The home loan interest rate you get on your loan will determine the total interest payout and therefore, the cost of borrowing the loan. Home loan borrowers repaying a loan should know that floating home loan interest rates depend on external market conditions. They change with a changing market — when the market interest rates go up, floating home loans become expensive and when the market interest rates go down, floating interest rate home loans become cheaper.
One of the external factors that affect market interest rates and home loan interest rates is the MSF Rate. This article shares important details about the Marginal Standing Facility Scheme and explores how the MSF rate impacts home loan interest rates.
Marginal Standing Facility and Marginal Standing Facility Rate Explained
The Marginal Standing Facility was introduced by the Reserve Bank of India in 2011-12 as a measure to reduce volatility within the borrowing space. The facility came into effect on May 9, 2011, and the same year, scheduled banks and lenders borrowed Rs.1 Billion from the Reserve Bank of India under this facility.
Under the Marginal Standing Facility, banks that meet the eligibility criteria set by the Reserve Bank of India can borrow funds from the apex bank of the country by pledging government-approved securities as collateral. Under this facility, scheduled banks and lenders borrow funds by dipping into the SLR or statutory liquidity ratio.
Further, these banks and lenders can make use of the MSF facility only when inter-bank liquidity has completely dried up and the borrowing financial institution has no other source from which they can borrow funds. The minimum amount that a bank or a lender can borrow from the RBI under the MSF scheme is Rs.1 Crore. Further, the amount is always borrowed in the multiples of Rs.1 Crore.
Funds borrowed under the Marginal Standing Facility comes with a one-day loan tenor. In other words, these loans are given to handle short-term liquidity issues. When a bank borrows funds under the MSF scheme, the RBI charges interest at the MSF Rate. The MSF rate current is 6.75%. The MSF Rate is always higher than the Bank Rate and the Repo Rate, both of which also impact the home loan interest rates.
Bank Rate is the rate of interest at which banks avail themselves of loans from the Reserve Bank of India in the absence of any collateral. When banks and lenders borrow funds from the RBI against security and enter into a repurchase agreement with the RBI, the RBI charges interest in the form of a Repo Rate. The current bank rate is 5.1.5% and the current Repo Rate is 6.50% per annum.
Why Does the RBI Change the MSF Rate?
In 2011-12, as part of the measures it took to reform its monetary policy, the RBI introduced the MSF Scheme. The MSF scheme helps the apex bank of the country:
- To reduce the volatility in the overnight financing rates
- To increase the share of commercial banks and lenders in government-approved securities
- To control the flow of funds within the Indian economic ecosystem
The Reserve Bank of India performs many functions, and one of its key functions is to ensure sustained economic growth within the country. Excessively high inflation poses a problem to economic growth. Thus, whenever inflation exceeds a certain limit, the Reserve Bank of India jumps into action and takes the required initiatives to bring inflation under control.
One of the things it does to bring inflation under control is to increase the MSF Rate. When the MSF rate increases, banks have to borrow funds from the RBI at a higher rate of interest. Thus, banks start charging their clients a higher rate of interest to keep their profit margins intact.
In the case of loans availed of floating home loan interest rates, the rate of interest goes up and the loan EMIs become more expensive. This is the key reason why anyone who has availed themselves of a loan must track changes in the MSF rate regularly.
Home loan borrowers should also use the home loan calculator to check the feasibility of the loan they wish to borrow. The home loan calculator helps borrowers estimate their repayment capacity. Loan applicants should also make sure they meet their lender’s home loan eligibility criteria to ensure quick loan approval and the best home loan terms and conditions.
