What is MSF and its Full Form?

Marginal Standing Facility (MSF) is a provision made by the Reserve Bank of India through which scheduled commercial banks can obtain liquidity overnight, if 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.

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

Banks can avail immediate cash of up to a percentage, meaning that they can dip into their SLR to obtain liquidity support from the RBI at the MSF rate. 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.

MSF Rate

The current MSF rate or Marginal Standing Facility Rate in India is 4.25%. This is the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.

5 Key Terms related to MSF

Here are 5 frequently used terms in relation with MSF, each explained as follows:

NTDL – Net Time and Demand Liabilities

NTDL or NDTL is actually a combination of two liabilities viz. Time and Deposit, that a bank/NBFC holds towards its customers. While Demand liabilities include all those liabilities which are payable on demand, Time Liabilities are those liabilities which are to be paid on completion of prescribed period.

SLR - Statutory Liquidity Ratio

SLR is the term that refers to the reserved liquid assets that the commercial banks in India need to maintain in the form of government approved securities or gold assets with liquid cash before offering loans to the borrowers. The SLR of a bank is determined by calculating the ratio of total demand and time liabilities.

Repo Rate

It is the Rate of Interest at which RBI lends money to commercial banks and lenders. In times of inflation, RBI increases Repo Rate to make funds expensive and restrict buying behavior and contrarily, when it wants to provide money at a cheaper rate, it decreases the repo rate.

Reverse Repo Rate

When banks and lenders have surplus funds with them, they can lend money to the central bank as well. This rate is pre-decided by the RBI which is called the Reverse Repo Rate.

Bank Rate

This is the rate at which RBI offers long-term loan to the banks and NBFCs, unlike Repo Rate which is applicable over short term loans.

How Does MSF Work for RBI?

  • In special cases when commercial lending institutes and banks exhaust their eligible security holdings owing to a sudden rise in borrowing demand, they request RBI to provide them with funds overnight.
  • These funds are lent at a higher rate(usually by 25bps) by RBI compared to the Repo Rate under the Liquidity Adjustment Facility.
  • Using this facility, all the scheduled banks under RBI can avail money in emergency situations up to 1% of their NDTL or SLR securities.
  • Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits of the SLR.
  • This special facility can only be pledged by banks under emergency situations.

MSF Rate vs Repo Rate – Key Differences

  • Repo rate is applied on loans that meet the banks’ regular short-term financial needs while MSF is applied on loans that are required overnight due to sudden shortage of funds.
  • Repo rate applies to commercial banks whereas MSF is applied to scheduled banks.
  • In case of repo rate, Banks may have to provide their own securities as collateral to the RBI along with a repurchase agreement. For MSF, banks have to provide government securities as collateral.

MSF Rate vs Bank Rate

Bank rate is the rate at which RBI offers long-term loan to the banks and NBFCs. MSF on the other hand, is used to provide funds to banks overnight.

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Why was MSF introduced by the RBI?

It can so happen that a commercial bank can be faced with a mismatch between its deposit and loan portfolio, thereby creating a financial gap. This, in turn, may result in a temporary cash crunch. In order to enable banks to borrow money overnight from the central bank and to have more control over the supply of money into the economy, the MSF was introduced by the RBI.

When did MSF come into existence?

MSF was introduced in India by the RBI in its monetary policy of 2011-12 with effect from 9 May 2011. During the very first year of its introduction, the combined borrowings of various banks under this policy stood at Rs 1 billion.