What is/are the purpose/purposes of the Marginal Cost of Funds based Lending Rate (MCLR) announced b

Question

What is/are the purpose/purposes of the Marginal Cost of Funds based Lending Rate (MCLR) announced by RBI?These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.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.

Accepted Answer

To ensure better transmission and transparency of rates, the RBI introduced the MCLR framework, under which banks have to calculate their cost of funds based on the latest rates offered on deposits or borrowings. This was to ensure that changes in deposit rates were immediately reflected on banks’ cost of funds.Apart from helping improve the transmission of policy rates into the lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates on advances. The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.Further, marginal cost pricing of loans will help the banks become more competitive and enhance their long run value and contribution to economic growth.