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Economic Glossary

    Marginal Standing Facility

Marginal Standing Facility (MSF) is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12).
It came into effect from 9th May 2011.

MSF scheme is provided by RBI where 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. However, with effect from 17th April 2012 RBI has raised the borrowing limit under the MSF from 1 per cent to 2 per cent of their NDTL outstanding at the end of the second preceding fortnight. The rate of interest for the amount accessed through this facility is fixed at 100 basis points (i.e. 1 per cent) above the repo rate for all scheduled commercial banks. However, the rate of interest on the amount accessed from this facility is fixed at 300 basis points (i.e. 3%) above the repo rate with effect from 15/07/2013.

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.

Conditions of Burrowing:
Banks can borrow through MSF on all working days except Saturdays, between 3.30 and 4 30 p.m. in Mumbai where RBI has its headquarters.
The minimum amount which can be accessed through MSF is Rs.1 crore and in multiples of Rs.1 crore. ( Rs 1 crore = Rs 10 million).
The application for the facility can be submitted electronically also by the eligible scheduled commercial banks.

First Used:
The banks used the facility for the first time in June 2011 and borrowed Rs.1 billion via the MSF.

Data and Analysis:
As on 21 August 2013, the MSF rate is 10.25 per cent, which is 3 per cent above the repo rate which is at 7.25 per cent.  MSF represents the upper band of the interest corridor and reverse repo as the lower band and the repo rate in the middle. To balance the liquidity, RBI would use the sole independent policy rate which is the repo rate and the MSF rate automatically adjusts to 1 per cent above the repo rate.

Marginal Lending Facility similar to Marginal Standing Facility
The ECB (European Central Bank) also offers standing facilities called marginal lending facilities similar to the MSF introduced in India. The Federal Reserve has discount window systems similar to Standing facilities.

In US it is SCF
Like the MSF, the secondary credit facility made available by the Federal Reserve to the depository institutions in USA is typically overnight credit on a very short term basis at rates above the primary credit rate.

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