The Reserve Bank of India will revise the initial margin requirement for collateral against the marginal standing facility that it provides to scheduled banks.
The initial margin on the collateral provided by banks to avail MSF, will now depend on the residual maturity of the security, the RBI said in a release. This move is in line with international standards and will be effective starting Aug. 1.
The MSF enables the central bank to provide funds to scheduled commercial banks to meet short-term requirements against government securities. It is usually pegged at a 100 basis points or one percent higher than the repo rate.
As per the current system, an initial margin on collateral stands at 4 percent in case of government securities and 6 percent for state development loans. This system fails to differentiate between market risk across securities.
Now, initial margin requirement would be in the range of 0.5 percent to 4 percent for benchmark government securities depending on their residual maturity. For state development loans, this requirement would range from 2.5 percent to 6 percent.
To incentivise credit rating of development loans by state governments, their initial margin requirements will be 1 percent lower than other state development loans of the same maturity.