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 & interest rates which are fair to the borrowers as well as the banks Select the correct answer using the code given below:

QUESTION

Medium

Economy

Prelims 2016

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

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

Select the correct answer using the code given below:

Select an option to attempt

Explanation

MCLR (Marginal Cost of Funds-based Lending Rate) This is a benchmark interest rate set by banks in India, below which they cannot lend. It represents the minimum cost of funds for the bank, considering factors like their own borrowing costs, operating expenses, and a profit margin. The purposes of MCLR as outlined by the RBI include

Improved Transparency (point 1) MCLR standardizes the method for calculating the minimum lending rate. This transparency allows borrowers to better understand how banks arrive at their interest rates and facilitates comparison between different banks.
Fairness for Borrowers and Banks (point 2) MCLR ensures a certain level of fairness. It prevents banks from setting arbitrarily high minimum lending rates, potentially benefiting borrowers. At the same time, it allows banks to cover their basic costs and earn a reasonable profit margin.

Therefore, both options 1 and 2 accurately reflect the purposes of the MCLR system.

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