RBI's Weekend Liquidity Reversal Is A Strategic Shift For Banks: SBI Ecowrap
The Central Bank has now decided to allow the reversal of liquidity facilities under both standing deposit facility(SDF) and marginal standing facility (MSF) even during weekends and holidays with effect from 30 December 2023.
MSF enables banks to borrow funds from the Reserve Bank of India (RBI) in emergencies when their liquidity dries up. This short-term borrowing scheme facilitates the scheduled banks to get funds from the central Bank overnight in case of serious cash shortage by offering their approved government securities. Liquidity shortfalls are often faced by banks resulting from the financial gap created due to deposit and loan portfolio mismatch. Such shortfalls don't last long and to manage such emergency conditions banks can approach RBI for quick money for one day within the limits of the Statutory Liquidity Ratio (SLR).
SBI in its Ecowrap report dated 24 September 2023 had highlighted the peculiar case of banks keeping money under SDF and at the same time borrowing through the route of the MSF on days of deficit liquidity mainly on account of 24*7 National Electronic Funds Transfer(NEFT) and Real Time Gross Settlement(RTGS).
The report highlighted that this trend depicts the precautionary motive.
Furthermore, the report has said that the issue aggravates on weekends and holidays, with funds flows on select Saturdays, in particular, inching towards the normal trading days as corporates resort to deft(debit, credit and NEFT) funds management, in sync with their cashflows.
The pattern exemplifies that banks are unsure of momentum and funds flow during such periods which leads them to tend to be risk agnostic. This results in the piling on the buffer of extra liquidity that remains unusable.
The report said that the institution demanded enhancing the timing of Clearing Corporation of India Limited(CCIL) clearing till 5:00 pm (from the present 2:30 pm). The recent development is expected to facilitate better fund management by the banks. This measure will be reviewed after six months or earlier, the Central Bank will allow the reversal of liquidity facilities under SDF and MSF even during weekends and holidays starting from 30 December 2023. if needed.
Post advent of online banking 24*7, banks have been doubly cautious to keep more than sufficient funds as a cushion to enable probable large outflows post business hours on Saturdays in particular or on the eve of scheduled holidays as RTGS/NEFT funds movement in large value affects their funds management capability, the report pointed out.
Also, there had been two sets of banks of banks in the market, one resorting to parking funds in SDF and another borrowing from MSF, ideally should have been interplay amidst these segments first. This asymmetry should also be lessened now as an elongated/eventual effect of RBI’s measure.
