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RBI extends enhanced borrowing limit for banks

Topics Covered:  Inclusive growth and issues arising from it.

RBI extends enhanced borrowing limit for banks:


Context:

Because of economic woes created by the COVID-19 pandemic, the Reserve Bank has decided to extend by six months the enhanced borrowing facility provided to banks to meet the shortage of liquidity till March 31, 2021.

These measures include:

Borrowing limit for scheduled banks under the marginal standing facility (MSF) scheme was increased from 2% to 3% of their net demand and time liabilities (NDTL) with effect from March 27, 2020.

Implications:

This dispensation provides increased access to funds to the extent of ₹1.49 lakh crore, and also qualifies as high-quality liquid assets (HQLA) for the liquidity coverage ratio (LCR).

What is MSF?

Under the MSF, banks can borrow overnight at their discretion by dipping into the statutory liquidity ratio (SLR).

  • It is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.
  • This scheme was launched by RBI while reforming the monetary policy in 2011-12.
  • It is a penal rate at which banks can borrow money from RBI when they are completely exhausted of all borrowing assistance.

Key terms:

Net Demand and Time Liabilities (NDTL):

NDTL refers to the total demand and time liabilities (deposits) of the public that are held by the banks with other banks.

The high-quality liquid assets include only those with a high potential to be converted easily and quickly into cash.

InstaLinks:

Prelims Link:

  1. What is MSF?
  2. What is LAF? Who decides it?
  3. What is SLR?
  4. What is NDTL?
  5. What is HQLA?
  6. Difference between Repo Rate and MSF.

Sources: the Hindu.