RBI to ensure adequate liquidity in system; cuts reverse repo rate by 25 basis points

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In a move to ease financial stress and to maintain adequate liquidity in the system, the Reserve Bank of India has announced several steps on Friday including targeted long term repo operations and providing special refinance to financial institutions like NABARD, SIDBI and National Housing Bank.

“It has been decided to conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of ₹50,000 crore, to begin with, in tranches of appropriate sizes,” RBI Governor Shaktikanta Das said while announcing the measures.

Banks should deploy these funds by investing in investment grade bonds,commercial paper, and non-convertible debentures of NBFC with at least 50% of the total amount availed going to small and mid-sized NBFCs and MFIs.

RBI has also decided to provide special refinance facilities for a total amount of ₹50,000 crore to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs.

Also read: Coronavirus | RBI announces more measures to fight economic disruptions

“This will comprise ₹25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs); ₹15,000 crore to SIDBI for on-lending/refinancing; and ₹10,000 crore to NHB for supporting housing finance companies (HFCs),” RBI said.

Commenting that there has been significant surplus liquidity in the banking system, Mr. Das said the fixed rate reverse repo has been reduced by 25 bps to 3.75% — to discourage banks to park surplus funds with RBI.

RBI said the step was taken to to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy.

RBI has also increased the ways and means advances limit further for states. It has decided to increase the WMA limit of states by 60 per cent over and above the level as on March 31. The increased limit will be available till September 30, 2020.

The banking regulator has also provided some asset quality relief. For all accounts which lenders decided to grant moratorium, RBI said, there would be an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020.

“With the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges, they will have to maintain higher provision of 10% on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts,” RBI said.

RBI also said scheduled commercial banks and cooperative banks shall not make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions.

The regulator has also brought down the liquidity coverage ratio requirement for Commercial Banks from 100 per cent to 80 per cent with immediate effect.

“The requirement shall be gradually restored back in two phases — 90% by October 1, 2020 and 100 per cent by April 1, 2021,” RBI said.

Mr. Das also said that the payment infrastructure is running seamlessly and that ATM operations stood at over 91 per cent of full capacity.

“Regional offices of the RBI have supplied fresh currency of ₹1.2 lakh crore from March1 till April 14, 2020 to currency chests across the country to meet increased demand for currency in the wake of the COVID-19 pandemic. Banks have risen to the occasion by refilling ATMs regularly, despite logistical challenges,” Mr. Das said.

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