UPSC Prelims 2016 · Question 68 of 98
UPSC Prelims 2016 question on Marginal Cost Lending Rate (MCLR)
- ExamUPSC CSE
- Year2016
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicBanking
- DifficultyMedium
- TypeStatement
What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI?
1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.
Select the correct answer using the code given below.
Show answer
Answer: C. Both 1 and 2
Verdict
The answer is both 1 and 2. MCLR improves transparency in how banks set lending rates and seeks rates fair to borrowers and banks alike.
Analysis
Statement 1 is CORRECT. Under the Marginal Cost of Funds based Lending Rate framework banks must compute their cost of funds from the latest rates offered on deposits and borrowings, which makes the methodology visible and comparable rather than discretionary. Statement 2 is CORRECT. By ensuring that changes in deposit rates are reflected promptly in the cost of funds, the framework improves transmission of policy rate changes into lending rates, producing rates that are fair to borrowers as well as to banks.
Source
The Hindu report on the Reserve Bank linking lending rates to loan tenor.
How to crack it
When a regulator replaces one benchmark with another, the objectives are almost always transparency and transmission, so both statements are predictable from the fact of the reform. Note the progression worth carrying, from the benchmark prime lending rate to the base rate to MCLR and later to external benchmarks, each step taken to make lending rates respond faster and more visibly to policy. Knowing why the sequence exists answers questions about any link in it.