Banking Sector in India: UPSC Previous Year Questions (Indian Economy)
74 previous year UPSC Prelims questions on banking make this the largest Indian Economy chapter, from 1997 to 2025, across 24 exam years. UPSC returns to the RBI’s functions and income, monetary policy tools, payment systems such as UPI, RTGS and NEFT, new bank types and capital rules. The explanations show how each tool or institution works in practice.
Explanations state facts as of the year each question was asked; words like “recently” refer to that year.
Showing 11–20 of 74 questions
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UPSC 2023Indian Economy · Banking Sector in India
Q11. Consider the following statements: 1. The Self-Help Group (SHG) programme was originally initiated by the State Bank of India by providing microcredit to the financially deprived. 2. In an SHG, all members of a group take responsibility for a loan that an individual member takes. 3. The Regional Rural Banks and Scheduled Commercial Banks support SHGs How many of the above statements are correct?
Explanation
Statement 1 is incorrect: The SHG movement in In-dia was not initiated by the State Bank of India. The National Bank for Agriculture and Rural Development (NABARD) played a pivotal role in promoting and scaling up SHGs by providing financial support, capacity-building initiatives, and policy frameworks. In 1992, NABARD launched the SHG-Bank Linkage Programme which facilitated the integration of SHGs into the formal banking system.
Statement 2 is correct: All members of a Self-Help Group (SHG) share responsibility for any loans taken by individual members. This system fosters mutual support and peer account-ability thereby encouraging timely repayments and financial discipline. Generally banks extend loans to the SHG as a single entity, which then distributes funds among its members. In the event of a default, the group collectively ensures repayment, safeguarding its overall creditworthiness.
Statement 3 is correct: Regional Rural Banks (RRBs) and Scheduled Commercial Banks (SCBs) play a crucial role in supporting Self-Help Groups (SHGs). As part of the SHG-Bank Linkage Programme launched by NABARD in 1992, these banks extend financial services, including credit, savings, and insurance, to SHGs. This initiative has significantly improved financial inclusion, enabling marginalized communities, particularly rural women, to access formal banking services, build credit histories, and enhance their economic stability.
Exam tip:
S1 aligns with Function-person/organisation/ministry match trap as it’s easy to manipulate to make it false. Is it SBI or NABARD or RBI? Also, S2 and S3 are too general and positive to be false.
UPSC 2022Indian Economy · Banking Sector in India
Q12. With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, the Reserve Bank of India (RBI) is likely to buy government securities. 2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. 3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars. Which of the statements given above are correct?
Explanation
Statement 1 is incorrect: When inflation is higher than the RBI aims to reduce liquidity in the market. Buying government securities injects money into the economy by increasing liquidity, which would worsen inflation. On the contrary the RBI is more likely to sell government securities to absorb excess liquidity.
Statement 2 is correct: When the rupee depreciates rapidly its value falls relative to the U.S. dollar. This means more rupees are required to purchase one dollar, indicating a weakening rupee. To stabilize the rupee and prevent excessive depreciation, the Reserve Bank of India (RBI) can intervene in the foreign exchange market by selling dollars from its reserves. When the RBI sells dollars in the market, it increases the available supply of dollars in the foreign exchange market. Market participants (importers, banks, and investors) exchange rupees to buy these newly available dollars. This increases the demand for rupees. As demand for rupees rises, the pressure on the rupee to depreciate reduces. This can help stabilize or even strengthen the rupee.
Statement 3 is correct: A fall in US or EU interest rates makes Indian assets more attractive, prompting foreign investors to seek higher returns in India. This increases demand for the rupee, causing it to appreciate. A stronger rupee can hurt exports by making Indian goods more expensive globally. To stabilize the currency and protect export competitiveness, the RBI may intervene by buying dollars, increasing forex reserves and preventing excessive rupee appreciation.
Exam tip:
For S1, Buying government securities = injecting money into the economy. More money in the system = more demand, which leads to higher inflation, But the inflation is already high! So why would RBI fuel inflation further? Completely illogical hence false.
UPSC 2022Indian Economy · Banking Sector in India
Q13. Consider the following statements: 1. In India, credit rating agencies are regulated by the Reserve Bank of India. 2. The rating agency popularly known as ICRA is a public limited company. 3. Brickwork Ratings is an Indian credit rating agency. Which of the statements given above are correct?
Explanation
Credit Rating is assessment of the creditworthiness of a borrower. Individuals are given ‘credit scores’, while corporations and governments receive ‘credit ratings’.
Statement 1 is incorrect: Credit rating agencies in India are regulated by the Securities and Exchange Board of In-dia (SEBI) under SEBI (Credit Rating Agencies) Regulations, 1999, not the Reserve Bank of India (RBI).
Statement 2 is correct: ICRA (Investment Information and Credit Rating Agency of India Ltd.) was set up in 1991 by IFCI, LIC, SBI and select banks as well as financial institutions to rate debt instruments. The ICRA consists of a group of Companies including its subsidiaries. ICRA Limited is a public limited company listed on stock exchanges.
Statement 3 is correct: In India credit rating agencies registered under Securities and Exchange Board of India (SEBI) are CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings. Globally, Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) control approximately 95% of ratings business.
Exam tip:
For S2, have you ever read/heard any provisions about RBI in constitution? Probably not! because it doesn’t exist. Trust your knowledge. Probability is more that if it would have been there in constitution, you must have read it, hence likely false.
UPSC 2022Indian Economy · Banking Sector in India
Q14. With reference to the Banks Board Bureau (BBB)’, which of the following statements are correct? 1. The Governor of RBI is the Chairman of BBB. 2. BBB recommends for the selection of heads for Public Sector Banks. 3. BBB helps the Public Sector Banks in developing strategies and capital raising plans. Select the correct answer using the code given below.
Explanation
The Banks Board Bureau (BBB) was formed on the recommendations of ‘P. J. Nayak Committee to Review Governance of Boards of Banks.
Statement 1 is incorrect: The Banks Board Bureau (BBB) was headed by a prominent professional or former senior government official, rather than the Governor of the Re-serve Bank of India (RBI). Notably, its first Chairman was Shri Vinod Rai, who previously served as the Comptroller and Auditor General of India.
Statement 2 is correct: Its primary role was to recommend appointments for senior positions in Public Sector Banks (PSBs), Financial Institutions (FIs), and Public Sector Insurance Companies. In 2022, the BBB was replaced by the Financial Services Institutions Bureau (FSIB), which continues to carry out similar functions.
Statement 3 is correct: The BBB advises PSBs on various strategic matters such as: Business strategies, Capital raising plans, Governance reforms, etc. It also assists banks in addressing issues related to non-performing assets (NPAs) and improving operational efficiency.
UPSC 2022Indian Economy · Banking Sector in India
Q15. In India, which one of the following is responsible for maintaining price stability by controlling inflation?
Explanation
The Reserve Bank of India (RBI) is primarily responsible for maintaining price stability and controlling inflation in India. It does this through its monetary policy framework, which includes tools like the repo rate, reverse repo rate, open market operations, and cash reserve ratio (CRR). Under the Monetary Policy Framework Agreement (2016), the RBI, in collaboration with the Government of India has a mandate to maintain inflation at 4% (with a tolerance band of ±2%), i.e., between 2% to 6%.
UPSC 2021Indian Economy · Banking Sector in India
Q16. Consider the following statements: 1. The Governor of the Reserve bank of India (RBI) is appointed by the Central Government. 2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest. 3. The Governor of the RBI draws his power from the RBI Act. Which of the above statements are correct?
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.
Additional insight:
Functions of RBI Monetary Authority Formulates, implements and monitors the monetary policy. Maintaining price stability while keeping in mind the objective of growth. Regulator and Supervisor of the Financial System Prescribes broad parameters of banking operations within which the country’s banking and financial system functions. Regulation and supervision of banks under Banking Regulation Act 1949. Regulation and supervision of non-banking financial companies. Protecting depositors’ interest Manager of Foreign Exchanges Manages the Foreign Exchange Management Act, 1999. It facilitate external trade and payment Promote development and maintenance of foreign exchange market in India. Issuer of currency RBI has the sole right to issue currency notes in India. Besides exchanges and destroys currency and coins not fit for circulation. To give the public an adequate quantity of supplies of currency notes and coins and in good quality. Developmental Role Performs a wide range of promotional functions to support national objectives such as making institutional arrangements for rural or agricultural finance. Financial Inclusion The Reserve Bank has selected a bank led model for financial inclusion in India. RBI has undertaken a series of policy measures. Eg. Basic Savings Bank Deposit Account" (BSBDA), JAM Trinity, etc. Use of Technology Devices such as ATMs, hand held devices to identify user accounts through a card and biometric identifier, Deposit taking machines and Internet banking and Mobile banking facility to provide the banking services to all sections of society with more ease. Banker to banks It maintains banking accounts of all scheduled banks. It also acts as a lender of last resort by providing funds to banks. Banker to Government It performs merchant banking functions for the central and the state governments. It is entrusted to the central govt. ‘s money, remittances, exchange and manages its public debt as well. Governor of RBI Appointment: Appointed after the proposal made by the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary. Term: According to Section 8 (4) of the RBI Act, the Governor and Deputy Governors shall hold office for such term not exceeding 3 years as the Central Government may fix when appointing them. Re-Appointment: They are eligible for re-appointment Qualification: The RBI Act does not provide for any specific qualification for the governor. Removal: The governor can be removed by the central government. Minimum Re-serve System of RBI With a minimum value of government-held gold of 200 crores (115 cr rupee should be in the form of Gold or gold bullion and rest 85 cr should be in the form of foreign currencies) and the remaining is backed by the government securities issued and held by RBI. Subsidiaries of RBI:
Deposit Insurance and Credit Guarantee Corporation (DICGC) Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) Reserve Bank Information Technology Private Ltd. (ReBIT) Indian Financial Technology And Allied Services (IFTAS) Income and Expenditure of RBI Income Expenditure Returns from foreign currency assets Interest on rupee-denominated government bonds Interest on overnight lending to commercial banks Management commission on handling the borrowings of central and state governments. Printing of currency Staff expenditure Commission given to commercial banks Commission to primary dealers Assets And Liabilities of RBI Assets Liabilities Foreign currency assets Bill purchases and discounts Collaterals by commercial banks Loan and advances Rupee securities Gold coin bullion Currency held by Public Vault cash held by commercial banks Government securities Other liabilities
UPSC 2021Indian Economy · Banking Sector in India
Q17. With reference to ‘Urban Cooperative Banks’ in India consider the following statements: 1. They are supervised and regulated by local boards set up by the State Governments. 2. They can issue equity shares and preference shares. 3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966. Which of the statements given above is/are correct?
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.
UPSC 2021Indian Economy · Banking Sector in India
Q18. In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following? 1. Lending to trade and industry bodies when they fail to borrow from other sources 2. Providing liquidity to the banks having a temporary crisis 3. Lending to governments to finance budgetary deficits Select the correct answer using the code given below.
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.
UPSC 2020Indian Economy · Banking Sector in India
Q19. If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India? 1. Not depending on short-term foreign borrowings 2. Opening up to more foreign banks 3. Maintaining full capital account convertibility Select the correct answer using the code given below:
Explanation
Statement 1 is correct: Short-term foreign debt is a major vulnerability during a financial crisis. When global confidence deteriorates, investors can pull their short-term funds out of emerging markets very quickly. This sudden outflow of capital can cause a currency crisis, sharp interest rate increases, and severe economic disruption. A lower reliance on such borrowings provides greater resilience.
Statement 2 is incorrect: Opening up to more foreign banks would lead to enhanced exposure to the global economy. While foreign banks can introduce advanced practices and enhance capital availability, they also increase India’s exposure to global financial shocks. During crises these banks often prioritize their home markets, reducing support to Indian operations and exacerbating credit shortages. Greater foreign bank presence may foster interconnectedness but does not guarantee immunity, potentially heightening India’s vulnerability to external disruptions.
Statement 3 is incorrect: Capital account convertibility means no restriction on the amount one can convert into foreign currency to enable one to acquire any foreign assets and vice versa. In case of a financial crisis it can create a situation of "Capital flight" where a foreign investor can withdraw all his money at once.
UPSC 2020Indian Economy · Banking Sector in India
Q20. If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be:
Explanation
Demand deposit accounts consist of funds held in a bank account from which deposited funds can be withdrawn at any time while a term deposit account restricts access for a predetermined time(Fixed deposits accounts, Recurring deposits accounts). Current accounts and savings accounts are demand deposits. Money = total currency with the public + demand deposits of the public with banks. When you withdraw Rs. 1,00,000 in cash from your demand deposit account, you’re simply changing the form of your money. You’re not changing the total amount of money in the economy. Before the withdrawal: You have Rs. 1,00,000 in your bank account, which is part of the money supply (specifically, it’s part of the deposit component of the money supply). After the withdrawal: You have Rs. 1,00,000 in cash. This cash is also part of the money supply (specifically, it’s part of the currency in circulation component). The money has just moved from one "pocket" of the money supply to another. The overall quantity of money remains the same.
Answer key for these questions
Q
UPSC year
Correct answer
11
2023
(b) Only two
12
2022
(b) 2 and 3 only
13
2022
(b) 2 and 3 only
14
2022
(b) 2 and 3 only
15
2022
(d) Reserve Bank of India
16
2021
(c) 1 and 3 only
17
2021
(b) 2 and 3 only
18
2021
(b) 2 only
19
2020
(a) 1 only
20
2020
(d) to leave it unchanged
What UPSC has tested in Banking Sector in India
The Banks Board Bureau selects the chairmen of public sector banks.
The National Payments Corporation of India links all the ATMs in India.
The Reserve Bank of India is responsible for maintaining price stability by controlling the money supply; it also acts as the lender of last resort.
In RTGS the settlement is instantaneous, while NEFT settles in batches.
Payment Banks and Small Finance Banks were allowed to promote financial inclusion.
Participatory Notes are issued by registered foreign portfolio investors to overseas investors.
The Service Area Approach was implemented under the Lead Bank Scheme.
Frequently asked questions
How many previous year UPSC questions are there on Banking Sector in India?
This page covers 74 previous year UPSC Prelims GS Paper-I questions on Banking Sector in India (Indian Economy), asked from 1997 to 2025. Each has the correct answer and an explanation.
What is the lender of last resort function of the RBI?
The central bank lends to banks that are solvent but short of liquidity when no other source is available, usually during a crisis. This protects the financial system from a loss of confidence and a run on banks.
How do RTGS and NEFT differ?
RTGS settles each payment individually and instantly, and is meant for large-value transfers. NEFT settles payments in half-hourly batches. Both are operated by the Reserve Bank of India, and both now work round the clock.
What is the Banks Board Bureau?
A body set up by the Government of India in 2016 to select the chairmen and heads of public sector banks and to advise on their governance and capital-raising. It was later replaced by the Financial Services Institutions Bureau in 2022.
What are Participatory Notes?
Instruments issued by registered foreign portfolio investors to overseas investors who wish to invest in Indian securities without registering with SEBI themselves. They are also called P-Notes and are regulated by SEBI.
