As of August 2023, the MSF rates of borrowing stands at 6.25% per annum which is 0.25% more than the repo rate. Financial institutions can take advantage of this increased percentage and receive financial assistance against their net demand, time liabilities and SLR securities.
In this guide, we will learn everything about MSF rate. So, continue reading to know more about the same.
What is MSF?
The Reserve Bank of India provides various facilities to manage the cash circulation in our economy. Some of these include repo rate, marginal standing facility and reverse repo rate.
MSF or marginal standing facility allows financial institutions in India to borrow money from the Reserve Bank of India during an emergency situation to increase interbank liquidity overnight. While making changes in the monetary policy in the FY 2011 – 12, the RBI launched this facility. With the help of this facility, financial institutions have the option to borrow money from the RBI at a rate of interest above the repo rate.
How do MSF rates work?
The spread between the repo rate and the marginal standing facility (MSF) rate typically ranges from 25 basis points to 0.25%. A financial institution can use this facility to obtain financial support equal to 1% of its SLR or Net Demand Side Liabilities (NDTL) securities. MSF’s interest rate was 100 basis points higher than the repo rate when it was first introduced in 2011. To cope with the falling value of the INR, the RBI increased this rate by 300 basis points, or 3%, in 2013. Later, this rate was reduced by 50 basis points by the RBI.
Terms related to MSF
- NDTL
Net Demand and Term Deposit Liabilities (NDTL) measures the sum of a bank’s liabilities to its clients and includes both deposit liabilities and term liabilities. Time liabilities are liabilities that the bank must fulfil after a certain period of time.
As an example, imagine a bank’s annual fixed deposit. In this case, the bank has a one-year time commitment, as it is obliged to repay the principal and interest after the specified period.
On the other hand, deposit liabilities include obligations that the bank must fulfil in response to customer demands. For example, if you have a savings account, you can ask the bank for money at any time. The bank has a deposit obligation towards you in this situation.
- SLR
The required liquid asset reserve required by Indian commercial banks is known as Statutory Liquidity Ratio (SLR). In addition to cash, these assets can be government-approved securities or gold before lending to borrowers. The statutory liquidity ratio required by RBI regulations is the percentage of net demand and time deposits (NDTL) that banks are required to retain as liquid assets. The ratio of total demand and time liabilities serves as the basis for calculating the bank’s SLR. The SLR rate is calculated by multiplying liquid assets and demand and time liabilities by 100%.
- Repo rate
Just as you approach banks for a loan at a specific interest rate, banks approach the Reserve Bank of India (RBI) when they need money. Banks sell their excess securities, especially bonds, to the RBI in exchange for short-term loans with a promise to buy back the securities at a predetermined price in the future. The repo rate is the interest rate at which the central bank of India lends funds to banks.
The repo rate is raised by the RBI when it wants to make lending to banks more expensive. On the other hand, it lowers the repo rate and at the same time tries to offer credit at a lower price. If the repo rate is low, banks and other financial organisations can obtain funds at lower interest rates. Contrarily, a higher repo rate causes financial distress, which limits borrowers’ access to credit.
- Reverse repo rate
Banks use their excess securities to borrow money from other banks on a conditional basis when they need cash because there are insufficient funds available. They promise to buy the securities back at a predetermined price after a predetermined period of time. Once the crisis is over and they have extra funds, they give that money to the RBI and earn interest at a rate known as the reverse repo rate. The reverse repo rate is basically the rate at which the RBI borrows funds from Indian commercial banks.
- Bank rate
The rate at which the RBI provides long-term loans to banks is designated bank rate, commonly referred to as the discount rate. Using this rate, the central bank can control and improve the country’s credit environment, which benefits the banking industry and the economy as a whole. Commercial bank loan interest rates are directly influenced by the bank rate. Banks try to make money by borrowing money at low rates and lending it out at higher interest rates, so a higher bank rate means higher interest rates for the banks.
How do MSF rates affect prospective borrowers?
The most significant reasons for the MSF rate increase by the RBI are:
- Regulation of excessive supply of rupee within the Indian banking system.
- Halting the depreciation of the rupee against the dollar.
Borrowers are indeed affected by the MSF rate increase. The cost of bank loans rises as MSF rates rise. Because they have less access to rupees, borrowers have to pay higher interest rates on their loans. Whether it is a personal loan or home loan interest rate, the figures keep rising, making it difficult to get loans when borrowers need them.
Nevertheless, existing borrowers who want to opt for home loan, must check their pre-approved offers. Lenders extend these offers to secured lines of credit, including home loans and loan against property. Pre-approved offers streamline the entire loan application process and reduce the time-consuming documentation phase. This speeds up the availability of funds in times of financial urgency.
The MSF rate initiative was launched by the RBI to reduce the volatility of interest rates of overnight loans in the interbank market and promote smooth money transmission in the financial system.
