What is/are the purpose/purposes of the 'Marginal Cost of Funds based

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.

1 only

2 only

Both 1 and 2

Neither 1 nor 2

Answer is Right!

Answer is Wrong!

This question was previously asked in

UPSC IAS – 2016

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Both statements 1 and 2 correctly describe the purposes of the Marginal Cost of Funds based Lending Rate (MCLR) announced by RBI. MCLR was introduced to replace the Base Rate system to improve transparency in how banks determine interest rates on loans and to ensure that changes in the RBI’s policy rates are transmitted more effectively to borrowers. This aims to make interest rates fairer for both banks (reflecting their cost of funds more accurately) and borrowers (ensuring timely benefit from policy rate cuts).

MCLR is an internal benchmark for banks, based on the marginal cost of borrowing. It replaced the Base Rate system for all new floating rate loans sanctioned from April 1, 2016.

The key components of MCLR include the marginal cost of funds, negative carry on account of CRR, operating costs, and tenure premium. RBI’s objective with MCLR was to improve the monetary policy transmission mechanism and enhance transparency in lending rates. MCLR rates are reviewed and published monthly by banks.

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