Economics Current

RBI’s new liquidity management framework and regulations

The covid-19 pandemic has exploded into a crisis like no other in the recent human history. The unconscionable loss of human lives and destruction of economic activity has induced extreme uncertainty in financial markets under what has been called as ‘The Great Lockdown’ (IMF, 2020). Financial markets in India went into a tailspin and several financial institutions faced stress. Under this backdrop, the Reserve Bank of India (RBI) announced measures:
·maintain adequate liquidity in the system and its constituents in the face of covid-19 related dislocations
·facilitate and incentivise bank credit flows
·ease financial stress
·enable the normal functioning of markets
Banking system liquidity refers to the availability of reserve funds with the banks, the dominant financial intermediaries in India with preferred access to central bank liquidity. On a given day, system liquidity is in deficit (i.e., system demand for borrowed reserves is positive), if the banking system is a net borrower from the Reserve Bank at its liquidity windows. While, the system liquidity is in surplus (i.e., system demand for borrowed reserves is negative) if the banking system is a net lender to the Reserve Bank.
·RBI has undertaken measures to target liquidity provision to sectors and entities which are experiencing liquidity constraints and/or hindrances to market access. 
·Long term repo operations (LTROs) to ensure adequate liquidity at the longer end of the yield curve, exemptions from the cash reserve ratio for the equivalent of incremental credit disbursed by banks as loans in certain select areas/segments and targeted LTROs or TLTROs fall in this class of sector-specific measures.
·Accordingly, it has been decided to conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of ₹50,000 crore. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50% of the total amount availed going to small and mid-sized NBFCs and MFIs.
RBI announced certain regulatory measures to mitigate the burden of debt servicing brought about by disruptions on account of the pandemic and to ensure the continuity of viable businesses. Based on a review of the rapidly evolving situation, and consistent with the globally coordinated action committed to by the Basel Committee on Banking Supervision to alleviate the impact of Covid-19 on the global banking system.
·Asset classification - all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020.
·Extension of resolution time 
·Distribution of dividend - 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
·Coverage ratio – lowered from 100% to 80% 
·NBFC loans to real estate projects – extended by 1 year

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