MSF or Marginal Standing Facility enables banks to borrow funds from RBI (Reserve Bank of India) in emergency situations when their liquidity absolutely dries up. This short-term borrowing scheme facilitates the scheduled banks to get funds from the central bank of India overnight in case of serious cash shortage by offering their approved government securities. Liquidity shortfalls are often faced by banks resulted from the financial gap created due to deposit and loan portfolio mismatch. Such shortfalls don't last long and to manage such emergency conditions banks can approach RBI for quick money for a period of one day within the limits of the Statutory Liquidity Ratio (SLR).
MSF was introduced by Reserve Bank of India in its Monetary Policy of 2011-12. However, it was effective from 9 May 2011. After its initiation, this facility was first introduced in June 2011 and in the very first year, Rs.1 billion was borrowed by the banks under this policy.
This latest liquidity adjustment facility was introduced to increase the stability of the overnight lending rates between banks thus promoting proper financial transmission in the banking system. It helped RBI to gain better control on the supply of money in the financial system of India.
When the commercial banks are in dire need of funds, they pledge RBI to provide funds at a higher rate compared to the Repo rate under LAF or Liquidity Adjustment Facility. Generally, the MSF rate is 0.25% or 25 basis points more than the repo rate. Using this facility, all the scheduled banks under RBI can avail money in emergency situations up to 1% of their NDTL (net demand and time liabilities) or SLR securities. This special facility can only be pledged by banks under emergency circumstances when the inter-bank liquidity freezes completely.
MSF rate or Marginal Standing Facility rate is the interest rate at which the Reserve Bank of India provides money to the scheduled commercial banks who are facing acute shortage of liquidity. This rate differs from the Repo rate and the banks can get overnight funds from RBI by paying the exclusive MSF rate. RBI can vary the rate of borrowing and the percent of borrowing under MSF to maintain stability in the Indian economy.
During its introduction in May 2011, the interest rate of MSF was 100 bps higher than the Repo rate and by paying this rate banks could get up to 1% of their net demand and time liabilities (NDTL) which refers to their total deposits and liabilities related to the borrowings from other banks. But in July 2013, RBI increased the MSF rate to 300 (3%) basis points more than the Repo rate to manage the falling value of Rupee. Later, in another amendment, the central bank has reduced that to 50 basis points which made it easier for the banks to get money from RBI whenever they were in need of immediate funds. As per the last amendment in RBI monetary policy done on 4 October, 2017, the MSF rate is fixed at 6.25% which is 25 bps more than the current Repo rate.
In this way, the MSF rate has undergone several changes after its introduction as RBI reduces or increases the rate of MSF to maintain a balance in the economic condition of the country.
Currently, the MSF rate of borrowing is 6.25% p.a. which is 25 basis points or 0.25% higher than the Repo rate. In simple terms, at present, the scheduled commercial banks can take money from RBI by selling their government securities at an interest rate of 6.25% p.a. when they are no more eligible to get money under the repo rate which is 6% p.a.
NDTL or Net Demand and Time Deposit Liabilities Time liabilities are the total liabilities of a bank towards its customers. It comprises of two different components- Deposit Liabilities and Time Liabilities.
Time liabilities are the liabilities that the bank has to pay after a pre-decided period of time.
For example: If you have a fixed deposit for one year with a bank then the bank has a one-year time liability towards you as after one year the bank has to return your money back with interest.
Contrarily, deposit liabilities are the liabilities that the bank are accountable to pay on demand of the customer.
For example: When you have a savings account with a bank you can ask the bank anytime to give your money as this is where the bank has a deposit liability towards you.
SLR or Statutory Liquidity Ratio is the term that is used to refer to the reserved liquid assets that the commercial banks in India need to maintain in the form of government approved securities or gold assets besides cash before offering loans to the borrowers. In other words, as per the RBI guidelines, banks have to keep a proportion of their net demand and time deposits (NDTL) in the form of liquid assets which is known as Statutory Liquidity Ratio. The SLR of a bank is determined by calculating the ratio of total demand and time liabilities.
SLR Rate Formula- The formula to decide SLR rate is - SLR rate = Liquid assets/ (demand and time liabilities) x 100%.
Just like how you approach banks to borrow money at the time of need by paying a certain interest rate, banks also sometimes need money for which they go to Reserve Bank of India. Banks can take short-term loans from RBI by selling their excess securities, generally bonds, along with an agreement in which they state to repurchase these securities at a predefined price after a certain period. This rate of interest at which the central Indian bank provides funds to the banks is called the Repo Rate or Repurchase Rate.
When RBI wants to make borrowing of funds expensive for the banks, it increases the repo rate and contrarily, when it wants to provide money at a cheaper rate, it decreases the repo rate. While repo rate is low, banks and financial organizations get funds at low-interest rates, whereas when the repo rate is high there is a shortage of funds leading to limited access of borrowers towards loans. In this way, the central bank regulates the currency flow in the Indian economy while controlling inflation and depreciation of the currency.
RBI has lowered the repo rate from 6.25% p.a. on 2nd August, 2017. Currently, the rate is fixed at 6.00% p.a.
When the banks are in need of money due to shortage of funds, they borrow money from banks against their extra securities at a conditional agreement that after a specified time period they will repurchase the securities at a predefined rate. Once they get over the crisis and have surplus funds in hand, they give the funds to RBI and earn money at a rate which is called reverse repo rate. In other words, it can be said that, the rate at which RBI borrows money from the commercial banks in India is called the reverse repo rate.
Reserve Bank of India has reduced the Reverse Repo Rate and the current rate at present is 5.75% p.a.
The rate at which RBI offers long-term loan to the banks is called Bank rate or Discount Rate. The central bank uses the bank rate to manage and control the credit scenario of the country leading to a betterment of the national economy as well as the banking sector. The bank rate has a direct effect on the interest rates of the loans offered by commercial banks. The higher the bank rate is, the more will be the lending rate of the banks as the banks tend to make profits by borrowing funds at low rates and then lending the money at high interest rates.
As of now, RBI is not using MSF as monetary management as now it is 6.00% p.a. which is same as the repo rate.
The Repo rate of RBI is slightly different from the MSF rate and here are the basic differences between both:
Though you might think that Bank Rate and MSF Rate are the same, each of these rates are different and have a different role to play in the borrowing and lending system of the country. Here, you will get to know the key differences between both:
You might wonder when banks can easily get money at Repo rate, why do they go for MSF? The reason being, the MSF window is opened by RBI to enable the scheduled commercial banks to borrow money in situations when there is no flow of cash in the market between banks. This system allows banks to get more amounts of money from RBI at a higher rate than the Repo rate. MSF is also needed to stabilise the volatility of the overnight interbank lending rates.
RBI hikes the MSF rate due to various reasons among which the most vital ones are-
Yes, hike in the MSF rate has some kind of effect on the borrowers. Due to the increase in the rate of MSF, borrowing becomes expensive for the banks and as a result, the loans get expensive for the borrowers due to the low obtainability of the rupee. Be it, personal loan, home loan or car loan, the interest rates will be high making it difficult for you to borrow loans at the time of need.
Recently, RBI slashed the MSF rate from 7.0% p.a. to 6.25% p.a. on 4 October, 2017. This step is taken by RBI so that banks can opt for an increased amount of funds which in turn will upsurge the accessibility of the rupee in the financial market. When banks will have sufficient amount of funds, they can give high amounts of loans to businesses and corporates which will help to strengthen the Indian economy.
Banks can borrow required fund via MSF at the time of financial urgency while following the below-mentioned criteria:
While borrowing funds under MSF, Banks need to follow a certain procedure. Here is how the scheduled banks having a current account and SGL account with RBI can apply for a fund:
As mentioned earlier, the rate of MSF is 25 bps more than the repo rate of RBI as MSF provides higher liquidity support to the banks. More the MSF rate, loans will be more expensive from the banks resulting in high-cost loans for the borrowers.
MSF is a measure taken by RBI to provide liquidity cushion to the banks in India. RBI has taken into consideration the requests of the bank to give flexible liquidity options to them to make the process of borrowing easier for them. It has greatly helped the banks to manage their short-term liquidity issues in a better way.
The MSF rate is hiked in order to control the excess availability of the rupee and keep a control on its depreciation in terms of the dollar. While the repo rate was cut by 25 basis points in an attempt to ensure better transmission of rates.
It is a quite a debate whether the gap between MSF and Repo rate has strengthened the Rupee or not. Let’s check out a few points:
Since both the above-mentioned points are favourable for the growth of Indian economy, it will result in a strengthening of Rupee. So, it can be safely said that the MSF rate has actually been instrumental in the strengthening of Indian currency.
However, the gap needs to be balanced. There shouldn't be too big of a difference between the two as that might repel the foreign investors from making investments in Indian banks resulting in the downfall of the economy.
The RBI monetary policies go through changes from time to time to manage the Indian financial system. Here are the key RBI policies with their rates and ratios as per the Fourth bi-monthly Monetary Policy Statement of RBI for 2017-18 which was announced on 4 October, 2017:
Bank Rate- 6.25%
Reverse Repo Rate- 5.75%
Repo Rate- 6.00%
MSF Rate- 6.25%
Cash Reserve Ratio- 4%
SLR Ratio- 20.00%
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