Understanding Marginal Standing Facility (MSF): A Complete Guide - Loan Trivia


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Tuesday 2 July 2024

Understanding Marginal Standing Facility (MSF): A Complete Guide

The Reserve Bank of India (RBI), being the central bank, imposes rules and regulations for the smooth functioning of banks in the country. Being the authority of banking functions, RBI has implemented several measures to assist banks with short-term emergency funds and long-term capital requirements. 

Marginal Standing Facility (MSF) is one such measure assisting banks with liquidity issues. RBI introduced this facility for lowering volatility in the interbank market and ensuring smooth monetary functioning in the system. One can read on to familiarise themselves with Marginal Standing Facility guidelines. 

What is Marginal Standing Facility (MSF)?

Marginal Standing Facility (MSF) is a mechanism that allows commercial banks to borrow funds from the Reserve Bank of India (RBI) when they are completely exhausted of funds. All commercial banks will have to do is pledge their government securities as collateral. 

This facility was introduced in 2011 to assist commercial banks during times of urgency. It also enables the central bank to maintain stability in the financial market while managing liquidity in banking. 

How does a Marginal Standing Facility work?

Marginal Standing Facility is an emergency option when commercial banks can obtain funds by pledging their securities with RBI. State development loans, treasury bills and government securities are accepted as collateral. Here, RBI is the main governing body to decide the interest rate on the borrowed amount.  

The borrower bank must repay the amount within one working day along with the accumulated interest. Failing to repay the loan amount on time will cause RBI to take possession of the securities pledged as collateral and then sell them in the financial market for quick recovery of funds. 

Benefits of Marginal Standing Facility 

There are certain benefits of Marginal Standing Facility. They are as follows:

  • Flexible borrowing option

MSF facility allows banks to borrow funds during a financial crisis by pledging SLR securities with RBI. Thus, they can avail the flexible option for borrowing, and managing their short-term needs without exhausting long-term funding.

  • Liquidity management

The Marginal Standing Facility, being an important monetary instrument, helps in managing liquidity in the banking system. Utilising this facility, banks benefit in acquiring emergency funds thereby ensuring a proper settlement in payment.

  • Transparency in the collateral framework

Borrowed banks must pledge high-quality collateral for accessing funds through MSF. Thus, it encourages banks to maintain a portfolio of stable assets and contributes toward a robust financial system.

  • High rate of interest

RBI charges a higher interest rate on the borrowed amount under Marginal Standing Facility. This option is thereby beneficial for banks in terms of obtaining additional liquidity at a high rate.

  • Funding during emergency

During times of financial crisis, when commercial banks face issues in raising funds, Marginal Standing Facility becomes the ultimate option. By opting for this facility, banks can acquire funds quickly and meet their financial needs

Marginal Standing Facility rate

Marginal Standing Facility (MSF) rate is the rate of interest that the Reserve Bank of India (RBI) charges on commercial banks for borrowed funds overnight against approved government securities. This rate is set higher than the repo rate. 

The rate charged is higher to make this facility a less attractive borrowing option in comparison with the repo rate. Thus, banks should explore other options before approaching the Marginal Standing Facility. 

Several lenders provide pre-approved offers on different financial products such as home loan, loans against property, etc. These offers exist for a short duration. In the meantime, interested individuals can check the lender’s official website thoroughly for further detailed information on pre-approved offers by entering relevant information such as name, contact details, email address and so on. 

To conclude, the Marginal Standing Facility is a crucial tool for helping commercial banks during a financial crisis. Allowing banks to borrow funds during financial emergencies against approved securities, MSF ensures that banks opt for this facility to maintain stability in the financial market. MSF not only provides support to meet short-term needs but also promotes a secured collateral framework, making it easy for banks to maintain high-quality assets.

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