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

Explanation

PMJDY (Pradhan Mantri Jan Dhan Yojana) is a na-tional initiative for financial inclusion, aiming to ensure that every household in the country has access to comprehensive financial services. The objective of "Pradhan Mantri Jan-Dhan Yojana (PMJDY)" is ensuring access to various financial services like availability of basic savings bank account, access to need based credit, remittances facility, insurance and pension to the excluded sections i.e. weaker sections & low income groups. This deep penetration at affordable cost is possible only with effective use of technology. The plan includes providing universal banking access, with at least one basic bank account per household, as well as promoting financial literacy, credit access, insurance, and pension services. Beneficiaries will receive a RuPay Debit card, which includes accident insurance coverage of 1 lakh. The program also plans to direct all government benefits (from central, state, and local bodies) into beneficiaries’ accounts and promote the Direct Benefits Transfer (DBT) scheme.

Explanation

Option (a) is incorrect: While reducing the SLR can stimulate economic activity by increasing liquidity but it does not directly lead to a drastic increase in GDP growth. GDP growth is influenced by a multitude of factors, including investment levels, consumption, and government spending.

Option (b) is incorrect: The SLR reduction primarily affects domestic liquidity and does not directly influence foreign investment decisions. Foreign Institutional Investors (FIIs) are more influenced by factors such as market potential, regulatory environment, and economic stability.

Option (c) is correct: The Statutory Liquidity Ratio (SLR) cut by the RBI is likely to give more room for banks to cut rates. When the RBI reduces the SLR banks are required to keep a smaller portion of their net demand and time liabilities (NDTL) in liquid asset freeing up additional funds. This boost in liquidity allows banks to lend more to borrowers. To encourage borrowing and make use of the increased liquidity, banks may lower their lending rates, thereby making credit more accessible to consumers and businesses.

Option (d) is incorrect: It does not drastically reduce the liquidity to the banking system. Reducing the SLR increases liquidity in the banking system by freeing up funds that banks can use for lending or investment.

Explanation

The Basel III Accord is a set of international regulatory reforms developed by the Basel Committee on Banking Super-vision in response to the global financial crisis of 2008. Its main objective is to enhance the regulation, supervision, and risk management of the banking sector making banks more resilient to financial and economic shocks and reducing the risk of future crises. Key Aspects of Basel III:

Capital Requirements: It increases both the quality and quantity of capital banks must hold, helping them absorb losses and reducing the risk of insolvency. Liquidity Standards: It enforces stricter liquidity requirements to ensure that banks maintain enough liquid assets to meet short-term obligations, especially in times of financial stress, addressing the risk of liquidity crises. Leverage Ratio: The accord introduces a leverage ratio to curb excessive borrowing by banks, preventing them from becoming overleveraged. Countercyclical Capital Buffer: It requires banks to accumulate additional capital during periods of rapid credit growth, which can be used to absorb losses during economic downturns.

Explanation

Monetary policy refers to actions undertaken by the central bank (in India, the Reserve Bank of India - RBI) to manipulate the money supply, interest rates, and credit conditions to stimulate or restrain economic activity. Its primary goal is to maintain price stability (control inflation) while supporting economic growth.

Statement 1 is correct: The bank rate in India is defined as the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks for long-term loans. It serves as a tool to control the money supply in the economy and manage inflation. Changes in the bank rate influence other inter-est rates in the economy. An increase in the bank rate makes borrowing more expensive which can slow down economic activity and inflation. Decreasing the bank rate has the opposite effect.

Statement 2 is correct: Open Market Operations (OMO) involve the buying and selling of government securities by the RBI in the open market. When the RBI purchases government securities, it injects money into the economy, thereby increasing the money supply. Conversely, when the RBI sells government securities, it removes money from circulation, reducing the money supply. These actions influence interest rates and the availability of credit in the economy. Statements 3 and 4 are incorrect: Public Revenue and debt are not part of monetary policy. They are related to fiscal policy. Public debt also known as government debt represents the total amount of money the government owes to its creditors. It arises from borrowing to finance government spending. Public debt is a consequence of fiscal policy decisions. Public revenue refers to the income the government generates through taxes and other channels. Public revenue is an element of fiscal policy rather than monetary policy.