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Reserve Bank of India (RBI) will permit Scheduled Regional Rural Banks to access the liquidity adjustment facility, the marginal standing facility, and the call money market.
Regional Rural Banks
- The nationalization of the banks in 1969 boosted the confidence of the public in the Banking system of the country.
- However, in the early 1970s, there was a feeling that even after nationalization, there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers.
- This issue was taken up by the government and it set up the Narasimham Working Group in 1975.
- On the basis of this committee’s recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.
- Regional Rural Banks came into existence on Gandhi Jayanti in 1975 with the formation of a Prathama Grameen Bank.
- The RRBs were owned by three entities with their respective shares as follows:
- Central Government – 50%
- State government – 15%
- Sponsor bank – 35%
Regulation of RRBs
Regional Rural Banks are regulated by RBI and supervised by National Bank for Agriculture and Rural Development (NABARD).
Liquidity Adjustment Facility (LAF) - Primary instrument of Reserve Bank of India for modulating liquidity and transmitting interest rate signals to the market.
- t refers to the difference between the two key rates viz. repo rate and reverse repo rate.
- Informally, Liquidity Adjustment Facility is also known as Liquidity Corridor.
Liquidity Adjustment Facility works? - Under Repo, the banks borrow money from RBI to meet short term needs by putting government securities (G-secs) as collateral. Under Reverse Repo, RBI borrows money from banks by lending securities.
- While repo injects liquidity into the system, the Reverse repo absorbs the liquidity from the system.
- RBI only announces Repo Rate. The Reverse Repo Rate is linked to Repo Rate and is 100 basis points (1%) below repo rate.
Marginal standing facility (MSF) - Window for banks to borrow from the Reserve Bank of India in an emergency when interbank liquidity dries up completely.
- The Marginal standing facility is a scheme 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.
- The Marginal Standing facility allows banks to borrow money with an interest rate above the repo rate and can be termed as the Marginal standing facility rate.
MSF Description - Banks borrow from the RBI by pledging government securities at a rate greater than the repo rate under LAF (liquidity adjustment facility).
- The MSF rate is pegged 100 basis points or a percentage point above the repo rate.
- Under MSF, banks can borrow funds up to one percent of their net demand and time liabilities (NDTL).
- The minimum amount for which RBI receives application is Rs.1 Crore, and afterward in multiples of Rs.1 Crore.
Call Money Market - The call money market part of the Indian Money Market, where the day-to-day surplus funds are traded. The money market is a market for short-term financial assets that are close substitutes of money. Important feature of a money market instrument is that it is liquid and can be turned into money quickly at low cost .
- The loans short-term duration from 1 to 14 days, and are traded in the call money market. The money that is lent for one day in this market is known as “Call Money”, and if it exceeds one day (but less than 15 days) it is referred to as “Notice Money”. Term Money refers to Money lent for 15 days or more in the InterBank Market.
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