Bank rate is the interest at which the Central Bank of any nation provides a loan to its domestic banks. It is usually given against government securities and for a shorter or a longer period of time. MSF rate is the rate charged by the Central bank of the nation (RBI) to its domestic banks when there is an emergency such as the complete drying of inter-bank liquidity.
Bank Rate vs MSF Rate
The main difference between Bank Rate and MSF Rate is that the central bank provides funds to commercial banks and financial institutions for a discounted rate, which is known as the bank rate. On the contrary, MSF (Marginal Standing Facility) rate is a rate on which the central bank issues money overnight to commercial banks.
Bank rate was introduced in the year 1900, while the MSF rate was introduced in the year of 2011. It is applicable only for a very short period and the banks can borrow just one percent of their entire demand.
Comparison Table Between Bank Rate and MSF Rate
| Parameter of comparison | Bank Rate | MSF Rate |
|---|---|---|
| What is it? | Interest at which the nation’s central bank loans its domestic banks | The rate at which the nation’s central bank loans its domestic banks during an emergency situation. |
| Period | loan lasts for shorter or longer period | loan lasts for a very short period |
| The interest rate charged by the national bank | Usually nominal | Usually high |
| What happens when it is lower? | Lower Bank rate helps in expanding the economy as the cost of funds are really less for the borrowers | Lower MSF rate means there is no emergency for funds and the economy is doing well |
| What happens when it is higher? | It helps in bringing back the currency value when there is higher inflation | It is usually higher so that the domestic banks manage their demands by its own |
| When it is loaned? | Any time | Usually loaned overnight |
| Who can borrow? | Any commercial bank or any financial institution | Only Scheduled Commercial Banks (SCB) that are linked to the central bank |
| Is there any limit? | Limited to the government securities that are provided | Usually limited to one percent of the net demand. |
| When is it introduced? | In practice for so many years, and also in different nations | Reserve Bank of India (RBI) had introduced it in its 2011-2012 monetary policy |
| Other names | It is also called as discount rate | It is also called as overnight rate |
| How is it calculated? | The National bank of the country determines it based on monetary policy | MSF rate = Repo rate + 1% |
| Which is lower? | As it is issued for loans of a longer period, it is lower than the MSF. | As it is issued for overnight loans under financial emergencies, it is higher than the Bank rate. |
What is Bank Rate?
Bank rate is the interest percentage at which the country’s national bank loans its domestic banks. Bank rate plays a major role in determining the economic activities of the country.
The higher bank rate helps in restoring the inflation whereas the lower bank rate helps in expanding the economy. As the bank rate is usually issued for loans of a longer period, it is lower than the MSR rate.
What is MSF Rate?
MSF
stands for Marginal Standing Facility (MSF) and the MSF rate is the rat eat
which the National bank borrows its domestic banks in case of any emergency,
especially, when there is complete drying of inter-bank liquidity.
It
is made higher to ensure that such a situation shouldn’t occur often. Also,
Marginal Standing Facility is offered only for a very short period.
MSF rate is calculated by adding one to the repo rate, where the repo rate is the rate at which the national bank lends to its local banks for short terms.
MSF rate = Repo rate + 1%
Main Differences Between Bank Rate and MSF Rate
- Bank rate is the interest rate at which the national bank borrows its domestic banks when the inter-bank liquidity dries up whereas the MSF rate is the rate at which the nation’s central bank borrows its domestic banks in case of any emergencies.
- The former loan rates last for a shorter or longer period and the latter lasts for a very short time.
- The interest rate charged as Bank rates are nominal whereas the MSF rate charged is higher.
- Lower the Bank rate is the higher the country’s economy gets expand but the lower the MSF rate is the higher the emergency for funds among the domestic banks.
- On the contrary, when the Bank rate is higher, it brings back the currency value reducing the inflation. Higher MSF rate ensures that the domestic banks ask for help to the central bank less often.
- Bank rate loans can occur at any time whereas the MSF rate loans usually occur overnight.
- Any commercial bank or any financial institution can borrow from the central bank. Only Scheduled Commercial Banks (SCB) that are linked to the Central bank can avail loans are MSF rate.
- The former loans are limited to the government securities provided whereas the latter loans are limited to one percent of the net demand.
- Bank rate is in use for so many years around the world whereas the MSF rate was first introduced by Reserve Bank of India (RBI) in its monetary policy 2011-2012.
- Bank rate is also called as discount rate and the MSF rate is also called as overnight rate as it is borrowed overnight.
- The former rate is determined by the National bank of the country based on the monetary policy whereas the latter is calculated by adding one percent to the repo rate. Repo rate is the rate at which the national banks lends to its domestic banks for a shorter period.
Conclusion
Bank rate and MSF rate are both interest percentages charged by the nation’s central bank to its domestic banks or financial institutions (only in the case of the former), but they differ in the situation when they are borrowed.
For example, the former is borrowed when there is a complete dry up in the liquidity of the inter-banks whereas the latter is borrowed when there is a financial emergency for any domestic bank.
To reduce such emergency borrows, the central bank usually sets the MSF rate higher whereas the Bank rates are usually nominal.
References
- https://search.proquest.com/openview/e460f3c9be5e518c22cd0a75b29a3ab1/1?pq-origsite=gscholar&cbl=54462
- https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/06SPBL100811.pdf