Economics • Banking & FinanceMedium
What does the term 'Base Rate' signify in the lending framework of Indian commercial banks before it was replaced by MCLR?
A. The maximum interest rate charged by a bank to its most favored corporate borrower.
B. The minimum interest rate below which a bank was not permitted to lend to its general customers.✓ Correct Answer
C. The rate at which the central bank lends overnight funds to commercial banks.
D. The average rate of return on government securities over a ten-year horizon.
💡 Solution & Explanation
The Base Rate was the minimum benchmark interest rate below which banks could not lend, ensuring transparency and appropriate pricing of loans before being superseded by the Marginal Cost of Funds based Lending Rate system. Unlike market-driven benchmark rates, this floor rate prevented unhealthy undercutting among commercial lenders. The Reserve Bank of India introduced this framework in twenty-ten to improve monetary policy transmission.
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