In its Fiscal Policy of 2011-12, the Reserve Bank of India (RBI) introduced the MSF scheme with effect from 9th May 2011. The objective behind launching this financial programme was to manage the short-term liquidity instabilities faced by the banking sector while ensuring an effective and stable working of the monetary system in India. 

By introducing this policy, RBI allowed the scheduled banks to avail funds as per the prevailing MSF rate that changes from time to time. In the first year, the financial scheme entertained Rs.1 billion in funding to the banking sector.   

What is MSF?

Marginal Standing Facility (MSF) is a window put forth by the RBI in 2011 that enables commercial banks to borrow funds from the RBI during an emergency to enhance liquidity and maintain cash flow. 

Shortage of liquidity is a common experience of banks which leads to financial gap due to the mismatch of total deposit and sum of credit account. Under such circumstances, the scheme facilitates commercial banks to get overnight financial backup from the RBI by pledging approved government securities and by paying the MSF interest rate.

What is MSF rate?

The interest rate that RBI charges for allowing overnight credit facilities to scheduled banks in case of severe shortfall of cash flow is the Marginal Standing Facility rate. The MSF rate is different from repo rate. 

MSF rate is determined by the RBI as it holds the authority to modify it and bring stability to the nation’s economy. MSF rate is also called a panel or penalty rate. As per the updates of 29th July 2023, the current MSF rate of the RBI stands at 6.75%. 

What is the current MSF rate?

As of now, MSF rate stands at 6.75% per annum which is 0.25% higher than the Repo rate. By paying this MSF rate, scheduled banks can fetch financial backing from RBI by selling their government securities at 6.25% annual interest rate. During this phase, banks lose their eligibility to get funding under repo rate of 6% interest per annum. 

Important terms to know for understanding MSF

Following are the important terminologies involved in Marginal Standing Facility (MSF) rate:

  1. Statutory Liquidity Ratio (SLR) 

Statutory Liquidity Ratio defines the least percentage of deposits commercial banks need to keep in reserve in terms of cash, securities and gold. Precisely, it is the total amount of deposit that banks should have before allowing credit to their customers. The RBI is the authority to decide the extent of SLR from time to time to have control over the credit growth in the country. 

  1. Net Demand and Time Liabilities (NDTL)

Net Demand and Time Liabilities or NDTL define the demand time obligations of a bank to its customers. It involves time liabilities as well as demand accountabilities. Time liabilities indicate the time obligations by which the bank is required to pay the deposits like FD or RD to its customers. Conversely, deposit liabilities signify payments that keep a bank obligated to pay to the customers on their demand like a deposit of a savings account.

  1. Repo rate

Repo rate refers to the rate based on which the Reserve Bank of India allows credit facilities to commercial banks. To avail such funding, commercial banks have to collateralise securities such as government bonds, and treasury bills to the RBI. 

In general, banks go for these types of short-term loans from the RBI, when they experience a deep crisis of fund flow. When there is an escalation in the repo rate, lending institutions normally increase the rate of interest on their loans, including home loans.

  1. Bank rate 

Bank rate is the rate based on which RBI lends long-term loans to commercial banks. Aka discount rate, the RBI uses this instrument to control the credit market in the country and nation’s economic growth alongside the banking sector. 

The bank rate demonstrates a direct relation between home loan interest rates and other loans offered by public banks. The escalation of bank rate will automatically increase the bank’s lending rate since banks need to earn profits by keeping the margin between borrowing and lending interest rates. 

  1. Reverse repo rate

Reverse repo rate defines the rate based on which the Reserve Bank of India borrows from commercial banks operating in the country. It is basically a fiscal policy instrument which is adopted in order to control the fund flow in the country. For instance, an escalation of reverse repo rate will lower the money supply in an economy while its decrease will act reversely and thereby enable it to have control over cash flow in the economy. 

How does MSF rate work?

More often than not, commercial banks come across intense cash crunch. To get over the situation, they can request funds from the Reserve Bank of India under Liquidity Adjustment Facility (LAF) by depositing government securities at a considerably higher rate compared to the repo rate. 

Scheduled banks under the control of the RBI are allowed to deploy this tool that helps them get emergency funding up to the extent of 1% of their Net Demand and Time Liabilities (NDTL). 

What is the procedure for borrowing credit under MSF? 

Commercial banks aim to borrow funds from the Reserve Bank of India when they come across a monetary crisis and need to file a loan application. They are allowed to borrow at least Rs.1 crore under the MSF scheme. For availing the short-term loan, they are required to collateralise transferable government securities. 

If the eligibility criterion is required by RBI to decide the bank’s eligibility to get funds, the same is allowed within 24 hours. In addition, banks that apply for funds under the MSF need to furnish their application through the Negotiated Dealing System (NDS). 

In a nutshell, Marginal Standing Facility (MSF) helps manage the short-term liquidity discrepancies in the banking system to ensure the stability of the monetary policy. Besides, financial institutions use MSF as an emergency tool for obtaining liquidity at the Marginal Standing Facility or MSF rate.

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