Economics • Banking & FinanceMedium
What is the primary function of the 'Marginal Cost of Funds based Lending Rate (MCLR)' system introduced by the Reserve Bank of India for commercial banks?
A. To determine the minimum benchmark interest rate below which banks cannot lend to borrowers✓ Correct Answer
B. To calculate the maximum interest rate banks can charge on agricultural crop loans under priority sector lending
C. To fix the interest rate paid by commercial banks on savings bank deposit accounts
D. To regulate the commission charged by payment aggregators on merchant discount rate transactions
💡 Solution & Explanation
The Marginal Cost of Funds based Lending Rate is the internal benchmark methodology introduced by the Reserve Bank of India to determine the minimum interest rate for loans, ensuring better transmission of policy rate changes. Distractors mischaracterize it as a maximum cap on crop loans, savings deposit rates, or payment aggregator commissions. MCLR is computed based on the marginal cost of borrowings, negative return on cash reserve ratio, operating costs, and tenor premium. Most floating rate loans linked to external benchmarks have now largely superseded MCLR frameworks.
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