Economics • Banking & FinanceEasy
What does the term 'Marginal Cost of Funds based Lending Rate (MCLR)' replace in the Indian banking system for determining loan interest rates?
A. Base Rate system✓ Correct Answer
B. Prime Lending Rate system
C. Cash Reserve Ratio mechanism
D. Statutory Liquidity Ratio framework
💡 Solution & Explanation
The Marginal Cost of Funds based Lending Rate framework was instituted by the Reserve Bank of India in 2016 to supplant the older Base Rate system for loan pricing. Earlier mechanisms like the Prime Lending Rate lacked transparency in monetary policy transmission across commercial lending portfolios. MCLR ties loan interest rates more closely to the actual marginal cost incurred by banks in acquiring funds.
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