2016 GS Paper I, all questions

UPSC Prelims 2016 · GS Paper I

Question 43: Economy and Social Development

What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI?

  1. 1.These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
  2. 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.

a1 only
b2 only
cBoth 1 and 2
dNeither 1 nor 2

AnswerUPSC’s answer is (c).

RBI introduced the Marginal Cost of Funds based Lending Rate from 1 April 2016 to replace the base rate. Banks must price loans with reference to their marginal cost of funds, which makes the way lending rates are set more transparent, helps rates respond faster to RBI's policy rate changes and keeps them fair to both borrowers and banks. Both purposes appear in RBI's guidelines.

  • 1. The guidelines improve transparency in how banks set lending rates.
  • 2. They aim at credit at rates fair to borrowers and banks.

How you could have got this

  1. If you were sure statement 1 is correct, (b) and (d) go: each of them leaves 1 out.

    What you needed to know: The guidelines improve transparency in how banks set lending rates.

  2. Then, if you were sure statement 2 is correct, (a) goes: it leaves 2 out.

    What you needed to know: They aim at credit at rates fair to borrowers and banks.

Only (c) is left. This one needs every statement.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Statement 2 is also a purpose of the guidelines.
  • (b) Statement 1, transparency, is also a purpose.
  • (c) Right: both transparency and fair rates are purposes.
  • (d) Both statements describe purposes, so 'neither' fails.

Worth knowing: MCLR has since been displaced for new floating-rate retail and MSME loans, which since October 2019 are linked to external benchmarks such as the repo rate.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2016, General Studies Paper I, Series A. The paper on upsc.gov.in.