MSF allows banks to borrow overnight from the RBI by submitting a prescribed amount of securities with the RBI when they don’t have any eligible securities (recognized securities above SLR requirements). It was introduced in 2011. Under MSF, banks could borrow funds from RBI at 1% above the liquidity adjustment facility-repo rate against pledging government securities. But banks should give a higher interest rate of 1% above the repo rate while MSF funds.
Importance of MSF is that it helps banks to borrow from the RBI even if they don’t have eligible securities. Borrowing under repo for overnight need eligible securities or government securities over the SLR rate. Hence, MSF is a liquidity facility that can be availed by banks during exceptional circumstances.
Difference between MSF and the LAF Repo
Under LAF Repo, banks can borrow from RBI at the Repo rate by pledging government securities over and above the statutory liquidity requirements. In the case of borrowing from the MSF, banks can borrow funds up to one percentage of their NDTL, at a rate of one percentage higher than the repo rate. This can be done by keeping one percentage below the SLR requirement.
