In recent news, the Reserve Bank of India (RBI) has revealed a range of initiatives aiming at providing liquidity assistance to Non-Banking Financial Companies (NBFCs). This move also assists in providing certain benefits for loans given to the commercial real estate sector.
Understanding TLTRO 2.0
The RBI plans to conduct Targeted Long-term Repo Operations (TLTRO 2.0) for a total amount of Rs 50,000 crore. These operations will occur in suitably sized installments. Under the TLTRO 2.0 plan, banks are instructed to invest these funds in investment-grade bonds, commercial papers, and non-convertible debentures of NBFCs. The RBI mandates that at least 50% of these funds should be received by small to mid-sized NBFCs and Micro Finance Institutions (MFIs).
Held-to-Maturity Investments
The RBI classifies bank investments under this initiative as ‘Held-to-Maturity’ (HTM), even if it exceeds 25% of the total investment allowed in the HTM portfolio. HTM securities are ones businesses purchase with the intent to hold until they mature. This classification helps alleviate the liquidity issues currently faced by NBFCs and MFIs.
Liquidity Challenges Faced by NBFCs
NBFCs are confronted with liquidity pressure since banks have not offered any repayment moratorium to these entities even as NBFCs need to provide their clients with the same.
Special Refinance Facility Provided by the RBI
Additionally, the RBI has decided to give a special refinance facility worth ₹50,000 crore to the likes of National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and National Housing Bank (NHB). This funding aims to cater to sectoral credit needs and is divided as follows – ₹25,000 crore to NABARD for refinancing Regional Rural Banks, cooperative banks, and MFIs; ₹15,000 crore to SIDBI for on-lending or refinancing; ₹10,000 crore to NHB for supporting Housing Finance Companies.
Extension of Loans to the Real Estate Sector by NBFCs
The RBI has permitted the extension of loans by NBFCs to delayed commercial real estate projects by a year without any need for restructuring.
About Targeted Long-term Repo Operations (TLTRO)
TLTRO is a tool that allows banks to borrow one to three-year funds from the RBI at the repo rate. It provides government securities with similar or higher tenure as collateral. ‘Targeted’ LTRO means that the RBI wants banks opting for funds under this option to specifically invest in investment-grade bonds.
Role of Investment-Grade Bonds, Commercial Paper, and Non-Convertible Debentures
Investment-grade bonds denote bonds carrying a relatively low credit risk compared to other bonds. A commercial paper is a short-term debt instrument that firms issue to raise funds, generally for up to one year. Non-convertible debentures refer to debentures that can’t be transformed into shares.
Introduction to National Housing Bank (NHB)
Established on July 9, 1988, under the National Housing Bank Act, 1987, NHB is a mandated organization acting as the apex level financial institution for the housing sector in the country. It’s a government-owned entity.
Understanding Non-Banking Financial Company (NBFC)
A company registered under the Companies Act, 1956, NBFC’s business involves loans and advances, the acquisition of shares/stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities. Their operations include leasing, hire-purchase, insurance business, and chit business.
Features of NBFCs
NBFCs cannot accept demand deposits and are not part of the payment and settlement system. Hence, they cannot issue cheques drawn on themselves. There’s no deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation available to the depositors of NBFCs.
