Banks turning to SDF over liquidity mismatch and 24x7 RTGS facility

The liquidity mismatch in the banking system, together with the round-the-clock Real Time Gross Settlement System (RTGS) facility, are compelling banks to place funds in the standing deposit facility (SDF) rather than participating in the call market, according to market participants.

Banks earn less for keeping money in SDF, at 6.25 per cent, while call money rates hover around 6.70 per cent.

“The liquidity is skewed within the system. When you are dealing in the call money market, you have to have counterparty limits to lend to another bank. So, if you have exhausted counterparty limits, you may not be able to lend beyond a certain amount. The banks with surplus liquidity park their funds in the SDF,” a treasury head at a private bank said.

On Monday, call money volumes were only Rs 9622.20 crore while banks placed Rs 40,937 crore in SDF and borrowed Rs 30,749 crore from the marginal standing facility.

The larger banks with surplus funds are deploying in the SDF, while smaller banks are turning to the MSF window for funds. Banks obtain funds from the MSF at 6.75 per cent.

The overnight SDF facility is available between 17:30 hrs and 23:59 hrs on all days, including Sundays and holidays. Banks have a swipe facility which automatically transfers funds to SDF before 23.59 hours.

Deposits under the SDF are not considered as balances eligible for the maintenance of the cash reserve ratio (CRR), but they are for the maintenance of the statutory liquidity ratio (SLR).

During the monetary policy announcement, the Reserve Bank of India Governor, Shaktikanta Das, had suggested that banks should put funds in the call money market, which earns them more than SDF. He also mentioned that while some banks are accessing the marginal standing facility, some are also depositing in the SDF.

“We know the Real Time Gross Settlement System (RTGS) operates round the clock. Banks might not have surplus funds during market hours, and they might receive RTGS inflows after the market closes. They have no choice but to park that money with the RBI,” a dealer at a private bank said.

The RTGS system is specifically designed for high-value transactions, ensuring swift and real-time money transfers. This electronic payment system operates instantaneously, enabling immediate fund transfers. Under RTGS, the minimum amount that can be remitted is Rs 2 lakh, with no maximum limit.

The service was made available round the clock, throughout the year, on December 14, 2020.

In the post-policy press conference, Das mentioned that banks had borrowed Rs. 80,000 crore from MSF, while the total deposits in the SDF stood at Rs. 56,000 crore.

“It is desirable that banks with surplus funds explore lending opportunities in the inter-bank call market rather than passively placing funds in the SDF at less attractive rates,” Das said during a post-monetary policy interaction with the media on Friday.

The weighted average call rate has largely remained above the repo rate since August 10, following the announcement of the incremental cash reserve ratio (I-CRR).

The repo rate is 6.50 per cent. The weighted average call rate was 6.70 per cent on Tuesday. The SDF rate is 6.25 per cent, which is lower than the call money rate.