The Reserve Bank of India announced on Saturday, 27th June 2020, that it will extend the enhanced borrowing facility provided to the banks to meet their liquidity shortages till 30th September 2020.
The move has been taken in the view of the economic woes created by the coronavirus pandemic. RBI has now raised the borrowing cap for scheduled banks under the marginal standing facility (MSF) scheme from 2 percent to 3 percent of their Net Demand and Time Liabilities (NDTL) with effect from 27th March 2020.
Under the MSF, banks can borrow funds overnight, at their discretion, by entering the statutory liquidity ratio (SLR). This relaxation, which was granted until 30th June 2020, has now been extended until 30th September 2020.
A circular released by the Reserve Bank of India said, “On a review, it has now been decided to extend this enhanced limit till September 30, 2020.” The circular added, “Banks may continue to access overnight funds under the MSF against their excess SLR holding.”
The marginal facility rate presently stands at 4.25 percent. The RBI also extended the relaxation of the minimum regular maintenance of the Cash Reserve Ratio (CRR) to 80 percent for a total duration of three months until 25th September 2020.
On 27 March, the minimum daily maintenance of the CRR was reduced from 90% of the approved CRR to 80 percent till 26th June 2020. It was done in the light of the continued challenges encountered by banks in terms of the social distancing of staff and the consequent burden on reporting requirements.
Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) window created by Reserve Bank of India in its May 2011 credit policy. MSF is the cost at which banks can borrow funds overnight from Reserve Bank of India against approved government securities.
The Reserve Bank of India or RBI requires banks to store a proportion of their deposits in cash so that the same may be given to the customers of the bank if necessary. The amount of cash required to be held in reserve in relation to the total reserves of the bank is called the Cash Reserve Ratio. The cash balance is either deposited in the bank's vault or transferred to the RBI. Banks do not get any interest in the money that RBI collects under the provisions of the CRR.
Statutory Liquidity Ratio or SLR is the required percentage of deposits to be kept by a commercial bank in the form of liquid cash, gold, or other securities. Essentially, it is the reserve allowance that banks are required to hold before providing credit to customers. The SLR is set by the RBI and is a kind of credit growth control in India. The government uses the SLR to regulate inflation and fuel production. Increasing the SLR would regulate inflation in the economy whilst decreasing the statutory liquidity rate would contribute to growth in the economy. SLR is provided under Section 24 (2A) of the Banking Regulation Act, 1949.