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.
Objectives of MSF:
The objective of the Marginal Standing Facility is to manage short-term liquidity fluctuations in the banking system while ensuring stability and effective transmission of monetary policy. By setting the MSF rate higher than the repo rate, the central bank encourages banks to manage their liquidity efficiently and rely on the MSF only when necessary, discouraging excessive borrowing and promoting responsible liquidity management.
Here are some key features of the Marginal Standing Facility:
1. Interest rate: The MSF rate is typically set at a higher rate than the repo rate. The repo rate is the rate at which banks borrow funds from the central bank against government securities. The MSF rate serves as a penal rate, creating a disincentive for banks to access this facility regularly.
2. Liquidity provision: The MSF provides an additional avenue for banks to meet their short-term liquidity requirements. Banks can borrow funds from the central bank under the MSF against eligible securities, including government securities and other approved instruments.
3. Overnight borrowing: The funds borrowed under the MSF are provided on an overnight basis, which means banks have to repay the borrowed amount along with the applicable interest rate within one working day.
4. Emergency funding: The MSF acts as a last resort for banks to meet their liquidity needs in case they are unable to obtain funds from other sources. It is primarily intended to address situations where banks are faced with a temporary liquidity crunch.
5. SLR marginal relief: Under normal circumstances, banks are required to maintain a certain percentage of their net demand and time liabilities (NDTL) in the form of liquid assets, known as the statutory liquidity ratio (SLR). The MSF allows banks to borrow funds up to a certain percentage of their SLR investments, providing them with additional flexibility.
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.
Key difference between bank rate and MSF rate
Criteria |
Bank Rate |
MSF Rate |
Purpose |
Lends money to banks for long-term purposes, supporting capital investment and meeting statutory reserve requirements. |
Short-term borrowing facility for banks to address sudden and temporary liquidity needs. |
Duration of loan |
Loans are typically for an extended period, often ranging from 90 days to one year or more. |
Specifically designed for short-term funds, usually for overnight borrowing. |
Applicability |
Used by banks for various purposes, including meeting liquidity requirements and long-term capital needs. |
Utilised by banks to address immediate and temporary liquidity mismatches. |
Rate differential |
Generally lower than the MSF Rate. Reflects a more accommodative stance for providing long-term funds. |
Generally higher than the Bank Rate. Considered a penal rate, serving as a disincentive for frequent usage. |
Collateral requirement |
Involves the pledge of assets as collateral, and the interest rate is determined based on the collateral provided. |
Banks can avail funds by providing eligible securities as collateral, reflecting the emergency nature of borrowing. |
Objectives of MSF
- Liquidity management: MSF helps banks manage short-term liquidity fluctuations by providing a quick source of funds during emergencies.
- Emergency funding: It acts as an emergency funding option for banks facing immediate liquidity challenges.
- Interest rate management: MSF influences short-term interest rates by providing funds at a higher rate than the standard repo rate.
- Preventing volatility: MSF stabilises the money market by offering an additional borrowing option at higher rates during times of stress.
- Financial stability: It contributes to financial stability by providing a safety net for banks during unforeseen liquidity shocks.
- Regulating borrowing rates: MSF plays a role in regulating overnight borrowing rates in the interbank market.
- Control of money supply: The facility allows the RBI to influence the overall money supply by adjusting MSF interest rates.
MSF FAQ
The criteria for borrowing through the Marginal Standing Facility (MSF) include being a scheduled commercial bank, facing unexpected liquidity needs, willingness to pay the MSF rate (higher than the repo rate), providing eligible collateral, adhering to percentage limits on borrowing, keeping the borrowing duration short-term, and complying with RBI regulations.
Yes, an increase in the Marginal Standing Facility (MSF) rate can affect borrowers by leading to higher borrowing costs, resulting in increased interest rates on loans, potentially impacting economic activity and investment decisions.
The key difference between the repo rate and the marginal standing facility (MSF) lies in their purpose and the type of banks that can access them:
Aspect |
Repo Rate |
Marginal Standing Facility (MSF) |
Purpose |
Routine liquidity management for banks. |
Emergency or unforeseen liquidity needs for banks. |
Usage |
Regular short-term borrowing. |
Reserved for urgent situations as a source of last resort. |
Interest Rate |
Generally lower. |
Higher than the repo rate, reflecting its emergency nature. |
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.
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.
