Marginal Standing Facility

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.

It is a penal rate at which banks can borrow money from RBI when they are completely exhausted of all borrowing assistance. The Marginal Standing facility allows banks to borrow money with an interest rate above the repo rate and can be termed as the Marginal standing facility rate.

This article gives relevant details about the topic of a marginal standing facility. This is an important part of the Economy subject under the UPSC syllabus. The economy is an important part of the UPSC syllabus.  It is important to be aware of important UPSC terms and basic concepts, which are asked in the IAS exam directly or indirectly.

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What is Marginal Standing Facility?

The Marginal Standing Facility (MSF) refers to the facility under which scheduled commercial banks can borrow an additional amount of overnight money from the central bank over and above what is available to them through the LAF (liquidity adjustment facility) window by dipping into their Statutory Liquidity Ratio  (SLR) portfolio up to a limit.

Facts about MSF

• 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 per cent of their net demand and time liabilities (NDTL).
• Banks can borrow through MSF on all working days except Saturdays.
• The minimum amount for which RBI receives application is Rs.1 Crore, and afterwards in multiples of Rs.1 Crore.
• MSF provides a safety valve against unexpected liquidity shocks to the banking system.

Objectives of MSF

• The scheme has been introduced by RBI with the aim of reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.

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Difference between MSF and Repo Rate

• The difference between the MSF and the repo rate is that MSF is used only in emergencies.
• The RBI does this to control interest rate volatility by allowing commercial banks to borrow against government securities at a higher rate than the prevailing repo rate (1 percentage point higher).
• Another difference with the repo rate is that banks can pledge government securities from the SLR quota up to 1% under the MSF. Then, even if the SLR comes below 21.5%, banks need not pay any penalty under MSF.

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