Long Term Repo Operations (LTROs) and Targeted Long Term Repo Operations (TLTROs) is in the news after the Reserve Bank of India launched these instruments. In this post, we shall understand these terms from exam point of view.

Before starting this post, it is recommended to read about Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF). You can read it using the link given.

LTRO and TLTRO in Simple language (in Hindi)

Before understanding LTRO and TLTRO deeply, first, understand it in simple terms. It has been explained in Hindi.

LTRO and TLTRO aise tool hai jisse RBI, banks ko paisa lend karta hai. By this way liquidity is injected in the system. Ye long term lending hoti hai unlike LAF and MSF jo short term lending hoti hai (like 28 days).

Ab bank RBI se paisa borrow karega to usse kuch interest bhi pay karna padega. This interest is linked to Repo Rate.

TLTRO aur LTRO me difference ye hai ki, TLTRO me bank ne jo paisa borrow kiya hai, wo kis jagah utilise hona chahye, ye RBI ne fix kar diya hai. hence it get its name TARGETED. Its end use is targetted to a specific sector.

LTRO and TLTRO have been introduced to ensure growth of economy in time of COVID-19.

Now read the post to understand it in detail.

What is LTRO?

• LTRO is a tool which allows banks to borrow funds from Reserve Bank of India for a tenor of upto 1-year to 3-years at Policy Repo Rate, against government securities with similar or higher tenure as collateral.
• Use of LTRO: LTRO is used to inject liquidity into the market and ensure flow of credit to the economy.

LTRO issued by RBI

• RBI in February 2020 announced to conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of ₹ 1,00,000 crore at the policy repo rate.
• So this LTRO auction of the amount of Rs 1 lakh crore was conducted in four parts and in each part the notified amount was Rs 25,000 Crore. This means that, all banks (inclusive) cloud borrow Rs. 25000 Crore in each auction.
• The four auctions were conducted on February 17, 2020, February 24, 2020, March 02, 2020 and March 09, 2020.
• After this, an additional Long Term Repo Operations (LTROs) was conducted by RBI on March 18, 2020 for an amount of Rs 25,000 crore.
• Hence total liquidity injected by LTRO=Rs 1,25,000 Crore (approx.)

Important Points for LTRO

• Minimum Bid= Rupees one crore and multiples thereof. (same for TLTRO)
• Maximum Bid= Notified amount of that auction. (same for TLTRO)
• Interest Rate of this LTRO= Fixed rate of Policy Repo Rate
• Tenor= 1 to 3 years

What is TLTRO?

TLTRO stands for Targeted Long Term Repo Operations. It is same as LTRO with a difference that the money borrowed by the banks under this scheme has to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures. It means that this LTRO should be targeted towards investment-grade corporate bonds, commercial paper, and non-convertible debentures. Hence the name Targeted LTRO.

The maximum amount that a particular bank can invest in the securities issued by a particular entity or group of entities out of the allotment received by it under the TLTRO shall be capped at 10 per cent.

TLTRO issued by RBI

• On March 27, 2020, the Reserve Bank of India announced to conduct TLTROs of up to three years of appropriate sizes for a total amount of ₹ 1,00,000 crores.
• After this 4 TLTRO auctions each of size Rs 25,000 crore was conducted on March 27, 2020, April 03, 2020, April 09, 2020 and April 17, 2020. In this way the total auction of Rs 1,00,000 crore was achieved.
• Interest Rate= Floating Rate linked to Repo Rate

TLTRO 2.0

The second version of TLTRO was announced by RBI on April 17, 2020. In this, the total amount has been decided at ₹ 50,000 crores.

Banks are required to deploy the funds to the specific sector within 45 days of borrowing. Funds that are not deployed within this time frame will be charged interest at the prevailing policy repo rate plus 200 bps for the number of days such funds remain un-deployed.

The investment in this case by banks under TLTRO 2.0

The funds availed under TLTRO 2.0 shall be deployed in investment-grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs). At least 50 percent of the total funds availed shall be apportioned as given below:

1. 10 per cent in securities/instruments issued by Micro Finance Institutions (MFIs);
2. 15 per cent in securities/instruments issued by NBFCs with asset size of ₹ 500 crore and below; and
3. 25 per cent in securities/instruments issued by NBFCs with assets size between ₹ 500 crores and ₹ 5,000 crores.

Reason for introduction of TLTRO 2.0

After the auction of TLTRO it was observed that deployment of TLTRO funds was largely been to bonds issued by public sector entities and large corporates, especially in primary issuances. The disruptions caused by COVID-19 have, however, more severely impacted small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs), in terms of access to liquidity. Hence there was a need to provide funds to these sectors. And hence 50% of the amount was now fixed for these sections in TLTRO 2.0.

Summary

LTRO and TLTRO are used to inject liquidity into the market and ensure flow of credit to the economy.

• Tenor of LTRO- 1 to 3 years
• Tenor of TLTRO- 3 years
• Minimum Bid (for both)= Rupees one crore and multiples thereof.
• Maximum Bid(for both)= Notified amount of that auction.
• Interest Rate of this LTRO= Fixed rate of Policy Repo Rate
• Interest Rate of TLTRO= Floating Rate linked to Repo Rate
• Amount of LTRO= Rs 1 lakh Crore
• Amount of TLTRO= Rs 1 lakh Crore
• Amount of TLTRO 2.0= Rs 50,000 Crore

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