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 gu

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Q: 18 (IAS/2016)
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.

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,261,59,25,28,261,6

keywords: 

{'marginal cost': [0, 0, 0, 1], 'lending rate': [0, 0, 0, 1], 'interest rates': [0, 1, 0, 3], 'mclr': [0, 0, 0, 1], 'rbi': [1, 4, 2, 23], 'bank credit': [0, 0, 0, 1], 'funds': [0, 1, 2, 9], 'banks': [5, 6, 5, 25], 'borrowers': [0, 0, 0, 1]}

The correct answer is Option 3: Both 1 and 2.

The Marginal Cost of Funds based Lending Rate (MCLR) is a methodology introduced by the Reserve Bank of India (RBI) in April 2016 as a way to determine the lending rates of banks. The MCLR is based on the marginal cost of funds, or the cost incurred by banks for incremental borrowings, and includes factors such as repo rate, marginal cost of funds, operating costs, and tenure premium.

The purpose/purposes of the MCLR as announced by RBI are:

1. Transparency in interest rate determination: The MCLR guidelines aim to improve transparency in the methodology followed by banks for determining the interest rates on advances. By using a formula-based approach that incorporates various components, such as the repo rate, banks are required to disclose the factors influencing their lending rates. This helps borrowers better understand the basis of the interest rates charged by banks, making the process more transparent.

2. Fair availability of credit: The MCLR guidelines also aim to ensure the availability of bank credit at interest rates that are fair to both borrowers and banks. The RBI sets the benchmark MCLR rates based on macroeconomic indicators, which are meant to reflect the actual cost of funds for banks. This ensures that the lending rates charged by banks are based on a fair and transparent methodology, which benefits borrowers in accessing credit at reasonable rates, while also protecting the interests of banks.

Additional Information:

- The MCLR is reviewed by banks at least once a month, which allows for more frequent adjustments in lending rates based on changes in the cost of funds.

- Banks are also required to review and publish their internal benchmarks for fixing lending rates under the MCLR framework, which further enhances transparency.

- The MCLR guidelines also provide for a reset period, after which the interest rates on floating rate loans are revised, to ensure that borrowers can benefit from changes in the benchmark rates in a timely manner.

- The MCLR is applicable to all rupee loans and credit limits, including loans to individuals, micro and small enterprises, and corporate borrowers. However, it does not apply to loans linked to the base rate or the prime lending rate, which were used prior to the introduction of the MCLR framework.