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

Explanation

The National Payments Corporation of India (NPCI) is an umbrella organization established by the Reserve Bank of In-dia (RBI) and the Indian Banks’ Association (IBA) under the Payment and Settlement Systems Act, 2007, to create a robust payment and settlement infrastructure in India.

Statement 1 is correct: National Payments Corporation of India (NPCI) helps in promoting financial inclusion in the country by providing affordable and accessible digital payment solutions to all sections of society including rural and under-served areas. It supports initiatives like the Unified Payments Interface (UPI), Aadhaar Enabled Payment System (AEPS) and RuPay which enable seamless and low-cost digital transactions.

Statement 2 is correct: NPCI launched RuPay as India’s first domestic card payment network to reduce dependency on international card networks like Visa and Mastercard. RuPay is widely used in debit cards, credit cards and prepaid cards issued by Indian banks and it supports financial inclusion by offering low-cost payment solutions. The alliances with international network partners (Discover Financial Services, Japan Credit Bureau and China Union Pay) provide valuable access to a global acceptance footprint and offer world-class payment solutions to RuPay cardholders.

Explanation

The Scheme for Sustainable Structuring of Stressed Assets (S4A) is a framework designed to address the issue of stressed assets in the corporate sector, particularly large accounts with significant debt facing genuine difficulties. It was introduced by the RBI in 2016 to tackle non-performing assets (NPAs) in Indian banks. The scheme aims to restructure the financial obligations of companies allowing them to continue operations while ensuring that lenders (banks and financial institutions) can recover their dues in a structured manner. Key Features of S4A:

The S4A scheme divides a company’s debt into sustainable (50%) and unsustainable portions based on cash flows. The sustainable part is serviced under existing terms, while the unsustainable portion can be converted into equity or quasi-equity instruments like optionally convertible debentures. To be eligible a company must be operational with lender exposure exceeding 500 crore. The debt must be sustainable, meaning the company can service the sustainable portion with its current cash flows. The Overseeing Committee (OC), formed by the IBA in consultation with the RBI, reviews and approves lenders’ resolution plans to ensure transparency and compliance. Options (a), (c) and (d) are incorrect:

S4A is not a related procedure for considering ecological costs of developmental schemes formulated by the Government. S4A is not a disinvestment plan. It is a debt resolution framework for private and public corporate entities, not specifically for Central Public Sector Undertakings (CPSUs) S4A is not part of the Insolvency and Bankruptcy Code (IBC). While both aim to resolve stressed assets, S4A is a separate RBI-led initiative that operates outside the IBC framework

Explanation

UPI allows direct bank-to-bank transfers without the need for intermediary wallets. This has led to a decline in mobile wallet transactions, as users and merchants prefer UPI for its seamless and direct approach. Options (b), (c) and (d) are incorrect:

While UPI has accelerated the adoption of digital payments but it is uncertain when or if physical cash will completely disappear. Cash is still widely used, and a full transition to digital payments would depend on many economic and social factors beyond just UPI’s impact. UPI enhances domestic digital transactions but its direct impact on a significant rise in FDI lacks strong evidence. UPI impact is limited as many beneficiaries withdraw DBT funds in cash soon after receiving them.

Explanation

The Small Finance Banks (SFBs) were established by the Reserve Bank of India (RBI) to further financial inclusion by providing essential banking services to underserved and un-served segments of the population.

Statement 1 is correct: Small Finance Banks (SFBs) focus on extending credit to micro and small enterprises, thereby supporting entrepreneurship and economic growth at the grassroots level.

Statement 2 is correct: SFBs aim to meet the unique needs of small and marginal farmers by offering tailored financial products and services which enhances agricultural productivity and rural development.

Statement 3 is incorrect: Though SFBs support small business units and micro-entrepreneurs but the specific emphasis on "young entrepreneurs" is not explicitly stated in the RBI’s guidelines.

Explanation

Statement 1 is correct: The primary function of the MPC is to determine the policy repo rate, which is the benchmark interest rate at which commercial banks borrow money from the RBI. This rate influences other interest rates in the economy

Statement 2 is incorrect: The MPC is a 6-member body consisting of: 3 members from the RBI, including the Governor (who acts as the chairperson). 3 external members nominated by the Government of India. Members are appointed for a four-year term

Statement 3 is incorrect: The MPC functions under the chairmanship of the Governor of the RBI, not the Union Finance Minister.