What is Marginal Standing Facility?
What is marginal standing facility? The RBI initially introduced it to help banks when they face an urgent money shortage. It also supports scheduled commercial banks that need short-term overnight funds to stay liquid. This borrowing option helps banks avoid missing payments. It keeps the banking system safe and steady. Banks turn to this when they cannot find money in the market.
The marginal standing facility is not a daily-use service. The RBI created this facility to prevent panic among banks during sudden financial stress. So, it helps the RBI control money flow and manage inflation. Though meant for banks, the concept is similar to an instant personal loan that helps individuals during emergencies.
How Does Marginal Standing Facility Work?
Banks apply for the marginal standing facility when they cannot meet their financial needs. They borrow funds from the RBI using approved government bonds as security. The process is done online through RBI's secure platform. Banks must meet all set rules before applying. The rate charged is always more than the repo rate (which limits frequent use).
This helps the RBI control cash supply. It also helps banks avoid asset loss during sudden fund gaps. The marginal standing facility RBI system gives relief when markets fail to offer money at a fair cost.
Eligibility for Marginal Standing Facility
Here are the eligibility criteria for MSF:
1. Scheduled Commercial Banks -These are the main users of the marginal standingfacility. They must follow RBI rules and have a proper banking license.
2. SLR Maintenance -Before using MSF, banks must use all funds held under the Statutory Liquidity Ratio for regular use.
3. Collateral Requirements -Banks must provide approved government bonds marked as held-to-maturity. These must be clear of any other borrowings.
4. Usage Limit -Banks can borrow only up to one per cent of their net demand and time liabilities as per the RBI marginal standing facility rules.
Current Marginal Standing Facility Rate
Date | MSF Rate (%) | Change |
06 June 2025 | 5.75 | Reduced from 6.25 on 09 April 2025 |
The current marginal standing facility rate is 5.75% (effective from 09 April this year). It aligns with the RBI's reduction in the repo rate (which is 5.50%) & bank rate (5.75%). It supports economic growth while reflecting the RBI's efforts to ease financing conditions. It ensures sufficient liquidity in the banking system.
Read also: Difference Between Repo Rate and Reverse Repo Rate
What does Marginal Standing Facility Rate mean?
The marginal standing facility rate is the interest that the RBI changes when banks borrow through the MSF. It is always set above the repo rate and bank rate. When the rate increases, borrowing becomes expensive. This reduces cash flow while slowing down loan applications. It discourages scheduled commercial banks from relying on it for regular funding, thereby bringing down inflation.
When the rate is reduced, it helps banks borrow at low cost. The RBI marginal standing facility helps control the monetary supply. It gives banks support during funding stress while managing overall inflation targets. The rate works as a guide for the market. The rate is reviewed during every RBI monetary policy meeting.
Pros of Marginal Standing Facility
1. Speedy Money During Shortage: Banks use the marginal standing facility to get overnight funds quickly. This helps when they run out of money and need urgent support without delay.
2. Support for Payment Safety: This facility helps banks avoid payment failures. It protects the banking system from panic and ensures that all money transfers happen on time without errors.
3. Easy to Apply:Banks can apply through the RBI's online platform. The system is fast, safe, and allows approved banks to access funds directly without manual paperwork delays.
4. Maintains System Flow: The facility ensures banks do not stop working due to financial shortage. It supports daily operations and keeps services like ATMs and payments running properly.
5. Helps Manage Inflation: The RBI changes the marginal standing facility rate to control extra cash in the economy. It gives a balance between money flow and price rise control.
6. Reduces Market Pressure:Banks don't have to sell government bonds in the market during a fund shortage. This prevents sudden price drops and supports calm in financial markets.
Cons of Marginal Standing Facility
1. Higher Borrowing Cost: The marginal standing facility rate is always higher than repo rate or bank rate. This makes borrowing costly for banks during urgent money needs.
2. Limited Users Allowed:Only approved banks can use this facility. Not every financial institution or non-banking company gets access, which limits how widely it can be used.
3. Only Short-Term Fix: The loan through MSF is for one day only. It does not solve long-term money problems and is not a full financial support system.
4. Collateral Must be Approved: Banks can only use specific government bonds as security. If they don't hold enough of the right type, they cannot apply for funds.
5. 1% Borrowing Cap:Banks can borrow only up to one per cent of their net demand and time liabilities. This limit may not meet higher urgent needs.
6. Can Signal Financial Stress:If a bank often uses MSF, it may show serious cash problems. This can reduce trust and raise concerns among investors and regulators.
5 Key Terms Related To MSF (Marginal Standing Facility)
1. Repo Rate - This is the rate at which banks borrow money from the RBI for short periods. The marginal standing facility rate is always kept above the repo rate.
2. Net Demand and Time Liabilities -This is the total of all bank deposits that decide how much a bank can borrow under MSF. The RBI uses this to set the one per cent borrowing cap.
3. SLR Securities - These are government bonds that banks must hold to meet the Statutory Liquidity Ratio. Any extra bonds beyond the required level can be used as security for MSF loans.
4. Held-to-Maturity Bonds -These are long-term government securities that banks plan to keep until maturity. The RBI allows these bonds as collateral when banks apply for funds under the MSF window.
5. Liquidity Adjustment Facility -RBI uses it to manage liquidity in banking. The marginal standing facility is a part of this facility for urgent funds.
Key Difference between Bank Rate and MSF Rate
Feature | Bank Rate | MSF Rate |
Main Objective | Used for long-term borrowing directly from the RBI when banks need funds for planned financial operations. | Used for emergency overnight borrowing when banks face a sudden shortage of money at the end of the day. |
Loan Duration | The loan period is longer than one day and is not used for urgent or same-day cash needs. | The loan is strictly for one night and helps banks meet sudden short-term money gaps only. |
Applicability | Applies to all RBI-supported borrowing by banks or financial institutions needing long-term funds. | Applies only during emergency fund shortages when banks exhaust all other borrowing options. |
Rate Differences | The rate is always lower than the marginal standing facility rate and offers cheaper long-term borrowing. | The rate is always higher than bank and repo rates to control emergency borrowing volume. |
Collateral Needs | Banks may borrow without offering government bonds as collateral, depending on the case. | Banks must give approved government securities to the RBI before getting funds through MSF. |
Conclusion
The marginal standing facility gives banks a fast way to manage sudden or temporary cash needs. It supports seamless banking while helping the RBI control liquidity & inflation. It costs more than other options, but it offers short-term help. The MSF keeps the banking system steady, especially when money is tight or markets face sudden stress.
Frequently Asked Questions (FAQs)
Q.1. What Tools are used in Marginal Standing Facilities?
The RBI manages the marginal standing facility using clear rules. It sets a higher interest rate, demands approved government bonds as collateral, limits borrowing to one per cent of net demand and time liabilities, and allows only eligible banks that meet SLR use and liquidity norms to apply.
Q.2. Why did the RBI introduce MSF?
The RBI brought the marginal standing facility in the year 2011 to help banks manage urgent overnight money needs. It supports banks during cash crunches, prevents payment delays, and ensures smooth operations when other borrowing options are not available. It helps maintain stability in the financial system during stress.
Q.3. What happens when MSF Rate is increased?
When the marginal standing facility rate increases, borrowing becomes costlier for banks. They reduce short-term borrowing, which limits money flow in the system. This helps control inflation but may slow down lending, raise loan interest rates, and reduce spending.
Q.4. How often is the MSF Rate updated?
The RBI reviews the marginal standing facility rate during its policy meetings. It is held every two months. It may also change the rate anytime as per the needs of the economic conditions. The review depends on inflation, money supply, financial needs, etc. They help manage short-term cash flow while keeping banking stable.
Q.5. Why does RBI Lower the MSF Rate?
The RBI lowers the marginal standing facility rate to make short-term borrowing inexpensive for banks. A lower rate also helps boost spending, which supports growth when the economy slows down.
Q.6. What happens when MSF Rate is increased?
When the marginal standing facility rate increases, banks borrow less due to the higher cost. This reduces cash in the system. It helps control inflation while slowing lending or spending. Higher rates mean tighter money policy (it affects markets & borrowing across the economy).
Q.7. Who can borrow through MSF?
Scheduled commercial banks may borrow through the marginal standing facility if they maintain the required SLR & hold approved government securities. Co-operative banks and non-banking financial companies are not allowed. Borrowing is limited to one per cent of a bank's net demand and time liabilities, and only overnight loans are allowed.
