Marginal standing facilityBanks occasionally borrow funds from Reserve bank of India on short terms to manage their finances. Marginal standing facility also called MSF in short form, is the rate at which the banks borrow money overnight from Reserve bank of India under set procedures and approved securities to meet emergency needs. So this is a ultra short term borrowing from RBI. The need for MSF arises when there is a mismatch between deposits and loans in commercial banks.
This facility was introduced by RBI in May 2001 for all scheduled commercial banks having SGL accounts with RBI. The limit for this amount is up to one per cent of banks respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight, but this is revised BR RBI from time to time.
Rate of interest on Marginal Standing Facility (MSF)
When MSF scheme was introduced the basic rate of interest on amount borrowed overnight from RBI under this facility was 100 basis points above LAF repo rate but the Reserve Bank of India reviews this from time to time and adjustment is done according to current market conditions. Availing marginal standing facility is a costly affair for the banks but it helps to tide over emergency situations. Government securities are pledged to RBI at a higher interest rate than normal borrowing rate from RBI ( repo rate)
Rate adjustments are done by RBI to keep a tab on inflation and dollar appreciation. When MSF is increased borrowing by banks becomes costly so the availability of rupee in the market reduces in short term. Similarly when repo rate is increased by RBI the lending rates increases leading to high EMI’s on your borrowings like car loan / home loan.