Money Banking

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.

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. 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 has modified the existing base rate system from April 2016 onwards.

The new methodology uses the marginal cost for obtaining funds (from deposits and borrowing from RBI) while setting their lending rate. This means that the interest rate given by a bank for deposits and the repo rate (for obtaining funds from the RBI) are the decisive factors in the calculation of MCLR.

For example, suppose SBI's marginal cost of funds comes out to 6%, operating costs is 1% , CRR maintenance is 1% and tenor premium is 1% for one year. If you take a loan for one year, then the MCLR comes out to 9% + spread (if any).

Marginal Cost of Funds based Lending Rate (MCLR) improves 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.

The correct option is C.