The Reserve Bank of India’s plan to offer more long-term funds to banks via its on-tap targeted long-term repo operations is unlikely to boost lending due to lack of demand and nervousness around credit quality, said bankers. This, despite tweaks made to the scheme which widen the use of funds raised via the new TLTRO facility.
Last week, the RBI said that it would offer Rs 1 lakh crore in funds under the on-tap TLTRO. “Liquidity availed by banks under the scheme has to be deployed in corporate bonds, commercial papers, and non-convertible debentures issued by the entities in specific sectors over and above the outstanding level of their investments in such instruments as on September 30, 2020,” the regulator had said in its statement. It excluded an earlier condition attached to TLTRO funds which said that the money must be invested in the investment-grade paper.
“The liquidity availed under the scheme can also be used to extend bank loans and advances to these sectors,” the RBI said.
The TLTRO is aimed at providing regulatory support to the banking sector during the second half of the current financial year since credit tends to typically pick up after October, said Rajiv Anand, executive director at Axis Bank.
“The RBI is ensuring that due to the festive demand there should not be any tightness in liquidity. By ensuring that banks can extend loans and invest in sub-investment grade securities, the RBI has also increased the use case for the TLTRO funds,” Anand said. “But the demand situation still needs to improve.”
Not all banks are likely to tap the facility since many of them have adequate liquidity.
Sujit Kumar Verma, deputy managing director at State Bank of India, said there’s ample liquidity in the system, leading to lenders parking funds at the RBI’s reverse repo window. “There might be some banks who might not have the liquidity flow like SBI and other large banks do,” he said. “For them, this facility will make sense. Moreover, the funds deployed through this route do not need to meet the large exposure framework guidelines of the RBI, which could be beneficial for some banks.”
As per the RBI’s latest large exposure framework guidelines, banks can only extend up to 30% of their eligible capital base toward a single corporate entity through loans or bonds. According to SBI’s Verma, companies which do not have borrowing headroom can access these funds for their financing needs. However, credit risk fears will continue to impact credit flow, he said.
In its final guidelines for the on-tap TLTRO window, the RBI will also need to clarify which sectors will receive the benefit of this additional liquidity, Verma said.
Pallav Mohapatra, chief executive of Central Bank of India, agreed.
“The major factor impacting the flow of credit is not liquidity. That there is plenty of. But the availability of capital is a serious concern,” Mohapatra said. “Moreover, banks are also required to make higher provisions against accounts which may look at restructuring after the pandemic, which will dampen sentiments.”
According to credit data available with the RBI, for the fortnight ended Sept. 25, the banking system saw outstanding credit rise by only 5.11% year-on-year.
While the banking system continues to be risk-averse, analysts expect lending to pick up in the next six months.
“Our channel checks say that banks are interested in lending further. Risk aversion is real, but we must also remember that the system entered this pandemic with tight credit standards,” said Asutosh Mishra, head of research-institutional desk at Ashika Stock Broking. “This means that the incremental stress will be under control and banks can take up fresh exposures.”
The scheme may also need further tweaks for it to meet its desired objective of broadening credit flow. The RBI should ideally tell banks that companies above a certain credit rating should not be allowed to access funds availed through the TLTRO route, said Anil Gupta, vice president and sector head, financial sector ratings at ICRA Ltd. “The RBI should also give clear instructions on the maximum permissible amount which can be extended to a single borrower or issuer,” Gupta said. “This will ensure that funds are available to all those in need.”
The TLTRO scheme, offering Rs 1 lakh crore in liquidity for a three-year duration, was first introduced in March and a second-round was offered in April. While the first round saw strong off-take, the second round failed to garner an adequate response from bankers, owing to risk aversion and tight conditions laid down by the RBI.
As a Subscriber you get
Stories
RECOMMENDED FOR YOU
POPULAR