MSF (Marginal Standing Facility)

26/01/2021 0 By indiafreenotes

The Marginal Standing Facility (MSF) is the rate at which the scheduled commercial banks borrow funds fortnight from the Reserve Bank of India against the government approved securities.

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency when inter-bank liquidity dries up completely. The Marginal standing facility is a scheme launched by RBI while reforming the monetary policy in 2011-12.

Marginal Standing Facility (MSF) is a provision made by the RBI through which scheduled commercial banks can obtain liquidity overnight, in the event that inter-bank liquidity completely dries up. This is a facility for emergencies, through which banks obtain liquidity support at the MSF rate, which is a rate higher than the repo rate.

Banks can avail immediate cash of up to a percentage, now 3%, of their NDTL under MSF, meaning that they can dip into their SLR to obtain liquidity support from the RBI at the MSF rate. It is a penal rate of interest at which the RBI offers banks funds under the Marginal standing facility. If a bank’s liquidity dries up due to, say, a loan-deposit mismatch, it could avail funds from the RBI at the marginal standing facility rate even if it does not have eligible securities beyond the SLR.

MSF is a short-term arrangement as banks generally do not run out of liquidity for a long time, but at a given point they may face a dire shortage of funds.

  • Banks borrow from the RBI by pledging government securities at a rate greater than the repo rate under LAF (liquidity adjustment facility).
  • The MSF rate is pegged 100 basis points or a percentage point above the repo rate.
  • Under MSF, banks can borrow funds up to one percent of their net demand and time liabilities (NDTL).
  • The minimum amount for which RBI receives application is Rs.1 Crore, and afterward in multiples of Rs.1 Crore.

Normally, banks pledge eligible securities above the SLR requirement to the RBI to obtain liquidity through loans at the repo rate. Now, if a bank exhausts this means, it can resort to the MSF provision to get quick money for a 1-day period by pledging, within the limits of SLR, government securities.

Objectives of MSF rate

The Marginal Standing Facility was introduced by the RBI in the 2011-2012 monetary policy and it helps both banks and the RBI in a handful of ways.

  • There is less volatility in overnight lending rates thanks to MSF
  • Banks have a way to plug short-term liquidity shortfalls with MSF
  • With MSF, RBI has more control over the money supply in the economy

RBI uses Marginal standing facility to control and manage the money supply in the financial system. With the increase in the rate, the borrowing becomes expensive for the commercial banks and in return the loans become dearer for the individual or corporate borrowers, which will result in less flow of money in the market. Also, the MSF rate is often increased by RBI to curb the excessive availability of rupee and to avoid further rupee depreciation against a dollar.

Rate of Interest

The rate of interest on MSF is above 100 bps above the Repo Rate.  The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility. This means that Difference between Repo Rate and MSF is 200 Basis Points.  So, Repo rate will be in the middle, the Reverse Repo Rate will be 100 basis points below it, and the MSF rate 100 bps above it. Thus, if Repo Rate is X%, reverse repo rate is X-1% and MSF is X+1%.

Borrowing under MSF

  • Banks can borrow through MSF on all working days except Saturdays, between 3:30pm and 4:30pm in Mumbai where RBI has its headquarters.
  • The minimum amount which can be accessed through MSF is Rs. 1 crore and in multiples of Rs. 1 crore.
  • The application for the facility can be submitted electronically also by the eligible scheduled commercial banks.