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Answer

Correct Option is 2 only

Justification: Banks can choose from one of the four external benchmarks — repo rate, three-month treasury bill
yield, six-month treasury bill yield or any other benchmark interest rate published by Financial Benchmarks India
Private Ltd.
Current scenario:
At present, interest rates on loans are linked to a bank’s marginal cost of fund-based interest rate, known as
the Marginal Cost of Lending Rate (MCLR).
Existing loans and credit limits linked to the MCLR, base rate or Benchmark Prime Lending Rate, would continue
till repayment or renewal.
What is external benchmarking of loans?
When you borrow money from a bank, be it for purchasing a house, car or for business purposes, interest is levied
based on certain methodologies approved by the Reserve Bank of India (RBI). At present, banks use Marginal
Cost-based Lending Rate (MCLR) to arrive at their lending rate. Prior to this, it was the Base Rate method and the
Benchmark Prime Lending Rate (BPLR). These were all internal benchmarks. Banks have been allowed to use RBI’s
policy rate among other market-driven options to calculate lending rates.
Why the need for a new method?
For faster transmission. Since February, RBI cut its policy rate by 110 basis points (100 bps=1 percentage point),
including the higher-than-expected reduction of 35 bps in its August policy review. However, banks have not been
so generous. Until August, they had only passed on 29 bps in rate cuts to borrowers, which the RBI thought was
unfair. Hence, the regulator has now made it compulsory for banks to link their new floating rate home, auto and
MSME loans to an external benchmark from October 1 so that the borrowers can enjoy a lower interest rate.  

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