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Marginal Standing Facility & Base Rate

Marginal Standing Facility & Base Rate

MARGNAL STANDING FACILITY

  • Marginal Standing Facility (MSF) is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12).
  • It came into effect from 9th May 2011. MSF scheme is provided by RBI where the banks can borrow overnight up to 1 per cent of their net demand and time liabilities (NDTL) i.e. 1 per cent of the aggregate deposits and other liabilities of the banks.
  • The rate of interest for the amount accessed through this facility is fixed at 100 basis points (i.e. 1 per cent) above the repo rate for all scheduled commercial banks.
  • The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which has lower rate of interest in comparison with the MSF.            Marginal Standing Facility & Base Rate
  • The MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio.
  • The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.

BASE RATE   [Marginal Standing Facility & Base Rate]

  • The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except in cases allowed by RBI. The Base Rate system has replaced the BPLR system with effect from July 1, 2010.
  • Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers.
  • Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently.  Marginal Standing Facility & Base Rate
  • There can be only one Base Rate for each bank. However, banks have the freedom to choose any benchmark to arrive at a single Base Rate but the same needs to be disclosed transparently.

As per RBI guidelines (as in July 2012), the following categories of loans could be priced without reference to Base Rate:‑

  • DRI Advances;
  • Loans to banks’ own employees including retired employees;
  • Loans to banks’ depositors against their own deposits.

RBI had made it mandatory for all banks to introduce Base Rate w.e.f. 1st July, 2010. Base Rate system is applicable to all new loans and for those old loans that come up for renewal after July 2010.

Existing loans based on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms. Marginal Standing Facility & Base Rate

 

ALSO READ : https://www.brainyias.com/iasbuzz/banking-reforms-in-india/

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