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Q43 (IAS/2016) Economy › Money, Banking & Inflation › Interest rate concepts Official Key

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.

Result
Your answer: —  ·  Correct: C
Explanation

The correct answer is option C because both statements accurately reflect the purposes of MCLR as announced by RBI.

MCLR helps improve the transparency in the methodology followed by banks for determining the lending rates.[1] This directly validates statement 1, which refers to interest rates on advances (lending).

The MCLR methodology helps ensure availability of bank credit at interest rates which are fair to the borrowers as well as banks.[1] This confirms statement 2 is correct.

RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016, replacing the base rate structure, which had been in place since July 2010.[2] The MCLR system was designed to address shortcomings in the earlier base rate system by linking lending rates to the marginal cost of funds, thereby enabling fast transmission of repo rate into lending rate (better monetary policy transmission).[1]

Since both statements 1 and 2 correctly describe the purposes of MCLR, option C (Both 1 and 2) is the correct answer.

Sources
  1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > MCLR > p. 91
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > INCREMENTAL CASH RESERVE RATIO > p. 169
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Q. What is/are the purpose/purposes of the 'Marginal Cost of Funds based Lending Rate (MCLR)' announced by RBI? 1. These guidelines help im…
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10
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This is a classic 'Policy Objective' question. When RBI introduces a new acronym (MCLR, EBLR, ICRR), the official stated rationale is the first thing to memorize. Standard economy texts copy-paste these objectives directly from RBI notifications. If you read the 'Why' behind the reform, this is a free hit.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Was increasing transparency in banks' methodology for determining interest rates on advances stated as an objective of the Reserve Bank of India's Marginal Cost of Funds based Lending Rate (MCLR) introduced in 2016?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > MCLR > p. 91
Presence: 5/5
“Hence, because of linking the lending rate with marginal cost of deposits, there will be fast transmission of repo rate into lending rate (better monetary policy transmission). It will also help improve the transparency in the methodology followed by banks for determining the lending rates. The MCLR methodology will help ensure availability of bank credit at interest rates which are fair to the borrowers as well as banks. Every Bank calculates its own MCLR rate based on cost of deposits, operational costs, reserve requirements and tenor premium. So MCLR (or Base Rate) is an "internal benchmark" which varies from bank to bank.”
Why this source?
  • Explicitly states MCLR 'will also help improve the transparency in the methodology followed by banks for determining the lending rates.'
  • Directly links the MCLR methodology to the objective of improving transparency of lending-rate determination.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > INCREMENTAL CASH RESERVE RATIO > p. 169
Presence: 4/5
“However, based on recommendations of Narasimham Committee on banking sector reforms, the rate of SLR was gradually reduced. Rate of SLR as on 5 February 2021 stood at 18 per cent of NDTL. MCLR - The Marginal Cost of funds-based Lending Rate (MCLR) is the minimum interest rate below which a bank cannot lend. RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016, replacing the base rate structure, which had been in place since July 2010.”
Why this source?
  • Confirms RBI introduced the MCLR methodology from 1 April 2016, replacing the previous base rate structure.
  • Provides temporal context showing the timing when those objectives (like transparency) became relevant.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Base Rate: > p. 90
Presence: 3/5
“Base Rate was introduced in July 2010 replacing the Benchmark Prime Lending Rate (BPLR) system. Base Rate is the minimum rate below which Scheduled Commercial Banks cannot lend. RBI publishes guidelines for calculation of Base Rate and every bank calculates its own base rate. Base rate calculation methodology was based on the following four factors: • (Average) Cost of deposits/funds (interest rate that bank offers to its depositors)• Cost of maintaining CRR and SLR (if the banks are required to keep higher reserves like CRR and SLR, then they will be able to lend less money & will have to charge higher interest rate)• Operational Costs of Banks• Return/profit on Net worth (investment) From 1st April 2016, RBI introduced a new methodology for calculation of the Base Rates based on marginal cost of funds rather than average cost of funds.”
Why this source?
  • Describes the methodological shift in 2016 from average-cost (base rate) to marginal-cost (MCLR) calculation.
  • Supports that MCLR was a change in methodology — consistent with objectives such as making rate-setting more transparent.
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