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Q43·GS Paper 1 · Prelims 2016

Marginal Cost of Funds based Lending Rate

EconomyMonetary Policy and BankingStatement-based● MediumStatic

Question

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

1These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
2These 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.

  1. 1.

    These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.

  2. 2.

    These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.

Options

a

1 only

b

2 only

c

Both 1 and 2

Answer
d

Neither 1 nor 2

Explanation

Both statements are correct. The Marginal Cost of Funds based Lending Rate (MCLR) was introduced by the RBI in April 2016 with dual objectives. Statement 1 is correct because MCLR replaced the older Base Rate system and introduced a more transparent and objective methodology for determining lending rates by banks, with explicit consideration of the cost of funds. Statement 2 is also correct because MCLR aims to ensure that interest rates charged to borrowers are fair and competitive while also being sustainable for banks, thereby improving the transmission of monetary policy. The system reduces information asymmetry and creates a more balanced borrower-lender relationship.

MCLR combines transparency and fairness by making the cost calculation explicit while ensuring both banks and borrowers benefit from a rational pricing mechanism.

Question details

Year

2016

Paper

GS Paper 1

Question

Q43

Subject

Economy

Sub-topic

Monetary Policy and Banking

Type

Statement-based

Difficulty

Medium

Nature

Static

Source hint

RBI Monetary Policy 2016

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