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.
Answer & explanation
Answer: (c) Both 1 and 2
Both statements are correct. RBI's MCLR guidelines of 17 December 2015 aimed to make the way banks set lending rates more transparent, and to make credit available at rates fair to both borrowers and banks. They applied from 1 April 2016.
- ✓ 1. The Ministry of Finance told Parliament that the MCLR guidelines are expected to improve transparency in the methodology banks follow in fixing interest rates on advances.
- ✓ 2. The same reply says the guidelines are also expected to ensure availability of bank credit at rates that are fair to borrowers as well as banks.
- • Since then For new floating-rate retail loans and loans to micro and small enterprises from 1 October 2019 (and medium enterprises from 1 April 2020), RBI now requires an external benchmark such as the repo rate or Treasury bill yields, instead of MCLR.
Remember · MCLR (from 1 April 2016) is the internal benchmark for bank loan pricing, meant to improve transparency and give fair rates to both borrowers and banks.
Sources
- PIB, Ministry of Finance: Lending Rate Based Interest Rates (26 February 2016) ↗ “these guidelines are expected to improve transparency in the methodology followed by banks for determining interest rates on advances. These guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.”
- Reserve Bank of India, Master Direction on Interest Rate on Advances ↗ “All floating rate rupee loans sanctioned and renewed w.e.f. April 1, 2016 shall be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) … All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans extended by banks to Micro and Small Enterprises from October 01, 2019 and floating rate loans to Medium Enterprises from April 01, 2020 shall be benchmarked to one of the following”
Question and answer: UPSC's official GS Paper I (2016, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·