BANKS’ LENDING RATES % Flashcards
What major event in 1969 changed how lending rates were set in India?
The nationalization of private banks, which put the government in control of interest rates.
What was the goal of the Narasimham Committee recommendations in 1991?
To deregulate banks and allow them to set their own interest rates, promoting competition in the banking sector.
What is the BPLR, and why was it introduced?
BPLR stands for Benchmark Prime Lending Rate. It was introduced in 2003 to give banks a reference point to calculate loan interest rates.
How does the MCLR system work?
MCLR (Marginal Cost of Funds-based Lending Rate) was introduced in 2016. It requires banks to calculate their lending rates based on the marginal cost of borrowing funds. This includes factors like the interest rate on deposits, repo rate, and operating costs.
Why was the BPLR system considered less effective than the MCLR?
The BPLR system was less effective because banks could choose how often to update their BPLR formulas. This made it difficult to transmit changes in monetary policy quickly to interest rates on loans.
Explain the BPLR system.
The Benchmark Prime Lending Rate (BPLR) system was introduced in 2003. Banks used their BPLR as a reference point to calculate interest rates on loans. Banks had the discretion to determine how often they updated their BPLR formulas.
How does the MCLR system differ from the BPLR?
The Marginal Cost of Funds-based Lending Rate (MCLR), introduced in 2016, requires banks to base lending rates on their marginal cost of borrowing funds. This system links loan rates more closely to changes in the repo rate and other market factors.
What is a key limitation of the MCLR system?
Even with the MCLR system, banks are not required to fully pass on the benefits of reduced interest rates (like repo rate cuts) to borrowers. This can limit the effectiveness of monetary policy changes.
