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RBI to put 200 bps penalty on banks if failed to invest TLTRO funds in 30 days

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The Reserve Bank of India (RBI) has instructed banks that they need to invest the mandated 50% of the funds raised through targeted long-term repo operations (TLTRO) route, under the first tranche conducted on March 27, 2020,in corporate bonds or specified securities within a month or 30 working days.RBI to slap 200 bps penal interest

  • If failed, the interest rate on un-deployed funds will increase to prevailing policy repo rate plus 200 bps (basis points) additional penal interests will have to be paid for the number of days such funds remain un-deployed.
  • The present policy rate is 4.40%.

RBI has announced the TLTRO on March 27, 2020 to ensure sufficient liquidity in the corporate bond market and has already conducted three such operations worth Rs 25,000 crore each. Now, the liquidity availed under it has to be deployed by banks in investment grade corporate bonds, commercial papers and Non-convertible debentures (NCDs).

Key Points:

-Investments made by banks under this TLTRO facility will be classified as held to maturity (HTM) i.e. owned till maturity.

-Banks will have to maintain specified securities for the amount received in TLTRO in the HTM book at all times till maturity of TLTRO.

-Banks 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.

-The deployment of funds availed under TLTRO in the primary market cannot exceed 50% of the amount availed.

About TLTRO:
It is a tool under which the central bank provides one-year to three-year money to banks at the prevailing repo rate. This stimulates bank lending which leads to efficient liquidity in the economy.

About Reserve Bank of India (RBI):
Headquarters– Mumbai, Maharashtra
Formation– 1 April 1935
Governor– Shaktikanta Das
Deputy Governors– 4 (Bibhu Prasad Kanungo, Mahesh Kumar Jain, Michael Debabrata Patra, one is yet to be appointed).