Friday, 31 August 2012

Marginal Standing Facility

What is the marginal standing facility?
The Reserve Bank of India in its monetary policy for 2011-12, introduced the marginal standing facility (MSF), under which banks could borrow funds overnight from RBI against pledging government securities. Banks can borrow funds through MSF when there is a considerable shortfall of liquidity. This measure has been introduced by RBI to regulate short-term asset liability mismatches more effectively.
Under the MSF scheme the banks can borrow overnight upto 1 per cent of their net demand and time liabilities (NDTL) i.e. 1 per cent of the aggregate deposits and other liabilities of the banks. The MSF rate is pegged 100 basis points or a percentage point above the repo rate. 
In the annual policy statement, RBI says: "The stance of monetary policy is, among other things, to manage liquidity to ensure that it remains broadly in balance, with neither a large surplus diluting monetary transmission nor a large deficit choking off fund flows."

What is the difference between liquidity adjustment facility-repo rate and marginal standing facility rate?
Banks can borrow from the Reserve Bank of India under LAF-repo rate, which stands at 7.25%, by pledging government securities over and above the statutory liquidity requirement of 24%. Though in case of borrowing from the marginal standing facility, banks can borrow funds up to one percentage of their net demand and time liabilities, at 8.25%. However, it can be within the statutory liquidity ratio of 24%.
In MSF banks avail funds under the stipulated SLR.The rate of interest on amount availed under this facility will be 100 basis points above the LAF repo rate.Requests will be received for a minimum amount of Rs. One crore and in multiples of Rs. One crore thereafter.
The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which has lower rate of interest in comparison with the MSF. The MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio. The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system." 3

Read for info on LAF and other monetary policy tools.