UPSC Prelims 2016 Question:

What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI?

1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances. 
2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.
   
   

Select the correct answer using the code given below:

Explanation: 

• Marginal Cost of Funds based Lending Rate (MCLR) is the minimum lending rate below which a bank is not permitted to lend. The Reserve Bank of India introduced the MCLR methodology for fixing interest rates in 2016. It replaced the base rate structure, which had been in place since 2010.
  
  

• MCLR is set by the banks on the basis of the structure and methodology followed for determining interest rates on advances. Thus, it helps to improve transparency as it is improved version of the base rate. To summarize, borrowers can benefit from this change. So, statement 1 is correct.
  
  
• The new provisions are win-win situations to both borrower and creditor. As it will ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks. So, statement 2 is correct.
  
  

Therefore, option (3) is the correct answer.

Relevance: RBI implemented Marginal Cost of Funds based Lending Rate (MCLR) in 2016 to determine rates of interests for loans.

Subject: Economics | Money and Banking