BANKING AFFAIRS

BANKING GENERAL KNOWLEDGE

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

Base rate of lending was introduced by RBI to substitute the prime lending rate mechanism for fixing of interest rate on bank loans and advances. What is the reason for this decision of RBI?

A	To exercise greater control of RBI over banks
B	In accordance with Damodaran Committee recommendations
C	To improve banks’ profitability
D	For effective transmission of monetary policy changes and greater transparency

Explanation:

Detailed explanation-1: -The base rate system, with a link to the banks’ cost of funds, was expected to facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of the transmission of monetary policy.

Detailed explanation-2: -The current Repo Rate as fixed by the RBI is 5.90%. After the latest hike in the repo rate on 7 December 2022, the Marginal Standing Facility (MSF) Rate rose to 6.15% from 5.65% and currently stands at 6.50%.

Detailed explanation-3: -Subsequently, the Reserve Bank replaced PLR with benchmark prime lending rate (BPLR) to serve as a reference rate for banks in 2003.

Detailed explanation-4: -Marginal Cost of Funds based Lending Rate (MCLR) is the minimum lending rate below which a bank is not permitted to lend. MCLR replaced the earlier base rate system to determine the lending rates for commercial banks. RBI implemented MCLR on 1 April 2016 to determine rates of interests for loans.

There is 1 question to complete.