Marginal Standing Facility

The Reserve Bank of India uses different tools to control the money supply in the Indian economy. Among other tools of its monetary policy, namely repo and reverse repo rate, marginal standing facility, or MSF rate is another one that allows the apex bank of this country to manage the market's liquidity.

MSF is a provision put forth by the Reserve Bank of India that allows commercial banks to increase their liquidity overnight. RBI introduced this facility in 2011-12 to aid these financial institutions in case of any emergency and maintain the flow of money. This facility is particularly beneficial for concerned banks as they can pledge Government securities and avail of funds within 24 hours.

However, the rate of interest applicable here is higher than that of the repo rate.

The MSF rates are typically 0.25% to 25 basis points higher than that of the repo rate. With the help of this facility, a financial institution can receive monetary assistance of up to 1% of their SLR securities or net demand and time liabilities (NDTL). Moreover, during its introduction in 2011, the rate of interest of MSF was 100 basis points higher than the repo rate. Afterwards, in 2013, RBI increased this rate by 300 basis points or 3% to manage the falling valuation of INR. Later RBI reduced this rate by 50 basis points.

The marginal standing facility rate in 2021 stands at 4.25%, which is 0.25% higher than the current Repo rate, which stands at 4%.

Key Terms That You Need to Know to Understand MSF

Here are a few terms associated with MSF in banking that one should know about –

• NDTL

NDTL stands for Net Demand and Time Deposit Liabilities. Here time liabilities signify deposits that individuals or, in this case, financial institutions can withdraw after a previously determined time period. Demand liabilities, on the other hand, convey a contrary working principle.

• SLR

The term Statutory Liquidity Ratio or SLR refers to the liquidity reserve assets that commercial banks of India need to maintain in government securities or gold to keep operational.

As per the current guidelines of RBI, banks need to keep a portion of the NDTL in the form of liquid assets as SLR. This ratio is calculated by computing the ratio of total demands and total liabilities.

Formula or SLR: SLR rate = Liquid assets/ (demand and time liabilities) x 100%

• Repo Rate

Repo rate, short for repurchase rate, is an interest rate at which commercial banks of India borrow money for the RBI. Usually, banks sell their current securities and bonds to the RBI and get a short-term loan with an agreement to repurchase them at a pre-set rate after a specific period.

• Reverse Repo Rate

In case banks have a surplus in hand, they deposit that amount at an interest rate called reverse repo rate. To put it another way, RBI borrows money from commercial banks against this interest rate.

• Bank Rate

The bank rate is the interest rate against which the RBI provides long-term loans to commercial banks. This is another armour under RBI's monetary policy that helps the apex bank to manage the flow of money in the Indian economy.

Here are some key differences between the marginal standing facility and the repo rate –

1. Repo rate is charged from short-term loans, whereas MSF is charged on overnight or emergency funds.
2. Repo rate is applicable for commercial banks, and MSF is applicable for eligible scheduled banks.
3. In the case of repo rate, banks sell government securities against a repurchase agreement, but for MSF, banks sell the extra government securities to avail funds.
4. When availing under MSF, banks can use the SLR securities, which are not allowed in case of borrowing against the repo rate.
5. MSF rate is always 0.25% higher than that of the repo rate.

With a clear understanding of marginal standing facility, you can now make sound financial decisions.