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

Explanation

Statement 1 is incorrect: The Reserve Bank of India (RBI) mandates a minimum capital requirement for wholly owned subsidiaries (WOS) of foreign banks operating in India. As per current regulations, the minimum paid-up equity capital required is 500 crore to ensure financial stability and a strong capital base. The WOS was to be treated on par with the existing branches of foreign banks for branch expansion with branches in a year and preference for branch expansion in under-banked areas.

Statement 2 is incorrect: According to RBI guidelines, the board of directors of a Wholly Owned Subsidiary (WOS) of a foreign bank must follow these rules:

At least 51% of the board members must meet the qualifications specified under Section 10A of the Banking Regulation Act, 1949. At least two-thirds of the directors must be non-executive, meaning they are not involved in the day-to-day operations. At least one-third of the directors must be independent, with no ties to the subsidiary, its parent bank, or any related entity. At least 50% of the directors must be Indian nationals, NRIs (Non-Resident Indians), or PIOs (Persons of Indian Origin), with at least one-third being Indian nationals residing in India. The WOS must have a Part-time Chairman and a full-time CEO. Under the scheme for establishing wholly owned subsidiaries of foreign banks in India, at least 50% of the directors must be either Indian nationals, Non-Resident Indians (NRIs), or Persons of Indian Origin (PIOs). Additionally, one-third of the directors must be Indian nationals residing in India. However, since PIOs are not necessarily classified as Indian nationals, the requirement of having at least 50% Indian nationals is not mandatory.

Explanation

Statement 1 is incorrect: Liquidity Adjustment Facility(LAF) is monetary policy tool of RBI to inject or absorb liquidity. Under the LAF Scheme, the Reserve Bank will continue to have the discretion to conduct overnight repo or longer term repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors. NBFCs generally do not have direct access to the LAF window of the RBI. The LAF is primarily available to scheduled commercial banks and primary dealers. While NBFCs can indirectly benefit through banks accessing LAF, they cannot access it directly. Primary Dealers (PDs) are eligible to access the Liquidity Adjustment Facility (LAF) of the Reserve Bank of India (RBI). According to RBI guidelines, a non-bank entity intending to operate as a Primary Dealer must first register as a Non-Banking Financial Company (NBFC) under Section 45-IA of the RBI Act, 1934. Thus, while NBFCs generally do not have direct access to the LAF, those meeting specific regulatory requirements may be granted access under certain conditions.

Statement 2 is correct: FIIs are allowed to invest in G-Secs within prescribed limits set by the RBI and the government. These limits have been periodically increased to encourage foreign investment in India’s debt market. The Reserve Bank of India (RBI) on April 26, 2024 kept the investment limit by Foreign Portfolio Investors (FPI) in government securities unchanged at 6 percent of the outstanding securities stocks for 2024-25. The RBI has announced that it would maintain the FPI limits for investment in state government securities and corporate bonds at 2 percent and 15 percent, respectively, of the outstanding securities stocks for FY25.

Statement 3 is correct: Stock exchanges in India, such as the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), can offer separate trading platforms for debt instruments. For instance, the NSE operates the NDS-OM (Negotiated Dealing System-Order Matching) platform for government securities, facilitating real-time trading among institutional investors.

Explanation

Statement I is correct: In syndicated lending, multiple lenders share the loan amount, which reduces the exposure of any single lender to default risk. If the borrower faces financial trouble, the loss is distributed among multiple lenders, rather than falling entirely on one institution. This mechanism enhances financial stability and ensures that large borrowers can still access capital.

Statement II is incorrect: The loan can involve a fixed amount of funds, a credit line, or a combination of the two. Thus, syndicate lending offers flexibility of structuring and customization of the loan according to the specific needs of the borrower.