Q. The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to
- banking operations
- communication networking
- military strategies
- supply and demand of agricultural products
Answer: (a) banking operations
Marginal Standing Facility (MSF):
- Marginal Standing Facility (MSF) refers to the rate at which banks can borrow overnight funds from the RBI in exchange for authorized government securities.
- This is applicable in emergency situations such as the inter-bank liquidity dries up completely and results in volatility in the overnight inter-bank rate.
- This was introduced by the RBI in its credit policy of May 2011.
- The banks have to exchange the securities with the RBI to avail of the overnight credit through MSF.
- The maximum credit a bank can avail through MSF is 3% of its total deposits (NDTL).
- The banks can use the securities under the SLR quota without paying a penalty as it is an emergency situation.
- This will shield the banks from the volatility of overnight inter-bank interest rates.
- Objectives of MSF:
- To reduce the volatility of the overnight inter-bank interest rates.
- To aid the banks in case of emergencies like drying up of inter-bank liquidity.
Difference between MSF and Repo Rate:
| Marginal Standing Facility (MSF) | Repo Rate |
|---|---|
| The MSF is intended for overnight lending to banks. | The repo rate is applied to loans made to banks in order to meet their short-term financial requirements. |
| The MSF rate is the rate at which the RBI lends money to scheduled banks. | The repo rate is the rate at which the RBI lends money to commercial banks |
| Loans at MSF rates require the provision of government securities as collateral. | Lending at repo rates entails selling bank securities as collateral to the RBI and entering into a repurchase agreement. |
Difference between LAF and MSF:
| Parameter | Liquidity Adjustment Facility (LAF) | Marginal Standing Facility (MSF) |
|---|---|---|
| Minimum amount to borrow | Minimum bidding amount is 5 crore. | Minimum bidding amount is 1 crore and multiples of 1 crore. |
| Eligibility | All commercial banks are eligible to bid. | Only scheduled commercial banks can bid. |
| Usage of SLR Quota | Bank cannot use securities part of bank’s SLR quota. | Bank can use the securities from its SLR quota to RBI. |
| Maximum amount to borrow | Bank can borrow any amount of money as long as it has the securities to sell to the RBI. | Bank can maximum borrow upto 3% of its NDTL. |
Net Demand and Time Liabilities
- The Net Demand and Time Liabilities or NDTL shows the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank.
- Bank’s NDTL = Demand and time liabilities (deposits) – deposits with other banks
- Suppose a bank has deposited 5000 with the other bank and its total demand and time liabilities (including the other bank deposit) is 10,000. Then the net demand and time liabilities will be 5,000 (10,000-5,000).
- Demand Liabilities: The demand liabilities include all those liabilities of a bank which are payable on demand. Such as current deposits, cash certificates and cumulative/recurring deposits, outstanding telegraphic transfers, Demand drafts, margins against the letter of credit/guarantees, credit balance in cash credit account, etc., all are paid on demand.
- Time Liabilities: Time liabilities are those liabilities of a bank which are payable otherwise on demand. These include fixed deposits, cash certificates, staff security deposits, time liabilities portion of saving deposits account, margin held against the letter of credit (if not payable on demand), gold deposits, etc.
- Other Demand and Time Liabilities: These include all those miscellaneous liabilities which are not covered in above two types of liabilities. Such as interest accrued on deposits, unpaid dividend, suspense account balances showing the amount due to other banks or public, participation certificates issued to other banks, cash collaterals, etc.
