Money & Banking

51. What is the importance of the term “Interest Coverage Ratio” of a firm

What is the importance of the term “Interest Coverage Ratio” of a firm in India?

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  • 1. It helps in understanding the present risk of a firm that a bank is going to give loan to.
  • 2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
  • 3. The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.

Select the correct answer using the code given below:

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1 and 2 only
2 only
1 and 3 only
1, 2 and 3
This question was previously asked in
UPSC IAS – 2020
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The Interest Coverage Ratio is calculated as Earnings Before Interest and Taxes (EBIT) divided by Interest Expense. It measures a company’s ability to handle its outstanding debt interest payments.
Statement 1 is correct: A company’s current Interest Coverage Ratio indicates how many times its current earnings can cover its current interest obligations. A low ratio signals potential difficulty in meeting interest payments (present risk), while a high ratio indicates a strong ability to do so.
Statement 2 is correct: By analyzing historical trends of the ratio, future projections of EBIT, and changes in interest expenses, a lender can evaluate the likelihood of the firm being able to service debt in the future, thus helping assess emerging risk.
Statement 3 is incorrect: A *higher* Interest Coverage Ratio means the company has more earnings available relative to its interest expense. This indicates a *better* ability to service its debt obligations, not worse. A *lower* ratio suggests a worse ability.
The Interest Coverage Ratio is a key financial metric used by lenders to assess a borrower’s capacity to repay interest on debt. A higher ratio signifies greater financial health and lower risk from the lender’s perspective.
Different industries and debt structures may have varying acceptable levels for the Interest Coverage Ratio. A ratio below 1.5 is often considered risky, indicating that the company may struggle to meet interest payments.

52. The money multiplier in an economy increases with which one of the

The money multiplier in an economy increases with which one of the following?

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Increase in the cash reserve ratio
Increase in the banking habit of the population
Increase in the statutory liquidity ratio
Increase in the population of the country
This question was previously asked in
UPSC IAS – 2019
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The correct answer is B) Increase in the banking habit of the population.
The money multiplier is the ratio of the money supply to the monetary base (high-powered money). It is inversely related to the reserve ratio (CRR + SLR) and the public’s cash-to-deposit ratio. When the banking habit of the population increases, people hold less cash and deposit more money in banks. This reduces the cash-to-deposit ratio. With a lower cash-to-deposit ratio, a larger proportion of the monetary base is held as reserves by banks, enabling banks to create more credit and expand the money supply through the process of deposit multiplication, thereby increasing the money multiplier.
Options A and C are incorrect because an increase in the Cash Reserve Ratio (CRR) or the Statutory Liquidity Ratio (SLR) forces banks to hold more reserves, reducing the funds available for lending and decreasing the money multiplier. Option D, an increase in the population, does not directly or necessarily increase the money multiplier; its effect would depend on how it influences other factors like banking habits or savings rates.

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53. Consider the following statements: The Reserve Bank of India’s recent

Consider the following statements:
The Reserve Bank of India’s recent directives relating to ‘Storage of Payment System Data’, popularly known as data diktat, command the payment system providers that

  • 1. they shall ensure that entire data relating to payment systems operated by them are stored in a system only in India
  • 2. they shall ensure that the systems are owned and operated by public sector enterprises
  • 3. they shall submit the consolidated system audit report to the Comptroller and Auditor General of India by the end of the calendar year

Which of the statements given above is/are correct?

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1 only
1 and 2 only
3 only
1, 2 and 3
This question was previously asked in
UPSC IAS – 2019
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The correct answer is A) 1 only.
The Reserve Bank of India’s (RBI) directive on ‘Storage of Payment System Data’ requires all system providers to ensure that the entire data relating to payment systems operated by them are stored in a system only in India. This is the core of the ‘data localization’ mandate.
Statement 2 is incorrect; the RBI directive applies to all payment system providers (including private companies, foreign entities operating in India, etc.) and does not mandate that the systems must be owned and operated by public sector enterprises.
Statement 3 is incorrect; the payment system providers are required to submit the System Audit Report to the RBI, not the Comptroller and Auditor General (CAG) of India. The CAG audits government accounts and public sector undertakings, not typically the compliance reports of private payment system providers submitted to the regulator (RBI).

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54. Which one of the following is not the most likely measure the Governme

Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?

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Curbing imports of non-essential goods and promoting exports
Encouraging Indian borrowers to issue rupee denominated Masala Bonds
Easing conditions relating to external commercial borrowing
Following an expansionary monetary policy
This question was previously asked in
UPSC IAS – 2019
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The correct answer is D) Following an expansionary monetary policy.
An expansionary monetary policy typically involves lowering interest rates and increasing liquidity in the economy. This can lead to increased domestic demand and inflation, potentially making the country’s exports less competitive and increasing import demand. Furthermore, lower interest rates might make domestic assets less attractive to foreign investors, potentially leading to capital outflows. All these factors tend to weaken a currency (cause it to slide), not stop its slide.
Options A, B, and C are measures that can help strengthen the Indian Rupee:
A) Curbing imports (reduces demand for foreign currency) and promoting exports (increases supply of foreign currency) improves the trade balance and supports the rupee.
B) Encouraging Indian borrowers to issue rupee-denominated Masala Bonds abroad brings foreign currency into India as foreign investors buy these bonds, increasing demand for the rupee.
C) Easing conditions for External Commercial Borrowing (ECB) encourages Indian entities to borrow in foreign currency from abroad, bringing foreign currency into India and increasing its supply relative to the rupee.
Therefore, an expansionary monetary policy is the least likely measure to be taken to stop a currency slide.

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55. The Chairmen of public sector banks are selected by the

The Chairmen of public sector banks are selected by the

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Banks Board Bureau
Reserve Bank of India
Union Ministry of Finance
Management of concerned bank
This question was previously asked in
UPSC IAS – 2019
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As part of banking reforms aimed at improving governance in Public Sector Banks (PSBs), the Government of India established the Banks Board Bureau (BBB) in 2016. One of the primary functions of BBB was to recommend persons for appointment as whole-time directors and non-executive chairmen in PSBs and public sector financial institutions. While the final appointment order is issued by the Ministry of Finance (on the recommendation of the Appointments Committee of the Cabinet), the selection process and recommendation for these top posts in PSBs are made by the dedicated body, BBB (which was later replaced by FSIB). Therefore, the selection is done by the Banks Board Bureau (or its successor body).
The selection of Chairmen (and other whole-time directors) of Public Sector Banks is done by the Banks Board Bureau (or its successor, FSIB).
The Reserve Bank of India regulates banks but does not appoint their chairmen. The management of the concerned bank does not select its own top leadership. While the Union Ministry of Finance is the administrative ministry and issues the final appointment order, the actual selection process for recommending candidates is undertaken by the specialized body (BBB/FSIB) to professionalize the appointments.

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56. What was the purpose of Inter-Creditor Agreement signed by Indian bank

What was the purpose of Inter-Creditor Agreement signed by Indian banks and financial institutions recently?

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To lessen the Government of India's perennial burden of fiscal deficit and current account deficit
To support the infrastructure projects of Central and State Governments
To act as independent regulator in case of applications for loans of ₹ 50 crore or more
To aim at faster resolution of stressed assets of ₹ 50 crore or more which are under consortium lending
This question was previously asked in
UPSC IAS – 2019
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The Inter-Creditor Agreement (ICA) was signed by major Indian banks and financial institutions as part of the ‘Sashakt’ scheme for resolving stressed assets, particularly large value Non-Performing Assets (NPAs) under consortium lending (where multiple banks have lent to the same borrower). The ICA aims to facilitate faster decision-making among lenders regarding resolution strategies (like restructuring, liquidation, change in ownership, etc.) for stressed accounts involving multiple creditors, especially those with total exposure of ₹ 50 crore or more. This helps avoid delays in resolving bad loans which arise when multiple banks with different stakes and priorities are involved.
The Inter-Creditor Agreement is a mechanism among lenders to speed up the resolution of stressed assets under consortium lending.
The ICA streamlines the process by allowing a decision agreed upon by a certain majority of creditors (by value of debt) to be binding on all other creditors who are part of the agreement. This prevents minority creditors from blocking resolution efforts and aims to maximize recovery value from stressed assets, complementing existing frameworks like the Insolvency and Bankruptcy Code (IBC).

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57. Which of the following is not included in the assets of a commercial b

Which of the following is not included in the assets of a commercial bank in India?

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Advances
Deposits
Investments
Money at call and short notice
This question was previously asked in
UPSC IAS – 2019
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Deposits are not included in the assets of a commercial bank in India.
In banking terminology, assets are what a bank owns or what is owed to it, while liabilities are what a bank owes to others.
A) Advances (Loans): When a bank provides a loan to a customer, the customer owes the bank money. This is an asset for the bank.
B) Deposits: When a customer deposits money into an account, the bank owes that money back to the customer. Therefore, deposits represent a liability for the bank, not an asset.
C) Investments: Banks invest in various instruments like government securities, bonds, and shares. These investments are assets owned by the bank.
D) Money at call and short notice: This refers to very short-term loans made by banks to other financial institutions. The amount lent is owed back to the lending bank, making it an asset.
The balance sheet of a commercial bank lists its assets (like cash reserves, loans, investments) and liabilities (like deposits, borrowings, capital). The fundamental accounting equation applies: Assets = Liabilities + Equity. Deposits are the primary source of funds for most banks and are thus their largest liability.

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58. The Service Area Approach was implemented under the purview of

The Service Area Approach was implemented under the purview of

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Integrated Rural Development Programme
Lead Bank Scheme
Mahatma Gandhi National Rural Employment Guarantee Scheme
National Skill Development Mission
This question was previously asked in
UPSC IAS – 2019
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The Service Area Approach was implemented under the purview of the Lead Bank Scheme.
The Service Area Approach (SAA) was introduced by the Reserve Bank of India (RBI) in April 1989. It was an integral part of the Lead Bank Scheme, aiming to assign specific villages to each bank branch operating in rural and semi-urban areas. The objective was to ensure planned and orderly development of banking facilities, particularly credit delivery, in rural areas by making each branch responsible for a designated ‘service area’ (a cluster of villages). This was intended to improve the quality of credit planning and flow to the rural sector and avoid overlapping service areas among different banks.
The Lead Bank Scheme was introduced in 1969 based on the recommendations of the Gadgil Study Group and the Nariman Committee, aiming to give a lead role to individual banks (both public and private sector) for banking development in specific districts. The SAA operationalized the ground-level implementation of credit plans under the Lead Bank Scheme by assigning specific geographical responsibilities to bank branches. The SAA guidelines were revised in 2004, and the focus shifted towards Block as the unit for planning rather than individual villages assigned to branches.

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59. With reference to the governance of public sector banking in India, co

With reference to the governance of public sector banking in India, consider the following statements :

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  • 1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
  • 2. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.

Which of the statements given above is/are correct ?

1 only
2 only
Both 1 and 2
Neither 1 nor 2
This question was previously asked in
UPSC IAS – 2018
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Statement 2 is correct: As part of reforms to strengthen public sector banks, the merger of the five associate banks of SBI and Bharatiya Mahila Bank with the parent State Bank of India was completed in 2017. This was a significant step in consolidating public sector banking. Statement 1 is likely incorrect: While there have been significant government capital infusions into public sector banks over the last decade, particularly to address Non-Performing Assets (NPAs) and meet capital adequacy norms, the infusion has not shown a steady increase year-on-year throughout the entire decade, but rather occurred in large tranches during specific periods.
Government intervention in public sector banks includes capital infusion for recapitalization and consolidation through mergers. The merger of SBI associates was a major reform move.
The government has undertaken various measures to improve the health of PSBs, including recapitalization programs and consolidation. After the SBI merger, the government also initiated the merger of other PSBs in subsequent years to create fewer, larger banks.

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60. Consider the following statements : 1. The Reserve Bank of India man

Consider the following statements :

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  • 1. The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.
  • 2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
  • 3. Treasury bills offer are issued at a discount from the par value.

Which of the statements given above is/are correct ?

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1 and 2 only
3 only
2 and 3 only
1, 2 and 3
This question was previously asked in
UPSC IAS – 2018
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The correct answer is C) 2 and 3 only.
This question pertains to the management of government securities and the characteristics of Treasury Bills in India.
1. The Reserve Bank of India (RBI) serves as the banker and debt manager for *both* the Central Government and the State Governments. It manages and services both Government of India Securities (G-Secs) and State Government Securities (State Development Loans – SDLs). Statement 1 is incorrect.
2. Treasury Bills (T-Bills) are short-term money market instruments. In India, T-Bills are issued *only* by the Central Government to meet its short-term funding requirements. State Governments do not issue T-Bills; they raise market borrowings through SDLs. Statement 2 is correct.
3. Treasury Bills are zero-coupon securities, meaning they do not pay interest. They are issued at a discount to their face value (par value) and redeemed at the par value on maturity. The return to the investor is the difference between the maturity value and the issue price (the discount). Statement 3 is correct.
Therefore, statements 2 and 3 are correct.

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