued by NBFCs with assets size between ₹ 500 crores and ₹ 5,000 crores.

This was necessitated due to the total negligence on the part of financial institutions in ignoring various micro, medium or other NBFCs financial instruments for investment.

Let us hear the other steps initiated by RBI while ushering in the objectives stated.

In terms of instructions issued on March 27, 2020, lending institutions were permitted to grant a moratorium of three months on payment of all term loans instalments falling due between March 1, 2020 and May 31, 2020 (Moratorium period). RBI has in line with the Basel Committee on banking supervision, has classified as standard as on February 29, 2020, even if overdue, the moratorium period, wherever granted, shall be excluded by the lending institutions from the number of days past-due for the purpose of asset classification under the IRAC norms.

This will help thousands of borrowers who in spite of good health and working conditions at home could not productively engage themselves towards their work schedule.

Notifications issued by RBI on the same date is given below for fellow bankers, bank concurrent auditors, individual term loan borrowers, executives of NBFCs or other micro finance executives.

COVID19 Regulatory Package – Asset Classification and Provisioning

https://taxguru.in/rbi/covid19-regulatory-package-resolution-stressed-assets.html

Some of the other approved decisions are enumerated below:

(i) In case of provisioning for above accounts under discussion, RBI has permitted to provide 5% provisioning per quarter ended March 31, 2020 and June 30, 2020 and it is not a surprise to know that the financial institutions will adjust these provisions with actual figure at the end of their financial year.

(ii) Extension of resolution Timeline: RBI prudential framework expects AIFIs, NBFR-NE-Sis to hold extra 20%provision in case of non-implementation of resolution plans. In view of uncertain economic situation, RBI extends the period of Resolution plan by 90 days.

(iii) To conserve capital and support the economy, the only option available for an average share holder is to sacrifice his dividend and RBI expectedly advised banks not to indulge in payouts by way of dividend for financial year ended March 31, 2020. Being one of the share holders of one or other public sector or private sector bank, I am disappointed but when even the capital invested as deposits has been shaky with Indian banks, one is not surprised by this move of RBI.

(iv) Liquidity Coverage Ratio: To ease the liquidity position of individual financial institution, KCR for SCBs has been reduced to 80% and may be lifted up next two phases.

(v) NBFC loans to Commercial Real Estate Projects: Previously, commencement of the same if delayed beyond the control of promotors was allowed for extension of one year for SCBs and the same is applicable for NBFCs too.

Conclusion

One might have read many speeches, statements or press releases by RBI officials and generally, an air of authority or distance from a common man has been noticed. But, however, this statement by the current RBI Governor will go down in history an embodiment of humility, kindness and offer of hope to all of us. It is amazing to find him, one of the most experienced bureaucrats with decades of experience in Government of India finds it easy to face the most challenging economic situation with ease and promise to monitor it on a day to day basis. I can only salute RBI governor and the vast institution, namely, RBI itself whole heartedly.

His concluding remark echoes in my mind just like it shakes yours too.

“The RBI will monitor the evolving situation continuously and use all its instruments to address the daunting challenges posed by the pandemic. The overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable. Regulatory measures that have been announced so far – including those made today – are dovetailed into the objective of preserving financial stability.

Although social distancing separates us, we stand united and resolute. Eventually, we shall cure; and we shall endure.

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