Mastering Marginal Standing Facility: Navigating the MSF Rate Landscape
The MSF scheme was introduced by the Reserve Bank of India as a key policy rate in 2011-12 and within its first year of introduction, banks across the country borrowed Rs.1 Billion from the Reserve Bank of India at the Marginal Standing Facility Rate. Scheduled banks and lenders facing a liquidity crunch can borrow funds from the Reserve Bank of India under this scheme, however only if they have exhausted all other sources through which they can borrow funds. For such borrowings, the Reserve Bank of India charges interest in the form of the Marginal Standing Facility Rate. The marginal standing facility rate is always higher than the Repo Rate. The current Repo Rate is 6.50% whereas the current MSF Rate is 6.75%.
Funds under the MSF scheme are availed of against approved securities, such as cash reserves, treasury bills, government securities, corporate bonds, etc. The Marginal Standing Facility is a way to handle short-term liquidity issues. Under this scheme, scheduled banks and commercial lenders can borrow funds from the Reserve Bank of India for a day. In other words, the tenor for loans availed of at the Marginal Standing Facility Rate is one day.
People often confuse the Marginal Standing Facility Rate with the Repo Rate and the Bank Rate. So, let us know the difference between these three.
Marginal Standing Facility Rate, Bank Rate and Repo Rate: Know the Difference
Banks and commercial lenders operating within the country can borrow funds from the Reserve Bank of India at any time without pledging any securities. When a bank or a lender borrows funds without pledging collateral, the RBI charges interest in the form of a Bank Rate. The current bank rate is 5.15%. The bank rate is always the lowest of the three.
When banks and lenders are facing a liquidity crunch, they can borrow funds from the Reserve Bank of India for a short term by pledging government-approved securities as collateral. Here, banks pledge their excess securities and enter an agreement with the Reserve Bank of India to repurchase these pledged securities before an agreed date. If the borrowing bank fails to fulfil its obligation, RBI can sell the pledged securities for recovery. The current Repo Rate is 6.50%.
The Marginal Standing Facility scheme is a solution to very short-term liquidity issues. When interbank liquidity completely dries up and a bank is faced with a liquidity crunch, they can borrow funds from the Reserve Bank of India for one day by pledging government-approved securities. In this case, the RBI charges interest at the Marginal Standing Facility Rate. The MSF Rate is always the highest of all three and the current MSF Rate is 6.75%. Under the MSF scheme, borrowing banks dip into their SLR securities. Further, only those banks and lenders that meet the criteria specified by the RBI can borrow funds.
Also Read: Rbi Repo Rate Hike Home Loan
Why Should Home Loan Borrowers Track Changes in Bank Rate, Repo Rate and MSF Rate?
Individuals repaying a home loan must keep track of any changes in Bank Rate, Repo Rate and MSF Rate. The Reserve Bank of India makes changes in these rates primarily to manage inflation and keep the growth of the Indian economy on track. When inflation goes beyond an acceptable level, the RBI makes borrowing expensive by increasing the Bank Rate, Repo Rate and MSF Rate. This, in turn, reduces the flow of funds within the economy by reducing the access that common people have to credit. This helps bring inflation under control and the growth of the economy back on track. On the other hand, when the RBI has to improve the flow of funds within the economy, it decreases the Bank Rate, Repo Rate and MSF Rate. An increase in any of these rates makes loans expensive and individuals repaying loans on floating interest rates find their loan EMIs going up when the RBI increases any of these rates. On the other hand, a decrease in any of these rates makes loans cheaper. Thus, all home loan borrowers must check changes in these rates from time to time.