What is/are the purpose/purposes of the Marginal Cost of the Fund-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.

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YESPYQ · Accepted Answer

Correct answer: Both 1 and 2. MCLR is the lowest interest rate a bank can charge for loans. It helps banks calculate the minimum interest rate for different types of loans. The Reserve Bank of India (RBI) introduced the MCLR system on April 1, 2016, to make monetary policy transmission more effective and increase transparency in setting interest rates. It replaced the base rate system, which had been used since July 2010. Statement 1 is correct: Bringing transparency in the meth- ods followed by various banks for the determination of interest rate is one of the key objectives of MCLR regime. Before banks used various methods to set lending rates which UPSC GS Paper-I PYQs 286 lead to opacity and confusion for borrowers. MCLR introduced a standardized, transparent calculation method, requiring banks to disclose its components, helping borrowers better understand their loan rates. Statement 2 is correct: By standardizing the methodology for calculating lending rates, the MCLR guidelines aim to en- sure that interest rates are “fair” to Borrowers and Banks:  The transparent methodology

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