Central Bank and Banking system are important part of Economy and its syllabus. Previous Year Question (PYQ) papers are invaluable resources for aspirants preparing for competitive exams like the Union Public Service Commission (UPSC) examinations. In this article we present important PYQ on Central Bank and Banking system.
PYQ on Central Bank and Banking system
Q- With reference to the ‘Banks Board Bureau (BBB)’, which of the following statements are correct? (2022)
- The Governor of RBI is the Chairman of BBB.
- BBB recommends for the selection of heads for Public Sector Banks.
- BBB helps the Public Sector Banks in developing strategies and capital raising plans.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer- Option B
EXPLANATION
Statement 1 is inaccurate: The Governor of the Reserve Bank of India (RBI) does not serve as the Chairman of the Bank Board Bureau (BBB). Instead, the Appointments Committee of the Cabinet has the discretion to appoint the Chairman and members of the BBB.
Statement 2 is accurate: The BBB advises the Government on matters concerning the appointments, confirmation or extension of tenure, and termination of services of the Board of Directors in Public Sector Banks (PSBs) and financial institutions (FIs). Additionally, it is responsible for the selection and appointment of the Board of Directors of PSBs and FIs.
Statement 3 is also correct: One of the functions of the BBB involves assisting Public Sector Banks in developing business strategies and capital-raising plans, among other tasks.
Q- In India, which one of the following is responsible for maintaining price stability by controlling inflation? (2022)
(a) Department of Consumer Affairs
(b) Expenditure Management Commission
(c) Financial Stability and Development Council
(d) Reserve Bank of India
Answer- Option D
EXPLANATION
In India, the Reserve Bank of India (RBI) is tasked with the responsibility of conducting monetary policy, as mandated by the Reserve Bank of India Act, 1934. The primary goal of monetary policy is to maintain price stability while also considering the objective of fostering economic growth. Price stability is seen as a crucial prerequisite for sustainable economic growth.
Q- In India, the Central Bank’s function as the “lender of last resort” usually refers to which of the following? (2021)
1. Lending to trade and industry bodies when they fail to borrow from other sources
2. Providing liquidity to the banks having a temporary crisis
3. Lending to governments to finance budgetary deficits
Select the correct answer using the code given below
a) 1 and 2
b) 2 only
c) 2 and 3
d) 3 only
Answer- Option B
EXPLANATION
A lender of last resort, typically a nation’s central bank, provides loans to banks or other eligible institutions facing financial distress or deemed highly risky or near failure.
The primary purpose of the lender of last resort is to safeguard depositors and prevent bank runs caused by panic withdrawals during periods of temporary liquidity shortages. Commercial banks generally aim to avoid borrowing from the lender of last resort, as doing so signals financial turmoil within the bank.
Q- Consider the following statements: (2021)
1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in the public interest.
3. The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Answer- Option C
EXPLANATION
Statement 1: Accurate. Section 8(1)(a) of the RBI Act states that the central government can appoint one Governor and up to four Deputy Governors to the central board of RBI
Statement 2: Incorrect. Section 7 of the RBI Act permits the Central Government, in consultation with the Governor, to issue directions to the RBI in the public interest, contrary to the assertion that the Constitution of India does not grant such authority.
Statement 3: Accurate. As outlined in the RBI Act, the Governor holds authority over the general management and direction of the affairs and operations of the RBI. The Governor is empowered to exercise all powers and perform all duties that the RBI is entitled to undertake.
Q- With reference to Urban Cooperative Banks in India, consider the following statements: (2021)
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1996
Which of the statements given above is/are correct?
a) 1 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Answer- Option B
EXPLANATION
Statement 1: The Urban Banks Department of the Reserve Bank of India oversees the regulation and supervision of primary cooperative banks operating in urban areas, commonly known as Urban Cooperative Banks (UCBs).
Statement 2: Cooperative banks are permitted, with prior approval from the RBI, to issue equity shares, preference shares, or special shares to their members or individuals residing within their operational areas, through either public offerings or private placements.
Statement 3: Large cooperative banks with a paid-up share capital and reserves amounting to Rs. 1 lakh were included within the scope of the Banking Regulation Act 1949 following an amendment in 1966.
Q- What is the importance of the term “Interest Coverage Ratio” of a firm in India? (2020)
(1)It helps in understanding the present risk of a firm that a bank is going to give a loan to.
(2) It helps in evaluating the emerging risk of a firm that a bank is going to give a 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
Answer- Option A
EXPLANATION
The Interest Coverage Ratio assesses a firm’s capability to service its debt obligations by measuring its ability to repay loans within the loan term. This metric aids in evaluating the risk associated with lending to a particular firm. Therefore, statement 1 is accurate.
The ratio is calculated by dividing the company’s earnings before interest and taxes (EBIT) by its interest expenses over a specified period, making statement 2 correct. Contrary to statement 3, a lower interest coverage ratio indicates a higher burden of debt expenses on the company. When the ratio falls below 1.5, the company’s capacity to cover interest expenses may become questionable.
Q- If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (2020)
(1) Cut and optimize the Statutory Liquidity Ratio
(2) Increase the Marginal Standing Facility Rate
(3) Cut the Bank Rate and Repo Rate
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
Answer- Option B
EXPLANATION
Expansionary policy, also known as an easy or moderate policy, is implemented by the RBI to ease interest norms and increase liquidity in the market, aiming to stimulate economic growth. This policy enhances the purchasing power of individuals and is designed to boost the economy.
Contractionary Monetary Policy, on the other hand, aims to slow the rate of growth in the money supply or even decrease it to control inflation. When a central bank increases the overall money supply to stimulate economic activity, it is termed as an accommodative monetary policy.
Q- Consider the following statements: (2020)
(1) In terms of short-term credit delivery to the agriculture sector, District Central Cooperative Banks (DCCBs) deliver 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.
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
Answer- Option B
EXPLANATION
Scheduled banks contribute approximately 70-80% of agricultural and allied credit, while cooperative institutions play a significant but smaller role, accounting for around 15-16% of the total credit. Therefore, statement 1 is incorrect.
Cooperative banking operates in either a three-tier or two-tier structure. The three-tier structure involves State Cooperative Banks (StCBs), District Central Cooperative Banks (DCCBs), and Primary Agricultural Credit Societies (PACS). Meanwhile, the two-tier structure consists of only StCBs and PACS. In the three-tier system, DCCBs and PACS provide credit to individual borrowers using their own funds and seek refinancing from the upper tiers, such as PACS from DCCBs/StCBs and DCCBs from Central Banks (CBs).
In the two-tier setup, PACS offer credit to individual borrowers and seek refinancing from StCBs. Additionally, in some cases, StCBs directly extend credit to individuals through their branches across the state. Therefore, statement 2 is correct.
Q- If you withdraw 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 (2020)
(a) to reduce it by 1,00,000
(b) to increase it by 1,00,000
(c) to increase it by more than 1,00,000
(d) to leave it unchanged
Answer- Option D
EXPLANATION
A Demand Deposit Account is comprised of funds held in a bank account that can be withdrawn by the account holder at any time, contrasting with a term deposit account which limits access for a specified period. Current and Savings Accounts are examples of Demand Deposit Accounts, with some banks requiring customers to maintain a minimum balance.
The Money Supply represents the total value of money accessible within an economy at a specific point in time. It encompasses the total currency in circulation among the public and the demand deposits held by the public in banks.
Therefore, Money Supply can be expressed as the sum of Currency held by the public and Currency held in banks. According to this equation, when cash is withdrawn from a bank, it transitions to currency in hand but does not alter the overall value of the money supply. Consequently, there is no change in the aggregate money supply.
Q- The money multiplier in an economy increases with which one of the following? (2019)
(a) Increase in the cash reserve ratio
(b) Increase in the banking habit of the population
(c) Increase in the statutory liquidity ratio
(d) Increase in the population of the country
Answer- Option B
EXPLANATION
The money multiplier represents the ratio of the total money supply to the base money or reserves held by banks. If the cash reserve ratio is raised, banks have less money available for lending, reducing the money multiplier. Conversely, an increase in the banking habits of the population would lead to more lending and deposits in the banking system, thereby increasing the money multiplier. However, an increase in the country’s population does not automatically result in an increase in the money multiplier.
Q- Consider the following statements: (2019)
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
Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3
Answer- Option A
EXPLANATION
All providers of payment systems must store all data related to their operations within India, as stated in statement 1. This data should encompass all transaction details and information collected, processed, or carried out as part of the payment process.
For transactions involving a foreign component, the data can be stored in a foreign country if necessary. Providers must ensure compliance with this rule within six months and report their adherence to the Reserve Bank by October 15, 2018. Following completion, providers must submit a System Audit Report (SAR) conducted by CERT-IN empanelled auditors, approved by their respective boards, to the Reserve Bank by December 31, 2018. The involvement of the CAG is not mentioned in this context.
Q- Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee? (2019)
(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
Answer- Option D
EXPLANATION
Promoting exports and curbing imports of non-essential goods can help control the depreciation of the rupee by boosting growth through increased exports. This aligns with statement 1. Encouraging Indian borrowers to issue rupee-denominated Masala Bonds is a strategy employed by the RBI/government to stabilize the Indian rupee, as it doesn’t exert pressure on the currency by borrowing in foreign currency.
This corresponds to statement 2. Easing conditions for external commercial borrowing could lead to higher borrowing from abroad, temporarily alleviating the forex deficit in India and preventing the rupee’s decline, supporting statement 3.
However, implementing an expansionary monetary policy may lead to lower interest rates, increased inflation, and higher imports due to increased government spending, potentially contributing to the depreciation of the rupee. Therefore, statement 4 suggests that such a policy is not employed by the government/RBI to halt the slide of the Indian Rupee.
Q- Which of the following is not included in the assets of a commercial bank in India? (2019)
(a) Advances
(b) Deposits
(c) Investments
(d). Money at call and short notice
Answer- Option B
EXPLANATION
The primary function of banks is to receive various types of deposits from the public and subsequently lend these funds to borrowers. This process is known as financial intermediation.
Q- The Chairman of public sector banks are selected by the (2019)
(a) Banks Board Bureau
(b) Reserve Bank of India
(c) Union Ministry of Finance
(d) Management of concerned bank
Answer- Option A
EXPLANATION
The Bank Board Bureau (BBB) is responsible for the selection and appointment of the Board of Directors in Public Sector Banks (PSBs) and Financial Institutions, and it was established based on the recommendations of ‘The Committee to Review Governance of Boards of Banks in India, May 2014’ chaired by P. J. Nayak. BBB operates as an independent advisory body and provides recommendations regarding appointments, while the Ministry of Finance makes final decisions in consultation with the Prime Minister’s Office.
In addition to recommending personnel for PSBs, BBB also suggests candidates for director positions in government-owned insurance companies. It collaborates with the boards of directors of PSBs to develop strategies for their growth and enhancement and endeavors to enhance corporate governance standards and capacities within the public sector banking sector.
Q- Consider the following statements (2018)
(1) The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
(2) The Central Government has domestic liabilities of 21% of GDP as compared to that of war of GDP of the State 2 Governments.
(3) As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer- Option C
EXPLANATION
The FRBM Review Committee, led by Mr. N.K. Singh, submitted its report in January 2017, proposing debt as the primary target for fiscal policy. It recommended targeting a debt to GDP ratio of 60%, with 40% allocated to the central government and 20% to the states, to be achieved by 2023. Hence, statement 1 is accurate.
However, the domestic liabilities of the Central Government were reported at 46.1% of GDP in 2016-17, while state government liabilities increased to 23.2% at the end of March 2016, which contradicts statement 2. Additionally, Article 293(1) permits state governments to borrow solely from domestic sources, and according to Article 293(3), a state with outstanding borrowings from the central government must obtain prior approval before incurring further debt. Hence, statement 3 is true.
Q- Which one of the following links all the ATMs in India ? (2018)
(a) Indian banks’ Association
(b) National Securities Depository Limited
(c) National Payments Corporation of India
(d) Reserve Bank of India
Answer- Option C
EXPLANATION
The National Financial Switch (NFS) stands as the largest network of shared automated teller machines (ATMs) in India, established in 2004 by the Institute for Development and Research in Banking Technology (IDRBT) to inter-connect ATMs nationwide, promoting convenience banking.
NPCI assumed control of NFS from IDRBT on December 14, 2009, and currently operates it. NPCI serves as the overarching entity for all retail payments in India, established with the backing of the Reserve Bank of India (RBI) and the Indian Banks Association (IBA).
Q- Which one of the following statements correctly describes the meaning of legal tender money ? (2018)
(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
Answer- Option B
EXPLANATION
Legal tender refers to an officially recognized medium of payment acknowledged by law, capable of settling public or private debts and fulfilling financial commitments. It constitutes the national currency, encompassing paper money and coins, which is mandated by legislation to be accepted as valid payment for debts and financial responsibilities. Unlike legal tender, cheques do not hold the same status, as they can be declined as a method of settling payment by a recipient.
Q- Consider the following statements: (2018)
(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.
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
Answer- Option A
EXPLANATION
The Capital Adequacy Ratio (CAR) is a metric that assesses a bank’s available capital relative to its risk-weighted credit exposures, typically expressed as a percentage. Also referred to as the capital-to-risk weighted assets ratio (CRAR), this ratio serves to safeguard depositors and uphold the stability and effectiveness of financial systems globally. It is determined by central banks and regulatory authorities to prevent commercial banks from assuming excessive leverage and facing insolvency risks.
Q- With reference to digital payments, consider the following statements: (2018)
(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 factors of authentication.
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
Answer- Option A
EXPLANATION
Bharat Interface for Money (BHIM) is a mobile payment application that facilitates convenient and rapid payment transactions through the Unified Payments Interface (UPI).
Developed by the National Payments Corporation of India (NPCI), BHIM aims to streamline payment processes. Contrary to chip pin debit cards, which lack four-factor authentication, BHIM app employs a three-factor authentication system.
Q- With reference to the governance of public sector banking in India, consider the following statements (2018)
(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.
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
Answer- Option B
EXPLANATION
Capital injection into public sector banks by the Government of India has not consistently risen over the past decade; there was a decline at certain points. Therefore, statement 1 is inaccurate.
To streamline operations within the public sector banking sector, mergers between associate banks and the parent State Bank of India have been implemented. Consolidating banks is expected to bolster their bargaining leverage, diminish operational costs, optimize capital usage, streamline banking activities, and alleviate their non-performing asset burden. Therefore, statement 2 is accurate.
Q- What is/are the most likely advantages of implementing ‘Goods and Services Tax (GST)’? (2017)
(1) It will replace multiple taxes collected by multiple authorities and will thus create a single market in India.
(2) It will drastically reduce the ‘Current Account Deficit’ of India and will enable it to increase its foreign exchange reserves.
(3) It will enormously increase the growth and size of the economy of India and will enable it to overtake China in the near future.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer- Option A
EXPLANATION
The Goods and Services Tax (GST) is a consumption tax applied to most goods and services sold within a country. It is collected by businesses from consumers and remitted to the government. GST is imposed on the supply side, covering the provision of goods or services. It operates on the principle of destination-based consumption taxation and aims to consolidate various taxes collected by multiple authorities into a single market in India. Therefore, statement 1 is accurate. GST is structured as a dual system, with both the Central and State governments imposing taxes on a shared base. Central GST (CGST) and State GST (SGST) are the respective levies.
The GST Bill was initially introduced in 2014 and was later ratified as the 101st Constitutional Amendment Act, 2016. However, expectations that GST will significantly reduce the Current Account Deficit are unlikely due to factors such as crude oil imports and OPEC price manipulation, rendering statement 2 incorrect. Similarly, the expectation that GST will lead to a substantial expansion of the economy is unlikely, as IMF projections suggest only a modest increase in growth rates. Additionally, overtaking China’s economy would require measures like currency devaluation and labor exploitation, which are not feasible in the near term. Therefore, statement 3 is also incorrect.
Q- What is the purpose of setting up Small Finance Banks (SFBs) in India? (2017)
(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.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer- Option A
EXPLANATION
According to the RBI guidelines, the establishment of small finance banks (SFBs) aims to enhance financial inclusion by offering savings options and extending credit to various underserved sectors such as small business units, small and marginal farmers, micro and small industries, and other unorganized sector entities, utilizing advanced technology at minimal costs.
Therefore, statements 1 and 2 accurately reflect the objectives of setting up SFBs. However, there is no explicit mention in the guidelines suggesting that SFBs are intended to promote the establishment of businesses specifically in rural areas. Hence, statement 3 is incorrect.
Q- Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’? (2017)
(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.
Answer- Option A
EXPLANATION
UPI enables users to make payments to various merchants directly from their bank accounts without the need to enter card details or net banking/wallet passwords, making option 1 accurate.
It is a payment system designed for smartphones that facilitates instant money transfers between any two bank accounts, as described in option 2. Unified Payments Interface (UPI) is an instant real-time payment system developed by NPCI to facilitate inter-bank transactions via mobile phones, aligning with the information provided in the paraphrase.
Q- The term ‘Core Banking Solutions’ is sometimes seen in the news. Which of the following statements best describes/describe this term? (2016)
(1) It is a networking of a bank’s branches that 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.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer- Option A
EXPLANATION
Core Banking Solution (CBS) enables customers to access banking services and manage their accounts from anywhere globally, validating Statement 1. This system serves as a centralized back-end platform facilitating efficient processing of banking transactions across a bank’s branches, aligning with Statement 2. Additionally, CBS plays a crucial role in accelerating banking transactions and extending banking services to rural and remote areas, which renders Statement 3 unnecessary.
Q- What is/are the purpose/purposes of the `Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI? (2016)
(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.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer- Option C
EXPLANATION
The Marginal Cost of Funds-Based Lending Rate (MCLR) signifies the minimum interest rate at which banks are permitted to lend to borrowers. The Reserve Bank of India has issued final guidelines regarding the calculation of interest rates on loans based on the marginal cost of funds. These guidelines aim to enhance the transmission of policy rates into bank lending rates and improve transparency in the methodology used by banks to determine interest rates on loans. Thus, statement 1 is accurate.
Additionally, these guidelines are anticipated to ensure the availability of bank credit at interest rates that are equitable for both borrowers and banks, aligning with statement 2. Furthermore, the implementation of marginal cost pricing for loans is expected to bolster banks’ competitiveness and contribute to their long-term value and the overall economic growth.
Q- With reference to ‘Financial Stability and Development Council’, consider the following statements : (2016)
(1) It is an organ of NITI Aayog.
(2)It is headed by the Union Finance Minister.
(3) It monitors macroprudential supervision of the economy.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3
Answer- Option C
EXPLANATION
The Financial Stability and Development Council (FSDC) was set up by the Government as the apex level forum in December 2010. It was set up much before NITI Aayog was even setup. So, Statement 1 is not correct. The Chairman of the council is the finance minister. Hence Statement 2 is Correct.
The council will act as a coordination agency between the various financial sector regulators – the RBI, SEBI, IRDA and the PFRDA. The Council monitors macro-prudential supervision of the economy, which includes functioning of large financial conglomerates. It also addresses inter-regulatory coordination and financial sector development issues. Hence statement 3 is correct.
Q- Recently, India’s first ‘National Investment and Manufacturing Zone’ was proposed to be set up in (2016)
(a) Andhra Pradesh
(b) Gujarat
(c) Maharashtra
(d) Uttar Pradesh
Answer- Option B
EXPLANATION
Andhra Pradesh was chosen to house India’s first national investment and manufacturing zone (NIMZ).
Q- There has been a persistent deficit budget year after year. Which action/actions of the following can be taken by the Government to reduce the deficit? (2016)
(1) Reducing revenue expenditure
(2) Introducing new welfare schemes
(3) Rationalizing subsidies
(4) Reducing import duty
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2, 3 and 4
Answer- Option A
EXPLANATION
Statement 1 and 3 are accurate as they correctly identify that a budget deficit arises when government spending exceeds its revenues, and reducing revenue expenditure and rationalizing subsidies can help alleviate the deficit.
However, statement 2 is incorrect because increasing taxes can indeed be a way to reduce the deficit by boosting revenue, not exacerbating it. On the other hand, statement 4 is also inaccurate as expanding industries could potentially lead to increased tax revenues in the long run, thereby reducing the deficit, rather than immediately adding to it.
Q- The establishment of ‘Payment Banks’ is being allowed in India to promote financial inclusion. Which of the following statements is/are correct in this context? (2016)
(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) 1 and 2 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3
Answer- Option B
EXPLANATION
Statement 1 accurately identifies the entities eligible to be promoters of Payment Banks, including existing non-bank Prepaid Payments Instrument (PPI) issuers, NBFCs, corporate business correspondents, mobile phone companies, supermarket chains, public sector entities, and real sector cooperatives.
However, statement 2 is incorrect because Payment Banks are indeed allowed to issue ATM/debit cards, but they cannot issue credit cards.
Statement 3 is correct as per RBI guidelines, which prohibit Payment Banks from undertaking lending activities.
Q- Which of the following is/are included in the capital budget of the Government of India? (2016)
(1) Expenditure on acquisition of assets like roads, buildings, machinery, etc.
(2) Loans received from foreign governments
(3) Loans and advances granted to the States and Union Territories
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer- Option D
EXPLANATION
The capital budget encompasses the government’s assets and liabilities, comprising both capital receipts and capital expenditures. Capital expenditures entail various items such as the acquisition of land, buildings, machinery, and the creation of assets like roads and hospitals, as well as the repayment of government borrowings and loans to state and union territory governments. Thus, statements 1 and 3 are accurate. Capital receipts include sources like loan borrowings, disinvestments, and funds generated from the issuance of shares or debentures. Consequently, statement 2 is also correct.
Q- ‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to (2015)
(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 chlorofluorocarbons in refrigeration with harmless chemicals
Answer- Option B
EXPLANATION
The Basel Committee on Banking Supervision issues banking supervision accords known as Basel accords, which are global standards for regulating banks. Established in 1974 by central bank governors from 10 countries, the committee aims to enhance banking supervision worldwide and is headquartered in Basel, Switzerland. Basel norms are international banking regulations designed to bolster the global banking system, focusing on risk management.
Basel-I, introduced in 1988, concentrated on credit risk, with India adopting its guidelines in 1999, defining capital requirements and risk-weighted asset structures.
Basel-II, established in 2000, encompassed capital adequacy, supervisory requirements, and market discipline, with a minimum capital adequacy requirement of 8% of risk-weighted assets.
Basel-III, issued in 2010 in response to the 2008 financial crisis, aims to strengthen the banking system’s resilience by addressing capital, leverage, funding, and liquidity. It sets a capital adequacy ratio of 12.9% and a leverage ratio of 3%, and introduces measures like the Liquidity Coverage Ratio and Net Stable Funding Ratio to enhance banks’ stability.
Q- With reference to the Indian economy, consider the following (2015)
(1) Bank rate
(2) Open market operations
(3) Public debt
(4) Public revenue
Which of the above is/are component/ components of Monetary Policy?
(a) 1 only
(b) 2, 3 and 4
(c) 1 and 2
(d) 1, 3 and 4
Answer- Option C
EXPLANATION
The Reserve Bank of India (RBI) implements monetary policy through various tools including open market operations, bank rate, cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo rate, and reverse repo rate. The bank rate represents the interest rate at which the RBI lends to commercial banks. Open market operations involve the buying and selling of government securities to regulate liquidity in the market. In addition, public debt refers to the total borrowing by the government to finance its development budget, encompassing all liabilities of the Union government paid from the Consolidated Fund of India. Public revenue comprises the government’s income from taxes, fees, sale of public goods and services, fines, donations, etc.
Q- When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen? (2016)
(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
Answer- Option C
EXPLANATION
The statutory liquidity ratio (SLR) is the mandated reserve that commercial banks must hold in the form of cash, gold reserves, PSU Bonds, and RBI-approved securities before extending credit to customers. Lowering the SLR allows banks to allocate more funds for lending to customers. In the event of a reduction in the SLR rate, if banks also lower their lending rates to some extent, their profitability would not be adversely affected. The reduction of the statutory liquidity ratio (SLR) by the RBI is aimed at enhancing liquidity in the market, and it serves as a tool to regulate the inflation rate.
Q- The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to (2014)
(a) banking operations
(b) communication networking
(e) military strategies
(d) supply and demand of agricultural products
Answer- Option A
EXPLANATION
The Marginal Standing Facility (MSF) refers to the interest rate at which banks can borrow funds overnight from the Reserve Bank of India (RBI) by pledging approved government securities. Banks are permitted to borrow funds through MSF up to a certain percentage of their net demand and time liabilities (NDTL). This facility is typically utilized by banks during emergency scenarios when inter-bank liquidity becomes scarce.
Q- In the context of Indian economy; which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’? (2014)
(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-to-day requirements
Select the correct answer using the code given below.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Answer- Option A
EXPLANATION
The Statutory Reserve Requirement is a tool used to manage liquidity by the Reserve Bank of India (RBI). It mandates commercial banks to maintain reserves to ensure they have adequate assets available when customers request withdrawals. Therefore, statement 2 is incorrect.
The primary instrument for this purpose is the Cash Reserve Ratio (CRR), which specifies the portion of deposits banks must hold with the RBI. Another tool is the Statutory Liquidity Ratio (SLR), which dictates the percentage of total deposits banks must maintain in the form of specified liquid assets. Lowering the reserve ratio is a method employed by the central bank to increase the money supply and regulate the amount of lending banks can undertake, thus statement 1 is correct.
Reserve requirements are established as precautionary measures to regulate the economy, rather than to curtail banks’ profits or ensure they hold sufficient cash for daily operations. Hence, statements 3 and 4 are incorrect.
Q- The Reserve Bank of India regulates the commercial banks in matters of (2013)
(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
Answer- Option D
EXPLANATION
The Reserve Bank of India (RBI) serves as the central bank and regulates the banking sector within the country, earning it the nickname “banker’s bank.” It employs tools such as the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), among others, to monitor and control banks’ asset liquidity. Therefore, statement 1 is accurate. Additionally, the RBI establishes guidelines pertaining to bank mergers, winding-up procedures, and branch expansions. Therefore, statements 2, 3, and 4 are also correct.
Q- An increase in the Bank Rate generally indicates that the (2013)
(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
Answer- Option D
EXPLANATION
The bank rate is the interest rate at which the central bank lends funds to commercial banks for extended periods. When the bank rate rises, it signifies that the central bank is implementing a restrictive monetary policy, as higher rates typically result in reduced money supply, leading to lower inflation and decreased investment. Therefore, option 4 is accurate.
Q- In the context of Indian economy, Open Market Operations’ refers to (2013)
(a) borrowing by scheduled 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
Answer- Option C
EXPLANATION
Open Market Operations (OMOs) are market transactions carried out by the RBI involving the sale or purchase of government securities to or from the market. These operations aim to adjust the liquidity conditions of the rupee in the market over a sustained period. When there is surplus liquidity, the RBI sells securities to absorb excess rupee liquidity. OMOs serve as one of the quantitative tools used by the central bank to regulate the overall money supply in the economy. Therefore, option 3 is the correct choice.