June 12, 2023
Durga Prasad

RBI Empowers Banks: Set Own Limits for Call & Notice Money Borrowing

The Reserve Bank of India (RBI) has made a significant improvement to liquidity management by allowing Scheduled Commercial Banks (with the exception of Small Finance Banks) to set their own borrowing limits in the interbank Call and Notice Money Markets. In managing their short-term funding needs and matching their borrowing limits to their unique liquidity requirements, banks now have more flexibility thanks to this move.

For borrowing in the Call and Notice Money Markets, banks were previously constrained by specific limits established by the RBI. But under the revised policy, banks now have the freedom to set their own borrowing caps within the prudential ceilings for interbank liabilities set by the RBI. In terms of managing liquidity and developing funding strategies, this change benefits banks in a number of ways.

The new policy empowers banks to align their borrowing limits with their specific liquidity requirements. By considering their financial stability and risk appetite, banks can optimize their borrowing strategies based on prevailing market conditions and their funding needs. This flexibility allows banks to effectively manage their short-term funding and improve their overall liquidity management practices.

Moreover, the revised policy recognizes that banks have varying liquidity profiles and risk management capabilities. By allowing banks to set their own borrowing limits, the RBI acknowledges that banks are better positioned to assess their own liquidity needs. This autonomy in determining borrowing limits enhances banks' ability to manage their short-term funding and tailor it to their unique circumstances.

The policy change is expected to enhance the efficiency of the Call and Notice Money Markets. With banks having the freedom to determine their borrowing limits, they can compete more effectively for funds in these markets. This increased competition can lead to better pricing and improved liquidity, benefiting both banks and the overall functioning of the money markets.

Experts in the financial sector have expressed positive views on the RBI's decision. Karthik Srinivasan, Senior Vice-President and Group Head of Financial Sector Ratings at ICRA, believes that banks can plan their liquidity management better amidst the current volatility in liquidity conditions. The revised policy gives banks more control over their borrowing limits, ensuring that reliance on call borrowing remains in check.

The RBI's decision to permit Scheduled Commercial Banks to choose their own borrowing limits in the Call and Notice Money Markets is a significant development in liquidity management, it can be concluded. Banks now have more freedom, flexibility, and the chance to improve their short-term funding strategies thanks to this revised policy. The efficiency and competitiveness of the market are anticipated to increase. It will be interesting to see how the new flexibility affects liquidity operations and how banks react to it. For banks to achieve their overall financial objectives, it is critical that they carefully evaluate their borrowing needs.


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