MSF the acronym for Marginal Standing Facility used by banks only when excess excess demand and temporary liabilities have been exhausted. In this structure, banks are required to pay interest at a rate of 100 bps above the repo rate, which is known as MSF rate .
Many think that the two rates are the same and use them interchangeably, but the fact that there is a subtle difference between the bank rate and the MSF rate, which is explained in the article in detail.
|Sense||The bank rate is a discount rate at which commercial banks and financial institutions borrow loans from the central bank.||The MSF index stands for Marginal Standing Facility, a rate at which commercial banks borrow overnight funds from the central bank.|
|stand as a candidate||All commercial banks and financial institutions.||All scheduled commercial banks (SCBs) have their current account and subsidiary general ledger (SGL) with an RBI.|
|Security promise||The loan can be increased without committing the securities.||The loan granted against security within the limits of the reflex and up to a certain percentage of NDTL.|
Definition of Bank Rate
The bank rate is an interest rate at which the Central Bank lends money to commercial banks to deal with the funds shortfall. Whenever the commercial bank does not have financing funds, it can borrow the loan from the apex bank, i.e. Reserve Bank of India (RBI). The Central Bank has the authority to increase or decrease the bank rate to control the money supply in the economy. If there is an increase in the bank rate, banks' lending rates will also increase, and if there is a decrease in the bank rate, interest rates will decrease.
Definition of the MSF rate
The marginal margin (MSF) referred to as a facility, where scheduled commercial banks can contract funds from the central bank overnight, against government-approved securities of the statutory Liquidity Ratio (SLR) portion (which exceeds the current SLR) up to a certain percentage of the their net demand and liabilities. This feature available for scheduled banks with their checking account and subsidiary general ledger (SGL) with the RBI.
at the discretion of RBI whether to grant the loan or not. This facility available to eligible banks on all business days except Saturdays from 15:30 to 16:30 at its headquarters (Mumbai).
Key differences between the bank rate and the MSF rate
- The bank rate is an interest rate at which commercial banks can borrow loans from RBI while MSF Rate a facility in which scheduled commercial banks can borrow funds overnight from the central bank.
- All commercial banks and financial institutions can benefit from the loan available at the bank rate from the RBI, while the MSF rate available only to the programmed commercial banks (SCB) with their current account and the general subsidiary accounts (SGL) with the RBI.
- The effective bank rate since 1900 while the MSF rate was introduced in 2011.
- The main difference between the bank rate and the MSF rate is that at the Bank rate the loan is not granted through the pledging of securities, but in MSF the loan is granted by pledging the securities approved by the government (specific criteria).
- The bank rate is not a last resort for banks, while the MSF rate is a last resort for commercial banks, which can borrow funds overnight.
- Both are discount rates at which the RBI lends commercial banks a loan.
- Both are official bank rates.
- RBI prescribes both.
- Both structures are used by banks in the event of a shortage of cash.
After much discussion about these two entities, we conclude that any of the options can be used by the commercial bank when there is a shortage of funds. But the main difference lies in the availability of a loan such as, if the bank needs to raise a loan on an urgent basis, the MSF rate can be chosen while, in the case of normalcy, the bank rate can be chosen.