Long-Term Repo Operation (LTRO)

• What is a Long-Term Repo Operation (LTRO) and how does it work?

Long-term repo operations (LTRO) is a monetary policy tool used by the Reserve Bank of India (RBI) to inject liquidity into the banking system for a longer duration, typically ranging from 1 to 3 years. LTRO was first introduced in India in February 2020, in response to the funding issues faced by banks and non-banking finance companies (NBFCs) due to the COVID-19 pandemic.

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.

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.

Mechanism:

The RBI conducts LTRO auctions where banks can borrow funds from the central bank at a fixed rate for a period of up to three years.

The funds are provided against eligible collateral such as government securities, state development loans, and treasury bills.

The banks can use the funds obtained from LTRO to lend to productive sectors such as agriculture, manufacturing, and infrastructure.

In January 2021, the RBI introduced the “on-tap” LTRO scheme, which allows banks to borrow funds through LTRO at any time they require, instead of waiting for the RBI to announce an auction. Under the on-tap LTRO scheme, banks can borrow up to 3% of their deposits at the prevailing repo rate, which is currently 4%. The on-tap LTRO scheme is aimed at providing banks with greater flexibility in managing their liquidity requirements and ensuring the smooth transmission of monetary policy.

Here are some advantages of LTRO:

1. Increased Liquidity: The primary advantage of LTRO is to provide liquidity to the banking system. When banks have sufficient liquidity, they are better equipped to lend money to businesses and consumers, which can boost economic activity and growth.
2. Lower Interest Rates: LTRO can also help to lower the interest rates in the economy by providing banks with access to cheaper funds. Banks can then pass on these lower rates to borrowers, making it easier for businesses and consumers to obtain credit and invest in productive activities.
3. Stability: LTRO can help to promote stability in the financial system by providing banks with a reliable source of funding. This can help to reduce the risk of bank failures and financial crises, which can have serious implications for the wider economy.
4. Increased Confidence: By providing banks with a reliable source of funding, LTRO can also help to increase confidence in the financial system. This can help to restore trust in the banking sector and encourage consumers and businesses to invest and spend.
5. Flexibility: LTRO can be a flexible tool that central banks can use to adjust the level of liquidity in the economy as needed. By providing longer-term loans, central banks can smooth out short-term fluctuations in the availability of credit and respond to changing economic conditions.
6. Stimulate Economic Growth: By providing long-term funding at a lower interest rate, LTRO can help to stimulate economic growth by encouraging investment and spending. Banks may use the funds to finance productive activities such as infrastructure development, business expansion, and job creation, which can in turn boost economic activity.
7. Reduce Systemic Risk: LTRO can also help to reduce systemic risk in the financial system by improving the liquidity position of banks. When banks have access to sufficient funding, they are better able to meet their obligations and reduce the risk of default. This can help to prevent contagion in the financial system and reduce the likelihood of financial crises.
8. Provide Predictability: LTRO can provide predictability to banks by ensuring that they have access to funding over an extended period of time. This can help banks to plan their operations and investments with greater certainty, reducing uncertainty and risk.
9. Encourage Financial Stability: LTRO can encourage financial stability by promoting a healthy banking sector. When banks have access to funding at a lower interest rate, they may be more likely to maintain adequate capital buffers and comply with regulatory requirements. This can help to prevent financial imbalances and promote stability in the financial system.
10. Improve Monetary Transmission: LTRO can improve monetary transmission by providing a direct channel for central banks to influence the supply of credit in the economy. By providing long-term funding at a predetermined interest rate, central banks can influence the cost of credit and encourage banks to lend to priority sectors such as small and medium-sized enterprises or housing.

In summary, LTRO can provide a number of advantages to the economy by improving liquidity, reducing interest rates, promoting stability, and encouraging growth. However, like any monetary policy tool, it has limitations and risks that must be managed carefully to ensure its effectiveness.