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      Question

      Consider the following statements regarding the marginal

      cost of funds-based lending rate (MCLR): 1. The Reserve Bank of India introduced the MCLR methodology by replacing the base rate structure.  2. Under the MCLR regime, banks are free to offer all categories of loans on fixed or floating interest rates. 3. Reserve Bank of India introduced the MCLR methodology for fixing interest rates from 1 April 2016. Which of the above statements is/are correct?
      A 1 only Correct Answer Incorrect Answer
      B 2 only Correct Answer Incorrect Answer
      C Both 1 and 2 Correct Answer Incorrect Answer
      D Neither 1 nor 2 Correct Answer Incorrect Answer
      E All 1,2 and 3 Correct Answer Incorrect Answer

      Solution

      The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate that a bank can lend at.  MCLR is a tenor linked internal benchmark, which means the rate is determined internally by the bank depending on the period left for the repayment of a loan. MCLR is closely linked to the actual deposit rates and is calculated based on four components: the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium. Reserve Bank of India introduced the MCLR methodology for fixing interest rates from 1 April 2016. It replaced the base rate structure, which had been in place since July 2010.

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