In 2011, to help banks solve the problem of short-term liquidity crunches and to maintain the integrity of the Indian Banking System, the Reserve Bank of India introduced the concept of Marginal Standing Facility. When scheduled banks have exhausted resources in the Repo market and need money urgently to take care of liquidity issues, scheduled banks can borrow money from the RBI for a short term under the Marginal Standing Facility.
When scheduled banks make use of the Marginal Standing Facility, lenders charge interest at a slightly higher rate of interest than the Repo Rate. This interest rate is called the Marginal Standing Facility Rate and at present, it is pegged at 6.75%. It is believed that in the first year of its implementation, commercial banks borrowed about Rs.1 Billion under the MSF facility.
Readers must know that all scheduled commercial banks can borrow from the RBI under the MSF facility. However, rural banks and local area banks cannot benefit from this facility. Further, to be able to borrow under MSF, scheduled banks are required to pledge SLR securities as collateral.
Under MSF, the Reserve Bank of India accepts government-approved securities, gold, treasury bills, cash, etc. as collateral. The borrowing bank must repay the amount borrowed the next day. Failing to do so gives the Reserve Bank of India the legal right to sell the pledged securities in the open market for the recovery of loan money.
Marginal Standing Facility: How Does it Help?
The Marginal Standing Facility is an important tool that the RBI uses to ensure the smooth working of the Indian banking system. Here’s how the MSF helps the Indian economy:
- The MSF facility helps scheduled banks tackle their short-term and urgent liquidity issues efficiently. This also helps maintain the smooth working of the Indian banking system.
- Under the Marginal Standing Facility, banks borrow from the Reserve Bank of India by pledging their SLR securities. This, in turn, allows banks to take care of short-term liquidity crunches without affecting their long-term commitments and requirements.
- Marginal Standing Facility also helps the Reserve Bank of India ensure financial stability within the Indian economy.
- Further, this handy tool also helps RBI effectively transmit its monetary policy framework, which brings us to how MSF affects home loans.
Marginal Standing Facility and Home Loans: How Are the Two Linked?
As per the latest guidelines issued by the RBI, lenders must link home loans to an external benchmark, which in the majority of cases is the Repo Rate. Thus, a direct link between changes in the Repo Rate and home loan interest rates is understandable. However, how do changes in the Marginal Standing Facility affect home loans? The answer is simple: when the Marginal Standing Facility rate goes up, banks have to borrow at a higher rate of interest.
Therefore, to keep their profit margins intact, lenders start lending money at a higher rate of interest. Therefore, every time the RBI increases the Marginal Standing Rate, home loan interest rates automatically go up. On the contrary, when the RBI reduces the MSF rate, home loans become cheaper.
Final Words
If you are a home loan borrower, you must read about the Marginal Standing Facility and make sure you are well aware of any changes made by the RBI to it for these changes will have a direct impact on you and your home loan EMIs. You must also keep track of any changes in the MSF to make sure you hold your lender accountable if they do not pass on the benefits to you.
If you are planning to apply for home loan, make sure to meet all the home loan requirements and home loan criteria. This will increase your chances of getting approved for a loan. Further, it will also give you better negotiating power, allowing you to ask for loan terms and conditions that will make loan repayment much easier for you.
For instance, if you have all the documents required for a home loan and you meet all the qualifying criteria, you can easily ask your lender to offer you a high loan sanction at low home loan interest rates and for a loan tenor that compliments your repayment capacity, thereby allowing you to repay the loan comfortably.