What is the Marginal Standing Facility (MSF) and How Does It Work?

In 2011, the Reserve Bank of India introduced the Marginal Standing Facility. The primary aim behind introducing this facility was to ensure the smooth working of the Indian banking system as well as to take care of any type of liquidity crunch that any banks or financial institutions may be facing. 

Under the Marginal Standing Facility, banks experiencing liquidity shortages can borrow money from the Reserve Bank of India by dipping into their SLR. 

The Reserve Bank of India lends funds only for a day and inability to repay the loan amount before the end of the next day can lead to the RBI selling the pledged assets and recovering assets. The rate of interest that the central bank of the country charges borrowing banks is known as the Marginal Standing Facility Rate. 

Marginal Standing Facility: Everything You Need to Know in a Nutshell

To start with, the Reserve Bank of India does not extend the Marginal Standing Facility to all banks and financial institutions operating within the country. Only those commercial banks that maintain current accounts and SGL or the subsidiary general ledger with the Reserve Bank of India are eligible to benefit from this facility. Regional rural banks and local area banks are not eligible to borrow under the MSF facility.  

As previously mentioned, these loans are extended only on an overnight basis. Thus, the borrowing bank must return the borrowed amount the next day. 

The rate of interest that the Reserve Bank of India charges for such borrowings is known as the Marginal Standing Facility Rate. The MSF Rate is decided by the Reserve Bank of India and it is always higher than the Repo Rate. The current Repo Rate is 6.50% whereas the current MSF Rate is 6.75%.

Banks borrow under the Marginal Standing Facility by pledging securities that are a part of their Statutory Liquidity Ratio. The statutory liquidity ratio is the total portion of a bank's total deposits that it must maintain in the form of cash, gold and other government-approved securities before it can start lending money to borrowers. When banks borrow under the Marginal Standing Facility, they agree with the RBI that they will return the loan amount before the agreed due date. Not doing so gives the RBI the legal right to sell the pledged collateral for recovery of losses. 

Under the Marginal Standing Facility, borrowers can borrow money on all days except for Saturdays and in multiples of Rs.1 Crore. 

The Marginal Standing Facility is important. It helps the central bank of the country ensure that short-term liquidity issues do not compromise the integrity or the working of the Indian banking system. By doing so, it helps the RBI maintain a secure financial environment within the country. 

Over and above this, the MSF is an important member of the RBI's monetary policy framework and the RBI uses it to ensure that the changes it brings to the interest rates get trickled down into the economy. 

When the Reserve Bank of India increases the Marginal Standing Facility Rate, banks have to pay a higher rate of interest on loans. Therefore, loans become expensive when the MSF rate goes up. On the other hand, when the RBI decreases the MSF Rate, loans become cheaper. Thus, people borrow more when the MSF Rate is low, which in turn, increases the flow of funds within the economy. 

Frequently Asked Questions About the Marginal Standing Facility Rate

Q: Can all banks and financial institutions borrow under the MSF Rate? 

No, only those banks that have a current account or subsidiary general lender with the RBI can borrow funds under the Marginal Standing Facility.

Q: What is the current MSF Rate? 

The MSF rate is always higher than the Repo Rate, which is the rate of interest that the RBI charges when banks borrow money from the RBI by pledging securities for a longer period. 

Q: What collaterals does the Reserve Bank of India accept under the Marginal Standing Facility? 

Under the Marginal Standing Facility, the Reserve Bank of India accepts all government-approved securities, such as treasury bills, gold, state development loans, etc.