Economics • Banking & FinanceMedium
What does the term 'Marginal Cost of Funds based Lending Rate (MCLR)' signify in Indian banking?
A. The minimum interest rate below which a scheduled commercial bank cannot lend to any borrower, except under RBI exemptions.
B. The average rate at which the central bank lends money to commercial banks against government securities.
C. The benchmark interest rate calculated by commercial banks based on the marginal cost of borrowing funds.✓ Correct Answer
D. The peak interest rate charged on unsecured retail credit cards.
💡 Solution & Explanation
The Marginal Cost of Funds based Lending Rate is an internal benchmark methodology introduced by the Reserve Bank of India to determine the minimum interest rates commercial banks charge on loans based on their marginal borrowing costs. This framework replaced the earlier base rate system to ensure faster transmission of monetary policy rate changes to borrowers.
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