Difference between Bank Rate and MSF RateAbout Bank RateThe bank rate was first adopted as a benchmark rate, as per Section 49 of the RBI Act, 1934, at which the central bank is prepared to buy or rediscount bills of exchange as well as additional instruments that are eligible for acquisition under the Act. However, the RBI has stopped discounting or rediscounting bills of exchange using bank rates since the creation of the Liquidity Adjustment Facility (LAF).  As a result, the bank rate proves to be a useless tool for managing money. As a result, the Bank rate and MSF rate are in line. Bank Interest RateIn accordance with section 49 of the RBI Act of 1934, the bank rate is the price at which the Reserve Bank of India is willing to buy financial instruments. It contributes to preserving the nation's overall credit status. The Bank Rate was once thought to be the primary policy rate that sets the direction of market interest rates. Nevertheless, since its inception, the repo rate has emerged as the crucial policy rate. Purpose of Bank RateThe following are the two primary uses of bank rates:
About MSF RateMSF stands for Marginal Standing Facility. Banks can only use this facility after they have used up all of the excess SLR on their Net Demand & Time Liabilities (NDTL). Under this facility, banks must pay interest, which is called the MSF Rate, at a rate 100 basis points higher than the repo rate. Scheduled commercial banks are able to obtain funds overnight through the Reserve Bank of India's MSF system. The MSF rate, also known as the marginal standing facility rate, is the interest rate that the RBI charges on certain types of borrowings. This measure was put in place by the RBI to assist scheduled banks in times of dire financial exigency when interbank liquidity fully dried up. The MSF rate is approximately 100 basis points, or one per cent, higher than the repo rate, and it is sanctioned against government assets. The RBI's liquidity adjustment facility, or LAF, applies to these loans. A portion of the bank's net demand and time liabilities, or NDTL, is the maximum amount that can be obtained under the MSF programme. Banks may accept loans under MSF by using their statutory liquidity ratio, or SLR. Bank liquidity is preserved with the help of this short-term loan. A short-term asset liability mismatch can be managed by banks with the assistance of MSF, which also helps to lower the volatility of overnight lending rates. By implementing this monetary policy, RBI protects depositors and controls the flow of money into designated banks. Retail loans may also be impacted, however somewhat, by the MSF rate that is charged when banks borrow funds from the RBI. Publicly available loan rates typically decrease in tandem with a decline in the MSF rate. Additionally, when necessary, the RBI adjusts the MSF rate to support the value of the rupee. The RBI established the monetary standing facility in 2011-12 as a way for banks to obtain overnight funding while the nation's monetary policy was being revised. Under the Marginal Standing Facility (MSF), scheduled commercial banks may draw down on their Statutory Liquidity Ratio (SLR) portfolio to the extent permitted by law, in order to borrow additional overnight funds from the central bank beyond what is made available to them through the LAF (liquidity adjustment facility) window. Facts about MSF
MSF Rate's ImpactOne of its key characteristics is the MSF's consistent maintenance at a rate 100 bps higher than the repo rate. MSF serves mainly as a noticeable buffer against liquidity. An increase in the MSF rate makes borrowing more expensive for scheduled banks, which in turn affects corporate and individual borrowers alike. The RBI uses MSF to manage the nation's money supply.  In order to combat the economy's rising inflation, the Reserve Bank of India raised the repo rate by 0.25%, or 25 basis points, on August 1st in its third bi-monthly monetary policy announcement of 2018. In the subsequent bi-monthly policy statement of the RBI for the fiscal year 2018-19, the lending rate was earlier increased by 25 basis points on June 6 from 6% to 6.25%. The most recent increase from 6.50% to 6.75% has also resulted in an increase in the MSF. Important Distinctions between MSF Rate and Bank RateThe following points elaborate on the distinctions between the bank rate and the MSF rate: The Bank Rate was established as the benchmark rate at which the RBI is prepared to buy or rediscount bills of exchange along with other financial instruments that meet the requirements for Act purchases. On the other hand, the RBI established the Marginal Standing Facility in 2011. Under this arrangement, the Reserve Bank will lend money to Scheduled Commercial Banks at a rate that is one percent higher than the going rate for repo, or MSF Rate. While Scheduled Commercial Banks (SCBs) with current accounts and Subsidiary General Ledgers (SGLs) with the RBI are the only commercial banks authorized to obtain loans at bank rates from the RBI, all other commercial banks are not. Without providing securities as security, a bank rate loan may be obtained from RBI. However, the MSF method is similar to the Repo Lending method in that the RBI lends banks more money in exchange for collateral. While the MSF Rate is utilized for short-term financing, the Bank Rate is intended for longer-term lending.  The RBI uses the bank rate as one of its tools to monitor and regulate the nation's credit supply. On the other hand, in situations where banks are severely short on cash, the MSF Rate serves as a tool to give them overnight access to capital. 1. Eligibility All scheduled banks that have a current account and a Subsidiary General Ledger (SGL) with the RBI are eligible to use this facility. 2. Tone and Volume Under this facility, qualified banks can borrow up to 1% of their relevant Net Demand and Time Liabilities (NDTL) that were still outstanding at the end of the previous fortnight for overnight purposes. 3. Interest Rate 1%, or 100 basis points, more than the current Repo Rate, or as decided by the central bank, will be the interest rate on the borrowed amount. 4. Lending Procedure Just like with the repo rate, the bank sells the RBI government securities in exchange for a guarantee to buy them back at a predetermined rate after a predetermined length of time. Additionally, the interest rate that the Central Bank earns is the difference between the purchase and sale. 5. Sending in Requests The Negotiated Dealing System (NDS) is the online method for submitting requests. The Reserve Bank of India operates an electronic trading system for issuing and exchanging government securities and other money market instruments. However, if qualified members are having legitimate system problems, they may also file a physical request. 6. Minimum Amount of Request A minimum of ₹1 crore or several amounts of ₹1 crore 7. Collateral Government Securities may be regarded as collateral for the purposes of the SLR requirement. 8. Reserve Bank discretion The reserve bank alone has the authority to approve or disapprove the request that the banks submit, in whole or in part. 9. Transaction Settlement Following the end of the deadline for acceptance, all requests received under this method are resolved on the same day. Comparison
ConclusionIn light of this, we can define MSF as a unique window through which scheduled commercial banks can obtain loans from the RBI in the event of a cash shortage against securities that have been approved by the government. The rate at which this facility is offered is known as the MSF rate. On the other hand, the standard rate that controls market interest rates was established as the bank rate. Next TopicDifference Between |
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