Long Term Repo Operation | 11 Mar 2020

Why in news

According to the Reserve Bank of India (RBI), the response to the Long Term Repo Operation (LTROs) has been highly encouraging.

Key Points

  • Long Term Repo Operation (LTRO) is a mechanism to facilitate the transmission of monetary policy actions and the flow of credit to the economy. This helps in injecting liquidity in the banking system.
  • Funds through LTRO are provided at the repo rate. This means that banks can avail one year and three-year loans at the same interest rate of one day repo. But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
  • According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
    • The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, repo, term repo etc.
  • The central bank has been conducting LTROs for one- and three-year tenors of appropriate sizes for up to a total amount of Rs 1,00,000 crore at the policy repo rate from the fortnight beginning February 15, 2020.
    • The central bank received total bids of ₹1.94 lakh crore, for the three-year repo, compared with the notified amount of ₹25,000 crores.
    • In yet another (LTROs) ₹48,856 crores worth of bids were conducted for an amount of ₹25,000 crores with a three-year tenor.
  • LTROs are conducted on Core Banking Solution (E-KUBER) platform. The operations would be conducted at a fixed rate.
  • The minimum bid amount would be Rs 1 crore and multiples thereof. There will be no restriction on the maximum amount of bidding by individual bidders.

E-Kuber

  • e-Kuber is the Core Banking Solution of Reserve Bank of India which was introduced in 2012.
  • Core Banking Solutions (CBS) can be defined as a solution that enables banks to offer a multitude of customer-centric services on a 24x7 basis from a single location, supporting retail as well as corporate banking activities.
  • The centralisation thus makes a “one-stop” shop for financial services a reality. Using CBS, customers can access their accounts from any branch, anywhere, irrespective of where they have physically opened their accounts.
  • Almost all branches of commercial banks, including the Regional Rural Banks (RRBs), are brought into the core-banking fold.
  • The e-kuber system can be accessed either through INFINET or Internet. The INFINET is a Closed User Group Network for the exclusive use of member banks and financial institutions and is the communication backbone for the National Payments System.

Benefits of the LTROs

  • Enhance Liquidity: It will enhance liquidity in the banking system by Rs 1 lakh crore.
  • Bring down the cost of funds for banks: The introduction of long-term repo operations (LTRO) will bring down the cost of funds for banks without effectively cutting deposit rates.
  • Boost Investment: It is a measure that is expected to bring down short-term rates and also boost investment in corporate bonds.
  • Ensure banks have durable liquidity: These efforts are being carried forward with a view to assuring banks about the availability of durable liquidity at a reasonable cost relative to prevailing market conditions.
  • Ensure credit flow to productive sectors: This should encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.

Source: TH