Bank Rate is defined as the rate at which the central bank is ready to purchase the financial instruments, that are covered under section 49 of the RBI Act. It helps in maintaining the overall credit situation in the country. It is not the same thing as MSF Rate.
MSF stands for Marginal Standing Facility availed by the banks only when the excess SLR of their net demand and time liabilities has been exhausted. In this facility, banks are required to pay interest, at a rate which is 100 bps greater than the repo rate, which is known as MSF Rate.
Many think that the two rates are one and the same thing and use them interchangeably but the fact is there is a fine line of difference between Bank Rate and MSF Rate, which is explained in the article in detail.
Content: Bank Rate Vs MSF Rate
|Basis for Comparison||Bank Rate||MSF Rate|
|Meaning||Bank Rate is a discount rate at which the commercial banks and the financial institutions borrows loan from the central bank.||MSF Rate stands for Marginal Standing Facility is a rate at which the commercial banks borrow funds overnight from the central bank.|
|Eligibility||All commercial banks and financial institutions.||All Scheduled Commercial Banks (SCBs) having their current account and Subsidiary General Ledger (SGL) with an RBI.|
|Pledging Security||The loan can be raised without pledging the securities.||The loan is given against security within the limits of SLR and up to a certain percentage of NDTL.|
Definition of Bank Rate
The bank rate is a rate of interest at which the Central Bank lends money to the commercial banks for meeting the shortfall of funds. Whenever the commercial bank lacks in funds of finance, 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 viz. If there is an increase in the bank rate, then the lending rates of banks will also increase and if there is a decrease in the bank rate the lending rates also falls.
Definition of MSF Rate
Marginal Standing Facility Rate (MSF) is referred to as a facility, in which the scheduled commercial banks can borrow funds from the central bank overnight, against the government approved securities of Statutory Liquidity Ratio (SLR) quota (which is in excess of the current SLR) up to a certain percentage of their Net Demand and Time Liabilities. This facility is available to the scheduled banks having their current account and Subsidiary General Ledger (SGL) with the RBI.
It is at the discretion of RBI whether to grant the loan or not. This facility is available to the eligible banks on all the working days except on Saturdays between 3:30 PM to 4:30 PM at its headquarters (Mumbai).
Key Differences Between Bank Rate and MSF Rate
- The bank rate is an interest rate at which the commercial banks can borrow loan from RBI while MSF Rate is a facility in which the scheduled commercial banks can borrow funds overnight from the central bank.
- All commercial banks and financial institutions are eligible for the availing loan at bank rate from RBI whereas MSF Rate is available only to the Scheduled Commercial Banks (SCBs) having their current account and Subsidiary General Ledger (SGL) with the RBI.
- The Bank rate is effective since 1900 while MSF Rate was introduced in 2011.
- The major difference between the Bank rate and MSF Rate is that at Bank rate the loan is not given by pledging securities, but in MSF, the loan is given by pledging the government approved securities (specified criteria).
- Bank Rate is not the last resort for the banks while MSF Rate is the last resort for commercial banks, which can borrow funds overnight.
- Both are discount rates at which RBI gives a loan to the commercial banks.
- Both are Bank policy rates.
- RBI prescribes both.
- Both facilities are availed by banks when there is an acute shortfall of cash.
After discussing much on these two entities, we conclude that any of the options can be availed by the commercial bank when there is a deficiency of funds. But the major difference lies in the availability of loan such as, if bank needs to raise a loan on an urgent basis, the MSF rate can be chosen whereas, in the case of normalcy, the bank rate can be opted.