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

Explanation

Statement 1 is correct: The Reserve Bank’’s affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act,1934.

Statement 2 is incorrect: The Constitution of India does not contain provisions granting the Central Government the authority to issue directions to the RBI. However, such authority is provided under Section 7 of the Reserve Bank of India Act, 1934. This section allows the Central Government to issue directions to the RBI in matters of public interest.Accordingly the Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider it necessary in the public interest.

Statement 3 is correct: The powers and functions of the RBI Governor are derived from the Reserve Bank of India Act, 1934. The Act outlines the roles, responsibilities, and authority of the Governor in managing the affairs of the RBI.

Explanation

A Co-operative bank belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are under dual control of the RBI and Registrar of Cooperative Societies. Agriculture, some small-scale businesses, and independent contractors primarily receive funding from cooperative banks. These banks are cooperative credit institutions that are registered under the Cooperative Societies Act 1912. These banks work according to the cooperative principles of mutual assistance. Co-operative banks have a three-tier structure:

Primary Credit Societies-PCSs (agriculture or urban). District Central Co-Operative Banks-DCCBs. State Co-Operative Banks-SCBs (at the apex level).

Statement 1 is incorrect: After Banking Regulation(Amendment) Act 2020 was passed, Most of the powers were transferred to RBI from the Registrars of the cooperative societies. Urban Cooperative Banks are subject to dual regulation by both the Re-serve Bank of India (RBI) and the respective State Governments. The RBI oversees their banking operations, while the State Governments handle their incorporation, registration, management, and audit aspects through the Registrar of Cooperative Societies.

Statement 2 is correct: RBI has issued guidelines to allow UCBs to raise capital by issuing equity shares and preference shares, similar to other banking institutions. This allows them to diversify their funding sources and strengthen their capital base.

Statement 3 is correct: Urban Cooperative Banks (UCBs) were brought under the regulatory framework of the Banking Regulation Act, 1949 through the Banking Laws (Application to Cooperative Societies) Act, 1965, which came into effect in 1966. This amendment extended the provisions of the Banking Regulation Act, 1949, to cooperative banks, including UCBs, bringing them under the supervision of the RBI.

Explanation

Statement 2 is correct: A "lender of last resort" means that the RBI (also called banker of banks) offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. By doing so, it helps stabilize the financial system and prevents bank runs and thereby safeguarding public confidence in the banking sector. Statements 1 and 3 are incorrect:

Trade and industry bodies typically borrow from commercial banks or financial markets and not directly from the central bank. The RBI’s role as a lender of last resort is limited to the banking sector to ensure financial stability. Providing funds to cover government budgetary deficits is not part of the lender-of-last-resort function. The RBI’s support in such cases would fall under separate monetary management activities rather than emergency banking support.