What is Marginal Standing Facility (MSF)? Meaning, Definition

Marginal Standing Facility (MSF):

marginal standing facility
Marginal Standing Facility (MSF) refers to the collateralised short term borrowing facility for the scheduled commercial banks and other financial institutions from the Reserve Bank of India (RBI).”
In other words, MSF is an instrument for the commercial banks and other financial institutions to avail the short term (overnight or one day) loan facility from the RBI by keeping its government securities as collateral.
Moreover, the rate of interest at which the financial institutions borrow the money from the RBI is known as the Marginal Standing Facility Rate (MSF Rate).

Introduction to the Marginal Standing Facility (MSF):

The Reserve Bank of India established MSF in its monetary policy on 9th May 2011. The major objective of MSF was to reduce the volatility in the inter-bank lending rate or call money rates.
Commercial banks often can suffer from short time liquidity crisis because of imbalance in deposits and withdrawal ratio. Therefore, to maintain the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), commercial banks require short term loans.
The commercial banks manage their liquidity crunch primarily using Repurchase Agreement (Repo Rate) from RBI as it is the lowest interest rate offered credit.
Since the limits of availing loans at Repo Rate is 1% of Net Demand and Time Liability (NDTL), hence, if commercial banks further require funds to balance their liquidity crunch, they can avail the loans under Marginal Standing Facility (MSF).

Importance of Marginal Standing Facility:

MSF is the last option for commercial banks to borrow money from the RBI. Whenever the commercial banks have utilised all their options of borrowing, they can use the Marginal Standing Facilitates. Some key points regarding MSF are given below.
  • MSF rate is always fixed over the Repo Rate. For example, MSF = Repo Rate + X%, where X is a variable and could have any value. Initially, it was 1% however, the current value of X is 0.25%. Moreover, the value of X is determined by the Reserve Bank of India depending upon the monetary policy of the country whether it has to increase the cash flow in the market or not.
  • Thus it is clear from the above formula, the RBI doesn’t fix MSF rate separately rather it uses its sole independent policy rate (Repo Rate) to adjust different liquidity adjustment facility rates.
  • Commercial banks can avail the loans from the Reserve Bank of India up to 1% of NDTL (Net Demand and Time Liability) in addition to Repo rate borrowing.
  • The commercial banks or other financial institutions have to keep their government securities as collateral with RBI to avail the loans under the Marginal Standing Facility (MSF).
  • The collateralised securities may also include the Statutory Liquidity Ratio’s securities (SLR’s securities). In other words, the securities, in the form of gold, government securities to maintain SLR can also be kept as collateral to borrow the funds under MSF scheme.
  • The Scheduled Commercial Banks only can borrow under MSF scheme and the minimum amount is Rs 1 crore or the multiple of one crore (2 crores, 3 crores, 4 crores….).

Repo Rate vs Marginal Standing Facility (MSF) Lending:

Although Repo Rate and MSF both are responsible for managing liquidity adjustment for the scheduled commercial banks or other financial institutions, yet there are still some differences between both which are explained below.

Interest Rate:

Repo Rate lending is the lowest interest-rate loan offered by the RBI whereas in case of MSF the interest rate is always higher than the repo rate lending.

Eligible Institutions:

Repo rate lending can be offered to both scheduled commercial banks and primary dealers, on the other hand, MSF is offered to only scheduled commercial banks.

Collateral:

Government securities under SLR maintenance can’t be kept as collateral in repo rate lending, while government securities under SLR maintenance can be considered as collateral in Marginal Standing Facility lending.

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