The Reserve Bank of India (RBI) is the central bank that lays down the rules and regulations of operation for all banks in the country. As the regulator and overseeing authority of banking functions, the RBI employs various measures to help banks manage short-term emergencies and long-term capital requirements. One such measure is the Marginal Standing Facility (MSF) which helps banks deal with their liquidity issues.
This article breaks down every detail concerning Marginal Standing Facility. Read on to understand MSF in simple terms.
What is a Marginal Standing Facility (MSF)?
The Marginal Standing Facility is a policy RBI launched in 2011-12, which reformed the existing monetary policies. Under the Marginal Standing Facility, scheduled commercial banks are allowed to borrow from the RBI if the inter-bank liquidity is affected and the bank has no other source for liquid funds. Commercial banks can achieve overnight liquidity through the Marginal Standing Facility and meet their short-term needs.
How does Marginal Standing Facility Work?
If banks run out of liquidity and need instant funds, they can use the Marginal Standing Facility and borrow from the RBI. To borrow, banks pledge the Government securities they own as a part of their Statutory Liquidity Ratio. The RBI, then, offers funds up to 1% of the bank’s NDTL (Net Demand and Time Liabilities).
The RBI introduced the concept of the Marginal Standing Facility in 2011-12 to help banks absorb liquidity shocks in emergencies. Banks might face a shortage of liquid funds in the case of considerable redemption pressure or in other emergencies. In such situations, the Marginal Standing Facility provides banks with a lifeline. RBI also introduced the Marginal Standing Facility to stabilize banks and reduce the volatility in overnight lending rates (between banks).
What is the Marginal Standing Facility Rate in India?
When banks borrow from the RBI, the RBI charges an interest rate on the funds. This interest rate is called the Marginal Standing Facility rate. The RBI fixed this rate is always higher than the repo rate. Moreover, the RBI also reviews the Marginal Standing Facility rate periodically and can change it if required depending on its monetary policy.
What is the Current Marginal Standing Facility in India?
As of June 2022, the RBI has hiked the MSF rate. The current Marginal Standing Facility rate in India is 5.15%. The policy repo rate, on the other hand, stands at 4.90%.
Terms to Know about Marginal Standing Facility (MSF)
In order to clearly understand the concept of Marginal Standing Facility and how it works, here are a few important terms that you need to know about –
Statutory Liquidity Ratio (SLR)
The Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that banks must maintain before offering credit to their customers. The SLR acts as a liquid reserve that banks can maintain in the form of gold, cash, or other securities.
SLR is calculated as the ratio of liquid assets to banks’ net demand and time liabilities.
Net Demand and Time Deposit Liabilities (NDTL)
The Net Demand and Time Liabilities (NDTL) include all the types of deposits banks offer their customers. Demand liabilities are those which customers can withdraw at any time, on-demand like a current account. On the other hand, time liabilities are those withdrawn after a specified time, like fixed or recurring deposits.
Repo, short for ‘repurchase’ is the rate of interest at which banks borrow short-term loans from the RBI. Under the repo option, banks sell their bonds and securities to the RBI on a short-term basis and get funds against such sales. The sale is based on an agreement that banks would repurchase the sold securities at a later date and at a predefined rate.
Reverse Repo Rate
As the name suggests, reverse repo is the opposite of repo. Under reverse repo, the RBI borrows money from banks. Banks with surplus funds loan them to the RBI and earn interest on the same.
Banks can also avail of long-term loans from the RBI. Such loans are issued at an interest rate called the bank rate.
Differences between Marginal Standing Facility, Repo Rate and Bank Rate
While Marginal Standing Facility, repo rate, and bank rate all involve borrowing from the RBI, these terms are quite different. Here’s a look at the differences between these three terms.
Basis of difference
Marginal Standing Facility
The Marginal Standing Facility is a feature through which banks can borrow overnight funds from the RBI by pledging Government securities that they own
Repo is the process in which banks borrow from the RBI by selling their securities and on an agreement to buy back such securities later on
Bank rate is applicable when banks borrow long-term loans from the RBI
Overnight, limited to 24 hours
Short-term in nature
Government securities. Banks can use their SLR securities
Bonds and other securities. SLR securities cannot be used
No security is pledged
Rate of interest
Higher than the repo rate. Currently stands at 5.15% as of June 2022
Lower than the Marginal Standing Facility rate. Currently stands at 4.9%
Depends on RBI’s monetary policy. Currently stands at 5.15%
Scheduled commercial banks that have a Subsidiary General Ledger (SGL) and a current account with the RBI
All types of banks and financial institutions
How Can Banks Borrow Funds under Marginal Standing Facility?
If banks run out of liquidity and need emergency assistance, they can request the RBI for the Marginal Standing Facility. They would have to pledge the Government securities they hold under their SLR obligation. After that, RBI would transfer the funds to the bank. The minimum borrowing under the Marginal Standing Facility is Rs.1 crore, and the facility is available on all working days excluding Saturdays.
Impact of Marginal Standing Facility Rate in India
While the Marginal Standing Facility rate is applicable for banks, it can also impact you. Here’s how –
The Marginal Standing Facility rate affects the loan rates charged by banks. If the MSF rate is increased, banks pay more to the RBI for emergency borrowing. They might charge higher rates to their borrowers to meet the high MSF rate.
The opposite might also hold true. If the MSF rate is slashed, loans might become cheaper (for you)
The MSF rate also impacts the monetary policy and determines the value of INR against US Dollars
The Marginal Standing Facility helps banks meet their emergency and liquidity needs by providing financial stability. The rate at which banks borrow from the RBI, called the Marginal Standing Facility rate, might impact the interest rates at which borrow loans. So, keep a tab on the MSF rates that the RBI revises periodically to understand the changing loan interest rates.
FAQs on Marginal Standing Facility
Q1. Is there a fixed percentage by which the MSF rate differs from the repo rate?
Ans:No, there is no fixed percentage of the difference between the Marginal Standing Facility rate vs repo rate. The Marginal Standing Facility rate can be fixed in any manner by the RBI. Usually, however, there is a difference of 25 basis points between the MSF rate and the repo rate but this difference is not fixed.
Q2. Can banks borrow more than Rs.1 crore?
Ans:Yes, they can. Banks can borrow in multiples of Rs. 1 crore whenever they need emergency liquidity funding. Rs. 1 crore is the minimum borrowing under the MSF.
Q3. Do banks need to maintain their SLR under the Marginal Standing Facility?
Ans:The Marginal Standing Facility allows banks to dip into their SLR for availing overnight finance. So, when the Marginal Standing Facility is extended, banks don’t have to maintain their SLR. However, once the loan under MSF is repaid, the SLR limit must be maintained.
Q4. Is there a limit up to which banks can resort to the MSF facility?
Ans:No, there is no limit. Banks can resort to MSF any number of times and up to any amount provided they have the required Government securities to pledge.
Q5. For how long is the MSF allowed?
Ans: The loan under Marginal Standing Facility is allowed for up to 24 hours.
Before you go…
Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!!
Or, maybe you’re looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to ₹5 crore. Install the Navi app now and get instant in-principle approval right away! Interest rates starting at 8.39% p.a.
How about an affordable health insurance policy👨⚕️ starting at a monthly premium of just ₹235? Install the Navi app now and get your policy in under 2 minutes.
Instead, want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research. Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
Vikram Kirloskar Origins – From Bicycle Repair Shop to Toyota
Facial Recognition-based Entry System in Airport Launched. Know More!
15 Best Christmas Gift Ideas Even Santa Wouldn’t Ignore
RBI Launches Digital Rupee – Is it Like Crypto?
The G.O.A.T. – Messi’s 7 Life-Changing Quotes You Can’t Ignore
Mercedes or SIPs – Indians Tweet Their First Choice
How to Open Demat Account: Fees, Eligibility, Documents
Udd Gaye Totey: 9 Funny Tweets that Got Indians ROFL
10 Best Places to Celebrate New Year 2023 in India
We are a diverse group of writers, editors and Subject Matter Experts striving to bring the most accurate, authentic and trustworthy finance and finance-related information to our readers. Our mission is to simplify jargon and industry lingo. We believe sharing knowledge through relatable content is a powerful medium to empower, guide and shape the mindset of a billion people of this country.
What is a Credit Card Balance Transfer – List of Cards That Offer & How To Do it?
Are you paying a heavy interest rate on your credit card? There’s a solution to pay the amount du...Read More »
What is Price Skimming and How does it work?
Price skimming is a price determination strategy whereby firms initially charge a higher price for ...Read More »
What are Virtual Debit Cards – Benefits, Usage and How to Apply?
Virtual debit cards are digital forms of physical debit cards that store all vital payment informat...Read More »
Best Credit Card Offers in India in 2023
Credit card offers are incentives offered to credit cardholders when they use the cards to make pur...Read More »
Understanding Risk-Weighted Asset (RWA) and its Calculation in Banking
Risk-weighted asset or RWA is a banking term that refers to an asset classification system to deter...Read More »
List of 10 Best Savings Accounts in India
A savings account keeps your money safe, and lets you earn interest every quarter. There are many b...Read More »
What is Credit Appraisal – Eligibility, Benefits & How It is Done?
Ever wondered why loans get approved but also sometimes get rejected? Well, every bank has its own ...Read More »
Debt Trap: Meaning & How to Avoid Falling in It
Piling up debt could bring unnecessary stress. Having multiple loan EMIs and credit card bills to c...Read More »
How to Apply for Debt Consolidation Loans and What are Its Benefits?
If you have multiple loans, taking out a single loan to pay them off is known as a debt conso...Read More »
What is a Bank Identification Number (BIN) and How Does it Help in Preventing Fraud Transactions?
A Bank Identification Number or BIN refers to a credit card's initial four to six digits. The BIN i...Read More »
What is Kiosk Banking, How Does it Work and What Does it Offer?
Banking kiosks or ATMs are available at multiple locations across India – mostly in remote and ru...Read More »
Personal Banking: Services and Products You Should Know
Personal banking refers to the products and services that banks offer to customers to manage their ...Read More »
Diwali 2022: Diwali Holidays – The Festival of Lights
The ‘Festival of Lights’ is one of the biggest and most anticipated festivals in India. This is...Read More »
Best Index Funds – Top 20 Index Funds in India
Index funds replicate the performance of a stock market index, such as the Sensex or Nifty 50 to ge...Read More »