RBI Announces Regulatory and Liquidity Measures in Context of Pandemic

To support the financial system and economy, the focus of liquidity measures by RBI will now include revival of activity in specific sectors that have both backward and forward linkages and multiplier effects on growth. Accordingly, it has been decided to conduct on tap targeted long-term repo operations (TLTRO) with tenors of up to three years for a total amount of up to INR 1000 billion at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021, with flexibility with regard to enhancement of the amount and period after a review of the response to the scheme. 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 liquidity availed under the scheme can also be used to extend bank loans and advances to these sectors. All exposures under this facility will also be exempted from reckoning under the large exposure framework. Moreover, banks that had availed of funds earlier under targeted long-term repo operations (TLTRO and TLTRO 2.0) will be given the option of reversing these transactions before maturity. The details of the scheme will be announced separately.

In terms of other regulatory measures, RBI has revised limit for risk-weight for regulatory retail portfolio, rationalized risk-weights for individual housing loans, and reviewed the model for co-origination of loans by banks and a category of non-banking financial companies (NBFCs) for lending to the priority sector subject to certain conditions:

•  As per the present RBI instructions, the exposures included in the regulatory retail portfolio of banks are assigned a risk-weight of 75%. For this purpose, the qualifying exposures need to meet certain specified criteria, including low value of individual exposures. In terms of the value of exposures, it has been prescribed that the maximum aggregated retail exposure to one counterparty should not exceed the absolute threshold limit of INR 50 million. To reduce the cost of credit for the segment consisting of individuals and small businesses, and in harmonization with the Basel guidelines, it has been decided to increase this threshold to INR 75 millions in respect of all fresh as well as incremental qualifying exposures. 
• In terms of the extant regulations on capital charge for credit risk of individual housing loans by banks, differential risk-weights are applicable based on the size of the loan as well as the loan to value ratio (LTV). It has been decided to rationalize the risk-weights by linking them only with LTV ratios for all new housing loans sanctioned up to March 31, 2022. Such loans shall attract a risk-weight of 35% where LTV is less than or equal to 80% and a risk-weight of 50% where LTV is more than 80% but less than or equal to 90%. 
• RBI had, in 2018, put in place a framework for co-origination of loans by banks and a category of NBFCs for lending to the priority sector subject to certain conditions. The arrangement entailed joint contribution of credit at the facility level by both the lenders, in addition to sharing of risks and rewards between them for ensuring appropriate alignment of respective business objectives. Based on  feedback received from the stakeholders, to better leverage the respective comparative advantages of the banks and NBFCs in a collaborative effort and to improve the flow of credit to the unserved and underserved sector of the economy, it has been decided to extend the scheme to all the NBFCs, to make all priority sector loans eligible for the scheme and give greater operational flexibility to the lending institutions. 

Keywords: Asia Pacific, India, Banking, COVID-19, Basel, Large Exposures, Credit Risk, TLTRO, LTV, RBI