Marginal Standing Facility & MSF Rate

Banks can sometimes face a shortage of liquidity, which can affect the whole economy in the country. However, the Reserve Bank of India (RBI) has some monetary tools in its arsenal to help banks overcome such a crisis and ensure the proper functioning of the economy by maintaining the right flow of money into the system.

One such key tool that is often used by the RBI to address the liquidity crisis is the marginal standing facility.

Knowing the following terms would help to better understand the marginal standing facility.

• Demand Liabilities These are the liabilities that the bank has to pay immediately to its customer on demand, such as withdrawal from a savings account, withdrawal through cheque, etc.
• Time Liabilities Time liabilities are the payments that the bank owes to its customers after the completion of a pre-defined time limit, such as fixed deposits, recurring deposits, etc

• Net Demand and Time Liabilities (NDTL) NDLT refers to the total liability a bank owns to its customers. It comprises two different components.
• Statutory Liquidity Ratio (SLR) As per the RBI guidelines, commercial banks operating in India have to mandatorily keep a portion of their liquid assets reserved in the form of cash, gold, or sovereign bonds. This proportion of reserved liquid assets is called the statutory liquidity ratio.The formula to derive SLR is SLR= (Liquid Asset/NDLT) x 100
• Repo Rate Banks can take short-term loans from the RBI in times of need. The repo rate is the rate of interest that the RBI charges on loan provided to banks.
• Reverse Repo Rate As the name suggests, it is just the opposite of the repo rate. Reverse repo rate is the rate of interest RBI pays to the banks for borrowing their money.

The RBI has made the provision of the marginal standing facility, or MSF to help scheduled commercial banks regain liquidity quickly in case of emergencies. This can be very beneficial for the bank, where all other liquidities have already been exhausted. Therefore, MSF is more like an emergency monetary tool for the struggling bank.The RBI introduced MSF in its monetary policy of 2011-12 with effect from 9 May 2011 . During the very first year of its introduction, the combined borrowings of various banks under this policy stood at Rs 1 billion.

A commercial bank can face a situation when there is a mismatch between its deposit and loan portfolio that creates a financial gap. This, in turn, can often result in a shortfall in liquidity. Such a liquidity crisis in a bank is temporary.The MSF was introduced to achieve the following objectives:

• Banks should be able to borrow money overnight from the RBI for a day as permitted under the limits of statutory liquidity ratio (SLR).
• Emergency lending rates for emergency borrowing by banks should be less volatile.
• The RBI should have more control over the supply of money into the economy.

The MSF rate or marginal standing facility rate is the rate of interest charged by the RBI on the amount that it lends to the scheduled commercial banks facing liquidity shortfall. While the MSF rate is usually higher than the repo rate at any time, it ensures quick access to liquidity for the concerned bank.The RBI can increase or decrease the MSF rate to maintain economic stability in the country.The MSF rate and the repo rate are closely linked to each other. Following is the brief timeline of MSF rates since its inception.

• FY 2011-12:The MSF rate was 100 basis points higher than the repo rate.
• FY 2013-14: The MSF rate was increased to 300 basis points above the repo rate to control the falling value of the rupee.Later, the MSF rate was reduced to 50 basis points to make borrowing easier for the banks.
• FY 2017-18: The MSF rate was fixed at 6.25 %, which was 25 basis points more than the repo rate.
• FY 2021-22: The current MSF rate in India is 4.25 per cent.

The current MSF rate, along with other rates such as repo rate, reserve repo rate, etc., can be accessed by visiting the 'Policy Rates' section of the official website of the RBI.

Whenever a bank needs liquidity, it borrows money from the RBI at MSF rates subject to certain rules and conditions.

• The bank is expected to avail of MSF loans when facing emergencies.
• Banks can ask for the loan amount of up to 1 per cent of their NDLT or SLR securities.

On 20 March 2020, the RBI temporarily allowed banks to avail of funds under the marginal standing facility up to 3 per cent of their NDLT. While this relaxation was initially available till 30 June 2020, it was extended multiple times.Currently, the MSF relaxation is in place till 31 December 2021.

• Banks should have a current account and a subsidiary general ledger (SGL) account with the RBI.
• Banks can borrow money under MSF by applying for the same at RBI headquarters in Mumbai on all working days between 3:30 PM to 4:30 PM, excluding Saturday.
• The application for borrowing should be made electronically.
• The borrowing amount must be a minimum of Rs 1 crore and thereafter, in multiples of Rs 1 crore.
• The borrowing under MSF can be requested by scheduled commercial banks only.

It should be noted that the RBI is under no obligation to lend money under MSF to the applicant bank. It has the right to reject, accept, or partly accept the request for an MSF loan at its discretion.

• The bank has to submit its MFS request in the negotiated dealing system.
• The MSF request must be pledged against the transferable government-approved sovereign bonds and securities.
• Once the RBI accepts the request and the securities, the accepted securities will be debited from the RC SGL account of the bank.
• The bank’s current account will receive the approved MSF amount.

While both MSF and repo rates are lending rates, they have some differences, as mentioned below.

Any change in MFS can affect retail borrowers. For example, if the RBI hikes the MFS, the banks will have to borrow money at a higher rate, and as a result, retail loans such as home loans, car loans, etc., will be offered by the banks at higher interest rates, making them expensive.On the contrary, slashing MSF rates can help banks increase their funds, ultimately resulting in cheaper and easy availability of loans. Therefore, the low MSF rate at present can be beneficial for those seeking loans.

You might think that the RBI should permanently reduce or, better, just remove MSF to benefit the public. However, the chief goal of the RBI monetary policy is to achieve optimal growth of the economy. Therefore, the RBI must consider various economic factors too, such as inflation, availability of money in the market, the value of the rupee compared to US dollars, etc.While the RBI and government indeed want to keep the MSF rate low, sometimes it becomes necessary to hike the MSF rate to better suit the larger interest of the nation’s economy.

Having a basic understanding of MSF and how it works can help you make informed choices regarding your investments and loans. For example, you can better understand whether the prevailing conditions are favourable for taking a new loan.Besides, we can expect a proactive role of MSF and other associated matrices when the economy opens up to the pre-covid levels.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.