Banks’ borrowings from the the Marginal Standing Facility (MSF), the costliest liquidity facility of the Reserve Bank of India, hit an all-time high at a whopping R73,600 crore from on Wednesday.
Bankers attribute the steady rise in MSF borrowings over last one week to pick-up in the credit offtake, especially demand for working capital loans.
With a cap on bank borrowings from the repo window — where banks can borrow at the benchmark repo rate of 7.25% — banks have no choice but to access funds from MSF window even a steep rate of 10.25%.
“The rise in MSF is mainly because of credit offtake. Companies are coming to banks also because they are not getting funds through bonds or CPs at competitive rates,” said KN Reghunathan, head of treasury at Union Bank of India.
The banking sector's loan growth rose to 17% year-on-year as of August 23 from around 14% in June.
On July 23, RBI capped banks’ borrowings from repo tender under LAF at 0.5% of their deposits and, therefore, the total daily borrowings through this facility have not exceeded R40,000 crore.
“Since the LAF is capped, banks have no choice, but to access MSF when a disbursement of loan has to be done,” said a dealer at a public sector bank. Some banks have been borrowing from MSF and deploying the same in high-yielding certificates of deposit and commercial papers to take advantage of the arbitrage opportunity.
“Rates on CDs and CPs are higher than MSF and there is a clear arbitrage opportunity for banks. There have been some borrowings from MSF for this,” said a treasury official at Bank of Baroda.
Rates on three-month CDs have been near 10.50% so far in September, although they have eased from 12% levels touched in August. Three-month CP rates have been close to 11% in September implying that banks can earn a clear arbitrage of 50-75 basis points by deploying funds borrowed through MSF.