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.
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2 ✓ UPSC's answer
- (d) Neither 1 nor 2
Why the answer is (c)
• The RBI introduced MCLR in April 2016, replacing the base-rate system, to link lending rates to banks' marginal cost of funds, operating costs, CRR cost and a tenor premium.
• Its stated purposes were to improve transparency in how banks set lending rates (statement 1) and to ensure credit is available at rates fair to both borrowers and banks, while improving transmission of policy rates (statement 2).
• MCLR was later supplemented by external benchmark-linked rates (2019).
• Hence both 1 and 2, option (c).
Why the other options are wrong
- (a) 1 only
- Statement 2 on fair rates is also a stated purpose.
- (b) 2 only
- Statement 1 on transparency is also a stated purpose.
- (d) Neither 1 nor 2
- Both statements are correct.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2016, held on 7 August 2016. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.