Non-Performing Assets (NPA)...Non-Performing Assets (NPA) If you owe your banks a hundred pounds,...

Non-Performing Assets (NPA)

‘If you owe your banks a hundred pounds, you have a problem. But if you owe your bank a

million pounds, the bank has.’

John Maynard Keynes

‘If you owe a your bank a billion pounds everybody has a problem.”

The Economist

Second Narasimhan Committee recommended that the definition be tightened in line with

the international best practices. In March 2004, a bad loan was classified as a loan on which

the interest or the principal remained unpaid for more than ninety days instead of the 180

days norm, followed up until then.

Shares of Components of Household Financial Savings.THE NPA STORY

(In %) 1970s 1980s 1990-91 1991-92 to 1996-

97

1997-98 to 2002-

03

2003-04 to 2006-

07

Currency 13.9 11.9 10.6 10.9 8.6 9.3

Bank deposits 45.6 40.3 31.9 33.1 38.5 44

Non-Banking

deposits

3 4.6 2.2 9.4 2.9 0.7

Life Insurance

Fund

9 7.5 9.5 9.5 13.1 14.6

Provident and

Pension Fund

19.6 17.5 18.9 17.6 19 11.4

Claims on

Government

4.2 11.1 13.4 7.1 14.9 16.9

Shares and

Debentures

1.5 3.9 8.4 8.3 3.7 3.9

Units of UTI 0.5 2.2 5.8 5 0.1 -0.8

Trade Debt

(Net)

2.7 0.9 -0.8 -0.8 -0.7 0

Shares of Components of Household Financial Savings.

Following issues made things difficult for overleveraged companies and, in the process,

for banks:

• Assumptions of double-digit growth in revenues no longer remaining valid for projects;

• Interest rates on loans going up, thanks to efforts to control the burgeoning inflation in

the economy;

• Delays in getting environmental and other clearances, as well as the land needed for the

project, added to the budgeted cost;

• The fall in the value of the rupee against the dollar, sent the borrowing costs in many

cases soaring.

• Gross NPA:

1. Substandard Assets: If a loan account remains NPA for a period less than or equal to 12 months,

2. Doubtful Assets: An asset is doubtful if it has remained in the sub-standard category for 12

months

3. Lost Asset: A loan account is declared as a lost asset when the bank’s internal or external

auditors declare it so or RBI inspection declares it as one.

• Net NPA = Gross NPA-Provisioning

• Gross NPA expressed as a percentage of total loans or an advance given by a bank is

referred to as the gross NPA ratio, or, simply put, the bad loans rate

• NPA Ratio = Net NPA/Loans given

• Tier-1 capital = Core Capital (Shareholder’s equity + Retained Earnings + Disclosed

Reserves)

• Tier-2 capital = Subordinate capital (debt capital instruments, revalued reserves, long

term unsecured loans etc)

• Provision Coverage Ration (PCR) = Equity-Net NPA/(Total Assets-Intangible Assets)

• PCR refers to the prescribed %age of funds to be set aside by the banks for covering

the prospective loses due to bad loans. Earlier RBI mandated PCR to be 70% of Gross

NPA but today no such prescription.

• Slippage Ratio = The rate at which good loans are turning bad.

• Slippage Ratio = Fresh Accretion of NPAs during the year/Total Standard assets at the

beginning of the yearX100

• Restructuring of a loan means changing its terms and conditions to mitigate the

difficulties encountered by the borrow due to genuine reasons. Changes may

include:

➢ Extended repayment period

➢ Reduced interest rate

➢ Converting a part of loan into equity. Etc.

Based on type

a. In case of term loan-if the payment/repayment remains overdue for a period of

greater than 90 days from the end of the quarter

b. In case of agriculture loan-if the payment/repayment has remained overdue for

period greater than two or one crop seasons from the due date, in case of short term

and long term loans respectively

Based on duration

a. Sub-standard- If an account remains as NPA for a period lesser than or equal to 12

months

b. Doubtful- If an account remains as NPA for a period greater than 12 months

c. Loss making- Once the account has remained as an NPA for a period of 3 years or

greater will be classified as loss making. Otherwise an account will be classified as

loss making if the realizable value of the asset comes below 10% of the total

outstanding debt.

Causes:

1. Lower global demand

2. Slowdown in domestic economy

3. Increasing number of willful defaults

4. Inefficient functioning of DRTs.

5. Governance issues

Impact

1. Lower liquidity and profitability

2. Lower quantity of loans are offered and at a very high cost

3. Erosion of investor confidence

4. Higher cost of credit will impact the retail and industrial borrowers

5. Various investment decisions of industries will be put on hold

6. Will be limiting the growth.

NPS: An Analysis

Stressed Assets: NPA + Restructured Loans + Written Off Assets

Over the last decade, Indian banks have seen a major growth in their NPAs. As of 31

March 2019, the overall bad loans of banks amounted to rs. 9, 36, 474 crore.

• All this money, if it had been utilized well…..

• But it ended up being wasted. In the process, good money of bank loans became the

bad money of the Indian financial system.

And because of this good money turning into bad money, everybody had a problem.

• Banks have jacked up interest rates

• This has made the monetary policy of RBI ineffective.

• While the economists do a fantastic job of explaining a crisis once it has happened, they

rarely see it coming. Why did no one see it coming?

• Because their models rarely take banks and financial institutions, and the part they play in

the general economy, into account.

• But HYMAN MINSKY did that.

• The basic premise is that when times are good and people have seen a period of healthy

economic growth, they want to take on more risk.

• Minsky talks about the 3 stages of finance: Hedge, Speculative and Ponzi.

• A simple interpretation of Minsky’s hypothesis would be that stability leads to instability.

• CIBIL

• Debt Recovery Tribunal (DRT) 1993 amended in 2016: Under this expeditious

disposal of suits was provided (around 6 months). So far 33 DRTs and 5 DRATs have

been set up.

• Set up under Recovery of Debts due to Banks and Financial Institutions (RDDBFI) Act,

1993.

• SARFAESI: A landmark law called SARFAESI was passed in 2002 to overcome some of

the deficiencies of DRTs which for the first time empowered the banking sector to

recover their bad debts by selling the hypotheticated securities and assets of the

defaulters without prior permission of courts.

• This act enabled the banking sector to bring down their NPAs. This act was amended

in 2004 and 2012 to ensure immediate recovery of finances and money due to the

financial institutions from borrowers.

• It empowers banks to cease immovable properties of defaulters.

• NBFCs are also covered under SARFAESI but not the RRBs.

• ARF/ARCs: The Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest (SARFAESI) Act, 2002; provides the legal basis for

the setting up ARCs in India.

• To expedite the process of recovery of NPAs, asset recovery companies have been

set up to reconstruct bad and doubtful loans of banks by taking over some of these

generally at discount

• As per amendment made on the SARFAESI Act in 2016, an ARC should have a

minimum fund of Rs 2 crore.

• The RBI planned to raise this amount to Rs 100 crore by end March 2019. Similarly,

the ARCs have to maintain a capital adequacy ratio of 15% (earlier it was 5%). And

promoters can hold 100% (previously it was 49%).

• NPAs shall be acquired at a ‘fair price’ by the ARCs.

• Latest regulations instruct that ARCs should give 15% of the value of assets in cash.

• At present, there are 29 ARCs in India.

• But collectively, their capital base is also insufficient to tackle the country’s nearly Rs

9 lakh crores NPAs.

Problems:

• Low capital base of ARCs,

• Low funds with the ARCS,

• Valuation mismatch of bad assets between banks and ARCs etc.

REFORMS:

• Government raised FDI in the sector to 100% through automatic route.

• In 2014, RBI allowed ARC’s to convert their debt to equity (ceiling of 26%)

ISSUES

BANKS’ NPAARC

SELL THEM IMMEDIATELY WITH MARGINAL PROFIT

RECONSTRUCT & HOLD AND THEN SELL

CANNOT GO FOR 2ND OPTION DUE TO THE LACK OF CAPITAL BASE

RESULT?

BAD BANK

• This entity will take over the bad loans thus cleaning the existing banks’ balance

sheet to enable them to lend further. Also, this “Bad Bank” would focus only on

recovering/ reviving these stressed assets and the problem could be more

professionally managed.

• Also, as opposed to ARC that go for liquidation of the stressed assets, bad banks can

hold such assets till the time the downturn is over and the business revives.

• The exact modalities of the “Bad Bank” are to be formulated coz there is no fixed

model.

• ARCs are Financial Institutions not owned by the Government but PARA popularly

known as BAD Bank is owned by the Government.

• A bad bank is essentially a government-driven asset reconstruction company where

banks can park their stressed assets.

• While this helps relieve individual banks from the pressure of stressed debt, the

system as a whole still needs to provide enough capital provision against the bad

loans.

PARA

The idea of a bad bank is not new

• In the aftermath of the global financial crisis, a number of countries set up bad bank-

like structures.

• The U.S. set up the Troubled Asset Relief Program (TARP), Ireland put in place the

National Asset Management Agency and Spain established an entity called ‘Sareb’ to

which troubled and illiquid assets were transferred. Dhanharta Bank of Malaysia. The

UK Asset Resolution (UKAR) of UK.

Bad bank: Should India have one?

• Banks have NPAs of Rs 9.7 lakh crore (as of December 2019) with estimates of fresh

slippages of Rs 5.5 lakh crore primarily because of the Covid-19 stress.

• There is added urgency because the government has put on hold fresh reference to

the NCLT under the IBC for one year due to Covid-19

• The CVC, some time ago, submitted a report to the government after examining

cases above Rs 50 crore that were sold to ARCs between 2013-14 and 2017-18 by

PSBs. The report mentions that, in at least 48 cases, assets were sold to ARCs below

the realisable value of security.

• If the economy has to come back on track, then lending has to resume in a big way.

As a rule of thumb, credit growth is roughly 2-2.5 times GDP growth.

• Arguments against establishing bad banks are: (1) When there are no takers for bad

assets, so why have a bad bank; (2) Why waste government resources when the

Covid-19 crisis has put tremendous strain on resources; (3) The price at which toxic

assets will be transferred will not be market-determined and price discovery will not

happen; (4) ARCs are already there for the purpose.

CRILC:

• In 2014 RBI set up a Central Repository of Information on Large Credits (CRILC) to

collect, store, and disseminate credit data to lenders.

• Banks will have to furnish credit information to CRILC on all their borrowers having

aggregate fund-based and non-fund-based exposure of Rs. 5 crore and above.

➢ Banks would have to furnish details of all current accounts of their customers

with outstanding balance (debit or credit) of Rs.1 crore and above.

➢ Before a loan account turns into an NPA, banks should identify incipient stress in

the account by creating a new sub-asset category, ‘Special Mention Accounts’

(SMA).

➢ Within the SMA category, there should be three sub-categories: SMA-NF non-

financial (NF) signals of incipient stress; SMA-1 principal or interest payment

overdue between 31-60 days; SMA-2 principal or interest payment overdue

between 61-90 days.

➢ Reporting of an account as SMA-2 by one or more lending banks/NBFC-SIs will

trigger the mandatory formation of a joint lenders’ forum (JLF) and formulation

of corrective action plan (CAP).

➢ The decisions agreed upon by a minimum of 75 per cent of creditors by value and

60 per cent of creditors by number in the JLF would be considered as the basis

for proceeding with the restructuring or recovery action of the account, and will

be binding on the lenders under the terms of the ICA (Inter-Creditor Agreement).

• The 5/25 Refinancing of Infrastructure Scheme: This scheme offered a larger

window for revival of stressed assets in the infrastructure sectors and eight core

industry.

• Under this scheme lenders were allowed to extend amortisation periods to 25 years

with interest rates adjusted every 5 years.

• Strategic Debt Restructuring (SDR): The RBI came up with the SDR scheme in June

2015 to provide an opportunity to banks to convert debt of companies (whose

stressed assets were restructured but which could not finally fulfil the conditions

attached to such restructuring) to 51 percent equity and sell them to the highest

bidders, subject to authorization by existing shareholders.

• An 18-month period was envisaged for these transactions, during which the loans

could be classified as performing.

• Asset Quality Review (AQR): Resolution of the problem of bad assets requires sound

recognition of such assets. Therefore, the RBI emphasized AQR, to verify that banks

were assessing loans in line with RBI loan classification rules. Any deviations from

such rules were to be rectified by March 2016.

• Scheme of Sustainable Structuring of Stressed Assets (S4A): Under this

arrangement, introduced in June 2016, an independent agency hired by the banks

will decide on how much of the stressed debt of a company is ‘sustainable’. The rest

(‘unsustainable’) will be converted into equity and preference shares.

• Unlike the SDR arrangement, this involves no change in the ownership of the

company.

➢ Unlike in 5:25, where banks could not take a haircut after structuring, S4A

permits banks to do so by converting the unviable portion of debt to equity.

➢ Unlike in SDR, after conversion to equity, banks do not have a find a new buyer in

any defined period of time.

➢ S4A incentivises existing promoters to opt for this scheme as they can continue

to hold majority stake.

• However, the S4A scheme cannot be applied to all cases of stressed exposure. The

limitations of the scheme are as follows:

➢ It can be applied to only operational projects and not to projects under

construction.

➢ It does not allow for any rescheduling of original tenure of repayment or

repricing of debt.

• Recommendation of Economic Survey 2015-16 has recommended 4R strategy

a. Recognition-the banks must find the true worth of the asset

b. Recapitalization-the banks must be provided funds either by the government or

by RBI

c. Resolution-the NPAs must either be revived or sold off

d. Reforms-the future incentives to the corporate must depend on their

performance/creditworthiness

WILFUL V. GENUINE Defaulters?

a. As per RBI guidelines issued in 2014, a borrower will be deemed as willful defaulter if

the borrower has not made the payment/repayment

b. Even when the borrower has the capacity/financial reserves to repay

c. The loan has been utilized for some other purposes

d. The funds have been siphoned off

e. If the borrower has disposed-off or removed the movable / immovable asset which

was given as acollateral/security

Who are Wilful Defaulters?

Once designated as a willful defaulter

a. Access to funds will be cutoff

b. Will not be allowed to enter equity market

c. Will not be allowed to float a new company for 5 years

ISSUES WITH NPA

1. DETERMINATION OF FAIR PRICE

2. ISSUE OF HAIR CUT

3. POLICY PARALYSIS

4. 4 Cs

5. PERCEPTION MATTERS

6. LACK OF POLITICAL WILL

7. POPULIST MEASURES

1. MUDRA LOANS

2. KISAN CREDIT CARDS

3. CONTINGENCY LIABILITY UNDER THE CREDIT GUARANTEE SCHEME FOR MSME SECTOR RUN BY SIDBI

TWIN BALANCE SHEET PROBLEM (TBS)

• TBS: PSBs + Real Estate Sector (2008 onwards)

• 4BS: TBS + Housing Sector + NBFCs (2015 onwards)

• In this scenario to understand India’s TBS problem four set of Questions need to be

answered.

➢ What went wrong – and when did it go wrong?

➢ How has India managed to achieve rapid growth, despite its TBS problem?

➢ Is this model sustainable?

➢ What now needs to be done?

What went wrong – and when did it go wrong?

• Boom then Burst then Global Financial Crisis-2011-12

How has India managed to achieve rapid growth, despite its TBS problem? (Twin

Balance Sheet Syndrome with Indian Characteristics)

• The unusual structure of its banking system (government backed public sector

banks), which ensured there would be no financial crisis.

• Extend and pretend

• Ever-greening of loans

• Regulatory forbearance

Is this Strategy sustainable?

❖ For some years the financing strategy has worked, in the sense that it has

allowed India to grow rapidly, despite a significant twin balance sheet

problem.

❖ But this strategy may now be reaching its limits.

What needs to be done?

• Even a single day's default in debt servicing would require reporting to the RBI and

implementation of Resolution Plan.

• All previous schemes were discontinued and IBC was declared as the main tool.

• The new rule mandates lenders to initiate insolvency resolution under the

Bankruptcy Code if a borrower fails to pay even at the end of the 180 days of first

default.

February 12, 2018 Circular

• Lenders were asked to finalise a resolution plan in case of a default on large accounts

of Rs 2,000 crore and above within 180 days, failing which insolvency proceedings

would be invoked against the defaulter.

• Banks, too, would face penalties in case of failure to comply with the guidelines.

• RBI asked lenders to weekly report credit information, including classification of an

account as special mention account (SMA) to the Central Repository of Information

on Large Credits (CRILC) on all borrowers having an aggregate exposure of Rs 5 crore

and above.

• After the Supreme Court Judgement of April 2019, which nullified the February 12

circular, The RBI on 7th June 2019 issued the much anticipated, revised circular on

dealing with defaulters.

• Now the RBI puts the onus on lenders to act quickly to preserve the value of assets

instead of waiting for directions.

SUPREME COURT JUDGEMENT

• So One-day default norm stays and an additional 30-day window has been given to

review the asset.

• The 180 days will start from the end of the review period.

• The new rules are applicable for loans above Rs. 2000 crore immediately while for

those between Rs. 1500 crore and 2000 crore, it will take effect on January 1, 2020.

• Only customers availing cash credit and overdraft have got relaxation.

Insolvency and Bankruptcy law

● Establishing Insolvency and Bankruptcy Board

● IR process to be handled by a professional (IP)

● The IR process to be over in a stipulated time period

● Separate process for Individuals and companies

● Two tribunals

○ DRT - Individuals and Partnerships

○ NCLT - Companies and LLP

Bankruptcy/Insolvency Bill

Lender/Borrower will approach DRT/NCLT

Authority appoints an Insolvency Professional (IP)

IP form CoC (Committee of Creditors)

CoC will deliberate

Decision is arrived (if no decision then IP recommends liquidation of the asset)

The liquidation process is started

Prompt Corrective Action

(It is about Capital, NPA & Profitability)

Stressed asset value Step to be taken

Up to ₹ 50 Cr Bank Led Resolution within 90 days

From ₹ 50 Cr to ₹ 500 Cr BLRA (Bank Led Resolution Approach) within 180 days

Above ₹ 500 Cr AMC or AIF route

Bigger loans will be referred to NCLT

Asset Trading Platform

Project Sashakt - Five Pronged Approach

• In April 2017, SBI Associate banks were merged with SBI.

• Indian Bank and Allahabad Bank = Allahabad Bank

• Canara Bank and Syndicate Bank = Canara Bank

• PNB + OBC + United Bank of India = PNB

• Union Bank of India + Andhra Bank + Corporation Bank = Union Bank of India

• In 2017 there were 27 Public Sector Banks but after August 30th 2019 announcement

now there are 12 PSBs.

MERGER OF BANKS

Idea of Big Bank/Bank Merger

● Pros

○ Economies of scale

○ Cost of operations will come down

○ Reach will increase

○ Resources can be pooled

● Cons

○ Need to have multiple big banks

○ Employees are worried about their interests (promotions, transfers etc)

○ The benefit packages, work culture etc vary so harmonization will be a big

challenge

• In the short-term, the mergers will contribute nothing towards engineering a

turnaround of the economy.

• The administrative and logistic challenges of mergers will divert the mind space of

bank managements away from their most pressing task at the moment — of

managing the NPAs and aggressively looking for lending opportunities.

• They can become too big to fail.

• While organic mergers of banks motivated purely by business considerations lead to

efficiency gains.

• PSBs can learn from private money lenders: Information, Incentive and Transaction

cost.

• Differentiated Licences

• Small banks tend to be better at catering to local needs, including needs of small and

medium businesses.

• As payment banks hold government securities for liquidity purposes, RBI can reduce

the quantity of government securities RB asks commercial banks to hold as part of

SLR.

Public Sector Banking Reforms

• If Banks lend today, they immediately become subject to CRR and SLR

requirements, and any lending they do attracts further priority sector obligations.

• The priority sector obligation: We can allow banks to fulfill existing norms more

efficiently? For instance, if one bank is more efficient at rural lending, can it over-

achieve its obligations and then ‘sell’ its excess to another bank that is an

underachiever?

Banks sometimes open branches in remote areas but the officers that staff them do not

really reach out to the local population.

Banks open no-frills accounts but many lie dormant.

The reality is that if the mandate is unprofitable, banks will find ways to avoid them.

In sun, we can increase competition in the banking sector while, at the same time,

strengthening banks by reducing the burden of obligations on them.

Certain suggestions:

1. Clean up their balance sheet

2. Improve their governance and management

3. Fill out the ranks of middle management.

4. More in-house expertise should be brought in to project evaluation.

5. Government should come out of competitor’s domain and even the task of

regulation should be performed by independent regulators and government

controlled.

6. RBI should introduce Differentiated Licences with restrictions on the geographical

reach or the products offered by a bank.

7. Real risks have to have to be mitigated where possible, and shared where not.

8. Financiers should put in a robust system of project monitoring and appraisal,

including, where possible, careful real-time monitoring of costs.

9. The incentive structure for bankers should be worked out so that they evaluate,

design, and monitor projects carefully.

10. Banks should explore new means of credit evaluation such as profiling of social

networking sites etc.

11. Using the IT, banks should make use of big data available today to determine a loan

applicant’s creditworthiness and also should track their behaviour for early warning

signs of stress.

12. The authorities should ensure their actions are institution, ownership, and

technology neutral so as to ensure that the most efficient customer-oriented

solutions emerge through competition.

13. Authorities should reduce differences in regulatory treatment between public

sector banks and private sector banks and more generally between banks and other

financial institutions.

• Assets- suffering from NPAs, High SLR and PSL (Priority sector lending)

• Liabilities- suffering from negative rate of return on deposits.

• As a result equity if going down.

• Four key policy recommendations which we call the four Ds: deregulate (in relation

to financial repression), differentiate (within the PSBs), diversify (within and outside

banking), and disinter (to create more efficient exit).

Double Financial Repression

• The structural problems relate to competition and ownership.

• First, there appears to be a lack of competition, reflected in the private sector banks’

inability to increase their presence.

• It was an anomalous case of private sector growth without private sector bank

financing.

• It is a company which may accept deposits but not the way a bank does and which

may provide loans under certain arrangements and for specific purposes but not the

way a bank does. This is how a NBFC is defined by RBI. Chit funds, Nidhis, Finance

Companies, Investment Companies all are the hybrid varieties of NBFC.

Non-Banking Financial Company (NBFC)

• NBFCs are now functioning in a regulated environment in terms of their practices

and have a very important role in any country to broaden the financial sector and to

broaden the financial instrument.

• As such the Narshimhan committee had recommended their integration/inclusion in

financing industry.

• The RBI imposes various conditions on them like keeping a CAR, necessarily investing

a certain percentage of deposits in government securities by way of SLR, obtaining

credit rating from credit rating agency, imposing a ceiling on interest rates that they

can offer on their deposits (currently 12.5%), imposing ceiling on deposits they can

accept, mandating that they must have a certain amount of their own capital etc.

Now it is mandatory for an NBFC to register itself with RBI.

• Originally, NBFCs registered with RBI were classified as:

i. equipment leasing company;

ii. hire-purchase company;

iii. loan company;

iv. investment company.

• From December 6, 2006 NBFCs have been reclassified as

i. Asset Finance Company (AFC)

ii. Investment Company (IC)

iii. Loan Company (LC)

New Approached towards Banking Reforms

• PSBs, opened 16.5 crore Jan Dhan accounts within six months, without seeking

additional man-power. In contrast, PRBs only opened 68 lakh Jan Dhan accounts.

Urjit Patel Recommendations

● CPI to be taken as measure of inflation

● Inflation target - 2% to 6%

● Monetary Policy Committee (1+4)

● Bi-monthly monetary policy

Nachiket Mor Committee

1. Universal Electronic Bank Account (UEBA)

2. Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges

3. Sufficient Access to Affordable Formal Credit

4. Universal Access to a Range of Deposit and Investment Products at Reasonable Charges

5. Universal Access to a Range of Insurance and Risk Management Products at Reasonable Charges

6. Right to Suitability

P J Nayak Committee ◦ Repeal the Bank Nationalisation Act (1970, 1980), the SBI Act

◦ Bank Investment Company (BIC)

◦ Bank Board Bureau (BBB)

◦ Board Appointments

1. 1969-Lead bank scheme (based on area approach)- Under which every public

sector bank is allotted certain districts and given the responsibility to take the lead in

bringing about all round development of those districts by identifying their credit

problems, credit gaps, preparing credit plans, interacting with local agencies &

submitting credit finance for integrating them in to over all development of a bank.

Major Banking Schemes of Social Inclusion

2. Differential Interest Rate Scheme 1972- every public sector bank has to lend at least

1% of its total advances at the end of financial year to poorest of poor at a mere 4%

interest rate. Family eligible under the scheme should have an income not exceeding

Rs. 6400/- in rural areas and Rs. 7200/- in other areas.

3. Service Area Approach 1986-87- Under which every public sector bank has to adopt

a cluster of certain villages to bring about their all round development as a sub-

scheme of lead bank scheme.

Money Laundering and

the Issue of Black Money

Why Laundering or Tax evasion even after 1991

Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015

• Those voluntarily declaring unaccounted income or assets would have to pay a flat

30 per cent tax.

• It also provided for a penalty equivalent to three times the value of tax, taking the

total tax exposure to as high as 120 per cent., while wilful tax evaders would be liable

for 10-years rigorous imprisonment.

• However, for this act to encourage voluntary disclosure of secret offshore assets;

owners must come to believe that:

1. The govt. will discover their offshore assets anyway.

2. The owners must have trust on the govt. that their disclosure would not be used

by the govt. to further harass them.

3. VDIS or IDS will not be offered as a matter of routine.

• Benami Transactions (Prohibition) Amendment Act, which came into force on

November 1, 2016, replaced Benami Transactions (Prohibition) Act 1988.

• It is to tackle the domestic black money, enforcement agencies empowered to attach

assets held abroad illegally, undisclosed income to be taxed at maximum marginal

rate, deductions and exemptions for such income would not be allowed and 10 years

rigorous imprisonment for concealing foreign assets.

FATCA (Foreign Account Tax Compliance Act)

• But it is not known about the obligations of the US to provide information to India,

and whether failure to comply with the standards being imposed on Indian entities

could lead to similar penalties on US financial institutions.

Conclusion:

• With regards to black money; numerous countries have found that getting back illicit

funds and collection of unpaid taxes is a time consuming and expensive task and that

is why World Bank’s Stolen Asset Recovery Programme of 2007 failed; that is why it is

far better to adopt policy measures to tighten the generation and transfer of black

money then to be quixotic about its return and for that we need to carry out

appropriate financial and capital market reforms along with taxation reforms.

• The Bill aims to stop economic offenders who leave the country to avoid due

process.

• Offences involving amounts of ₹100 crore or more fall under the purview of this law

and he has left the country and refuses to return to face prosecution.

The Fugitive Economic Offenders Bill, 2017

• Financial inclusion does not just mean credit for productive purposes, it means credit

for health care emergencies or to pay lumpy school or college fees. It means a safe

means of remunerated savings, and an easy way to make payments and remittances.

It means insurance and pensions. It means financial literacy and consumer

protection.

• For this Sambamurthy Committee has been constituted to recommend on how to

expand mobile banking in India through encrypted SMS based funds transfer in any

type of handset.

FINANCIAL INCLUSION

• The need for the banks is to move beyond simply opening bank accounts to ensuring

that poor customers are confident and comfortable enough to use them.

• Innovation in reaching out to the undeserved customer, rather than simply posting

higher numbers in branches or bank accounts opened, has to be part of banks’

efforts.

• These banks can accept deposits (with a cap of Rs 1 lakh per account), offer savings

and current accounts, pay bills, issue cheques and debit cards, and offer internet

banking.

• The one thing that payments banks cannot do, it is lending to people.

• Payments banks can help unbanked Indians to conduct high volume-low value

transactions quickly.

Payment Banks (2015)

• Payments banks can only invest in G-Secs, this amount will be freed up for credit

needs of infrastructure sector.

• Four of the 11 entities that got a licence are related to telecom service providers.

With 975 million mobile customers, telcos have customers deep in rural India who

can access these services.

• As these banks will be run digitally, they can build a credit profile of customers. With

transaction history captured, banks can unlock retail business potential.

Payment banks have following 4 basic opportunities

• There are four basic opportunities—

➢ fees for acting as business correspondents,

➢ fees from domestic remittances,

➢ transaction fees on the usage of debit cards, and

➢ the spread on savings deposits.

Conclusion:

• The payments bank model has been envisaged based on the success of M-Pesa in

sub-Saharan Africa. A study by Bill and Melinda Gates Foundation identified four

reasons why M-Pesa was able to reach a level of penetration that banks did not in

Kenya: Transaction fee, Trust, Security, Bank Penetration.

◦ Set up post 1975

◦ The central govt, state govt and the sponsoring nationalised bank own stake in RRBs

◦ Consolidation

◦ First round of consolidation was done in 2005, when the numbers were reduced from 196 (2005)

to 133 (2006)

◦ By march 2012 it was further reduced to 82 and further consolidation reduced it to 56

◦ In 2015, govt passed an amendment bill which allows these banks to raise capital from other

sources

Regional Rural Banks

• The Reserve Bank of India has brought RRB’s under the ambit of priority sector

lending on par with the commercial banks. They have to ensure that forty percent of

their advances are accounted for the priority sector. Within the 40% priority target,

25% should go to weaker section or 10% of their total advances to go to weaker

section.

• RRBs function under Lead Bank Scheme which was first recommended by Gadgil

Committee in 1969. Under this scheme RRBs are attached to a commercial Bank

preferably a natonalised bank which is responsible for the overall development of

that RRB.

• RRBs report to Lead Bank, Lead Bank to NABARD and NABARD to RBI.

• RRBs finances come through 3 sources: 50% from central government, 35% from

Lead commercial bank and 15% from state government.

• The authorised capital of each bank is Rs. 1 crore and the issued capital is Rs. 25

lakhs; which is held by them in the proportion of 50, 15 and 35 per cent respectively.

• In December 2014 parliament passed an amendment on RRBs which permits the

central government to bring down its stake from 50% to 16% and to state

governments to sell all its 15% stake.

• Under this amendment now central and state governments and Lead commercial

bank together can bring down their stake in RRBs to 51%.

Cooperative Banking ➢In 1966 those banks with a paid up share capital and reserves of over ₹ 1 lakh were brought under the

purview of Banking Regulation Act 1949

➢Cooperative banking structure

▪ Short term

oState Co-operative bank - at the state level

oCentral cooperative bank at the district level

oPrimary cooperative credit societies at the village level

➢Long term

➢State cooperative agriculture and Rural Development Banks (SCARDBs) at the apex level

➢Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) at the district level or blocklevel

➢While the state registrar of co-operatives is responsible for monitoring and administration of these banks,the banking functions are regulated by RBI

• It was first conceived in the budget proposal for 2014-15 and in March 2015 RBI

notified the guidelines for the constitution of Small Financial Banks.

• The objectives of setting up of small finance banks will be to further financial

inclusion.

• Resident individuals/professionals with 10 years of experience in banking and

finance; and companies and societies owned and controlled by residents will be

eligible to set up small finance banks.

Small Financial Institutions

• There will not be any restriction in the area of operations of small finance banks.

• The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.

• The small finance banks will be required to extend 75 per cent of its Credit (ANBC) to

the sectors eligible for classification as priority sector lending (PSL) by the Reserve

Bank.

• At least 50 per cent of its loan portfolio should constitute loans and advances of up

to Rs. 25 lakh.

• The promoter's minimum initial contribution to the paid-up equity capital of such

small finance bank shall at least be 40 per cent and gradually brought down to 26 per

cent within 12 years from the date of commencement of business of the bank.

• They will be subject to all prudential norms.

Development Finance Institutions (DFIs)

• On 1 July 1948, IFCI (Industrial Finance Corporation of India) was set up to provide long-term

finance to industry. It was the 1st DFI of India.

• In March 1949, the Madras Industrial Investment Corporation Limited (MIIL) was established

by the Government of Madras. It was the 2nd DFI in India.

• The 3rd DFI as a private institution was established on the recommendation of Eugene R

Black in January 1955 which would finance private-sector investment. Its name was ICICI

(Industrial Credit and Investment Corporation of India).

• 4th DFI was established on the recommendation of TT Krishnamachari on 1 July 1964 as a

100% subsidiary of RBI. Its name was Industrial Development Bank of India (IDBI).

• But the problem was that while the government was busy setting up all these DFIs, it

was also introducing laws, rules and regulations that made it difficult for businessmen to

carry out their businesses.

• It was highlighted by AD Shroff Committee in 1954 but was ignored by the policy

makers.

Conclusion

• In December 1997, the 2nd Narashimhan Committee popularly known as the

Committee on Banking Sector Reforms talked about the idea of ‘Universal Banking’.

• It said, In India also banks and DFIs are moving closer to each other in the scope of

their activities.

• There would then be only 2 forms of intermediaries, viz. banking companies and

non-banking financial companies. If a DFI does not acquire a banking licence within a

stipulated time it would be categorized as a non-banking financial company.

• Post 1991, as India opend up its economy, special treatment of DFIs was done away

with.

• Banks started to get into the business of project finance, or long-term industrial

lending, as well.

• DFIs went out of fashion post-2000. in October 2001, the boards of ICICI and ICICI

Bank approved the merger of ICICI and 2 of its wholly owned retail finance

subsidiaries.

• This left a gap in the financial system, which Public Sector Banks had to fill.

• There are 9 models of Micro-Finance institutions in India largely based on

Malaysian experiences:

1. SHG’s promoted and financed by banks

2. SHG’s promoted by NGOs/Government organisations and financed by banks

3. SHG’s promoted by and financed by NGOs through bank loans

4. The federated SHG approach

Micro-Finance Institutions

5. SHG’s promoted by NGOs/Societies/other organisations, financed by MFIs.

6. SHGs promoted and financed by MFIs

7. Individuals directly financed by MFIs

8. The Urban Corporation Banking Model

9. The Multi State Cooperative Solidarity group model.

• Micro Units Development and Refinance Agency Bank (MUDRA Bank), for

development of micro units and refinance of MFIs.

What is MUDRA Bank?

• Under it three initiative products: SHISHU, KISHOR & TARUN to signify the stage of

growth and funding needs of the micro units or entrepreneur.

• Mudra Shishu Yojana- loan upto 50,000/-

• Mudra Kishor Yojana- loan upto 5,00, 000/-

• Mudra Tarun Yojana- loan between 5,00,001 to 10,00,000/-

• Any Indian Citizen who are involve in income generating activity such as

manufacturing, processing, trading or service sector and whose credit need is less

than 10 lakh can approach.

• CCB is a relatively new concept, introduced under the international Basel III norms.

• The concept says that during good times, banks must build up a capital buffer that

can be drawn from when there is stress.

• In India, the minimum capital requirement is 9 per cent.

• The CCB would be 2.5 percentage points over and above the minimum capital

requirement

Capital Conservation Buffer

• The CCB is being implemented in a phased manner of 0.625 per cent per year from

January 1, 2016.

• The final phase is now delayed by a year, till March 31, 2020.

• MFIs do not have access to low cost deposits.

• Payment banks would run digitally

• Local area banks could not expand out of their designated area.

• There is an upper cap on how much can be deposited in any payment bank’s account.

• Small financial banks have to provide 50% of their advances as small loans of not exceeding Rs. 25

Lakhs.

• Payment banks cannot lend

• Regional rural banks are dependent on lead commercial banks.

WHY SO MANY BANKING INSTITUTIONS

Operation Twist

◦ Govt borrowing will influence the bond supply in the market

◦ The yield rates are inversely proportional to the market price

◦ The yield rates on 10 year G-Sec influence the lending rates

◦ RBI simultaneously sells short term and buys long term g-sec

• To enable better transmission of its monetary policy, the Reserve Bank of India (RBI)

introduced Long Term Repo Operation (LTRO).

• Key things:

1. What is LTRO?

❖ Under LTRO, RBI will conduct term repos of one-year and three-year tenors of

appropriate sizes for up to a total amount of Rs 1 lakh crore at repo rate.

Long Term Repo Operations

2. Why did RBI introduce LTRO?

❖ RBI introduced LTRO with a view to assuring banks about the availability of

durable liquidity.

3. When will LTRO start?

❖ RBI started conducting LTRO from the fortnight beginning on February 15,

2020 at the policy rate.

• In September 2014, the European Central Bank (ECB) has implemented other long-

term liquidity injections to support the economy through cheap auctions with a

maturity of four years, the so-called targeted long term refinancing operation

(TLTRO).

Targeted Long Term Repo Operations

• This operation differs from the LTRO because operations are “targeted”: the banks

will receive capital with well-defined constraints and that capital must actually get in

the hands of privates or companies, otherwise it will not be disbursed. Banks that do

not meet all the conditions will be forced to repay the loans at a penalty rate.

• This kind of financial transaction resembles the famous Quantitative Easing or QE

implemented in the United States.

• The novelty of the upcoming auctions will be, the interest rate (up to -0.40%). The

rates will also be negative for those banks that lend more cash to privates and

companies.

PREVIOUS YEARS’ QUESTIONS-IAS MAINS EXAMINATION

1. Pradhan Mantri Jan-Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional

finance fold. Do you agree with this for financial inclusion of the poorer section of the Indian society?

Give arguments to justify your option. (2016)

2. “In the villages itself no form of credit organization will be suitable except the cooperative society”. All

India Rural Credit Survey.

Discuss this statement in the background of agricultural finance in India. What constraints and

challenges do financial institutions supplying agricultural finance face? How can technology be used to

better reach and serve rural clients? (2014/200/12.5)

2020

Q1. What is the importance of the term “Interest Coverage Ratio” of a firm in India?

1. It helps in understanding the present risk of a firm that a bank is going to give loan to.

2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.

3. The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service

its debt.

Select the correct answer using the code given below:

(a) 1 and 2 only (b) 2 only

(c) 1 and 3 only (d) 1, 2 and 3

Q2. With reference to the Indian economy, consider the following statements.

1. “Commercial Paper’ is a short-term unsecured promissory note.

2. ‘Certificate of Deposit’ is a long term instrument issued by the Reserve Bank of India

to a corporation.

3. ‘Call Money’ is short-term finance used for interbank transactions.

4. ‘Zero-Coupon Bonds’ are the interest-bearing short-term bonds issued by the

Scheduled Commercial Banks to corporations.

Which of the statements given above is/are correct?


(c) 1 and 3 only (d) 2, 3 and 4 only

Q3. If the RBI decides to adopt an expansionist monetary policy, which of the

following would it not do?

1. Cut and optimize the Statutory Liquidity Ratio

2. Increase the Marginal Standing Facility Rate

3. Cut the Bank Rate and Repo Rate



(c) 1 and 3 only (d) 1, 2 and 3

Q4. Consider the following statements:

1. In terms of short-term credit delivery to the agriculture sector, District Central

Cooperative Banks (DCCBs) delivers more credit in comparison to Scheduled

Commercial Banks and Regional Rural Banks.

2. One of the most important functions of DCCBs is to provide funds to the Primary

Agricultural Credit Societies.


(a) 1 only (b) 2 only

(c) Both 1 and 2 (d) Neither 1 nor 2

Q5. In the context of the Indian economy non-financial debt includes which of the

following?

1. Housing loans owed by households

2. Amounts outstanding on credit cards

3. Treasury bills


(a) 1 only (b) 1 and 2 only

(c) 3 only (d) 1, 2 and 3

Q6. If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your

bank, the immediate effect on aggregate money supply in the economy will be

(a) To reduce it by Rs. 1,00,000

(b) To increase it by Rs. 1,00,000

(c) To increase it by more than Rs. 1,00,000

(d) To leave it unchanged

Q7. Which of the following phrases defines the nature of the ‘Hundi’ generally

referred to in the sources of the post-Harsha period?

(a) An advisory issued by the king to his subordinates

(b) A diary to be maintained for daily accounts

(c) A bill of exchange

(d) An order from the feudal lord to his subordinates

2019

8. Which one of the following is not the most likely measure the Government / RBI

takes to stop the slide of Indian rupee?

a) Curbing imports of non-essential goods and promoting exports

b) Encouraging Indian borrowers to issue rupee denominated Masala Bonds

c) Easing conditions relating to external commercial borrowing

d) Following an expansionary monetary policy

9. Consider the following statements:

The Reserve Bank of India’s recent directives relating to ‘Storage of Payment System

Data’, popularly known as data diktat, command the payment system providers that

1. They shall ensure, that entire data relating to payment systems operated by them

are stored in a system only in India.

2. They shall ensure that the systems are owned and operated by public sector

enterprises.

3. They shall submit the consolidated system audit report to the Comptroller and

Auditor General of India by the end of the calendar year.


a) 1 only

b) 1 and 2 only

c) 3 only

d) 1, 2 and 3

10. The money multiplier in an economy increases with which one of the following?

a) Increase in the cash reserve ratio.

b) Increase in the banking habit or the population.

c) Increase in the statutory liquidity ratio.

d) Increase in the population of the country.

11. What was the purpose of Inter-Creditor Agreement signed by Indian banks and

Financial institutions recently?

a) To lessen the government of India’s perennial burden of fiscal deficit and current

account deficit.

b) To support the infrastructure projects of Central and State Government.

c) To act as independent regulator in case of applications for loans of Rs 50 crore

or more.

d) To aim at faster resolution of stressed assets of Rs 50 crore or more which are

under consortium lending.

12. The chairmen of public sector banks are selected by the

a) Banks Board Bureau

b) Reserve Bank of India

c) Union Ministry of Finance

d) Management of concerned bank

13. The Service Area Approach was implemented under the purview of

a) Integrated Rural Development Programme

b) Lead Bank Scheme

c) Mahatma Gandhi National Rural Employment Guarantee Scheme

d) National Skill Development Mission

14. Which of the following is not included in the assets of a commercial bank in India?

a) Advances

b) Deposits

c) Investments

d) Money at call and short notice

2018

15. Which one of the following statements correctly describes the meaning of legal

tender money?

a) The money which is tendered in courts of law to defray the fee of legal cases

b) The money which a creditor is under compulsion to accept in settlement of his

claims

c) The bank money in the form of cheques, drafts, bills of exchange, etc.

d) The metallic money in circulation in a country


1. The Reserve bank of India manages and services Government of India Securities

but not any State Government Securities.

2. Treasury bills are issued by the Government of India and there are no treasury

bills issued by the State Governments.

3. Treasury bills offer are issued at a discount from the par value


a) 1 and 2 only b) 3 only

c) 2 and 3 only d) 1, 2 and 3

17. With reference to the governance of public sector banking in India, consider the

following statements:

1. Capital infusion into public sector banks by the Government of India has steadily

increased in the last decade

2. To put the public-sector banks in order, the merger of associate banks with the

parent State Bank of India has been affected


a) 1 only b) 2 only

c) Both 1 and 2 d) neither 1 nor 2

18. Which of the following best describes the term “Merchant Discount rate” sometimes

seen in news?

a) The incentive given by a bank to a merchant for accepting payments through debit

cards pertaining to that bank.

b) The amount paid back by banks to their customers when they use debit cards for

financial transactions for purchasing goods or services.

c) The charge to a merchant by a bank for accepting payments from his customers

through the bank’s debit cards.

d) The incentive given by the Government to merchants for promoting digital

payments by their customers through Point of Sale (PoS) machines and debt cards.

19. Which one of the following links all the ATMs in India?

a) Indian Bank’s Association

b) National Securities Depository Limited

c) National Payments Corporation of India

d) Reserve Bank of India


1. Capital Adequacy ratio (CAR) is the amount that banks have to maintain in the

form of their own funds to offset any loss that banks incur if the account-holders

fail to repay dues.

2. CAR is decided by each individual bank.


a) 1 only b) 2 only


21. With reference to digital payments, consider the following statements:

1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank

account.

2. While a chip-pin debit card has four factors of authentication, BHIM app has

only two factor of authentication.


a) 1 only b) 2 only


2017


1. National Payments Corporation of India (NPCI) helps in promoting the financial

inclusion in the country.

2. NPCI has launched RuPay, a card payment scheme.

Which of the above statement(s) is/are correct?

a) Only 1 b) Only 2

c) Both 1 and 2 d) None of the above

23. Which of the following statements best describes the term ‘Scheme for Sustainable

Structuring of Stressed Assets (S4A)’, recently seen in the news?

a) It is a procedure for considering ecological costs of developmental schemes

formulated by the Government.

b) It is a scheme of RBI for reworking the financial structure of big corporate entities

facing genuine difficulties.

c) It is a disinvestment plan of the Government regarding Central Public Sector

Undertakings.

d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently

implemented by the Government.

24. Which of the following statements is/are correct regarding the Monetary Policy

Committee (MPC)?

1. It decides the RBI’s benchmark interest rates.

2. It is a 12-member body including the Governor of RBI and is reconstituted every

year.

3. It functions under the chairmanship of the Union Finance Minister.


a) Only 1 b) Only 1 and 2

c) Only 3 d) Only 2 and 3

25. What is the purpose of setting up of Small Finance Banks (SFBs) in India?

1. To supply credit to small business units.

2. To supply credit to small and marginal farmers.

3. To encourage young entrepreneurs to set up business particularly in rural areas.


a) Only 1 and 2 b) Only 2 and 3

c) Only 1 and 3 d) All of the above

26. Which of the following is a most likely consequence of implementing the ‘Unified

Payments Interface (UPI)’?

a) Mobile wallets will not be necessary for online payments.

b) Digital currency will totally replace the physical currency in about two decades.

c) FDI inflows will drastically increase.

d) Direct transfer of subsidies to poor people will become very effective.

2016

27. The establishment of ‘Payment Banks’ is being allowed in India to promote financial

inclusion. Which of the following statement(s) is/are correct in this context?

1. Mobile telephone companies and supermarket chains that are owned and controlled by

residents are eligible to be promoters of Payment Banks.

2. Payment Banks can issue both credit cards and debit cards.

3. Payment Banks cannot undertake lending activities.

Select the correct answer using the code given below.

a) Only 1 & 2 b) Only 1 & 3

c) Only 2 d) All of the above

28. The term ‘Core Banking Solutions’ is sometimes seen in the news. Which of the

following statements best describes/ describe this term?

1. It is a networking of a bank’s branches which enables customers to operate their

accounts from any branch of the bank on its network regardless of where they

open their accounts.

2. It is an effort to increase RBI’s control over commercial banks through

computerization.

3. It is a detailed procedure by which a bank with huge non-performing assets is

taken over by another bank.


a) Only 1 b) Only 2 & 3

c) Only 1 & 3 d) All of the above.

29. 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.


a) Only 1 b) Only 2

c) Both 1 & 2 d) None of the above.

30. With reference to ‘Bitcoins’, sometimes seen in the news, which of the following

statements is/are correct?

1. Bitcoins are tracked by the Central Banks of the countries.

2. Anyone with a Bitcoin address can send and receive Bitcoins from anyone else

with a Bitcoin address.

3. Online payment can be sent without either side knowing the identity of the

other.


a) Only 1 & 2 b) Only 2 & 3

c) Only 3 d) All of the above.

31. Pradhan Mantri MUDRA Yojana is aimed at

a) Bringing the small entrepreneurs into fgormal financial system

b) Providing loans to poor farmers for cultivating particular crops

c) Providing pensions to old and destitute persons

d) Funding the voluntary organisations involved in the promotion of skill

development and employment generation.

2015

32. With reference to Indian economy, consider the following

1. Bank rate

2. Open market operations

3. Public debt

4. Public revenue

Which of the above is/are component/components at Monetary Policy?

a) 1 only b) 2, 3 and 4

c) 1 and 2 d) 1, 3 and 4

33. When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis

points, which of the following is likely to happen?

a) India’s GDP growth rate increases drastically

b) Foreign Institutional Investors may bring more capital into our country

c) Scheduled Commercial Banks may cut their lending rates

d) It may drastically reduce the liquidity to the banking system

34. Convertibility of rupee implies

a) Being able to convert rupee notes into gold

b) Allowing the value of rupee to be fixed by market forces

c) Freely permitting the conversion of rupee to other currencies and vice versa

d) Developing an international market for currencies in India

35. ‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to

a) Develop national strategies for the conservation and sustainable use of

biological diversity

b) Improve banking sector’s ability to deal with financial and economic stress

and improve risk management

c) Reduce the greenhouse gas emissions but places a heavier burden on

developed countries

d) Transfer technology from developed countries to poor countries to enable

them to replace the use of chlorofluorocarbaons in refrigeration with

harmless chemicals

2014

36. If the interest rate is decreased in an economy, it will

a) Decrease the consumption expenditure in the economy.

b) Increase the tax collection of the Government

c) Increase the investment expenditure in the economy

d) Increase the total savings in the economy

37. What does venture capital mean?

a) A short-term capital provided to industries

b) A long-term start-up capital provided to new entrepreneurs

c) Funds provided to industries at times of incurring losses

d) Funds provided for replacement and renovation of industries

38. The terms ‘Marginal Standing Facility Rate’ and ‘net Demand and Time Liabilities’,

sometimes appearing in news, are used in relation to

a) Banking operations

b) Communication networking

c) Military strategies

d) Supply and demand of agricultural products

39. What is/are the facility/facilities the beneficiaries can get from the services of

Business Correspondent (Bank Saathi) in branchless areas?

1. It enables the beneficiaries to draw their subsidies and social security

benefits in their villages.

2. It enables the beneficiaries in the rural areas to make deposits and

withdrawals.


a) 1 only b) 2 only

c) Both 1 and 2 d) Neither 1 nor 2

40. In the context of Indian economy, which of the following is/are the

purpose/purposes of ‘Statutory Reserve Requirement’?

1. To enable the Central Bank to control the amount of advances the banks can

create

2. To make the people’s deposits with banks safe and liquid

3. To prevent the commercial banks from making excessive profits

4. To force the banks to have sufficient vault-cash to meet their day-today

requirements


a) 1 only b) 1 and 2 only

c) 2 and 3 only d) 1, 2, 3 and 4

2013

41. An increase in the Bank Rate generally indicates that the

a) Market rate of interest is likely to fall

b) Central Bank is no longer making loans to commercial banks

c) Central Bank is following an easy money policy

d) Central Bank is following a tight money policy

42. In India, deficit financing is used for raising resources for

a) Economic development

b) Redemption of public debt

c) Adjusting the balance of payments

d) Reducing the foreign debt

43. Priority Sector Lending by banks in India constitutes the lending to

a) Agriculture

b) Micro and small enterprises

c) Weaker Sections

d) All of the above

44. A rise in general level of prices may be caused by

1. An increase in the money supply

2. A decrease in the aggregate level of output

3. An increase in the effective demand

Select the correct answer using the codes given below.

a) 1 only

b) 1 and 2 only

c) 2 and 3 only

d) 1, 2 and 3

45. Which one of the following is likely to be the most inflationary in its effect?

a) Repayment of public debt

b) Borrowing from the public to finance a budget deficit

c) Borrowing from banks to finance a budget deficit

d) Creating new money to fiancé a budget deficit

46. Supply of money remaining the same when there is an increase in demand for

money, there will be

a) A fall in the level of prices

b) An increase in the rate of interest

c) A decrease in the rate of interest

d) An increase in the level of income and employment

47. Which of the following grants/grant direct credit assistance to rural households?

1. Regional Rural Banks

2. National Bank for Agriculture and Rural Development

3. Land Development Banks

Select the correct answer using the codes given below

a) 1 and 2 only b) 2 only

c) 1 and 3 only d) 1, 2 and 3


1. Inflation benefits the debtors.

2. Inflation benefits the bondholders.

Which of the statements given above is/are correct

a) 1 only

b) 2 only

c) Both 1 and 2

d) Neither 1 nor 2

49. Consider the following liquid assets:

1. Demand deposits with the banks

2. Time deposits with the banks

3. Savings deposits with the banks

4. Currency

The correct sequence of these assets in the decreasing order of liquidity is

a) 1-4-3-2 b) 4-3-2-1

c) 2-3-1-4 d) 4-1-3-2

50. The Reserve Bank of India regulates the commercial banks in matters of

1. Liquidity of assets

2. Branch expansion

3. Merger of banks

4. Winding-up of banks

Select the correct answer using the codes given below:

a) 1 and 4 only b) 2, 3 and 4 only

c) 1, 2 and 3 only d) 1, 2, 3 and 4

51. In the context of Indian economy, ‘Open Market Operations’ refers to

a) Borrowing by schedules banks from the RBI

b) Lending by commercial banks to industry and trade

c) Purchase and sale of government securities by the RBI

d) None of the above

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