The Marginal Standing Facility was introduced by the RBI in 2011. This is a special facility that banks can use to their advantage in the extreme case that inter-bank liquidity has dried up and banks have no money to lend.
In this case, the bank can borrow from the Reserve Bank of India for a day by pledging securities that the RBI recognizes. This is known as the Marginal Standing Facility. The MSF rate is always slightly higher than the Repo Rate. Currently, the Repo Rate stands at 6.25% and the MSF rate stands at 6.50%.
When banks and lenders opt for the Marginal Standing Facility, they essentially decide to dip into their SLR or Statutory Liquid Ratio, which is the minimum percentage of deposits that a bank must maintain in the form of cash, gold and other securities with the RBI before it can start lending money to borrowers. Using the MSR facility, banks can borrow up to 1% of their SLR.
Readers must know that under no condition is the RBI obligated to lend money to a commercial bank -- it is entirely up to the discretion of the RBI to decide whether it should allow a specific bank to dip into their SLR when bank liquidity dries up.
If a bank wants to borrow under MSF, they must keep the following things in mind.
- Banks can borrow money on all days except Saturday between 3:30 PM and 4:30 PM. All decisions related to MSF are taken at the RBI headquarters in Mumbai.
- Under MSF, banks can borrow money in the multiples of Rs.1 Crore and Rs.1 Crore is the minimum amount that a bank can borrow.
- The application for getting access to MSF is made electronically.
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