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

Explanation

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility(LAF). The MSF rate is pegged 100 basis points or 1 percentage point above the repo rate. Under MSF banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL). Demand Liabilities Demand Liabilities of a bank are liabilities which are pay-able on demand. These include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, cash certificates and cumulative/ recurring deposits, Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account etc. Time Liabilities Time Liabilities of a bank are those which are payable otherwise than on demand. These include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits etc. The difference between a bank’s total demand and time liabilities (deposits) and its deposits in the form of assets held by another bank is represented by the term "Net Demand and Time Liabilities".

Explanation

Banking Correspondents (BCs) also known as Bank Saathis are individuals or entities hired by banks in India (including commercial banks, Regional Rural Banks (RRBs), and Local Area Banks (LABs)) to provide banking services in areas with limited or no banking access. A BC acts as an agent for the bank, serving as a substitute for the bank’s physical branch.

Statement 1 is correct: The Reserve Bank of India (RBI) launched the Business Correspondent (BC) Model in 2006 to improve financial inclusion in India. BCs play a critical role in disbursing direct benefit transfers (DBT), including subsidies and social security payments, to beneficiaries in rural areas. This eliminates the need for beneficiaries to travel long distances to a bank branch to collect their payments.

Statement 2 is correct: BCs offer a range of basic banking services, including accepting deposits, facilitating withdrawals, and enabling other small transactions. This brings basic banking services to people who previously had limited or no access.

Explanation

Statutory Reserve Requirements, such as the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are regulatory tools employed by the Reserve Bank of India (RBI) to ensure the stability and liquidity of the banking system. These requirements mandate that commercial banks maintain a certain percentage of their net demand and time liabilities (NDTL) in the form of liquid asset

Statement 1 is correct: When the central bank wants to increase the money supply in the economy, it lowers the reserve ratio. Hence it enables the Central Bank to control the amount of advances the banks can create.

Statement 2 is correct: RBI requires commercial banks to keep reserves in order to ensure that banks have sufficient assets to draw on when account holders want to be paid.

Statement 3 is incorrect: Reserve requirements are de-signed as "precautionary measures" to control the economy and not to stop banks from making "excessive" profit.

Statement 4 is incorrect: Vault cash (cash held by banks in their vaults) is separate from CRR. CRR is the cash banks must hold with the RBI, not in their own vaults. While banks need sufficient vault cash for daily operations, this is a separate operational requirement, not directly enforced by the SRR.