Marginal Standing Facility or MSF is a facility provided by the Reserve Bank of India (RBI) to banks to borrow money in case of emergency situations. It was introduced in 2011 to help banks manage their liquidity requirements. In this article, we will discuss in detail about Marginal Standing Facility and its workings.

Detail Guide About MSF

Banks can borrow money under Marginal Standing Facility by pledging government securities as collateral. The interest rate on MSF is higher than the repo rate, which is the interest rate at which RBI lends money to banks on a regular basis. Currently, the MSF rate is 4.25% while the repo rate is 4%. The difference between the two rates is known as the MSF spread.

The facility is designed for banks that are unable to borrow funds from other sources. It is meant to be used as a last resort and not as a regular source of funding. Banks can borrow up to 2% of their net demand and time liabilities (NDTL) under MSF. NDTL refers to the total amount of money held by a bank that is subject to reserve requirements.

MSF is an important tool in the hands of the RBI to manage liquidity in the banking system. It provides a mechanism for banks to borrow funds when they are facing a shortage of liquidity. However, the facility is subject to certain conditions and restrictions. Banks that use MSF frequently are subject to a penalty in the form of higher interest rates.

Conclusion

In conclusion, Marginal Standing Facility is an important facility provided by the RBI to help banks manage their liquidity requirements. It is meant to be used as a last resort and not as a regular source of funding. Banks can borrow money under MSF by pledging government securities as collateral and the interest rate is higher than the repo rate. It is subject to certain conditions and restrictions to ensure that it is used judiciously by banks.