RBI has brought a new methodology of setting lending rates by commercial banks under the name ...........

Economic Affairs Money Supply and Monetary Policy

RBI has brought a new methodology of setting lending rates by commercial banks under the name of Marginal Cost of Funds on Lending Rates (MCLR). Which of the following is/are correct about MCLR?

1. It facilitates monetary Transmission

2. Its has replaced Base Rate System

3. Its will be revised monthly

Choose the correct codes from the options given below:

2 and 3 only

1 and 2 only

1, 2 and 3

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Explanation:

All the statements are correct.

The marginal cost of funds based lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. It is an internal benchmark or reference rate for the bank. MCLR actually describes the method by which the minimum interest rate for loans is determined by a bank - on the basis of marginal cost or the additional or incremental cost of arranging one more rupee to the prospective borrower.

RBI decided to shift from base rate to MCLR because the rates based on marginal cost of funds are more sensitive to changes in the policy rates. This is very essential for the effective implementation of monetary policy. Prior to MCLR system, different banks were following different methodology for calculation of base rate /minimum rate – that is either on the basis of average cost of funds or marginal cost of funds or blended cost of funds.