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

Explanation

Statement 1 is correct: The BHIM (Bharat Interface for Money) app allows users to transfer money to anyone with a UPI (Unified Payments Interface)-enabled bank account. This is achieved through a UPI ID, mobile number, or QR code which makes it a seamless and widely accessible digital payment solution. It is a government-backed app designed to facilitate digital payments which promoting interoperability among various banks.

Statement 2 is incorrect: Both systems adhere to the Reserve Bank of India’s (RBI) mandate for two-factor authentication to enhance the security of digital transactions. Chip-PIN Debit Card typically employs two-factor authentication (2FA) not four-factor:

Possession Factor: The physical debit card.

Knowledge Factor: The Personal Identification Number (PIN) known to the user. BHIM App also utilizes two-factor authentication:

Possession Factor: The mobile device registered with the user’s bank account. Knowledge Factor: The UPI PIN set by the user.

Explanation

National Payments Corporation of India (NPCI) operates the National Financial Switch (NFS) which is the largest network of shared ATMs in India which connects over 265,000 ATMs as of January,2025. NFS facilitates interoperable cash withdrawal, card-to-card funds transfer, and interoperable cash deposit transactions, among other services thereby linking ATMs across the country.

Explanation

The Merchant Discount Rate (MDR) is a fee charged to merchants by banks or payment gateways for accepting payments from their customers and processing digital transactions such as payments made through debit cards, credit cards or other electronic means. It is typically a small percentage of the transaction amount and is used to cover the costs of processing the payment.

Explanation

The Capital Adequacy Ratio (CAR) measures a bank’s ability to handle risks like credit and operational risks while meeting its obligations. Simply put, it acts as a ‘cushion’ to absorb potential losses, protecting depositors and lenders. Regulators set and monitor minimum CAR levels to maintain trust in the banking system and ensure stability. A strong CAR shows that a bank can handle losses without affecting its financial commitments, reducing risks from defaults or unexpected economic challenges. The capital adequacy ratio is computed by dividing the total capital of a bank by its risk-weighted assets. This is why the CAR is also called the Capital to Risk (Weighted) Assets Ratio (CRAR).

Statement 1 is correct: Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities.

Statement 2 is incorrect: CAR is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process. The Re-serve Bank of India (RBI) mandates specific CAR requirements to ensure banks are adequately capitalised. This is aligned with the Basel III norms, which are international regulatory frameworks designed to improve the regulation, supervision, and risk management within the banking sector. Indian banks must ad-here to these norms to operate effectively both domestically and internationally.

Explanation

Legal tender is any official medium of payment recognized by law which the creditor is obligated to accept towards repayment of a debt. In other words, legal tender refers to the type of currency that the government has officially declared to be acceptable for conducting financial transactions within a country. Legal tender varies from country to country as different countries define and regulate their legal tender according to their monetary laws and policies. For instance, the U.S. dollar is legal tender in the United States, whereas for Eurozone countries the legal tender is euro. In India, Reserve Bank of India (RBI) is authorized to issue banknotes under RBI Act of 1934, which emphasises that ‘every banknote issued by RBI, unless withdrawn from circulation, shall be legal tender at any place in India for the amount expressed on it’. Legal tender can be categorized as either limited or unlimited. In India, coins are considered limited legal tender and currency notes are considered unlimited legal tender.

Explanation

Statement 1 is incorrect: The Reserve Bank of In-dia (RBI) manages and services both Government of India (Central Government) securities and State Government securities. These are called State Development Loans (SDLs). RBI acts as the debt manager for both the Government of India (GoI) and State Governments.

Statement 2 is correct: In India only the Central Government issues Treasury Bills (T-bills). State Governments do not issue T-bills. They raise funds through bonds known as State Development Loans (SDLs).

Statement 3 is correct: Treasury Bills (T-Bills) are issued at a discount to their face value (par value) and redeemed at face value upon maturity. The difference between the issue price and the face value represents the interest earned by the investor. For example a T-Bill with a face value of 100 might be issued at 98 and the investor earns 2 as interest.

Explanation

Statement 1 is incorrect: Capital infusion into Public Sector Banks (PSBs) over the last decade has not followed a steady upward trend. It has been cyclical driven primarily by specific challenges such as rising non-performing assets (NPAs). The government has made substantial infusions during critical periods while scaling back during others, depending on the banks’ requirements and fiscal constraints.

Statement 2 is correct: In 2017 five associate banks (State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State Bank of Tra-vancore) along with Bharatiya Mahila Bank were merged with State Bank of India (SBI). This merger was aimed at improving operational efficiency, reducing costs, and enhancing the balance sheet of SBI.