rbi-extends-enhanced-borrowing-limit-for-banks-under-msf-till-march-31

Context: The Reserve Bank of India (RBI) has extended the enhanced borrowing facility provided to banks by six months to meet liquidity shortage till March 31, 2021.

More about news:

  • The RBI, as a temporary measure, had increased the borrowing limit of scheduled banks under the marginal standing facility (MSF) scheme from 2 per cent to 3 per cent of their Net Demand and Time Liabilities (NDTL).
  • The facility was later extended due to economic disruptions caused by the COVID-19 pandemic and subsequent lockdown.
  • Banks may continue to access overnight funds under the MSF against their excess SLR holding.
  • The RBI has also extended the relaxation on the minimum daily maintenance of the Cash Reserve Ratio (CRR) at 80 per cent for a further period of three months till September 25, 2020.

Benefits of RBI’s move: It provides increased access to funds and also qualifies as high-quality liquid assets for the liquidity coverage ratio.

Marginal standing facility (MSF) 

  • It is a window for Scheduled Commercial Banks to borrow from the Reserve Bank of India in an emergency situation when interbank liquidity dries up completely.
  • Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF.
  • Difference with Repo rate: Only scheduled commercial banks can avail MSF while the Repo rate is the rate at which money is lent by RBI to all commercial banks.
  • Limits of borrowing: Under MSF, banks can borrow funds up to 2% of their net demand and time liabilities (NDTL). 
  • The MSF rate is pegged 100 basis points or a percentage point above the repo rate ie. MSF rate= repo rate + 1%
  • The marginal standing facility rate currently stands at 4.25 per cent.

Image source: Mygov