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    Explained: How RBI is trying to help small businesses with easier funding for NBFCs

    Explained: How RBI is trying to help small businesses with easier funding for NBFCs

    Explained: How RBI is trying to help small businesses with easier funding for NBFCs
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    By Ritu Singh   IST (Updated)

    The Reserve Bank of India on Friday announced multiple measures, primarily aimed at ensuring that small businesses get funds at reasonable rates of interest. Remember, small businesses have been hit the hardest because of the nationwide lockdown following the coronavirus. And many of them will go bankrupt unless they get timely funding. If small businesses collapse, the resulting job losses will be huge.
    Let’s look at the measures announced by the RBI and the reasons for those
    1. TLTRO 2.0
    2. RBI announced a second Targeted Long Term Repo Operation (TLTRO) of Rs 50,000 crores to ensure liquidity for non-banking finance companies (NBFCs) and microfinance institutions, which lend to small medium and micr businesses,
      So what exactly is a TLTRO?
      TLTRO is a tool under which RBI provides money to banks at the repo rate for three years. This is done to boost liquidity in the financial system. When liquidity gets tight, borrowing costs for companies shoot up. So RBI gives cheap fund to banks, which the banks then lend to companies by subscribing to their bonds and debentures.
      Why “targeted”?
      It is called targeted because RBI requires banks to specifically invest the funds in investment grade corporate debt.
      Was there a TLTRO 1?
      Yes there was, in the last week of March. But all the money was taken up by better rated large corporate and public sector undertaking (PSUs). NBFCs and microfinance institutions (MFIs) got nothing.
      What happens in TLTRO 2?
      Banks can borrow Rs 50,000 crore from the RBI and then have to invest that money in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs. At least half of that money has to be loaned to small and mid-sized NBFCs and MFIs.
      RBI will provide a special refinancing facility of Rs 25,000 crore National Bank For Agriculture & Rural Development (NABARD), Rs 10,000 crore for National Housing Bank and Rs 15,000 crore SIDBI.
      NABARD can refinance regional rural banks, SIDBI can lend to small businesses, and NHB can lend to housing finance companies (HFCs), all at a low rate of interest.
      RBI has reduced the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.0 per cent to 3.75 per cent with immediate effect.
      Simply put, reverse repo is the rate at what RBI pays banks when they deposit money with the central bank. The RBI realized that despite it recently cutting the rate at which it loaned money to banks (by 75 basis points), banks were not cutting interest rates at their end. Instead, they were parking a lot of money with the RBI and earning 4 percent on it.
      The cut in reverse repo rate is RBI’s way of making it less profitable for banks and nudging them to lend money to businesses and people who need it more.
      The Ways and Means Advances (WMA) limit for state governments has been increased by 60 percent with immediate effect, valid upto September 30, 2020
      What is WMA exactly?
      Ways and Means Advances scheme was introduced by RBI to help governments when there was a mismatch between their payments and receipts.
      How does it work?
      Under WMA, governments can avail immediate cash from RBI, and return it within the next 90 days along with interest. Interest is charged at the existing repo rate.
      What if the government does not repay within 90 days?
      It is treated as overdraft by RBI and a higher interest rate is charged on the amount.
      How will higher WMA limits help?
      WMA limit has been increased to allow states to borrow more to finance the expenditure on anti-COVID relief work. So states will have to rely less on bond markets where the interest rates are higher
      Wherever banks and NBFCs have decided to give a three-month deferment on repayment of loans under the recent RBI moratorium guideline, the account will remain ‘standard’ and not be classified as a non-performing asset (NPA).
      Usually, an account is classified as an NPA if there is no interest or principal repayment for 90 days.
      However, to ensure the health of the financial system is also protected while allowing for these relaxations, RBI has asked banks to set aside an additional ten percent provisioning for all accounts where the moratorium is availed.
      Under the stressed assets resolution framework of the RBI, called the June 7 circular, banks are required to set aside an additional 20 percent provision if they are unable to resolve accounts within 210 days from date of default or 180 days from turning an NPA. RBI has now decided that the period for resolution plan can be extended by 90 days.
      If the Date of Commercial Commencement of Operations (DCCO) for real estate customers of NBFCs are delayed by up to one year, these accounts do not have to be classified as NPA. Banks were given this concession some time back. This has now been extended to NBFCs as well.
      RBI has lowered Liquidity Coverage Ratio (LCR) requirement for all scheduled commercial banks to 80 percent from 100 percent currently.
      What is LCR?
      It basically highly liquid assets that RBI mandates that banks must hold. This is to make sure banks have enough assets that can be immediately liquidated to meet short term obligations at all times.
      What was the earlier rule?
      Banks had to hold enough high quality liquid assets (HQLA) equal or greater than its net cash flow to survive acute 30-days stress at the very least.
      What is the change in rule?
      The rule has been relaxed to 80 percent of the 30-day stress period requirement
      How will it help?
      Banks will be able to manage their liquidity better in a tight environment
      The Reserve Bank has said that all scheduled commercial banks will not make any dividend payout for the year ended March 2020 (financial year 2019-2020). This will be reviewed in the second quarter of FY21.
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