Marginal Standing Facility Rate

Marginal Standing Facility Rate

Know Current MSF Rate & MSF meaning

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What is Marginal Standing Facility

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. 

What is MSF Rate

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. 

How does MSF Rate Work

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.

What is the Current Rate of MSF in India

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. 

MSF Key Terms

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.

What is the process of Borrowing Funds under MSF

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). 

What is the Impact of MSF Rate

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).

Differences between MSF Rate and Repo Rate

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

Criteria

Marginal Standing Facility Rate 

Repo Rate

Purpose

The RBI came up with this strategy to help banks get liquidity during overnight emergencies.

The purpose of the repo rate is to address the short-term capital requirements of banking institutions.

Repayment Duration

Banks are required to pay back the loan within 24 hours or the next working day.

Banks can repay the loan amount in up to 5 to 15 days to secure a loan.

Eligibility 

Any scheduled bank like SBI, Axis Bank, etc, can avail of the MSF benefit offered by the RBI.

All commercial banks like HDFC Bank, ICICI Bank, etc are eligible to get loans.

Collateral 

Banks can use government securities to get a loan.

Banks can only use their own securities to secure a loan.

Current rate

The current MSF rate is 5.65% per annum.

5.40% is the current repo rate.

Differences between MSF Rate and Bank Rate

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

Criteria

Marginal Standing Facility Rate 

Bank Rate

Purpose

The purpose of MSF is to lend to banks to help them tackle overnight liquidity shortages.

The bank rate's objective is to meet the long-term financial needs of banking institutions.

Repayment Duration

Banks are required to repay the amount within 24 hours or next working day.

You can repay the loan within 28 days.

Eligibility 

The RBI's MSF benefit is available to all scheduled banks.

Any commercial bank may apply for a loan.

Collateral 

Banks can get loans by using government securities.

No collateral is required.

Current rate

The current MSF rate is 5.65% per annum.

The current bank rate is 5.65% per annum.

Conclusion

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.

Marginal Standing Facility FAQs

  • ✔️When was MSF first launched, and why?

    MSF was introduced and implemented by the RBI as part of the 2011-2012 monetary policy reform. This scheme was implemented with the goal of minimizing interbank lending rate volatility and promoting smooth macroeconomic transmission in the financial system.

  • ✔️What are the most recent rates and ratios for the important RBI policies?

    Here are the details about the current rates of key RBI policies.

    • MSF Rate: 5.65%

    • Bank Rate: 5.65%

    • Repo Rate: 5.40%

    • Reverse Repo Rate: 3.35%

    • Cash Reverse Ratio (CRR): 4.50%

    • Statutory Liquidity Ratio: 18%

    • Base Rate: Between 7.25% to 8.80%

    MCLR (Overnight): Between 6.70% to 7.30%

  • ✔️Who may benefit from MSF?

    Any scheduled bank like SBI, Axis Bank, City Union Bank, etc can avail of the MSF benefit offered by the RBI.

  • ✔️Is MSF a long-term solution?

    No. This facility is used to deal with overnight financial crises. Banks obtaining loans under MSF are required to pay it back to the RBI within 24 hours.

  • ✔️Can MSF be acquired by regional rural banks?

    Regional rural banks are eligible to benefit from the facility since the central bank's Marginal Standing Facility is open to all scheduled banks.

  • ✔️Is the MSF rate higher than the repo rate?

    Yes. The MSF rate is higher than the repo rate. As of RBI’s new guidelines, the current MSF rate is 5.65% and the repo rate is 5.40%.

  • ✔️What distinguishes the LAF from the MSF?

    The RBI's Liquidity Adjustment Facility (LAF) is a tool for monetary policy that is used to control the financial sector. The repo rate and reverse repo rate are the two most important rates in the LAF. On the other hand, the Marginal Standing Facility (MSF) is one of the solutions developed by the RBI to assist banks in obtaining liquidity in times of overnight financial emergencies.

  • ✔️What are the requirements for borrowing from MSF?

    The requirements for borrowing through the MSF are listed below:

    • A bank can borrow a minimum ₹of 1 Crore under this scheme. 

    • The loans will be accessible Monday through Friday

    • The loans must be repaid on the next working day. Additionally, loans obtained on a Friday are due the following Monday

    • Banks are permitted to borrow up to 1% of the total amount of their outstanding net demand and time liabilities

    • Applications for loans must be submitted through the computerized Negotiated Dealing System

  • ✔️When banks can borrow at repo rates, why do they need MSF?

    Loans at the MSF rate are only available for 24 hours and are used to make temporary adjustments to a bank's liquidity. This is the major reason why, in addition to the repo rate, MSF is a significant monetary policy instrument.

  • ✔️Does a rise in MSF have an impact on borrowers?

    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.