Banking Sector in India: UPSC Previous Year Questions (Indian Economy)

Explanation

The Reserve Bank of India is the central bank of the country. It earns income primarily through monetary operations, management of currency, and foreign exchange transactions

Statement 1 is correct: The RBI conducts open market operations involving the buying and selling of government securities (bonds). It earns income through interest receipts and capital gains on these transactions.

Statement 2 is correct: The RBI manages India’s foreign exchange reserves and intervenes in forex markets to stabilize the rupee. Gains from currency transactions contribute to its income.

Statement 3 is incorrect: RBI does not manage pensions for citizens or the government. Pension Fund Regulatory and Development Authority (PFRDA) governs pension systems like NPS. RBI only manages government accounts and public debt, not pension

Statement 4 is incorrect: The RBI does not lend directly to private companies. It lends to commercial banks and financial institutions as part of monetary policy and financial regulation, but lending to private companies is not a source of income.

Statement 5 is correct: RBI has the sole right to print and issue currency notes in India. It earns income through seigniorage, the profit made from issuing currency notes, which is the difference between the face value and the cost of printing. Seigniorage = Face value of currency - cost of printing it. For example, printing a 100 note may cost 3, giving a profit of 97.

Explanation

Statement 1 is incorrect: The Reserve Bank of India (RBI) does not mandate the submission of the Business Responsibility and Sustainability Report (BRSR). Instead, the Securities and Exchange Board of India (SEBI) mandates this requirement. Since 2022, SEBI has required the top 1,000 listed companies by market capitalization to submit BRSR as part of their annual reporting to improve transparency on ESG (Environmental, Social, and Governance) matters.

Statement 2 is correct: BRSR disclosures primarily involve non-financial information related to a company’s social responsibility, sustainability initiatives, environmental impact, governance, and stakeholder engagement. It complements financial reports by providing stakeholders with a broader understanding of a company’s impact and sustainable practices.

Explanation

RTGS and NEFT are examples of Inter Bank Transfer is a special service that allows you to transfer funds electronically to accounts in other banks in India.

Statement 1 is correct:

RTGS (Real Time Gross Settlement) processes transactions instantly and in real time. NEFT (National Electronic Funds Transfer) processes transactions in half-hourly batches, so settlement is not instantaneous and can take up to 2 hours.

Statement 2 is incorrect: As per RBI guidelines, no charges are levied for inward transactions (receiving funds) in both RTGS and NEFT systems. Charges, if any, are typically for outward transactions (sending money).

Statement 3 is incorrect: Both RTGS and NEFT are now available 24x7x365, including weekends and bank holidays. There are no restricted hours for either system as per current RBI guidelines.

Explanation

Unified Payments Interface (UPI) is an instant, real-time payment system developed by the National Payments Corporation of India (NPCI) in 2016. It enables users to transfer funds between bank accounts, pay bills, and make merchant payments seamlessly through a single mobile application. UPI supports both peer-to-peer and person-to-merchant transactions, operates 24x7, and eliminates the need to enter bank details for each transaction, making digital payments fast, secure, and convenient. List of countries where international merchant payments are accepted at select merchant outlets. Sr. No. Country Name

1. Bhutan

2. France

3. Mauritius

4. Nepal

5. Singapore

6. Sri Lanka

7. UAE Therefore, only three countries among the given options (UAE, France, Singapore) accept international merchant payments via UPI, apart from India.

Explanation

Statement 1 is incorrect: The Reserve Bank of India (RBI) mandates a minimum capital requirement for wholly owned subsidiaries (WOS) of foreign banks operating in India. As per current regulations, the minimum paid-up equity capital required is 500 crore to ensure financial stability and a strong capital base. The WOS was to be treated on par with the existing branches of foreign banks for branch expansion with branches in a year and preference for branch expansion in under-banked areas.

Statement 2 is incorrect: According to RBI guidelines, the board of directors of a Wholly Owned Subsidiary (WOS) of a foreign bank must follow these rules:

At least 51% of the board members must meet the qualifications specified under Section 10A of the Banking Regulation Act, 1949. At least two-thirds of the directors must be non-executive, meaning they are not involved in the day-to-day operations. At least one-third of the directors must be independent, with no ties to the subsidiary, its parent bank, or any related entity. At least 50% of the directors must be Indian nationals, NRIs (Non-Resident Indians), or PIOs (Persons of Indian Origin), with at least one-third being Indian nationals residing in India. The WOS must have a Part-time Chairman and a full-time CEO. Under the scheme for establishing wholly owned subsidiaries of foreign banks in India, at least 50% of the directors must be either Indian nationals, Non-Resident Indians (NRIs), or Persons of Indian Origin (PIOs). Additionally, one-third of the directors must be Indian nationals residing in India. However, since PIOs are not necessarily classified as Indian nationals, the requirement of having at least 50% Indian nationals is not mandatory.

Explanation

Statement 1 is incorrect: Liquidity Adjustment Facility(LAF) is monetary policy tool of RBI to inject or absorb liquidity. Under the LAF Scheme, the Reserve Bank will continue to have the discretion to conduct overnight repo or longer term repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors. NBFCs generally do not have direct access to the LAF window of the RBI. The LAF is primarily available to scheduled commercial banks and primary dealers. While NBFCs can indirectly benefit through banks accessing LAF, they cannot access it directly. Primary Dealers (PDs) are eligible to access the Liquidity Adjustment Facility (LAF) of the Reserve Bank of India (RBI). According to RBI guidelines, a non-bank entity intending to operate as a Primary Dealer must first register as a Non-Banking Financial Company (NBFC) under Section 45-IA of the RBI Act, 1934. Thus, while NBFCs generally do not have direct access to the LAF, those meeting specific regulatory requirements may be granted access under certain conditions.

Statement 2 is correct: FIIs are allowed to invest in G-Secs within prescribed limits set by the RBI and the government. These limits have been periodically increased to encourage foreign investment in India’s debt market. The Reserve Bank of India (RBI) on April 26, 2024 kept the investment limit by Foreign Portfolio Investors (FPI) in government securities unchanged at 6 percent of the outstanding securities stocks for 2024-25. The RBI has announced that it would maintain the FPI limits for investment in state government securities and corporate bonds at 2 percent and 15 percent, respectively, of the outstanding securities stocks for FY25.

Statement 3 is correct: Stock exchanges in India, such as the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), can offer separate trading platforms for debt instruments. For instance, the NSE operates the NDS-OM (Negotiated Dealing System-Order Matching) platform for government securities, facilitating real-time trading among institutional investors.

Explanation

Statement I is correct: In syndicated lending, multiple lenders share the loan amount, which reduces the exposure of any single lender to default risk. If the borrower faces financial trouble, the loss is distributed among multiple lenders, rather than falling entirely on one institution. This mechanism enhances financial stability and ensures that large borrowers can still access capital.

Statement II is incorrect: The loan can involve a fixed amount of funds, a credit line, or a combination of the two. Thus, syndicate lending offers flexibility of structuring and customization of the loan according to the specific needs of the borrower.

Explanation

Statement I is correct: In the post-pandemic period, many central banks worldwide carried out interest rate hikes. This was primarily in response to rising inflation caused by supply chain disruptions, increased demand post-pandemic, and geopolitical tensions (such as the Russia-Ukraine conflict). For example:

The Reserve Bank of India (RBI) raised the repo rate multiple times in 2022 and 2023 to combat inflation. The repo rate was increased from a historic low of 4% during the pandemic to 6.5% by early 2023. Similarly, the US Federal Reserve and the European Central Bank also raised interest rates aggressively to curb inflation.

Statement II is correct: Central banks such as RBI assume that they can counteract rising consumer prices (inflation) through monetary policy tools such as increasing interest rates. Higher interest rates reduce borrowing and spending, which in turn helps to cool down demand and control inflation. This is a well-established principle of monetary policy. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I: The inter-est rate hikes mentioned in Statement-I were explicitly carried out to counteract rising consumer prices (inflation), as stated in Statement-II.

Explanation

The Reserve Bank of India (RBI) employs Open Market Operations (OMOs) as a primary tool for sterilization. OMOs involve the buying and selling of government securities in the open market. When the RBI sells government securities, it absorbs liquidity from the banking system, effectively neutralizing the increase in money supply resulting from its foreign exchange interventions. This process helps in maintaining monetary stability and controlling inflation.

Explanation

Central Bank Digital Currencies (CBDCs) are digital forms of a country’s fiat currency which are issued and regulated by the central bank.

Statement 1 is correct: Central Bank Digital Currencies (CB-DCs) can operate independently unlike traditional cross-bor-der payments that rely on the US dollar as a reserve currency and the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system for messaging. It can facilitate direct peer-to-peer (P2P) transactions or cross-border payments without intermediaries like SWIFT. Countries like China (with its digital yuan) and India (exploring the digital rupee) are developing CBDCs to reduce dependence on the US dollar and SWIFT for international transactions. The m-CBDC Bridge project which involves countries like China, Hong Kong, Thailand, and the UAE, is an example of how CB-DCs can enable cross-border payments without relying on the US dollar or SWIFT.

Statement 2 is correct: One of the key features of CBDCs is their programmability. Central banks can embed specific conditions into the digital currency using smart contracts or similar technologies. For instance: A government could issue a digital currency for welfare payments with an expiration date to ensure timely spending and boost economic activity. A CBDC could be programmed to be used only for specific purposes, such as healthcare or education.