At present CLF and additional collateralised lending facilty (ACLF) are provided to scheduled commerical banks for two blocks of two weeks. Earlier at the end of four weeks period, there used to be a cooling period of two weeks during which banks were not permitted to draw any refinance.

The RBI in its April 1999 credit policy replaced the general refinance facility with interim liquidity adjustment facility (ILAF) for commercial banks--in keeping with the Narasimham Committee recommendations in the form of CLF and ACLF. Last year, in his October credit policy, RBI governor Bimal Jalan had announced the launch of liquidity adjustment facility (LAF) which did not come into force as the market conditions were not suitable at that point of time.

In a circular to all scheduled commercial banks, RBI said, "The objective is to make the scheme more flexible and effective in meeting liquidity requirement of banks and the system."

According to the circular, "Banks will be provided CLF and ACLF for the first block of two weeks at the bank rate and bank rate plus two percentage points."

According to sources in the banking sector, the central bank move to do away with the two weeks of cooling period between providing refinance to banks will provide more liquidity to the banks. "With excess refinance, banks will be able to manage their liquidity more effectively," said an official from a nationalised bank.

According to sources, every fortnight, the central bank releases Rs 3,500 crore refinance to the banking sector.

Banks resort to the refinance facility when call rates cross the 10 per cent mark. "The scheme has become very popular with the banks and banks are more frequently resorting to it to manage their liquidity," bank sources said.

The ILAF offers refinance to banks based on collateral. The existing ILAF provides a mechanism by which liquidity is injected at various interest rates and absorbed--when necessary--to minimise the volatility in the money market.