Very important banking terminologies

BANKING TERMINOLOGIES

 LIQUIDITY ADJUSTMENT FACILITY (LAF):

 As part of the financial sector reforms in 1998 the Committee on Banking Sector Reforms (Narasimham Committee II), LAF was

introduced under which the Reserve Bank would conduct auctions periodically, if not necessarily daily. LAF is used to aid banks

in adjusting the day to day mismatches in liquidity. LAF helps banks to quickly borrow money in case of any emergency or for

adjusting in their SLR/CRR requirements.

 LAF consists of Repo and Reverse repo operations. The Reserve Bank could reset its Repo and Reverse Repo rates which would

in a sense provide a reasonable corridor for the call money market. At present, daily LAF operations are being conducted on

overnight basis, in addition to term repo auctions.

 REPURCHASE AGREEMENT (REPO):

 Repo is a money market instrument combining elements of two different types of transactions viz., lending-borrowing and salepurchase.

Repo or repurchase option is a collaterised lending i.e. banks borrow money from RBI to meet short term needs by

selling securities to RBI with an agreement to repurchase the same at predetermined rate and date. The rate charged by RBI for

this transaction is called the repo rate. The collateral used for repo and reverse repo operations are Government of India

securities. Under Repo, the RBI injects funds to organisations (SCBs and Primary Dealers) which have both current account and

SGL account with the RBI.

 The Repo transaction has two legs. In the first leg, the Seller sells securities and receives cash while the purchaser buys

securities and parts with cash. In the second leg, the securities are repurchased by the original holder by paying to the counter

party the amount originally received by him plus the return on the money for the number of days for which the money was used

by him which is mutually agreed.

 REVERSE REPO:

 Reverse repo rate is the rate at which the Reserve Bank of India borrows money from commercial banks within the country. This

is exactly the opposite of the Repo transaction and is used for absorption of liquidity.

 The Reverse Repo Rate at present is at 25 basis points below the repo rate. Reverse Repo facility is available to Primary Dealers

also.

 The Reverse Repo is a monetary policy instrument which can be used to control the money supply in the country. An increase in

the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse

repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply

of money in the market.

 MARGINAL STANDING FACILITY (MSF):

 The Reserve Bank, in 2011, introduced MSF for banks and primary dealers to reduce the volatility in the inter-bank call money

market. The interest rate w.e.f. 6th April, 2017 is 25 bps above the repo rate, which is the rate at which banks borrow from the

RBI for the short term against the collateral of government securities. The rate may vary relative to the repo rate as warranted

by economic conditions.

 Banks can borrow funds through MSF when there is a considerable shortfall of liquidity. This measure has been introduced by

RBI to regulate short-term asset liability mismatches more effectively.

 The MSF Scheme is operational on the lines of the existing Liquidity Adjustment Facility – Repo Scheme (LAF – Repo) i.e.

commercial banks can borrow money from RBI. The basic difference between Repo and MSF scheme is that in MSF banks can

use the securities under SLR to get loans from RBI and hence MSF rate is 25 bps more than repo rate. All Scheduled Commercial

Banks having Current Account and SGL Account with RBI will be eligible to participate in the MSF Scheme.

 Under the facility, the eligible entities can avail overnight, facility up to one per cent of their respective Net Demand and Time



Liabilities (NDTL) outstanding at the end of the second preceding fortnight. Requests will be received for a minimum amount of

Rs. One crore and in multiples of Rs. one crore thereafter.

 TERM REPOS:

Term repo is a new window for providing liquidity to the banking system. Through Term repo auctions of 7-day and 14-day tenors

for a combined notified amount equivalent to 0.75 per cent of net demand and time liabilities (NDTL) of the banking system are

conducted by the Reserve Bank through variable rate auctions on every Friday.