Marginal Standing Facility Rate

The Marginal Standing Facility (MSF) is one of the facilities developed by the Reserve Bank of India (RBI) to assist banks in obtaining liquidity in times of overnight emergencies. It was introduced to assist in keeping the economy afloat by ensuring proper cash flow. MSF scheme allows banks to borrow money at an interest rate higher than the repo rate, which is also known as the Marginal Standing Facility rate.

The RBI introduced MSF as part of the monetary policy overhaul in 2011–2012. The scheme was introduced with the objective of lowering overnight lending rate volatility in the interbank market and facilitating seamless macroeconomic propagation in the financial system. Under this scheme, banks are required to repay the loan amount on the next working day (24 hours). However, loans taken on Friday are payable on the following Monday. 

MSF rate is the interest rate at which the RBI gives money to scheduled banks that are experiencing a severe cash flow shortfall. It is also known as a penalty rate at which financial institutions can borrow money from the RBI after they have exhausted all other financing options.

MSF rate is different from the repo rate. The institutions requesting money can obtain it by paying the exclusive MSF rate decided by the RBI. Additionally, to keep the Indian economy stable, the RBI can modify the rate of lending and the percentage of financing under MSF anytime. 

When commercial banks are in severe need of cash, they can request money from the RBI under LAF (Liquidity Adjustment Facility) by providing government securities at a significantly higher rate than the repo rate. All scheduled banks under the RBI can use this tool to get emergency funds up to 1% of their NDTL (Net Demand and Time Liabilities). Also, banks are allowed to borrow money on any working day except Saturdays. However, MSF in banking institutions can only benefit from this scheme in an eventuality when interbank liquidity is entirely constrained.

The RBI announced a new MSF rate on 5th August 2022 and the current Marginal Standard Facility rate is 5.65%  per annum. Banking institutions intending to get liquidity for their emergencies can obtain it from the RBI by using their government securities. 

In order to understand the MSF scheme descriptively, you must be aware of a few key terms that are associated with MSF. 

• Net Demand and Time Liabilities (NDTL): NDTL is the sum of a bank's time and demand obligations to its consumers. This comprises both Time liabilities and Demand liabilities. Time liabilities are obligations that the bank needs to pay after a specified amount of time to its consumers. For example, fixed deposits and recurring deposits. Deposit liabilities are payments that the bank is obligated to pay to the customer on demand. For example, the savings account.

• Statutory Liquidity Ratio (SLR): SLR is a certain amount of government securities that a bank must hold before making loans to its customers. Also, banks must maintain a certain percentage of their NDTL as liquid assets. The current SLR rate is 18%.

• Repo Rate: The repo rate, also known as the repurchase rate is the interest at which the RBI offers short-term lending to banking institutions. Banks can get short-term loans from the RBI by selling surplus securities, and bonds, accompanied by a commitment to purchase these securities at a specific cost after a specified time period. As of 5th August 2022, the current repo rate is 5.40%.

• Reverse Repo Rate: The interest rate at which the RBI obtains short-term loans from commercial banks is known as the reverse repo rate. It is a monetary policy instrument that can be used to manage the country's money supply. The current reverse repo rate is 3.35%.

• Bank Rate: Bank rate refers to the interest charges at which the RBI provides long-term loans to banks. The economic growth as well as the banking industry are improved by the use of the bank rate to monitor and regulate the country's credit situation. The interest rates on loans provided by commercial banks are directly impacted by the bank rate. On August 5, 2022, the RBI announced a new bank rate that is 5.65% annually.

If a bank is facing a financial crisis and intends to borrow money from the RBI under the MSF, it must file a loan request and provide transferrable government securities as collateral. A bank can borrow a minimum of ₹1 Crore under MSF. If the bank’s request meets all the eligibility requirements decided by the RBI, the loan application will be approved and money will be given to that bank. Additionally, banks requesting funds under the Marginal Standing Facility must submit their loan applications using the Negotiated Dealing System (NDS). 

The MSF rate has no direct effect on customers. However, it determines the cost of loans for banks. An increase in the MSF rate may lead to a rise in the loan rates given to consumers. This rate is an essential component of the nation's monetary policy and is a part of the apex bank's Liquidity Adjustment Facility (LAF).

Here are the key differences between the MSF rate and the repo rate. 

Below are the key differences between MSF rate and Bank rate:

You must have understood how the MSF or Marginal Standing Facility of the RBI impacts the cost of loans offered by banks. MSF helps banks tackle overnight liquidity shortages. Whenever RBI increases the MSF rate, it leaves a direct impact on the home loan interest rates. If you need an affordable home loan, you can visit Bajaj Markets. Bajaj Markets has partnered with various housing loan providers who offer home loans at attractive interest rates.