Exploring the Marginal Standing Facility: An Insight into Central Banking Operations

The Reserve Bank of India is the central bank of this country and all commercial lenders across the country borrow money from the RBI. The bank rate is the rate of interest charged by the central government of the country from commercial lenders when these lenders borrow under normal circumstances. When these commercial lenders borrow money by pledging government-approved securities, the Reserve Bank of India charges interest based on the Repo Rate. Repo Rate is applicable only in the case of short-term borrowings. However, if ever it so happens, that a bank's inter-bank liquidity completely dries up, they can borrow money from the Reserve Bank of India at a penal rate which is obviously more than the Repo Rate. Financial institutions have to dip into their statutory liquidity profile when they wish to avail themselves of a loan on the Marginal Standing Facility Rate. It must be highlighted here that the Statutory Liquidity profile refers to the minimum percentage of one's entire deposits that financial institutions must keep safe in the form of government-approved securities, such as cash, gold and government-approved bonds.

Now, here are a few things that home loan borrowers must know about the Marginal Standing Facility.

1. The concept of MSF was introduced by the Reserve Bank of India in its monetary policy 2011-12. The RBI introduced MSF with the key aim of reducing volatility in the inter-bank market lending rates and ensuring the smooth working of the Indian banking system.

2. When the RBI introduced the Marginal Standing Facility, the MSF rate was 100 basis points above the Repo Rate. However, as of today, the MSF rate is only 25 basis points higher than the Repo Rate. The current Repo Rate is 6.50% and the current MSF Rate is 6.75% per annum.

3. If a financial institution's interbank liquidity dries up, it can borrow money from the RBI under MSF. The Reserve Bank of India entertains MSF applications on all days except for Sunday. All applications must be made in multiples of Rs.1 Crore and the minimum amount that one can apply for is Rs.1 Crore.

4. The MSF rate is always higher than the Repo Rate. The MSF rate has never been lower than the Repo Rate and it can never be so.

5. Under MSF, banks can borrow up to 1% of their NDTL or Net Demand and Time Liabilities.

Loan borrowers must keep themselves apprised of changes in the MSF as any changes in the MSF rate directly impact borrowers. When the Reserve Bank of India increases the MSF rate, borrowing money becomes expensive. Thus, financial institutions charge a higher rate of interest from loan borrowers. Thus, an increase in the MSF rate causes borrowers' EMIs to become expensive. This is the reason why the common borrower must keep themselves apprised about any changes in the MSF and MSF Rate. In the case of home loans, which are the most popular in India, the MSF rate directly affects one's home loan EMIs. When the MSF rate goes up, home loan interest rates go higher and the home loan EMIs increase too.

Also Read: How the MSF Rate Impacts the Economy?