Keeping Up with the Current MSF Rate: Implications for Borrowers - Loan Trivia


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Monday 1 April 2024

Keeping Up with the Current MSF Rate: Implications for Borrowers

The Reserve Bank of India (RBI) introduced the Marginal Standing Facility (MSF) rate in the year 2011-12 in the financial system. In cases of emergencies, the RBI provides funds to banks by pledging securities at higher interest rates. This guide contains details about the current MSF rate, its implications on borrowers and other crucial details related to it. 

What is the MSF rate in banking?

When banks need funds urgently and cannot get them from anywhere else, they can borrow from RBI through the MSF scheme. The higher MSF rate acts like a penalty, pushing banks to handle their funds more carefully. In India, the current MSF rate is 6.75%. 

The lending institutions can only use the securities as collateral to avail loans from the RBI. Therefore, MSF rates are higher than repo rates. The MSF provides greater liquidity solutions to lending institutions.

What are the objectives of MSF? 

Here is a list of objectives of the present marginal standing facility rate in India:

  • Helps banks manage short-term cash needs quickly during emergencies.

  • Provides emergency funding to banks facing immediate cash shortages.

  • Influences short-term interest rates by lending money at higher rates than usual.

  • Stabilises the money market by offering extra borrowing options at higher rates during stressful times.

  • Contributes to financial stability by acting as a safety net for banks during unexpected cash shortages.

  • Regulates the overnight borrowing rates in the interbank market.

  • Allows the Reserve Bank of India to control an overall money supply by adjusting MSF interest rates.

What is the impact of the MSF rate on financial lending institutions?

The higher the MSF rates the higher the lending cost to a financial institution which ultimately results in high-interest-rate loans for the borrowers. These loans can include home loans, loan against property, etc. 

RBI provides this facility to banks as a liquidity cushion. They take into account the bank’s proposals to provide them with flexible liquidity options, making it easy to borrow. This facility greatly helps financial institutions to manage their short-term liquidity problems.  

What are the criteria for borrowing through the marginal standing facility?

A financial institution needs to meet the following eligibility criteria to borrow through a marginal standing facility:

  • When they experience an unexpected liquidity crisis. 

  • It is mandatory to submit collateral to borrow under MSF.

  • The loan duration under the MSF involves a shorter period.

  • Complies with the borrower’s percentage limit.

  • Adheres to the guidelines set by RBI.

What is the difference between the MSF rate and the repo rate?

The following point highlights the difference between the MSF rate and the repo rate:

  • MSF rate is levied on banks for overnight or emergency funds but the repo rate is levied on short-term loans.

  • In MSF lending institutions sell government securities to get funds, and in repo rate lending institutions sell government securities against a repurchase agreement.

  • The current MSF rate in India is 6.75% whereas the current repo rate in India is 6.50%.

  • MSF is applied to eligible scheduled banks, whereas the repo rate is applied to commercial banks.

Various lending institutions provide pre-approved loan offers to existing borrowers, depending on their credibility. These offers are usually applicable on loans against property, home loan, etc. Interested individuals can enter their name and other details on the lender's website to check their eligibility for pre-approved offers.

When in need of funds during an emergency RBI provides several financial tools like MSF rates, bank rates, repo rates, etc. to borrowers. Furthermore, these MSF rates act as a safety net for lending institutions that lack sufficient funds to operate their regular business. Hence, it is essential for borrowers to know about the current MSF rate when they are planning to apply for a loan. 

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