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What Is The MSF Limit, Really?


Warning: This is a complicated post on banking. If you are intimidated by acronyms please do not proceed further.

There is some confusion regarding the limit, for any bank, that MSF (The Marginal Standing Facility) can go to. Is it 2% of Net Demand and Time Liabilities (NDTL)? Is it excess SLR + 2% of NDTL? The former means MSF is limited to 2% of NDTL, or Rs. 1.6 trillion (1.6 lakh crore), since the current NDTL in the system is about 80 trillion.

The latter means the MSF can go first to all g-sec holdings beyond SLR. There are 21 trillion of bank holdings of G-secs, and only 18 trillion is required for SLR. The remaining 3 trillion can therefore be used for MSF if the latter is true. And then, we can see another 1.6 trillion (2% of NDTL) borrowed below the SLR limit, so the total MSF availability is Rs. 4.6 trillion.

So which is it?

To answer, let’s first see the history.

What is Repo? Repo is an auction by Rbi conducted in the morning of all weekdays. Banks borrow money overnight and give the RBI securities. The securities are not actually pledged, they are sold to RBI and re-bought the subsequent day by the bank (at a slightly higher rate to account for the interest).

What is SLR? Banks have to buy government securities (called SLR securities) with at least 23% of their Net Demand and Time Liabilities (NDTL). NDTL is a fancy term, but think of it as the sum total of deposits – current accounts, savings accounts and fixed deposits – in the bank. (Read more about NDTL, SLR and CRR here)

MSF came about in 2011. At this time, there was no limit on repo borrowing – a bank only had to maintain the Statutory Liquidity Ratio (SLR) and any government bonds it owned above that limit (which has been between 23% and 25% of NDTL) could be used for repo borrowing.

But banks said okay but sometimes we need EVEN more money than we can borrow under the repo auction, even after I have exhausted all my excess SLR securities. Which is why the RBI introduced the Marginal Standing Facility at 3:30 to 4:30 pm (Repo was before 12 noon).

The MSF rate was 1% above the Repo rate. So if a bank had “excess” SLR securities it would be stupid to not borrow in the repo window. Why would you borrow at 1% more, giving the same security, in MSF, when you can  do it in repo? (Some exceptions include if a bank needs money after the repo auction is over in the day, so it might use the MSF, but this is rare.)

So, when does a bank need MSF? If it has run out of excess SLR securities. Then it will dip into SLR securities to get money under MSF. That will violate SLR – you can’t sell or pledge securities and still have them under SLR. So technically the bank has less SLR securities than it should, a gross violation.

However, the MSF was designed so that you could violate SLR upto 1% (initially) of NDTL which was later increased to 2% of NDTL. (Applicable only if you borrowed that much under MSF)

At the same time, the limit of MSF was also increased from 1% to 2% of NDTL. So, if you had excess SLR securities worth, say, 5% of NDTL, you could only use 2% to borrow under MSF.

The MSF Limit was a separate beast, and was always applicable to all banks.

What has changed?

From July 17, repo limits are now 0.5% of NDTL. There was no limit earlier. Repo was at 7.25% and MSF was increased to 10.25% to make short term money expensive.

Now if banks wanted to borrow money, they would first exhaust their repo limit and then borrow in MSF.

Now, the MSF limit of 2% of NDTL applies to all banks, whether they have excess SLR securities or not. Even in the latest circular, the first statement is:

Please refer to our circular DBOD.No.Ret.BC.95 /12.02.001/2011-12 dated April 17, 2012
wherein it was advised that Scheduled Commercial Banks (SCBs) may borrow overnight up to 2 per cent of their respective Net Demand and Time Liabilities (NDTL) under the Marginal Standing Facility (MSF) Scheme and Press Release 2013-2014/112 dated July 17, 2013, relating to RBI’s Special Repo Window.

The other circular mentioned (April 17, 2012) says:

2. As announced in the Reserve Bank of India’s Annual Monetary Policy Statement 2012-13 on April 17, 2012, in order to provide greater liquidity cushion, it has been decided to raise the borrowing limit of SCBs under the MSF from 1 per cent to 2 per cent of their NDTL outstanding at the end of the second preceding fortnight with immediate effect.

3. Banks can continue to access overnight funds under the MSF against their excess SLR holding as advised in our circular FMD.No.65/01.18.001/11-12 dated December 21, 2011.

This circular has two points. First that the MSF is limited to 2% (increased from 1%) of NDTL (this has nothing to do with SLR or non-SLR). The second point is that a bank CAN access MSF against excess SLR holding. The points, read together, are unambiguous – there is no “unlimited” borrowing against excess SLR securities, the limit still remains 2% of NDTL.

Therefore my conclusion is:

Excess SLR or not, MSF is limited to 2% of NDTL.

Here are a few scenarios of how banks can borrow in the Repo + MSF windows. Assumptions are that a bank has 100,000 cr. of NDTL, and SLR is 23%.


Astute commenters in the know have been saying this is not true, and that banks are currently already borrowing more than 2% of NDTL. If that is so, the RBI needs to come out with a clarification.

[My view is that there is no need for an MSF limit at all. If you are a lender of last resort, against government securities, you should lend any amount. If borrowing increases, you can increase the MSF rate to even higher levels, like 12% or 15%, as a mechanism to squeeze out short term demand. But the current regulations say we have a limit.]

Please comment or mail me at deepakshenoy [at] with suggestions or disagreements.


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