Marginal Standing Facility (MSF) Rate - Explained in Hindi - YouTube

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Namashkar, my name is Mukul and welcome to Asset Yogi

Friends, this video is a part of a series in which we are discussing the Monetary policy of RBI

Firstly, we saw CRR and SLR requirements that how RBI

imposes requirements of CRR and SLR on the banks

So that they can control the liquidity and inflation

Then in the next video, we saw how RBI maintains a balance between inflation and growth by Repo rate and Reverse repo rate

In the 3rd video, we saw Bank rate

That if the inflation is controlled by the repo rate then what is the function of the bank rate

So if you haven't watched these 3 videos then I would suggest you to watch these first

You'll get the links in the description

In this video, we are going to discuss Marginal Standing Facility

We saw that repo rate and reverse repo rate are the liquidity adjustment facilities

RBI controls how much liquidity to put into the economy by the repo rate and reverse repo rate

So if we already have a facility of repo rate or reverse repo rate

Then what was the need for Marginal Standing Facility

Marginal standing facility also works in a similar way as repo rate

MSF rate works similarly to repo rate but there are some differences

And what was the need of launching the MSF policy by the RBI in 2011-12

We are going to see in this video

So watch this video till the end. Let's switch on the blackboard

As I told you in my previous videos that when we saw the requirements of CRR and SLR

What exactly they are

We'll do a quick recap

The total deposits with a bank are called Net Demand and Time Liabilities

Let's say the NDTL with a bank are 100 Cr

I also made a video on what exactly NDTL is and how it is calculated

So you can also watch that video

Let's say NDTL with a bank are 100 Cr

Let me write in short that demand deposits are the deposits in savings or current accounts which you can withdraw anytime on demand

This is demand deposit and another one is time deposit

And let me give an example for time deposit let's say in FD

If you did an FD for 6 months, you'll get money after 6 months. So this is called time deposit

So let's say NDTL with a bank are 100 Cr

So the main business of banks works by giving this money as loan

But they cannot give 100% as a loan and RBI have some restrictions for it

RBI instructs to deposit 4 Cr out of 100 Cr with them

4 Cr means 4% of NDTL which is the requirement of the cash reserve ratio (CRR) in today's date

That the bank has to deposit with the RBI

Another bank says to keep 19.5 Cr, i.e 19.5% of NDTL

In the form of liquid assets

Liquid assets are those which can be converted in the form of cash quickly

These can be gold, cash, or government securities

This requirement is called SLR (Statutory Liquidity Ratio)

That means 23.5% of the money is blocked

Now the bank is left with 76.5 Cr, i.e 76.5% of NDTL

This balance can be given in the form of the loan

Now why there are requirements for CRR or SLR? I've already discussed it in the video

It is basically a safety net

The bank should always have some amount in the liquid form for crisis situations

So RBI impose these restrictions

CRR and SLR are also tools of monetary policy through which inflation can be controlled

So you can watch my video on CRR and SLR

So we understood the requirements of CRR and SLR

Now let's talk about the repo rate and how it works

Since banks have to fulfil the requirements of CRR and SLR

Many a time, banks don't have a sufficient amount of money

So banks go to RBI and ask for some amount of money

and are ready to pay interest in exchange for it

So RBI give them money and in exchange, banks pay interest to the RBI

And this interest is called the repo rate

So RBI give money to the banks on repo rate because

Let's say RBI want to increase the liquidity of money in the market

then banks keep a low repo rate

And banks have an incentive to take maximum money from RBI and not from anyone else because it's more affordable

And if more money goes into the market, growth increases

So this was about the repo rate. But there are some problems and issues with it

So what are the main issues of Repo Lending

Banks can experience a liquidity crunch anytime

Let's say they took all the possible money from RBI on the repo rate

Then also liquidity crunch can occur

After that, the bank may go to the other banks and then the interest rates can fluctuate massively

Because during a liquidity crunch, volatility of interbank lending rates becomes high

To tackle these 2 issues, RBI introduced Marginal Standing Facility (MSF)

Basically, to provide liquidity to the banking system over and above repo lending

So if any liquidity crunch happens in the economy other than the lending under repo lending

Then banks can take some more loans from RBI using MSF

And secondly, we discussed about volatility that interbank interest rates are very volatile

So to reduce the volatility of the overnight interbank market, MSF was introduced in 2011-12

Now let's understand how repo rate and MSF rate work

Let's say that the borrowing limit on the repo rate is 1% of NDTL

Although RBI can change it

For example, 1% NDTL

The total NDTL in the total banking system, i.e the total deposits of all the banks

Total 1% is the borrowing limit on the repo rate

Generally, further bifurcation is done by the RBI

So they offer 0.25% bank-wise NDTL

That 0.25% of the total NDTL of a particular bank

They can take a loan on the overnight repo rate

Secondly, the remaining 0.75% is counted on the total NDTL of the total banking system

And this is auctioned on the term repo rate

These percentages can vary and it depends on the RBI policies

And besides this, if the liquidity is to be made more smooth then

rest of the money is lent on variable repo rate and reverse repo rate

So in this way, RBI controls the liquidity through repo rate

If we take an example, let's say the total NDTL of the whole banking sector is Rs 80 lakh Crores

In this, 1% is 80 thousand Crore. SO maximum repo lending can be 80 thousand Crore

Who are eligible for this?

All the scheduled commercial banks can participate in repo lending and

Primary dealers can do it. Who are the primary dealers?

The dealers who do buying and selling in government securities

So they can also participate

Since collateral is required, so you have to keep government securities there

In the SLR requirement also, you have to maintain the government securities

So you cannot keep the government securities in the SLR as collateral

when you are participating in the repo lending

But MSF is slightly different from repo lending

Let's see what is the difference

The rate of MSF is always slightly greater than the repo rate

The Repo rate is 6.5% in today's date

And the MSF rate is 6.75%

So basically, it is 0.25% more than the repo rate

But when the MSF policy was introduced, it was said that the MSF rate will always be 1% more than the repo rate

So definitely, RBI can change it from time to time

So in today's date, I would say repo rate + x%

Now this x can be anything

It can be 0.5%, it can be 0.25%

It depends on the monetary policy of RBI

So we saw that if the interest rate is less then the banks will borrow on repo lending

After that, if they need more capital then they borrow on MSF rate

That means if the banks imposed a limit of 1% NDTL, then the banks will complete the limit

After that, RBI allowed additional borrowing of 1% NDTL

That is to be done on MSF rate

We took example that if the NDTL of the total banking sector is Rs 80 lakh Crores

Then banks will borrow up to 80 thousand Crore on the repo rate

After that, they can take the remaining 80 thousand crores additionally on the MSF rate

It's not necessary that they will take 80 thousand crores

If their requirement is 40 thousand crores, then they will take that much only

So I think that this concept is clear that the MSF rate is over and above repo lending

What is its eligibility?

Here we discussed that the scheduled commercial banks and the private dealers both can participate

But here only scheduled commercial banks can participate under MSF lending

There is a difference in collateral also

In repo rate, you cannot consider the government securities under SLR requirements but

Under MSF lending, you can keep the government securities under SLR requirements as collateral with the RBI

What is collateral? It is basically security which you are to mortgage

When you borrow a home loan, you mortgage your house

In the same way, government securities are to be mortgaged to the RBI

If any bank wants to participate in repo lending or MSF lending

Besides this, I would like to tell one more thing that it is written in the policy of MSF rate

That banks can borrow in the multiples of 1 crore

If the banks go for the MSF lending, they can only borrow money in the multiple of 1 crore from RBI like 1 Cr, 2Cr, 3Cr

So I think that the concepts of MSF and bank rate are now crystal clear to you

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