Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities. This is a facility for emergencies ,through which banks obtain liquidity support at the MSF rate, which is usually higher than the repo rate.
This scheme was launched by Reserve Bank of India in its monetary policy (2011- 2012) which came into effect from May 9, 2011.
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.
BENEFITS OF MARGINAL STANDING FACILITY
The benefits of MSF are as below-
- There is less volatility in overnight lending rates due 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.
BORROWING UNDER 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 percent of their net demand and time liabilities (NDTL).
- The minimum amount which can be accessed is Rs. 1 crore and in multiples of Rs. 1 crore.
- 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 application for the facility can be submitted electronically also by the eligible scheduled commercial banks.
Earlier, banks could borrow upto 1% of their NDTL . But now due to this pandemic situation, this rate has been increased to 3% of their NDTL. Once this relaxation is discontinued, banks may be able to avail only upto 2% of their NDTL.
EFFECT OF CHANGES IN MSF RATE
- INCREASE IN MSF RATE : Hiking MSF rate makes borrowing expensive for a bank which means loans become expensive for individual and corporate borrowers and this in turn translates to lesser availability of the rupee. RBI uses MSF and other measures to control money supply in the financial system.
- DECREASE IN MSF RATE : When the MSF rate is decreased it becomes easier for banks to borrow and individuals and corporate borrowers can also avail cheaper loans. This can increase the supply of money in the economy .
Thus, in a nutshell, marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.