Marginal Standing Facility: Meaning and Current Rate

Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities.

MSF is a very short term borrowing scheme for scheduled commercial banks. Banks may borrow funds through MSF during severe cash shortage or acute shortage of liquidity.

Banks often face liquidity shortfalls due to mismatch in their deposit and loan portfolios. These are usually very short term and banks can borrow from RBI for one day period by offering dated government securities.

MSF had been introduced by RBI to reduce volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.

Under MSF, banks can borrow funds overnight up to 1% (100 basis points) of their net demand and time liabilities (NDTL) i.e. 1% of the aggregate deposits and other liabilities of the banks. NDTL liabilities represent a bank's deposits and borrowings from others.

In a move to stem the continuing fall of rupee, the RBI raised the MSF rate to 300 basis points (i.e. 3%) above the repo rate in July 2013. Thus, both rate of borrowing and percent of borrowing allowed under MSF can be varied by RBI.

What is the MSF Rate?

The Marginal Standing Facility (MSF) rate is a key policy rate set by the Reserve Bank of India (RBI) in the Indian financial system. It acts as a penal rate for banks. Banks facing a shortage of funds cannot meet their liquidity requirements through other sources so they can borrow funds from the RBI under the MSF scheme.

The MSF rate is higher than the repo rate, serving as a penal rate to encourage banks to manage their funds prudently. As of my last update in September 2021, the MSF rate can vary and is determined by the RBI based on the prevailing economic conditions and monetary policy objectives. Please check the latest sources for the most recent MSF rate.

When and Why MSF Was Introduced?

The Reserve Bank of India implemented the marginal standing facility in its Monetary Policy of 2011–12. Still, it went into effect on May 9, 2011. This facility was initially launched in June 2011, and the banks borrowed INR 1 billion under this policy in its first year of operation.

The marginal standing facility is the most recent liquidity adjustment option implemented to improve the stability of overnight financing rates between banks and support appropriate financial transmission within the banking system. It aided the RBI in improving its control over the flow of funds into the Indian financial system.

Difference Between Bank Rate, Repo Rate, And MSF Rate

For those who have the marginal standing facility meaning but cannot differentiate it from the bank rate and repo rate, this section is for you.

Marginal Standing Facility (MSF) Rate Vs Repo Rate:

Here are the main distinctions between the RBI Repo rate and the marginal standing facility rate, which differ by a small amount:

• The repo rate is the amount that the RBI lends money to commercial banks when they’re short on cash. In contrast, when banks are severely short on interbank liquidity, the RBI lends them overnight at the marginal standing facility rate.
• The repo rate is applied when the RBI loans money to commercial banking institutions. However, the marginal standing facility rate is applicable when the RBI gives cash to predetermined banks that meet certain requirements.
• The repo rate is used when banks borrow funds from the RBI by selling their excess securities and repurchasing agreements. In contrast, banks that borrow money from the RBI against excess government-approved securities must pay the marginal standing facility rate.
• Banks may employ Statutory Liquidity Ratio (SLR) securities while borrowing money under a marginal standing facility. However, this is not permissible in the case of the Repo rate.
• Since it can only be used for overnight lending amid a significant liquidity shortage, the marginal standing facility rate is 0.25% higher than the Repo rate.

Marginal Standing Facility (MSF) Rate Vs Bank Rate:

Despite the common misconception that the bank and marginal standing facility rates are interchangeable, these rates are distinct and have distinct functions within the nation’s lending and borrowing framework.

You will learn the following are the main distinctions between the two:

• When a commercial bank in India needs money, it can get loans from the RBI at the bank rate. In contrast, when a scheduled commercial bank needs money quickly, it can get it overnight by selling government securities subject to the Statutory Liquidity Ratio (SLR).
• All commercial banks and other financial institutions are eligible to apply for loans from the Reserve Bank of India under the bank rate anytime they need them. However, the marginal standing facility (MSF) rate is only available to Scheduled Commercial Banks with current accounts with the RBI and Subsidiary General Ledgers, or SGLs.
• The bank rate dates back to 1900, while the RBI established the marginal standing facility rate in 2011. Banks borrowed money at this extremely basic rate from the Central Bank of India for a very long period.
• The primary distinction between the two is that RBI does not require security when granting loans at the Bank Rate. However, banks must provide RBI with government-approved securities when borrowing money through a marginal standing facility.
• The last resort for commercial banks is to receive funds through the marginal standing facility rate overnight rather than borrowing at bank rates. The banks must borrow money at the MSF rate after using up their repo limit.

How Does Marginal Standing Facility Work?

The Marginal Standing Facility is a liquidity support mechanism from a RBI to commercial banks. It functions as follows:

• Eligibility:

  Commercial banks facing unexpected liquidity shortages can approach the central bank.

• Collateral:

  Banks pledge eligible securities like, gold, government securities, corporate bonds cash reserves, treasury bills,foreign currency assets, as collateral for the loan they seek from the central bank. These securities act as a security blanket.

• Interest Rate:

  The Reserve Bank of India provides funds to the bank at an interest rate set by the central bank, which is typically higher than the repo rate. The higher rate serves as a penalty for using this facility.

• Usage:

  Banks utilize the MSF when they cannot obtain funds through other means, like interbank lending or regular central bank operations.

• Overnight Borrowing:

  The borrowing typically has an overnight tenure, meaning it must be repaid the following day.

Why Do Banks Need MSF When They Can Borrow at Repo Rate?

Now that you understand the marginal standing facility meaning, you may be wondering why banks choose MSF when they can obtain funds at the repo rate with ease. Here’s why:

• The RBI opens the marginal standing facility window to allow designated commercial banks to borrow funds when there isn’t a cash flow between banks in the market.
• Through this mechanism, banks can obtain funds from the RBI at a rate that is greater than the repo rate.
• Additionally, a marginal standing facility is required to reduce the overnight interbank lending rates’ volatility.

Does The Increase of MSF Rate Affect The Borrowers?

The RBI raises the marginal standing facility rate for several reasons, the most important of which are:

• To control and manage the excessive supply of the Indian currency (rupees) within the Indian banking sector.
• To stop or control the decline of the Indian currency (rupees) in value relative to the US dollar.

So, there’s no doubt that the surge in the marginal standing facility rate affects the borrowers. The rise in the MSF rate makes borrowing costly for banks, which in turn makes loans costly for borrowers because of the low obtainability of the rupee.

You may find it challenging to obtain loans when needed because of the high interest rates on all loans—personal, home, or auto.

Why Has RBI Lowered the MSF Rate?

With a clear idea of ‘what is marginal standing facility,’ you may wonder why RBI bothered to lower its rate, right? Well, it was October 2017 when the RBI cut and lowered the marginal standing facility rate. The MSF rate reached 6.25% p.a., straight from 7.0% p.a. But why?

RBI took this decision to allow Indian banking institutions to deposit more funds to improve and boost the availability of the Indian currency (rupees) in the financial market. With access to sufficient funds, banks can find it easy to loan out large funds to industries and companies to boost the Indian economy.

What are the Criteria for Borrowing through MSF?

Here are the following criteria set by the RBI to borrow through marginal standing facility:

• Experiencing unwanted/unexpected liquidity crunch
• Being a designated commercial bank under the RBI
• Submitting eligible collateral against the MSF
• Accepting to pay the outlined marginal standing facility rate
• Borrowing the MSF for a shorter duration
• Complying with percentage limits on borrowing
• Adhering to all the rules and regulations set by the RBI.

What is the Effect of MSF Rate?

As previously indicated, because MSF offers banks greater liquidity support, its rate is 25 basis points higher than the RBI’s repo rate. Higher marginal standing facility rates mean higher bank lending costs, which means higher interest rates for borrowers.

The RBI implemented a marginal standing facility as a way to give Indian banks a cushion of liquidity. The RBI has carefully considered the bank’s proposals for flexible liquidity options so they can borrow money more easily. It has substantially aided the banks in better managing their immediate liquidity problems.

The purpose of raising the marginal standing facility rate is to limit the surplus supply of the rupee and prevent further currency depreciation against the US dollar. The repo rate was reduced by 25 basis points to improve rate transmission.

5 Key Terms Related to MSF

Here are five key terms related to MSF: -

• SLR

  Statutory Liquidity Ratio. However, it’s the requirement set by a RBI that mandates financial institutions to maintain a certain percentage of their total deposits and liabilities in the form of liquid assets, primarily government securities, and other approved securities.

• Repo Rate

  This rate is typically lower than the marginal standing facility (MSF) rate. Banks borrow from the MSF at a higher interest rate when they require immediate funds, while the RR is used for regular short-term liquidity needs.

• Reserve Rate

  The reserve rate in the marginal standing facility (MSF) is generally higher than the repo rate. MSF is a secondary window for banks to borrow funds from the RBI at a penalty rate in emergencies.

• Bank Rate

  The bank rate is the rate RBI delivers to the banks and NBFCs for long-term loans. MSF offers banks access to funds at a penalty rate to address immediate liquidity needs.

• NTDL

  Net Demand and Time Liabilities refer to a bank's total deposits and liabilities, excluding its capital. It's the basis for calculating SLR and MSF eligibility in India.