Special Liquidity Facility

Special Liquidity Facility for MFs

The SLF-MF is a two-week window in which the RBI will lend money to banks at the repo rate for 90 days.
The funds that banks borrow under this window can be used only for meeting the liquidity needs of mutual funds.
This could be either through outright purchase of certain debt instruments held by them, or lending to them using their bonds as collateral.
The debt instruments so acquired can only be investment-grade corporate bonds, commercial papers, debentures and certificate of deposit.
The total amount that the RBI promised to lend through the SLF-MF is ₹50,000 crore, but this is subject to change in the future.
The RBI has allowed banks to categorise the money borrowed using this facility as part of their held-to-maturity portfolio.
Loans by banks to mutual funds under this facility would also not be considered as part of their capital market exposure and adjusted non-bank food credit. The latter is used to calculate banks’ achievement of priority lending targets.

Significance of SLF-MF

As the bank deposit and small savings scheme returns have been falling lately, many individual investors have parked their savings in debt funds.
There are all kinds of debt funds, and the ones with higher risk earn a higher return.
Tax efficiency of debt funds has also been a draw. Investors who have moved from bank deposits to debt mutual funds that take on credit risk have witnessed multiple shocks over the past few years.
In times of uncertainty due to the Covid-19 pandemic, where many people are trying to keep their savings safe, the SLF-MF is a confidence-inspiring measure for the mutual fund industry and for bond markets.