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The Reserve Bank of India (RBI) has further extended the opportunity to banks to avail funds under the Marginal Standing Facility (MSF) by dipping into the Statutory Liquidity Ratio (SLR) up to March 31, 2020. So, the banks according to the RBI press release on September 28, can avail upto an additional 1% net demand and time liabilities (NDTL) from the RBI until the end of the present fiscal year. Earlier the banks were allowed to avail this facility upto June 30. There are two direct benefits of the banks as a result of this facility. One, the banks can access additional funds to the extent of 1.49 lakh crore from the RBI. Secondly, this would help the banks to qualify to maintain a high-quality liquid asset (HQLA) portion in the Liquidity Coverage Ratio (LCR) mandated by the Basel III banking norms.

MSF, REPO and SLR

A bank must have enough liquidity to continue its business with trust. But at times, banks face liquidity crises in their operations. This is why the RBI has deployed a number of liquidity support measures for banks to ensure the required liquidity when banks need it. Most well-known is the repo rate. Through this, the RBI injects liquidity into the banks. This comes under the RBI’s umbrella liquidity management mechanism called Liquidity Adjustment Facility.

Every bank has to maintain a portion of the total NDTL in its hand and that portion cannot be spent as credit. This is called the SLR. Banks maintain it mostly in the form of cash, reserve gold, PSU bonds and RBI approved securities. By this norm, the RBI restricts the banks’ expansion. The SLR is also used to control inflation and maintain growth by increasing or decreasing its value.

MSF, like the repo, is an overnight liquidity support provided by the RBI to the banks. But there are two differences between repo and MSF facilities. One, the repo rate is lower than the MSF rate. Therefore, the banks at first try to avail the repo facility. But when the requirement of money is more, then the banks use MSF. Two, before availing repo, banks have to deposit eligible securities which are above the SLR holding norms to the RBI but in case of MSF, banks need not require to deposit securities. Three, through the repo scheme, banks can avail only 0.25% of the NDTL but through the MSF scheme, banks can avail 1% of the NDTL.

Usefulness of extension of MSF

The RBI uses MSF and other measures to control money supply in the financial system. The rates of all the measures are variable. The MSF rate is hiked to control excess availability of the rupee and to control its depreciation with respect to foreign currencies. This was first introduced in 2011 and was first used in June in the same year.

In the present context, the RBI has taken to extend the MSF scheme with a view to ensure the smooth running of the banking industry by tackling disruptions imposed by the Covid 19 pandemic. In this situation, maintenance of statutory norm of LCR may be difficult at times. In that case, banks may have to use the facility.

Secondly, this would give the green signal to investors and assure them that availability of easy credit is not a problem. According to a section of bankers and former bankers, the extension of MSF by the RBI has a positive role in the psychological boosting of investors.

The latest credit disbursement scenario

The official view about the Indian economy is optimistic. According to this, the turnaround of the economy has already started after the full lockdown was withdrawn. The picture of credit disbursement does not favour the optimistic view about the economy. The following the RBI data (press release of the RBI on September 30) is to be noticed. First, non-food credit growth decelerated to 6% in August 2020 from 9.8%in August 2019. Secondly, credit to agriculture and allied activities increased by 4.9% in August 2020 as compared with a growth of 6.8% in August 2019. Thirdly, credit growth to industry decelerated to 0.5% in August 2020 from 3.9% in August 2019. Fourthly, credit growth to the services sector decelerated to 8.6% in August 2020 from 13.3% in August 2019. Fifthly, the personal loan segment continued to perform well - registering a growth of 10.6% in August 2020 compared to 15.6% of that in the same month in the last year. So it is doubtful how many banks will have to go for availing the MSF scheme to disburse credit in this FY.