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