As a temporary measure for the finance environment of the nation the Reserve Bank Of India had enhanced the borrowing limit under the MSF (Marginal Standing Facility) Scheme of the scheduled banks from 2% to 3% of their Net Demand and Time Liabilities (NDTL) with effect from March 27, 2020. RBI’s decision has been taken between the ongoing adverse economic situation created by the pandemic Coronavirus. This decision has been made for meeting the liquidity shortages of the banks. Thus, by dipping into the Statutory Liquidity Ratio (SLR), the banks can borrow overnight funds under the MSF at their discretion.
Reason Behind the Extension of the Enhanced Borrowing Limit
This relaxation was previously granted till June 30, and then it has been extended to September 30. According to the guidelines under MSF, it is considered a window for banks for borrowing from the RBI (Reserve Bank of India) in an emergency situation when the interbank liquidity dries up completely. Therefore by pledging the government securities at a rate higher than the repo rate, the banks borrow from the central bank under Liquidity Adjustment Facility. Usually, the banks can borrow funds up to 1% of their Net Demand and Time Liabilities (NDTL) under MSF. If we talk about the statutory liquidity ratio, it can be defined as the ratio of the liquid assets to the NDTL. The banks need to maintain a stipulated proportion of their Net Demand and Time Liabilities in liquid assets like gold, cash, and even unencumbered securities, apart from the Cash Reserve Ratio.
Involvement of SLR and MSF in the Decision of RBI
Every alternate Friday of each month, banks need to report the RBI regarding their SLR maintenance and pay penalties that happen due to failing to maintain the SLR as mandated by MSF. The dated securities and treasury bills that are issued under the market stabilization schemes and market borrowing program also form to be the part of the SLR. As per the RBI statement, the extension of the enhanced limit has been decided on a review until September 30, 2020. They also added that the banks might continue to access overnight funds under the MSF against their access SLR (Statutory Liquidity Ratio) holding. Currently, the marginal standing facility rate of the banks stands at 4.25%. RBI has also decided for some other rate extensions for a further period of 3 months till September 25, 2020.
As per this, RBI has extended the relaxation on the minimum daily maintenance of the Cash Reserve Ratio at 80%. The Cash Reserve Ratio (CRR) in India is decided by the Monetary Policy Committee of RBI in the periodic Monetary and Credit Policy. In every monetary policy review conducted at an interval of every six weeks, the RBI takes stock of the CRR. It is one of the primary weapons in the arsenal of RBI. It allows it to control the money supply, maintain a desired level of inflation and also liquidity in the economy.