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.

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: c

Explanation:

MCLR Rate

The full form of MCLR is Marginal Cost of Funds Based Lending Rate. It represents the minimum interest rate at which banks or financial institutions can offer loans. In determining this minimum interest rate, banks take into account several factors, including the cost of funds, operating expenses, and profit margins. Interest rates for various loans, such as home loans, are calculated using the MCLR. When the MCLR changes, the interest rates for loans linked to it also fluctuate, which in turn affects the monthly EMIs.

The MCLR has a direct impact on the interest rates on loans:

• If MCLR is lower, the interest rate will also fall, leading to lower EMIs. 
• A higher MCLR leads to high interest rates and higher EMIs. 

MCLR aims to: 

• Brings transparency in banks and financial institutions while determining interest rates.
• The availability of loans are ensured for customers, being fair for both customers and lenders.

Hence, both 1 and 2 are correct