NEW DELHI: The Reserve Bank of India (RBI) on Friday urged planned commercial and credit unions not to pay dividends for the fiscal year ending March 2020, and announced that it would take this position based on the financial health of the banks for the quarter to September 2020. RBI Governor Shaktikanta Das said today that given the challenges posed by Covid-19, this will be done to save cash.
“It is imperative that banks save capital in order to maintain their ability to support the economy and absorb losses in an environment of increased uncertainty,” said RBI Governor Shaktikanta Das in his address and announced several steps to improve liquidity, especially for non-bank financial companies (NBFC).
The central bank cut the reverse repo rate 25 basis points to 3.75%, despite leaving the repo rate unchanged at 4.4% and instead lending more to businesses and individuals.
Announcing the launch of the second tranche of targeted long-term repurchase agreements – TLTRO 2.0 – to facilitate lending to NBFCs, Das said the central bank would do this for an amount of ₹50,000 crore in tranches of the appropriate size.
That said the funds must be invested in investment-grade bonds, commercial paper and non-convertible notes from NBFCs within one month of being drawn, with at least 50% going to small and medium-sized NBFCs and microfinance institutions (MFIs) on RBI’s loan .
“Investments made by banks under this facility are classified as held to maturity (HTM) even if they exceed 25% of the total investment that may be included in the HTM portfolio. Exposures under this facility also do not count towards the large exposure line, ”said Das. The TLTRO 2.0 announcement will be released today, he said.
That said it was done because it was discovered that funds raised through TLTRO 1.0 were parked in bonds from public entities and large corporations. NBFCs and MFIs therefore have a hard time raising money.
That said the measures were designed to maintain adequate liquidity in the system and its components in the face of upheavals related to Covid-19; Facilitation and incentives for bank credit flows; Financial stress relief; and allow markets to function normally.
Between February 6 and March 27, RBI injected liquidity totaling 3.2% of GDP in order to relieve the financial markets. He said that as a result of these moves, financial conditions have eased significantly, which is reflected in bond market returns.
In addition to other announced measures to alleviate the pain of the banks, the RBI urged planned commercial banks and cooperative banks not to make any further dividend distributions from the profits of FY20 (April-March).
“This limit is being reviewed based on the financial condition of banks for the quarter ended September 30, 2020,” said Das.
That said India’s foreign exchange reserves remained resilient, totaling $ 476 billion as of April 10, equivalent to an import of 11.8 months.
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