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What is Marginal Standing Facility (MSF) - UPSC Economy Notes

Marginal Standing Facility (MSF) is a facility provided by the Reserve Bank of India (RBI) to banks when they need emergency funds.
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Marginal Standing Facility (MSF) - Simple Explanation

Marginal Standing Facility (MSF) is a facility provided by the Reserve Bank of India (RBI) to banks when they need emergency funds. Banks can borrow money from the RBI overnight (for one day) by pledging government securities as collateral.

Key Points:

  • It is a short-term borrowing option for banks in urgent need of cash.
  • The interest rate on MSF is higher than the repo rate to discourage frequent use.
  • It is used when banks do not have enough liquidity to meet their daily requirements.

Little confusing? Don't worry! I'll explain in the easiest way possible with a step-by-step approach. Let's break it down super simple with numbers and real-life examples.

Step 1: What is SLR?

Before understanding MSF, we need to know SLR (Statutory Liquidity Ratio).

  • Banks must keep some money in the form of government securities (like FD for banks) with the RBI.
  • Let’s say SLR is 18% (this means banks must keep 18% of their total money as a backup).

Imagine a bank has ₹10,000 crore in total deposits from customers.

  • The bank must keep ₹1,800 crore (18% of ₹10,000 crore) in government securities as per SLR rules.
  • The remaining money ₹8,200 crore can be used for loans, business, etc.

Step 2: What is MSF?

Now, imagine the bank suddenly needs extra money but doesn’t have enough cash.

  • The bank normally borrows from the RBI at the Repo Rate (6.5%) by giving extra government securities as a guarantee.
  • But in an emergency, if the bank has no extra securities, what can it do?

Here comes MSF (Marginal Standing Facility)!

  • Under MSF, the bank is allowed to use up to 2% of its SLR money (which it normally cannot touch) to borrow from the RBI.
  • But since it is an emergency loan, the interest rate is a little higher:
    • MSF Rate = Repo Rate + 0.25% = 6.75%

Step 3: Example with Numbers

🔹 Situation: Bank XYZ needs ₹200 crore urgently.

🔹 SLR requirement:

  • Bank XYZ has ₹10,000 crore total deposits.
  • It must keep ₹1,800 crore in government securities (18% SLR).
  • Under MSF, it can use up to 2% of its total deposits (₹200 crore) from its SLR reserve.

🔹 Borrowing under MSF:

  • The bank borrows ₹200 crore from RBI using its SLR reserve (SLR drops from ₹1,800 crore to ₹1,600 crore).
  • Interest Calculation for 1 day:
    • ₹200 crore × (6.75% ÷ 365)
    • = ₹200 crore × 0.0001849
    • = ₹3.7 lakh interest for 1 day.

🔹 Repayment the next day:

  • The bank must repay ₹200 crore + ₹3.7 lakh = ₹200.037 crore to the RBI.

Final Understanding

✔ MSF helps banks get emergency money from RBI when they have no other option.
✔ Banks can use up to 2% of their SLR reserves (which they usually cannot touch).
✔ MSF is costlier than repo borrowing because its interest rate is 0.25% higher than the repo rate.
✔ It prevents a banking crisis by providing quick cash in emergencies.

Super Simple Real-Life Analogy

Imagine you own a shop and always keep ₹1,800 in a locked cash box (SLR) as a safety reserve.

  • Normally, if you need extra money, you borrow from a friend at 6.5% interest (Repo Rate).
  • But today, you have no other money left and need ₹200 urgently!
  • So, you break your own cash box and take ₹200 from your ₹1,800 reserve (just like MSF allows banks to use 2% of SLR).
  • But, because you broke the rule, you have to pay extra interest (6.75% instead of 6.5%).

That’s exactly how MSF works for banks!


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