Bank vs MSF Rate: Difference and Comparison

The bank rate is the interest at which the Central Bank of any nation provides a loan to its domestic banks. It is given against government securities and for a shorter or longer period.

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.

Key Takeaways

1. The bank rate is the rate at which the central bank (or a country’s apex bank) lends money to commercial banks.
2. MSF (Marginal Standing Facility) rate is the rate at which commercial banks borrow money from the central bank in case of emergency or temporary liquidity needs.
3. The bank rate is generally lower than the MSF rate, and the central bank uses both rates to control the money supply in the economy.

Bank Rate vs MSF Rate

Bank rate is used for longer-term lending to commercial banks, while the MSF rate is used for short-term borrowing by commercial banks from the central bank. The MSF rate is generally higher than the bank rate, reflecting the higher risk associated with short-term borrowing or loans.

The bank rate was introduced in 1900, while the MSF rate was introduced in 2011. It is applicable only for a concise period, and the banks can borrow just one per cent of their entire demand.

Comparison Table

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.
Period	loan lasts for shorter or longer period	loan lasts for a concise 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 less for the borrowers	A 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 higher so that the domestic banks manage their demands on their own
When is it loaned?	Any time	Usually loaned overnight
Who can borrow it?	Any commercial bank or 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 per cent of the net demand.
When is it introduced?	In practice for so many years, and also in different nations	Reserve Bank of India (RBI) introduced it in its 2011-2012 monetary policy
Other names	It is also called the discount rate	It is also called the 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 more extended 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?

The bank rate is the interest percentage at which the country’s national bank loans its domestic banks. Bank rate plays a significant role in determining the country’s economic activities.

The higher bank rate helps restore inflation, whereas the lower bank rate helps expand the economy. As the bank rate is issued for loans of a more extended 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 rate eat which the National bank borrows from 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 concise 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

1. The bank rate is the interest rate at which the national bank borrows from its domestic banks when the interbank liquidity dries up. In contrast, the MSF rate is the rate at which the nation’s central bank borrows from its domestic banks in case of any emergencies.
2. The former loan rates last for a shorter or longer period, and the latter lasts for a short time.
3. The interest rate charged as Bank rates are nominal, whereas the MSF rate is higher.
4. The lower the Bank rate is, the higher the country’s economy gets to expand, but the lower the MSF rate is, the higher the emergency for funds among the domestic banks.
5. On the contrary, when the Bank rate is higher, it returns the current value reducing inflation. A higher MSF rate ensures that the domestic banks ask for help from the central bank less often.
6. Bank rate loans can occur anytime, whereas MSF rate loans occur overnight.
7.  Any commercial bank or any financial institution can borrow from the central bank. Only Scheduled Commercial Banks (SCB) linked to the Central bank can avail of loans at the MSF rate.
8. The former loans are limited to the government securities provided, whereas the latter are limited to one per cent of the net demand.
9.  The bank rate has been used for many years worldwide, whereas the Reserve Bank of India (RBI) first introduced the MSF rate in its monetary policy in 2011-2012.
10. The bank rate is also called the discount rate, and the MSF rate is also called the overnight rate as borrowed overnight.
11. The country’s national bank determines the former rate based on the monetary policy, whereas the latter is calculated by adding one per cent to the repo rate. The repo rate is when the national banks lend to their domestic banks for a shorter period.      

References

1. https://search.proquest.com/openview/e460f3c9be5e518c22cd0a75b29a3ab1/1?pq-origsite=gscholar&cbl=54462
2. https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/06SPBL100811.pdf