Money & Banking Archives

71. What is/are the purpose/purposes of the ‘Marginal Cost of Funds based

What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI?

1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.

Select the correct answer using the code given below.

[amp_mcq option1=”1 only” option2=”2 only” option3=”Both 1 and 2″ option4=”Neither 1 nor 2″ correct=”option3″]

This question was previously asked in

UPSC IAS – 2016

Both statements 1 and 2 correctly describe the purposes of the Marginal Cost of Funds based Lending Rate (MCLR) announced by RBI. MCLR was introduced to replace the Base Rate system to improve transparency in how banks determine interest rates on loans and to ensure that changes in the RBI’s policy rates are transmitted more effectively to borrowers. This aims to make interest rates fairer for both banks (reflecting their cost of funds more accurately) and borrowers (ensuring timely benefit from policy rate cuts).

MCLR is an internal benchmark for banks, based on the marginal cost of borrowing. It replaced the Base Rate system for all new floating rate loans sanctioned from April 1, 2016.

The key components of MCLR include the marginal cost of funds, negative carry on account of CRR, operating costs, and tenure premium. RBI’s objective with MCLR was to improve the monetary policy transmission mechanism and enhance transparency in lending rates. MCLR rates are reviewed and published monthly by banks.

72. The term ‘Core Banking Solutions’ is sometimes seen in the news. Which

The term ‘Core Banking Solutions’ is sometimes seen in the news. Which of the following statements best describes/ describe this term?

1. It is a networking of a bank’s branches which enables customers to operate their accounts from any branch of the bank on its network regardless of where they open their accounts.
2. It is an effort to increase RBI’s control over commercial banks through computerisation.
3. It is a detailed procedure by which a bank with huge non-performing assets is taken over by another bank.

Select the correct answer using the code given below.

[amp_mcq option1=”1 only” option2=”2 and 3 only” option3=”1 and 3 only” option4=”1, 2 and 3″ correct=”option1″]

This question was previously asked in

UPSC IAS – 2016

Download PDF Attempt Online

Statement 1 best describes the term ‘Core Banking Solutions’ (CBS).

– Core Banking Solutions (CBS) are a centralized system implemented by banks that allows all branches to access and process customer data and transactions in real-time from a central database.
– This enables customers to operate their accounts from any branch of the bank that is on the CBS network, regardless of where the account was originally opened (Statement 1). Services like cash withdrawal/deposit, fund transfers, account balance checks, etc., become available across the network.

– CBS is a technology platform that modernizes banking operations, improves efficiency, customer service, and data management. It facilitates activities across various departments of a bank, including deposit accounts, loan management, ledger maintenance, and customer relationship management.
– While computerization inherent in CBS provides banks with better data and operations management that *can* be used for regulatory compliance, its main purpose is not to increase RBI’s control (Statement 2 is incorrect).
– Statement 3 describes a banking merger or resolution process related to non-performing assets (NPAs), which is unrelated to the technical term CBS (Statement 3 is incorrect).

73. The establishment of ‘Payment Banks’ is being allowed in India to prom

The establishment of ‘Payment Banks’ is being allowed in India to promote financial inclusion. Which of the following statements is/are correct in this context?

Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks.
Payment Banks can issue both credit cards and debit cards.
Payment Banks cannot undertake lending activities.

Select the correct answer using the code given below.

[amp_mcq option1=”1 and 2 only” option2=”1 and 3 only” option3=”2 only” option4=”1, 2 and 3″ correct=”option2″]

This question was previously asked in

UPSC IAS – 2016

Download PDF Attempt Online

Payment Banks are a new model of banks conceptualized by the Reserve Bank of India (RBI) to enhance financial inclusion. They are allowed to accept restricted deposits, but their primary function is facilitating payments and remittances.

Let’s evaluate each statement:
1. **Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks:** The RBI guidelines for licensing of Payment Banks specify that various entities including non-bank Pre-paid Payment Instrument (PPI) issuers, NBFCs, corporate business correspondents, mobile telephone companies, supermarket chains, and public sector entities can be promoters. Entities must be owned and controlled by residents. This statement is correct.
2. **Payment Banks can issue both credit cards and debit cards:** Payment Banks can issue ATM/Debit Cards. However, they are explicitly NOT allowed to issue Credit Cards. This statement is incorrect.
3. **Payment Banks cannot undertake lending activities:** One of the key restrictions on Payment Banks is that they cannot undertake lending activities, either directly or indirectly. Their role is focused on deposit acceptance (up to a certain limit) and payments/remittances. This statement is correct.

Payment Banks can accept demand deposits up to a certain limit per individual customer (initially ₹1 lakh, later increased). They can facilitate domestic remittances and payments, provide internet banking and mobile banking. They must maintain a certain percentage of their deposits in government securities and other approved instruments.

74. With reference to the Indian Renewable Energy Development Agency Limit

With reference to the Indian Renewable Energy Development Agency Limited (IREDA), which of the following statements is/are correct?

1. It is a Public Limited Government Company.
2. It is a Non-Banking Financial Company.

Select the correct answer using the code given below.

[amp_mcq option1=”1 only” option2=”2 only” option3=”Both 1 and 2″ option4=”Neither 1 nor 2″ correct=”option3″]

This question was previously asked in

UPSC IAS – 2015

Download PDF Attempt Online

Both statements are correct.

The Indian Renewable Energy Development Agency Limited (IREDA) is indeed a Public Limited Government Company (a Mini Ratna under the Ministry of New and Renewable Energy) and is also registered with the Reserve Bank of India (RBI) as a Non-Banking Financial Company (NBFC).

IREDA’s primary objective is to promote, develop, and extend financial assistance for renewable energy and energy efficiency/conservation projects. Its status as a government company enables it to fulfil its developmental role in the renewable energy sector, while its registration as an NBFC allows it to perform lending and financial services within the regulatory framework set by the RBI.

75. With reference to Indian economy, consider the following: 1. Bank ra

With reference to Indian economy, consider the following:

1. Bank rate
2. Open market operations
3. Public debt
4. Public revenue

Which of the above is/are component/components of Monetary Policy?

[amp_mcq option1=”1 only” option2=”2, 3 and 4″ option3=”1 and 2″ option4=”1, 3 and 4″ correct=”option3″]

This question was previously asked in

UPSC IAS – 2015

Download PDF Attempt Online

The correct option is C (1 and 2). Bank rate and Open Market Operations are standard instruments of Monetary Policy.

– Monetary policy is the policy adopted by the central bank of a country to control the money supply and interest rates to promote macroeconomic stability.
– Instruments of monetary policy include quantitative measures like Bank Rate (discount rate), Open Market Operations (OMOs), Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo Rate, and Reverse Repo Rate.
– Bank rate (Statement 1) is the rate at which the central bank lends money to commercial banks without any security.
– Open market operations (Statement 2) involve the buying and selling of government securities by the central bank in the open market to control liquidity.
– Public debt (Statement 3) and public revenue (Statement 4) are components of Fiscal Policy, which relates to government spending and taxation. Fiscal policy is formulated and implemented by the government, not the central bank.

Monetary policy primarily targets inflation and growth by influencing the cost and availability of money and credit in the economy. Fiscal policy influences aggregate demand through government expenditure and revenue. In India, the Reserve Bank of India (RBI) is responsible for formulating and implementing monetary policy.

76. If the interest rate is decreased in an economy, it will

If the interest rate is decreased in an economy, it will

[amp_mcq option1=”decrease the consumption expenditure in the economy” option2=”increase the tax collection of the Government” option3=”increase the investment expenditure in the economy” option4=”increase the total savings in the economy” correct=”option3″]

This question was previously asked in

UPSC IAS – 2014

Download PDF Attempt Online

A decrease in the interest rate makes borrowing money cheaper.
A) decrease the consumption expenditure: Lower interest rates generally make it cheaper for consumers to borrow for purchases (like vehicles, homes) or to use credit, which tends to *increase* consumption expenditure, not decrease it. Also, lower returns on savings encourage spending.
B) increase the tax collection of the Government: While stimulating economic activity might eventually lead to higher tax collection, this is an indirect and not the most direct or immediate effect of a decreased interest rate.
C) increase the investment expenditure in the economy: Businesses often borrow money to finance investments in capital goods, expansion, research, etc. A lower interest rate reduces the cost of borrowing, making more investment projects financially viable and thus encouraging businesses to increase investment expenditure. This is a primary channel through which monetary policy (via interest rates) affects the economy.
D) increase the total savings in the economy: A lower interest rate means a lower return on savings. This makes saving less attractive relative to spending or investing, potentially leading to a *decrease* in the rate of saving or total savings, not an increase.

– Interest rates represent the cost of borrowing and the return on saving.
– Lower interest rates make borrowing cheaper and saving less attractive.
– Cheaper borrowing stimulates investment by businesses and consumption by households.

Central banks use interest rates as a tool of monetary policy. Decreasing interest rates (expansionary policy) is often used to stimulate economic growth during a slowdown by encouraging spending and investment. Conversely, increasing interest rates (contractionary policy) is used to curb inflation by making borrowing expensive and encouraging saving.

77. In the context of Indian economy, which of the following is/are the pu

In the context of Indian economy, which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?

1. To enable the Central Bank to control the amount of advances the banks can create
2. To make the people’s deposits with banks safe and liquid
3. To prevent the commercial banks from making excessive profits
4. To force the banks to have sufficient vault cash to meet their day-to-day requirements

Select the correct answer using the code given below.

[amp_mcq option1=”1 only” option2=”1 and 2 only” option3=”2 and 3 only” option4=”1, 2, 3 and 4″ correct=”option2″]

This question was previously asked in

UPSC IAS – 2014

Download PDF Attempt Online

The correct option is B. The purposes of ‘Statutory Reserve Requirements’ (CRR and SLR) include enabling the Central Bank to control the amount of advances banks can create and making people’s deposits with banks safe and liquid.

Statutory Reserve Requirements, specifically the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), are monetary policy tools used by the Central Bank (RBI).
1. By requiring banks to hold a portion of their deposits as reserves (cash with RBI for CRR, approved securities for SLR), the RBI limits the amount of funds banks have available for lending, thereby influencing credit creation and controlling the money supply. This directly enables the Central Bank to control the amount of advances banks can create.
2. CRR and SLR ensure that banks maintain a certain percentage of their liabilities in highly liquid assets (cash or approved securities), making a portion of the depositors’ funds safe and available if needed, thus enhancing the safety and liquidity of deposits.

3. Preventing commercial banks from making excessive profits is not the primary objective of reserve requirements. While controlling lending can indirectly impact profitability, the main goals are monetary stability, inflation control, and depositor protection.
4. Reserve requirements mandate holdings with the RBI (CRR) or in specific assets (SLR), not necessarily in the bank’s own vault cash for day-to-day requirements. Banks manage their day-to-day liquidity needs through other means, although reserve requirements do contribute to overall liquidity.

78. What is/are the facility/facilities the beneficiaries can get from the

What is/are the facility/facilities the beneficiaries can get from the services of Business Correspondent (Bank Saathi) in branchless areas?

1. It enables the beneficiaries to draw their subsidies and social security benefits in their villages.
2. It enables the beneficiaries in the rural areas to make deposits and withdrawals.

Select the correct answer using the code given below.

[amp_mcq option1=”1 only” option2=”2 only” option3=”Both 1 and 2″ option4=”Neither 1 nor 2″ correct=”option3″]

This question was previously asked in

UPSC IAS – 2014

Download PDF Attempt Online

The correct option is C. Both statements 1 and 2 describe facilities that beneficiaries can get from the services of Business Correspondents (Bank Saathi) in branchless areas.

Business Correspondents (BCs), also known as Bank Saathis, are retail agents appointed by banks to provide banking services in remote locations where establishing brick-and-mortar branches is not viable. Their main role is to promote financial inclusion by extending banking services to the underserved population, particularly in rural areas.

1. BCs enable beneficiaries of government schemes, pensions, and other social security benefits to receive their payments conveniently in their villages, often using biometric authentication.
2. BCs provide basic banking services like account opening, cash deposits, cash withdrawals, balance enquiry, and fund transfers through micro-ATMs or other digital devices at or near the customer’s location in rural areas.
Both facilities are core functions aimed at bringing banking services to the doorstep of people in unbanked or underbanked regions.

79. The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time L

The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to

[amp_mcq option1=”banking operations” option2=”communication networking” option3=”military strategies” option4=”supply and demand of agricultural products” correct=”option1″]

This question was previously asked in

UPSC IAS – 2014

Download PDF Attempt Online

The correct option is A. The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’ are used in relation to banking operations.

Marginal Standing Facility (MSF) is a facility under which scheduled commercial banks can borrow additional funds overnight from the Reserve Bank of India (RBI) by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a certain limit. The MSF Rate is the interest rate charged by the RBI for this facility, and it is a key monetary policy tool. Net Demand and Time Liabilities (NDTL) represent the total liabilities of a bank (deposits, borrowings, etc.) minus its deposits with other banks and other approved assets. It is the base on which banks’ reserve requirements like the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are calculated by the RBI.

Both MSF Rate and NDTL are specific terms used in the context of banking regulations, monetary policy, and the operations conducted by commercial banks under the purview of the central bank (RBI) in India. They are not related to communication networking, military strategies, or supply and demand of agricultural products.

80. Supply of money remaining the same when there is an increase in demand

Supply of money remaining the same when there is an increase in demand for money, there will be

[amp_mcq option1=”a fall in the level of prices” option2=”an increase in the rate of interest” option3=”a decrease in the rate of interest” option4=”an increase in the level of income and employment” correct=”option2″]

This question was previously asked in

UPSC IAS – 2013

Download PDF Attempt Online

When the supply of money remains the same and there is an increase in the demand for money, it leads to an increase in the rate of interest.

In the money market, the demand for money (Md) is inversely related to the interest rate, while the supply of money (Ms) is typically considered fixed by the central bank. If the demand for money increases (shifts right) while the supply is fixed, the equilibrium in the money market shifts to a higher interest rate, as people are willing to pay more to hold money or borrow funds.

This concept is explained by theories of money demand, such as the Keynesian liquidity preference theory, which posits that individuals hold money for transactional, precautionary, and speculative motives. A higher demand for money, for whatever reason (e.g., increased economic activity, higher expected inflation), ceteris paribus, drives up the cost of holding or borrowing money, which is reflected in the interest rate.