Economics • Banking & FinanceEasy
What does the term 'Base Rate' system, which was replaced by the Marginal Cost of Funds based Lending Rate (MCLR) in India, signify?
A. The maximum interest rate charged by banks to their prime corporate borrowers.
B. The minimum interest rate below which commercial banks were not permitted to lend to their customers.✓ Correct Answer
C. The interest rate paid by the central bank on the statutory liquidity reserves maintained by banks.
D. The benchmark rate used exclusively for housing loans under government subsidy schemes.
💡 Solution & Explanation
The Base Rate system represented the minimum interest rate below which commercial banks were prohibited from lending to any customer, ensuring transparency before being superseded by the marginal cost-based lending rate system. It prevented banks from engaging in predatory pricing or lending below cost. Banking sector reforms are crucial for economic awareness sections.
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