Economics • Banking & FinanceHard
What is the structural purpose of the 'Marginal Cost of Funds based Lending Rate (MCLR)' system introduced in Indian banking?
A. To fix interest rates on government bonds auctioned through primary dealer networks
B. To improve the transmission of policy rates of the central bank to lending rates charged by commercial banks to ultimate borrowers✓ Correct Answer
C. To determine the minimum wage payable to rural banking correspondents under financial inclusion schemes
D. To calculate the foreign currency non-resident deposit interest rates offered to overseas citizens
💡 Solution & Explanation
Marginal Cost of Funds based Lending Rate was introduced to replace the base rate system and improve monetary policy transmission by ensuring that changes in central bank repo rates are swiftly reflected in commercial loan pricing. MCLR is calculated based on the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs, and tenor premium. Banks review and publish their MCLR on a monthly basis. This benchmark ensures greater transparency in how commercial banks determine their minimum lending rates.
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