Marginal Standing Facility (MSF)
Marginal Standing Facility or MSF is a window that permits overnight borrowing by banks from RBI, at their discretion. MSF scheme is introduced to minimise volatility in the overnight lending rates in the inter-bank market (call market).
Why is Marginal Standing Facility (MSF) rate high?
Borrowings under MSF occur after LAF facility is exhausted. Under LAF, banks can borrow from RBI through repurchase agreements. The repo transaction under LAF happens at Repo rate against the collaterals of Government securities and SDLs. For borrowing under MSF, pledge of securities is not essential. Interest rate under MSF arrangement, known as MSF rate, is higher compared to LAF due to the absence of securities. Hence, banks resort to MSF borrowing only after other options including LAF is exhausted. Therefore, MSF facility is the last resort for banks to meet their overnight liquidity shortage. The MSF rate is thus a penal rate and banks can borrow funds within the limits of SLR.
How much is the MSF rate and permitted borrowing?
The MSF rate is pegged 100 basis points or a percentage point above the repo rate. The rate may undergo changes as decided by RBI from time to time. Normally, RBI alters repo rate and the change automatically gets reflected in MSF rate. In addition, RBI at their discretion may revise the spread of 100 basis points to adjust with the market requirements. During periods of inflation MSF rate will be high while it will be less during periods of deflation. (The prevailing spread over Repo rate, as on May 1, 2020 is 25 basis points)
Under MSF, banks can borrow funds up to two percentage(revised from earlier 1%) of their net demand and time liabilities. This ceiling can also be revised by RBI depending on prevailing market conditions. (On 27th March, 2020 RBI increased the limit of 2% to 3% till June 30, 2020 as part of countering high volatility arising on account of Covid-19.)
What are the major operational guidelines with regard to MSF?
1. Banks can borrow under MSF on all working days except Saturday, between 3.30 PM and 4.30 PM, in Mumbai.
2. The minimum amount of borrowing is Rs. 1 crore and in multiples of Rs. 1 crore
3. Banks can borrow funds up to two percentages (revised from earlier 1%) of their net demand and time liabilities. (On 27th March, 2020 RBI increased the limit of 2% to 3% till June 30, 2020.)
Do other central banks offer a facility akin to MSF?
Marginal Lending Facility (MLF) offered by European Central Bank and Discount Window System ( DWS) offered by the Federal Reserve (American Central Bank) are similar to the MSF facility provided by RBI, the Indian banking regulator.
