In 2011, the central bank introduced the Marginal Standing Facility to help financial institutions meet urgent liquidity requirements and steer clear of any kind of financial trouble. Under this facility, the borrowing entity can secure funds from the central bank by pledging SLR securities as collateral.
The most important question related to the Marginal Standing Facility is which financial institutions qualify and can benefit under this facility. Scheduled commercial banks, barring local area banks and regional rural banks, can borrow funds from the RBI under the MSF. However, the most important thing to know here is that the RBI lends funds under MSF only on an overnight basis.
In other words, borrowings under the Marginal Standing Facility are ideal only for handling short-term liquidity issues. Lastly, the rate of interest that the Reserve Bank of India charges when lending funds to scheduled commercial banks under the Marginal Standing Facility is known as the Marginal Standing Facility Rate and this rate is always higher than the Repo Rate.
When scheduled banks borrow funds from the Reserve Bank of India for a short term by pledging the SLR securities they own as security, the central bank of the country charges interest in the form of the Repo Rate. The current Repo Rate is 6.50%. On the other hand, when a scheduled commercial bank borrows funds overnight from the RBI to handle a sudden shortage of funds, the rate of interest that the RBI charges is known as the Marginal Standing Facility Rate. The current MSF Rate is 6.75%.
Now that we are familiar with the Marginal Standing Facility features, let us look at how this facility works.
Marginal Standing Facility: How Does it Work?
Banks and financial institutions can borrow funds from the RBI as well as from within the interbank market. However, when a bank exhausts its limit to borrow from another bank or when the interbank liquidity entirely dries up, the only option that a bank has is to borrow funds from the Reserve Bank of India by pledging SLR securities as collateral. Government securities, state development loans, and treasury bills fall under the broader category of SLR securities and a financial institution can borrow against them. Once a bank pledges these securities as collateral, the Reserve Bank of India and the borrowing entity enter into a financial agreement that clearly states that the borrowing bank will return the borrowed amount the next day and failure to do so will give the Reserve Bank of India the right to sell the pledged securities for recovery of losses. Once the borrowing institution returns the funds, the RBI also loses any right over the pledged securities.
Here’s Why and How the Marginal Standing Facility Helps Maintain the Stability of the Indian Economy
The Marginal Standing Facility is an important facility that offers many benefits.
To start with, MSF helps banks meet their immediate liquidity requirements, thereby allowing them to handle unforeseen liquidity crunches and related issues. This ensures that short-term liquidity crunches do not impact a bank’s long-term funding needs and goals. The Marginal Standing Facility also helps ensure the financial stability of the Indian economy by providing banks with an additional liquidity source during financial strains. MSF is also an important monetary policy tool in RBI’s armour that provides an additional channel for the RBI to ensure liquidity within the economic system as well as manage the effective transmission of its monetary policy framework.
What is the Marginal Standing Facility Rate and How Does it Impact Home Loan Interest Rates?
Changes in the Marginal Standing Facility Rate do not have a direct impact on loan borrowers. However, there is an indirect impact which must be understood.
When the RBI increases the MSF rate, scheduled banks have to pay higher interest on short-term borrowings, which skews banks’ profitability margins. Therefore, to ensure profitability, banks then start charging a higher rate of interest on loans. Consequently, when the MSF rate goes up, the home loan interest rate also increases and housing finance becomes expensive. Following this same logic, an MSF rate cut causes the home loan interest rates to go down.
If you are a home loan borrower or are planning to secure housing finance to make your dream home purchase affordable, you must know about the different rates, such as the Repo Rate, Reverse Repo Rate, and Marginal Standing Facility Rate, that have a direct or indirect impact on home loan interest rates. This will allow you to make smarter decisions for you.
