What is Marginal Standing Facility - MSF ? What is MSF?
Define Marginal Standing Facility in India
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What is Marginal Standing Facility ? / Definition of Marginal Standing Facility - RBI (we give below details in plain language for non bankers) :-
RBI in its Monetary Policy announced on 03rd May, 2011 that it will soon be introducing Marginal Standing Facility (MSF). Later on RBI announced that MSF scheme has become effective from 09th May, 2011.
Marginal Standing Facility Rate : Under this scheme, Banks are able to borrow upto 2% of their respective Net Demand and Time Liabilities" outstanding at the end of the second preceding fortnight . The rate of interest on the amount accessed from this facility wef 7th October, 2013 has been fixed at 9.00% (earlier wef 20th September, 2013, it was reduced 9.50%). This reduction has been done to meet the crunch in liquidity in the banking sector. This scheme is likely to reduce volatility in the overnight rates and improve monetary transmission.
What is Marginal Standing Facility - RBI circular ? (The below details are for Bankers, who needs the technical language):-
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The Marginal Standing Facility Scheme was introduced on the lines of the existing Liquidity Adjustment Facility – Repo Scheme (LAF – Repo). The salient features of the ORIGINAL Scheme are as under:
1. Effective Date
This facility will be effective from May 9, 2011.
All Scheduled Commercial Banks having Current Account and SGL Account with Reserve Bank, Mumbai will be eligible to participate in the MSF Scheme.
3. Tenor and Amount
Under the facility, the eligible entities can avail overnight, up to [one per cent]* of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight. But for the intervening holidays, the MSF facility will be for one day except on Fridays when the facility will be for three days or more, maturing on the following working day. In the event, the banks’ SLR holdings fall below the statutory requirement up to one per cent of their NDTL, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility in terms of notification issued under sub section (2A) of Section 24 of the Banking Regulation Act, 1949.
* WEF 17th April 2012 : RBI announced that in in order to provide greater liquidity cushion, it has been decided to raise the borrowing limit of SCBs under the MSF from 1 per cent to 2 per cent of their NDTL outstanding at the end of the second preceding fortnight with immediate effect.
The Facility will be available on all working days in Mumbai, excluding Saturdays between 3.30 P.M. and 4.30 P.M. [These are subject to change as per RBI announcements]
5. Rate of Interest
The rate of interest on amount availed under this facility at present is 9.00% wef 07/10/2013)
6. Discretion to Reserve Bank
The Reserve Bank will reserve the right to accept or reject partially or fully, the request for funds under this facility.
7. Mechanics of operations
i) The requests will be submitted electronically in the Negotiated Dealing System (NDS). Eligible members facing genuine system problem on any specific day, may submit physical requests in sealed cover in the box provided in the Mumbai Office, Reserve Bank of India, to the Manager, Reserve Bank of India, Securities Section, Public Accounts Department (PAD), Mumbai Office by 4.30 P.M.
ii) The NDS provides for submission of single or multiple applications by the member. However, as far as possible only one request should be submitted by an applicant.
iii) The MSF will be conducted as "Hold-in-Custody" repo, similar to LAF - Repo.
iv) On acceptance of MSF requests, the applicant’s RC SGL Account will be debited by the required quantum of securities and credited to Bank’s RC SGL Account. Accordingly, the applicant’s current account will be credited with the MSF application amount. The transactions will be reversed in the second leg. In case the second leg falls on a holiday, the reversal date will be the next working day.
v) The MSF transactions between Reserve Bank and counter parties which would involve operation of the RC SGL Account would not require separate SGL forms.
vi) Pricing of all securities including Treasury Bills will be at face value for MSF operations by Reserve Bank. Accrued interest as on the date of transaction will be ignored for the purpose of pricing of securities.
7. Minimum request size
Requests will be received for a minimum amount of Rs. One crore and in multiples of Rs. One crore thereafter.
8. Eligible Securities
MSF will be undertaken in all SLR-eligible transferable Government of India (GoI) dated Securities/Treasury Bills and State Development Loans (SDL).
9. Margin Requirement
A margin of five per cent will be applied in respect of GoI dated securities and Treasury Bills. In respect of SDLs, a margin of 10 per cent will be applied. Thus, the amount of securities offered on acceptance of a request for Rs.100 will be Rs.105 (face value) of GoI dated securities and Treasury Bills or Rs.110 (face value) of SDLs.
10. Settlement of Transactions
The settlement of all applications received under the MSF Scheme will take place on the same day after the closure of the window for acceptance of applications.
What is the difference between liquidity adjustment facility-repo rate and marginal standing facility rate of RBI?
Under LAF - Repo rate, Banks can borrow from RBI at the Repo -rate by pledging government securities over and above the statutory liquidity requirements.
However, in case of borrowing from the marginal standing facility, banks can borrow funds up to two percentage of their net demand and time liabilities, at the rates announced by RBI and this can be within the statutory liquidity ratio of 23%.
The rate of interest payable by banks is less in case of Repo facility than the borrowing availed under MSF i.e. we can say MSF borrowing is costlier for the banks than the borrowing under Repo Rate.
[To know the latest Repo Rate and Statutory Liquidity Requirements click below the appropriate link]