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

The correct answer is Both 1 and 2.

Both statements accurately capture the core purposes behind the Reserve Bank of India's introduction of the Marginal Cost of Funds based Lending Rate (MCLR) framework. Let us examine each statement carefully to understand why both are correct.

Background: What is MCLR?

The RBI introduced the MCLR system in April 2016, replacing the earlier Base Rate system. MCLR is an internal benchmark interest rate below which banks are not permitted to lend (with a few specified exceptions). It is calculated based on the marginal cost of funds — that is, the cost of raising one additional rupee of funds — rather than the average cost of funds used under the old system.

Analysing Statement 1:
"These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances."

This statement is correct. Under the earlier Base Rate system, banks had considerable discretion in their methodology, and the process lacked standardisation and clarity. A major criticism was that banks were slow to pass on RBI's rate cuts to borrowers, and the public had no clear way to verify whether lending rates were being set fairly.

The MCLR framework addressed this by mandating banks to follow a standardised, transparent, and rule-based methodology. Banks are required to publicly disclose their MCLR for various tenors (overnight, one month, three months, six months, one year, etc.). The components of MCLR — namely the marginal cost of funds, negative carry on the Cash Reserve Ratio (CRR), operating costs, and tenor premium — are clearly defined. This brings accountability and openness to the interest-rate-setting process, making it verifiable by borrowers and regulators alike.

Analysing Statement 2:
"These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks."

This statement is also correct. The MCLR framework was designed to strike a balance between two competing interests:

• For borrowers: Because MCLR is linked to the marginal (current) cost of funds rather than the historical average cost, it is more responsive to changes in the RBI's policy repo rate. When the RBI cuts rates, banks' marginal cost of funds falls quickly, and this reduction is expected to be transmitted to borrowers faster, making credit more affordable.

• For banks: At the same time, MCLR includes components such as operating costs and the negative carry on CRR, ensuring that banks are not forced to lend below their actual cost of operations. This protects the financial health and profitability of banks, making the rate "fair" from their perspective as well.

The RBI's own stated objectives for introducing MCLR explicitly included ensuring that lending rates are fair to both parties — neither exploitative for borrowers nor economically unviable for banks.

Conclusion:

Since Statement 1 is correct (MCLR improves transparency in interest rate determination) and Statement 2 is also correct (MCLR ensures fair credit rates for borrowers and banks alike), the answer is unambiguously Both 1 and 2.