Economics • Banking & FinanceEasy
What does the term 'Base Rate' system, which preceded the Marginal Cost of Funds based Lending Rate (MCLR) system in Indian banking, refer to?
A. The minimum interest rate below which banks were not permitted to lend to their general customers✓ Correct Answer
B. The interest rate charged by the RBI on overnight loans to commercial banks
C. The maximum interest rate charged on agricultural short-term loans
D. The benchmark yield on 10-year Government securities
💡 Solution & Explanation
The Base Rate system was introduced by the Reserve Bank of India to serve as the minimum interest rate below which commercial banks were strictly prohibited from lending, ensuring greater transparency in credit pricing. Wrong alternatives refer to distinct monetary policy levers like the repo rate or overnight lending yields rather than commercial lending floors.
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