Marginal Cost of Funds based Lending Rate (MCLR) reform

Q.  Which of the following is/are true?

1) Current bank interest rates change quickly as per changes in repo rate.
2) Marginal Cost of Funds based Lending Rate are less responsive to the RBI policy rates.
- Published on 31 Mar 16

a. Only 1
b. Only 2
c. Both 1 and 2
d. Neither 1 nor 2

ANSWER: Neither 1 nor 2
 
  • The Reserve Bank of India has brought a new methodology of setting lending rate by commercial banks under the name Marginal Cost of Funds based Lending Rate (MCLR). It will modify the existing base rate system from April 2016 onwards.
  • The present benchmark for lending rates is not responsive to rate reduction by RBI.
  • With MCLR, the component is the marginal cost of fund which is more sensitive to the RBI policy rate.
  • This has been done to improve transparency in methodology followed by banks to determine interest, and also ensure that interest rates are fair to both borrowers and banks.

Related Content

➨ Post your comment / Share knowledge


Enter the code shown above:

(Note: If you cannot read the numbers in the above image, reload the page to generate a new one.)
▲