Marginal Standing Facility

In news:

• RBI raises borrowing limit to 3% of SLR under Marginal Standing Facility. Under the marginal standing facility (MSF), banks can borrow overnight at their discretion by dipping up to 2% into the Statutory Liquidity Ratio (SLR).
• In view of the exceptionally high volatility in domestic financial markets which bring in phases of liquidity stress and to provide comfort to the banking system, the RBI has decided to increase the limit of 2% to 3% with immediate effect.

About Marginal Standing Facility

• Marginal Standing Facility is an overnight liquidity support provided by RBI to commercial banks with a higher interest rate over the repo rate. MSF can be used by a bank after it exhausts its eligible security holdings for borrowing under other options like the LAF repo. Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits of the SLR.
• Significance (out of the implication of clauses) of MSF is that it can be availed even if the latter doesn’t have the required eligible securities above the SLR limit.
• The MSF was introduced by the RBI in its monetary policy for 2011-12 after successfully test firing it from December 2010 onwards.
• Usually, when banks need short term loans from the RBI, they pledge their security holdings that is above the SLR holdings with the RBI to get one day loans under repo.
• Under MSF, a bank can borrow one-day loans from the RBI, even if it doesn’t have any eligible securities excess of its SLR requirement (maintains only the SLR).

Difference between MSF and Repo Rate

• The difference between the MSF and the repo rate is that MSF is used only in emergency situations.
• The RBI does this to control interest rate volatility by allowing commercial banks to borrow against government securities at a higher rate than the prevailing repo rate (1 percentage point higher).
• Another difference with the repo rate is that banks can pledge government securities from the SLR quota up to 1% under the MSF. Then, even if the SLR comes below 21.5%, banks need not pay any penalty under MSF.

PRELIMS QUESTION:

Which of the following statements regarding the Marginal Standing Facility (MSF) is incorrect:

1. Under MSF, banks can borrow one-day loans from the RBI

2. Banks have to pledge eligible securities above the SLR holdings to avail loans under MSF

Which of the statements given above is/are correct?

a) 1 only

b) 2 only

c) Both 1 and 2

d) Neither 1 nor 2

Answer to Prelims question