Marginal Standing Facility (MSF) is an overnight liquidity support provided by RBI3 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 Liquidity Adjustment Facility (LAF) repo. Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits of the SLR3.
Significance 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.
The working of MSF is thus is indirectly related with SLR. For example, imagine that a bank has securities holding of just 19% (of NDTL). This is equal to its mandatory SLR holding. The bank can’t borrow using the repo facility. But as per the MSF, the bank can borrow 1% of its liabilities from the RBI. Sometimes the RBI increases the limit of borrowings to 2% of NDTL. As in the case of repo, the bank has to mortgage3 the securities with the RBI.