Economics • Banking & FinanceMedium
What is the primary purpose of introducing 'Marginal Cost of Funds based Lending Rate (MCLR)' by the RBI?
A. To determine the minimum wage for rural bank employees
B. To improve the transmission of policy rate changes to lending rates charged by banks to borrowers✓ Correct Answer
C. To calculate the foreign exchange reserves adequacy
D. To penalize banks for holding excessive non-performing assets
💡 Solution & Explanation
The Marginal Cost of Funds based Lending Rate framework was introduced by the Reserve Bank of India in April 2016 to improve the monetary policy transmission mechanism to retail borrowers. Unlike the older base rate system, MCLR is calculated based on the marginal cost of borrowing funds, ensuring benchmark changes are reflected quickly.
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