Economics • Banking & FinanceEasy
What does the term 'Marginal Cost of Funds based Lending Rate (MCLR)' refer to in the Indian banking system?
A. The minimum interest rate below which banks cannot lend to any borrower.✓ Correct Answer
B. The average rate at which the central bank lends emergency funds to scheduled banks.
C. The statutory reserve requirement imposed on all cooperative banks.
D. The rate charged by non-banking financial companies for retail microloans.
💡 Solution & Explanation
The Marginal Cost of Funds based Lending Rate establishes the absolute minimum interest rate below which commercial banks cannot extend credit to borrowers. It replaced earlier base rate mechanisms to ensure faster transmission of central bank monetary policy actions. Banks calculate this internal benchmark using their marginal cost of borrowing funds.
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