What is Marginal Standing Facility?
Hiking MSF rate makes borrowing expensive for a bank which means loans become expensive for individual and corporate borrowers
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.
Introduction of MSF
- The RBI had introduced the marginal standing facility (MSF) in its Monetary Policy (2011-12).
- MSF came into effect on from May 9, 2011.
- Banks used the facility for the first time in June 2011 and borrowed Rs.1 billion via the MSF.
Does a hike in MSF rate affect us?
- Hiking MSF rate makes borrowing expensive for a bank which means loans become expensive for individual and corporate borrowers and this in turn translates to lesser availability of the rupee. RBI uses MSF and other measures to control money supply in the financial system.
- MSF rate hike is being done to control excess availability of the rupee and to control its depreciation with respect to the dollar.
Borrowing under MSF
- Banks can borrow through MSF on all working days except Saturdays, between 3:30pm and 4:30pm in Mumbai where RBI has its headquarters.
- The minimum amount which can be accessed through MSF is Rs. 1 crore and in multiples of Rs. 1 crore.
- The application for the facility can be submitted electronically also by the eligible scheduled commercial banks.
Get Free Daily Trading Ideas on your phone...Click Here!