The RBI has deployed a number of liquidity support measures for banks to ensure that there will be enough liquidity in the banking system. Most popular of these measures is the ‘work horse’ liquidity support arrangement called repo. Under repo, loan is provided for just one day and hence it is an overnight facility. Another feature of repo is that there should be eligible securities with the bank to avail money from the RBI by pledging them. Eligible securities are first class securities (including government bonds, T Bills etc) held by a bank over the SLR requirement. This means that the securities held by a bank above 19.5% (SLR as on 14th of November 2017) of its liabilities (deposits) can be pledged by the bank with the RBI to avail funds.
What is Marginal Standing Facility?
Marginal Standing Facility is a liquidity support arrangement provided by RBI to commercial banks if the latter doesn’t have the required eligible securities above the SLR limit.
Launch of Marginal Standing Facility (MSF)
The MSF was introduced by the RBI in its monetary policy for 2011-12 after successfully test firing it from December 2010 onwards.
Under MSF, a bank can borrow one-day loans form the RBI, even if it doesn’t have any eligible securities excess of its SLR requirement (maintains only the SLR). This means that the bank can’t borrow under the repo facility.
In the case of MSF, the bank can borrow up to 1 % (can be changed by the RBI) below the SLR (means 1% of Net Demand and Time Liabilities or liabilities simply).
The working of MSF is thus related with SLR. For example, imagine that a bank has securities holding of just 19.5 % (of NDTL). This is equal to its mandatory SLR holding. The bank can’t borrow using the repo facility. But as per the MSF, the bank can borrow 1 % of its liabilities from the RBI. Sometimes the RBI increases the limit of borrowings to 2% of NDTL. As in the case of repo, the bank has to mortgage the securities with the RBI.
MSF rate and the Repo rate
But the main condition is that for such borrowings the bank has to give higher interest rate to the RBI. The interest rate for MSF borrowing was originally set at one percent higher than the repo rate. As on November 2017, the RBI has lowered the difference between repo rate and MSF to 0.25%. Repo rate is 6.0% whereas the MSF rate is 6.25%. Both the MSF rate and Bank rate are equal.
Difference between the Repo rate and the MSF rate can be changed in accordance with the policy perspective of the RBI.
Following are the main features of the MSF.
Features of MSF
- Eligibility: All Scheduled Commercial Banks having Current Account and SGL Account with Reserve Bank, Mumbai will be eligible to participate in the MSF Scheme.
- Tenor and Amount: Under the facility, the eligible entities can avail overnight, up to one per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight.
- Timing: The Facility will be available on all working days in Mumbai, excluding Saturdays.
- Rate of Interest: The rate of interest on amount availed under this facility will be 100 basis points above the LAF repo rate, or as decided by the Reserve Bank from time to time.
- Discretion to Reserve Bank: The Reserve Bank will reserve the right to accept or reject partially or fully, the request for funds under this facility.
- Mechanics of operations: i) The requests will be submitted electronically in the Negotiated Dealing System (NDS). Eligible members facing genuine system problem on any specific day, may submit physical requests in sealed cover in the box provided in the Mumbai Office,
- Minimum request size: Requests will be received for a minimum amount of Rs. one crore and in multiples of Rs. one crore thereafter.
- Eligible Securities: MSF will be undertaken in all SLR-eligible transferable Government of India (GoI) dated Securities/Treasury Bills and State Development Loans (SDL).
Difference between MSF and the LAF Repo
Under LAF Repo, banks can borrow from RBI at the Repo rate by pledging government securities over and above the statutory liquidity requirements. In the case MSF, banks can borrow funds up to one percentage of their NDTL, at a rate of one percentage higher than the repo rate. The rate of interest and amount of borrowing can changed depending upon the monetary policy decisions by the RBI.