RBI eases SLR rules to boost liquidity

In another move aimed at easing the liquidity crunch in the banking system,the Reserve Bank of India has eased some restrictions on borrowings by banks from the central bank.

The RBI has decided to permit banks to avail themselves of funds from the central bank on overnight basis,under Marginal Standing Facility (MSF),against their excess statutory liquidity ratio (SLR) holdings.

Additionally,they can also avail themselves of funds,on overnight basis below the stipulated SLR,up to 1 per cent of their respective Net Demand and Time Liabilities deposits outstanding at the end of second preceding fortnight. Banks are required to maintain 24 per cent of their deposits in government bonds,gold or cash or SLR and these securities cant be pledged for raising funds. But the RBI has allowed them to dip 1 percentage point below this threshold to meet their cash shortages under the MSF facility.

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In the event the banks SLR holdings fall below the statutory requirement,banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility, the RBI said.

The MSF is a second liquidity window offered by the RBI where banks can get overnight funds at 9.50 per cent,which is 1 percentage point higher than the central banks repurchase rate of 8.50 per cent. Earlier,banks could only borrow up to 1 per cent of their net deposits under the MSF facility. Now this cap has been removed,benefiting banks which hold excess bonds with them.

Liquidity deficit worsened significantly from second week of November 2011. Average daily injection of liquidity through LAF (liquidity adjustment facility) has been around Rs 84,000 crore in November-December period so far compared with Rs 49,000 crore in April-October 2011.