{"id":1223,"date":"2020-05-19T18:35:00","date_gmt":"2020-05-19T13:05:00","guid":{"rendered":"https:\/\/blog.tickertape.in\/?p=1223"},"modified":"2021-03-24T12:12:25","modified_gmt":"2021-03-24T06:42:25","slug":"credit-crunch-and-ltro-part-1","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/credit-crunch-and-ltro-part-1\/","title":{"rendered":"Credit crunch and LTRO Part 1"},"content":{"rendered":"\n<p>Indian economy had slowed down even before the advent of coronavirus (COVID-19). Among other things, the market was gripped by a credit crunch. Thankfully, the RBI intervened and announced several cuts in the repo rate and conducted TLTRO, under what is known as the LTRO. Both LTRO and TLTRO are relatively new for us but these financial tools can address liquidity crunch, boost the economy and also impact <a href=\"https:\/\/www.tickertape.in\/blog\/can-we-have-an-sip-for-stocks\/\">personal finance<\/a>, that is the rate of interest you pay and receive.<\/p>\n\n\n\n<p>So, we have written two articles explaining what is LTRO and what problem it solves in this article. The post also discusses the influence that LTRO and TLTRO have on the macro. The sequel, <a href=\"https:\/\/www.tickertape.in\/blog\/credit-crunch-and-ltro-part-2\/?ref=blog\">Credit crunch and LTRO Part 2<\/a> narrates how LTRO worked for India and also dives into the micro-levels of the economy, that is, how this financial tool impacts the borrower and investors. So, stay tuned!<\/p>\n\n\n\n<p>The article covers:<\/p>\n\n\n\n<p><a href=\"#LTRO\">What is LTRO?<\/a><\/p>\n\n\n\n<p><a href=\"#LTRO-work\">How does LTRO work?<\/a><\/p>\n\n\n\n<p><a href=\"#LTRO-economy\">How does TLTRO boost the economy?<\/a><\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/credit-crunch-and-ltro-part-1\/#What-is-LTRO\" title=\"What is LTRO?\">What is LTRO?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/credit-crunch-and-ltro-part-1\/#How-does-LTRO-work\" title=\"How does LTRO work?\">How does LTRO work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/credit-crunch-and-ltro-part-1\/#How-does-TLTRO-boost-the-economy\" title=\"How does TLTRO boost the economy?\">How does TLTRO boost the economy?<\/a><\/li><\/ul><\/nav><\/div>\n<h3 class=\"wp-block-heading\" id=\"LTRO\"><span class=\"ez-toc-section\" id=\"What-is-LTRO\"><\/span><strong>What is LTRO?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Coined as LTRO, the long term refinancing operations, is a financial tool first introduced by the European Central Bank (ECB) during the European sovereign debt crisis. ECB used LTRO to lend low-interest rate loans to eurozone banks and help them address financial and liquidity issues.<\/p>\n\n\n\n<p>TLTRO\u2014targeted long term refinancing operations\u2014on the other hand, means LTRO targeted at a particular segment of the economy. For instance, TLTRO can be LTRO targeted at specific segments such as commercial banks, non-banking financial corporations, and micro-financial institutions.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"LTRO-work\"><span class=\"ez-toc-section\" id=\"How-does-LTRO-work\"><\/span><strong>How does LTRO work?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>LTRO is conducted through an auction where banks bid for liquidity under the operation. The RBI first ascertains the amount of liquidity to be infused into the system. It then determines the rate of interest, which currently is the prevailing repo rate. Next, the participating banks bid against each other to win the available liquidity.<\/p>\n\n\n\n<p>Further, loans offered under the TLTRO scheme can have a tenure ranging from 1 to 3 years. This means, the banks are required to repay the loan to RBI within 3 years from the borrowing date. That said, the banks can only avail loans under TLTRO after pledging collateral in the form of <a href=\"https:\/\/www.tickertape.in\/blog\/government-securities\/\">government securities<\/a> with the RBI. These securities can either have the same tenure as the loan or higher.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"LTRO-economy\"><span class=\"ez-toc-section\" id=\"How-does-TLTRO-boost-the-economy\"><\/span><strong>How does TLTRO boost the economy?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Everything is interconnected. That is to say, banks lend to businesses. They, in turn, produce goods and services and contribute to economic activities. But what happens when businesses don\u2019t get loans? What will become of the economy? That is when the RBI steps in as it did now.<\/p>\n\n\n\n<p>By offering TLTRO, the RBI injected cheap funds into the lending system and increased liquidity. This encourages banks to offer loans to businesses, who can kick-start their operations. Besides, banks can also use these funds to earn high returns by investing in attractive assets. Ultimately, this helps banks to tidy their balance sheet.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>LTRO and TLTRO can address liquidity crunch, boost the economy, and impact personal finance. Read what these mean and how LTRO works <\/p>\n","protected":false},"author":27,"featured_media":1242,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[10,1744],"tags":[],"acf":[],"modified_by":"Manonmayi","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/05\/TLTRO-1-BLOG.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1223"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/27"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=1223"}],"version-history":[{"count":3,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1223\/revisions"}],"predecessor-version":[{"id":1253,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1223\/revisions\/1253"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/1242"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=1223"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=1223"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=1223"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}