Difference Between Bank Rate and MSF Rate

Edited by Diffzy | Updated on: September 21, 2022

       

Difference Between Bank Rate and MSF Rate Difference Between Bank Rate and MSF Rate

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Introduction

A bank rate is the interest rate at which a nation's central bank lends plutocrat to domestic banks, frequently in the form of veritably short-term loans. Managing the bank rate is a system by which central banks affect profitable exertion. Lower bank rates can help to expand frugality by lowering the cost of finances for borrowers, and advanced bank rates help to control frugality when affectation is more advanced than asked. Bank Rate is the rate at which the central bank is ready to buy the fiscal instruments, that are covered under section 49 of the RBI Act, 1934. This rate helps in maintaining the overall credit situation in the country.

The bank rate in the United States is frequently appertained to as the reduction rate. In the United States, the Board of Governors of the Federal Reserve System sets the reduction rate as well as the reserve conditions for banks.

The Federal Open Market Committee (FOMC) buys or sells Treasury securities to regulate the plutocrat force. Together, the reduction rate, the value of Treasury bonds, and reserve conditions have a huge impact on frugality. The operation of the plutocrat force in this way is appertained to as financial policy

The MSF or Borderline Standing Installation (MSF) Rate is the rate at which RBI lends finances overnight to listed banks, against government securities. RBI has introduced this borrowing scheme with the aim to regulate short-term asset-liability mismatch more effectively. MSF provides a lower liquidity cushion. Advanced the MSF rate, more precious is espoused for banks, as well as marketable borrowers and individualities. It's used by RBI to control the capitalist force in the country’s financial system.

Bank Rate vs MSF Rate 

The main difference between the bank rate and MSF rate is Bank Rate was introduced as a standard rate at which the RBI is ready to buy or rediscount bills of exchange and other instruments, which are good for purchase under the Act. On the other hand, Borderline Standing Installation was introduced by RBI in the time 2011. At the first bank, the rate was known as the key policy rate which was directing the market rates but in contrast, the MSF rate became the key policy rate after the time it was introduced. On the contrary MSF rate is the rate at which a loan can be obtained by a commercial bank by giving the government securities as collateral. the main attraction of the MSF rate is that this can be obtained overnight by the commercial banks from the reserve bank of India at the urgent requirement.

Difference Between Bank Rate and MSF Rate  in Tabular Form

Table: Bank Rate vs MSF Rate
Parameters of Comparison
Bank Rate
MSF Rate
Definition
Bank Rate is also known as the discount rate  which is the rate at which RBI gives  long term loans to commercial banks.
MSF rate is a rate at which the commercial banks borrow funds overnight from the central bank with securities as collateral.
Eligibility
All commercial banks are eligible for taking bank rates.
All Scheduled Commercial Banks (SCBs) who have their current account and Subsidiary General Ledger (SGL) with an RBI can take this facility overnight.
To Be Granted For
The bank rate is meant for Long term Lending.
MSF rate is meant for Overnight ending loans to commercial banks.
Purpose
The bank rate is meant for two purposes
1. For providing discount rate
2. For providing the penal rate
The MSF rate is meant for two purposes
1. For providing liquidity to the system
2. Controlling the volatility of the overnight market.
Effect of rate
The higher the bank rate, the higher will be the long-term interest rates.
Higher the MSF rate means higher the overnight borrowing cost of funds for the banks
Requirement Of Collateral
In the case of Bank rate, Commercial banks can raise the loan Without pledging the securities.
For Obtaining MSF rate Commercial banks should provide securities as collateral.
Effect On Costs
Long-term interest rates tend to rise when the bank rate rises.
Banks face higher borrowing costs, which limit the amount of money available in the economy.
Process
Banks have to submit requests in physical
Up to a specific percentage of NDTL Requests are submitted online using the Negotiated Dealing System, and the loan is issued against collateral within the limitations of SLR (NDS).

What is Bank Rate?

The bank rate is the standard rate at which the Reserve bank is prepared to buy or rediscount bills of exchange or other commercial papers. The rise in bank rate also raises the interest rate and the lowering of bank rate lowers the interest rate. The bank rate is the tool of the central bank for controlling two major problems Inflation and liquidity. The bank rate has become a dormant tool now due to the introduction of the MSF rate (Marginal standing facility) and LAF (Liquidity adjustment facility). The bank rate refers to the official rate at which the central bank (Reserve bank of India) Provides loans to commercial banks and development banks. Such types of loans are given by two pathways either by direct lending or by rediscounting (buying back) the bills of treasury and commercial banks.

How Do You Define Bank Rates?

The bank rate was first adopted under Section 49 of the RBI Act, 1934, as a benchmark rate at which the central bank is willing to purchase or rediscount bills of exchange and other instruments that are qualified for purchase under the Act. The RBI has stopped discounting or rediscounting bills of exchange using bank rates since the introduction of the Liquidity Adjustment Facility (LAF). As a result, the bank rate is rendered ineffective as a tool for monetary management. As a result, the Bank rate is equal to the MSF rate.

Concept Behind Bank Rate

For understanding the concept of bank rate we need to imagine the situation when we experience a shortfall of expenses we visit the banks for loans, similarly when commercial banks need funds they approach the Reserve Bank of India .

Banks are needed to hold reserves equal to a specified chance of their deposits. They adopt plutocrats from another bank at a late rate if they do not have enough cash at the end of the day to meet their reserve conditions. When the reduction rate falls below the late rate, banks generally adopt plutocrats from the central bank rather than from each other. As a result, the reduction rate can impact the late rate.

Because the overnight rate is so influenced by the bank rate, it also has an impact on consumer lending rates. Banks charge their best, most creditworthy customers a rate that is extremely similar to the overnight rate while charging their other customers a slightly higher rate. When Bank Rate is increased by RBI, the bank’s borrowing costs increase which in return, reduces the force of plutocrats in the market. The rate of interest charged by the central bank on the loans they've extended to marketable banks and other financial institutions is called “ Bank Rate”. In this case, there's no retrieving agreement inked, no securities vended or collateral involved. Banks adopt finances from the central bank and lend the plutocrat to their guests at an advanced interest rate, therefore, making gains. Bank Rate is an important tool for controlling liquidity.

bank rate is also referred to as “ Reduction Rate”, and is frequently confused with Overnight Rate. While the bank rate refers to the interest rate charged by the central bank on loans granted to marketable banks, the late rate is the interest charged when banks adopt finances among themselves. When Bank Rate is increased by RBI, the bank’s borrowing costs increase which in return, reduces the force of plutocrat in the request.

Current Bank Rate

While repo rate and financial institution rate are reduced debtors are facilitated as they could reap loans at a decreased hobby price. the bank fee presently stands at four.65. in 2019, the Reserve bank of India decreased the repo price by five instances. on 7 February 2019, the repo rate turned cut from6.50 to 6.25. the repo fee was reduced by 25 bps on four April 2019 to6.00. on 6 June 2019, the repo price become decreased via 25 base factors to5.75. the RBI cut the repo fee with the aid of 35 bps on 7 august 2019 to 5.forty. the repo fee was further cut by way of the RBI from four October 2019 to 5.15

Effect On Bank Rate When Central Bank Increases The Discount Rate 

For controlling the inflation Reserve Bank of India increases the Discount rate and It is an effective tool for the same. When interest rates rise, the cost of borrowing money rises as well. As a result, disposable earnings fall, it becomes more difficult to borrow money to buy a house or a car, and consumer spending falls.

What is MSF Rate?

The MSF or Borderline Standing Installation (MSF) rate is defined as the rate at which RBI provided finances overnight to listed banks, by keeping government securities as collateral. This borrowing scheme was brought by the RBI to regulate RBI for regulating short-term asset-liability mismatch more effectively. For a better understanding of the concept of MSF, we need to first keep in mind that these funds are meant for the events of exigency when interbank liquidity ceases fully, a borderline standing installation is available for the listed marketable bank to adopt plutocrat from RBI overnight. In this installation, finances are available to the banks at an advanced rate of interest, which is generally lesser than the policy bank rate, which is called as MSF Rate.

In this context, listed commercial banks can easily adopt finances from the central bank overnight, against the government-approved securities of Statutory Liquidity Rate (SLR) share (which is more than the current SLR) up to a certain chance of their Net Demand and Time Arrears.

Effect On Banks When RBI Reduces The MSF Rate

When the MSF is reduced, banks are advanced finances overnight by the Reserve Bank of India (RBI). This translates to banks having further finances to give to businesses and further rupees circulating in the frugality which in turn strengthens it

Differences Between Bank Rate And MSF Rate In Points

  1. Bank Rate was introduced as a standard rate at which the RBI is ready to buy or rediscount bills of exchange and other instruments, which are good for purchase under the Act. On the other hand, Borderline Standing Installation was introduced by RBI in the time 2011.
  2. All marketable banks are eligible for the serving loan at bank rate from RBI whereas MSF Rate is available only to the Slated Marketable Banks (SCBs) having their current account and Subsidiary General Ledger (SGL) with the RBI.
  3. In the case of bank rate, the loan can be raised from RBI, without giving securities as collateral. But, the medium of MSF resembles Repo Lending Medium, wherein RBI provides a loan to banks on securities as collateral 
  4. Bank Rate is meant for long-term lending, whereas MSF Rate is the medium through which banks can obtain overnight funds.
  5. Bank Rate is a tool used by RBI to manage and control the credit force in the country. Again, MSF Rate is a medium to give finances to the banks overnight, when they face an acute deficit of finances.
  6. Bank rate is for meeting the shortage of funds while the MSF rate is for providing the emergency crisis of funds which is the reason banks need to provide securities as collateral.
  7. In Bank rate banks are not allowed to use the securities that come under the SLR. In MSF banks are allowed to use the securities that come under the Statutory Liquidity Rate (SLR) in the process of serving loans from RBI.
  8. Bank Rate is Lower than the MSF rate. MSF rate is nearly 100 points higher than the MSF rate.

Conclusion

A bank rate is the interest rate charged by a country's central bank to domestic banks when they adopt plutocrats. The interest rates charged by central banks are designed to keep frugality stable. The bank rate, generally known as the reduction rate, is set by the Board of Governors of the Federal Reserve System in the United States.

To meet reserve conditions and save liquidity, banks turn to the central bank for loans. The Federal Reserve issues three forms of credit grounded on a bank's fiscal situation and needs. The late rate, in discrepancy to the bank rate, is the interest rate that banks charge each other to adopt plutocrat.

Numerous central banks have acclimated their bank rates in response to the global extremity to stimulate and stabilize frugality.

References

  1. https://www.codeforbanks.com/banks/bank-rate-vs-msf-rate/

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"Difference Between Bank Rate and MSF Rate." Diffzy.com, 2022. Sun. 02 Oct. 2022. <https://www.diffzy.com/article/difference-between-bank-rate-and-msf-rate-103>.



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