Marginal Standing Facility

Introduction

• Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when interbank liquidity dries up completely. 
• MSF allows banks to borrow up to 1% of their Net Demand and Time Liabilities (NDTL) overnight at a 1% interest rate. 
• MSF is a last resort for banks who have exhausted all other borrowing alternatives, including the Liquidity Adjustment Facility (LAF). 
• Banks offer Government Securities to RBI within the limits of the statutory liquidity ratio (SLR). 
• The plan was implemented by the RBI with the primary goal of lowering overnight lending rate volatility in the interbank market.

Purpose of MSF

• Banks often face liquidity shortfalls due to mismatches in their deposit and loan portfolios. 
• Marginal Standing Facility is a very short term or overnight borrowing scheme for scheduled commercial banks. 
• Banks can borrow funds through MSF against approved government securities during acute liquidity shortages.
• MSF was introduced to reduce volatility in the overnight lending rates in the interbank market and to enable smooth monetary transmission in the financial system.

Does Hike in MSF Rate affect us?

• Hiking MSF rate makes borrowings expensive for banks, which means loans become expensive for individual and corporate borrowers and this in turn translates to lesser availability of money in the market. 
• The RBI uses MSF and other measures to control money supply in the financial system. 
• MSF rate hike is being done to control excess liquidity and this instrument is also used to control sliding of rupee value against the dollar.

Important Points

• The minimum amount which can be accessed through MSF is Rs. 1 Crore and in multiples of Rs. 1 Crore. 
• Currently RBI allows banks to borrow 1 % of its NDTL, which is the maximum limit. Borrowing amount also depends on Banks SLR reserves. 
•  SLR Securities can be used for borrowings under Marginal Standing Facility.