Unit 7 Banking and Financial Institutions PYQ’s 7th Dec 2023 Shift 1

The correct answer is Shah Committee (1992).

Key Points

• The Shah Committee, established in 1992, was instrumental in suggesting the regulatory framework for Non-Banking Financial Companies (NBFCs) in India.
• Objective: The primary objective of the Shah Committee was to review the existing regulatory framework for NBFCs and recommend necessary changes to enhance the regulation of these financial entities.
• Background: Before the Shah Committee's recommendations, NBFCs operated with relatively less stringent regulatory oversight compared to banks. This led to concerns about the financial stability and integrity of the NBFC sector.
• Recommendations:
  • The Shah Committee recommended a more structured regulatory framework for NBFCs to ensure their operations are transparent and financially sound.
  • It suggested that the Reserve Bank of India (RBI) should have greater authority over NBFCs, including the power to audit, inspect, and impose penalties.
  • The committee emphasized the need for NBFCs to maintain a certain level of capital adequacy and liquidity to mitigate risks.
• Impact: Following the Shah Committee's recommendations, the RBI implemented a series of regulations that significantly shaped the NBFC sector. These included requirements for registration with the RBI, adherence to specific capital and liquidity norms, and regular reporting of financial activities.
• Long-term Effects: The changes brought about by the Shah Committee have led to a more robust and resilient NBFC sector, contributing to the overall stability of India's financial system. It also paved the way for further refinements in NBFC regulations over the years.

Correct answer is Universal access to financial services

Key Points

• Financial inclusion = Financial inclusion refers to the availability and equality of opportunities to access the financial services and products that meet their needs such as transactions, payments, savings, credit facilities. Financial inclusion strives to remove the barriers that exclude the people from participating in the financial sector. It is also called inclusive finance. It leads to overall innovation, economic growth and consumer knowledge.
• Importance of financial inclusion
  • Financial inclusion reduces poverty and inequality = Financial inclusion provides various opportunities to the marginalized and poor people to access the normal financial services such as savings, credit facilities, insurance, transactions and payments. By providing theses tools the financial inclusion can help to lift the people out of poverty and reduce the inequalities.
  • Promotes economic growth = When more people have access to the financial services and the products they can participate actively in the economy. When the financial inclusion is increased it will lead to increase investment and savings which in turn would lead to economic growth.
  • Promotes small business = Due to financial inclusion the the small business will be able to get the credit facilities much easily. As the credit will be available easily more and more small business can emerge and grow.
  • Financial inclusion promotes innovation = Financial inclusion drives innovation in financial sector leading to development of new technologies that will benefit to the underserved population. By innovating new technologies there will be economic growth and the people will get more educated.
• Barriers to financial inclusion
  • The first barrier in financial inclusion is extreme poverty because people with little or no money does not require any financial services.
  • The next barrier is lack of knowledge. As the poor people have lack of knowledge they cannot get the benefit of the services provided by the financial institutions.
  • While opening the accounts the high minimum balance also serve as a barrier to financial inclusion because poor people have little or no money at all.

Key Points

• Saurashtra Gramin Bank is a Regional Rural Bank which was formed in 1978 after amalgamation of three banks. It is owned by Government of India, Government of Gujarat and State bank of India.
• Arunachal Pradesh Rural bank was established in 1983 under Regional Rural Bank Act, 1976. It operates in entire Arunachal Pradesh. It is sponsored by State bank of India, Government of India and Government of Arunachal Pradesh.
• Madhyanchal Gramin Bank was established in 2006. It is joint venture go Government of India, State Bank of India and Government of Madhya Pradesh. It caters to over 13 districts of Madhya Pradesh.
• Rajasthan Marudhara Gramin Bank was formed in 2014 after the amalgamation of Marudhara Gramin Bank and Mewar Aanchalik Gramin Bank.
• Telangana Gramin Bank, formerly known as Deccan Grameena Bank was formed in 2015. It is sponsored by Government of India, Telangana government and State bank of Hyderabad.

Additional Information

• Regional rural Banks are scheduled commercial banks which operate at regional level in different states of the country. Thy were established under the Regional rural Banks Act, 1976.
• RRBs provide credit facility, deposit facility and other banking facilities to rural and semi urban areas.
• RRBs are owned by government of India, the sponsor bank and the concerned State government.
• Regional Rural Banks are regulated by RBI and supervised by NABARD.

The correct answer is Both Statement I and Statement II are true

Key Points

• Both statements accurately describe the characteristics and issuance of ordinary treasury bills and ad hoc treasury bills
• Ordinary treasury bills (T-bills) are indeed marketable securities issued by the government to raise short-term funds.
• They are typically sold through auctions to a wide range of investors, including the public and financial institutions such as banks, mutual funds, and insurance companies.
• Moreover, T-bills are traded in the secondary market, allowing investors to buy and sell them before their maturity date.
• Ad hoc treasury bills are special short-term securities issued by the government, usually to the Reserve Bank of India (RBI), to meet temporary mismatches in its receipts and expenditures.
• These bills are not typically issued to the public or other financial institutions but are instead used as a mechanism for the government to borrow directly from the RBI.
• The RBI may issue currency notes against these ad hoc treasury bills, effectively monetizing the government's debt.

Additional Information

• Treasury bills (T-bills) are short-term debt securities issued by the government to raise funds.
• They are typically sold at a discount from their face value and mature in a relatively short period, ranging from a few days to a year. T-bills are considered one of the safest investments because they are backed by the full faith and credit of the government.

The correct answer is A, B, D and E Only

Key Points

• Bank of issue: This is correct. The RBI has the authority to issue currency notes in India. It is responsible for managing the supply of currency in the economy, ensuring its adequacy, and maintaining its integrity.
• Banker's bank and lender of the last resort: This is correct. The RBI acts as a banker to other banks in India, holding their deposits, providing them with liquidity, and facilitating inter-bank transactions. It also serves as a lender of last resort, providing emergency funds to banks facing financial crises.
• Regulator of fiscal policy: This is incorrect. The RBI is not directly responsible for fiscal policy, which involves government spending, taxation, and budgetary matters. Fiscal policy is typically set by the government, while monetary policy falls within the RBI's purview.
• Controller of credit: This is correct. The RBI plays a crucial role in controlling credit in the economy through various monetary policy tools such as bank rate, repo rate, and open market operations. It regulates the credit flow in the economy to maintain price stability and promote economic growth.
• Custodian of foreign exchange reserves: This is correct. The RBI manages India's foreign exchange reserves, which consist of foreign currencies, gold, and other assets held by the central bank. These reserves are used to stabilize the rupee's value in international markets and ensure external stability.

Additional Information

• The Reserve Bank of India (RBI) is the central bank of India and plays a pivotal role in the country's economic and financial system.
• he RBI's role is crucial in maintaining monetary stability, fostering economic growth, and ensuring the stability and integrity of India's financial system. It operates as an independent and autonomous institution, accountable to the government and the public for its actions and policies.

The correct answer is RuPay.

Key Points

• The National Payments Corporation of India (NPCI) is an important body for all retail payment systems in India.
• It aims to allow all Indian residents access to e-payment services.
• It has developed various digital payment systems, one of which is RuPay.
• Paytm is a private firm and does not come under the jurisdiction of the NPCI.
• BharatPe, like Paytm, is a private firm offering digital payment solutions and is not a product of the NPCI.
• Mastercard is a multinational financial services corporation headquartered in the United States, possessing no link to the NPCI.
• RuPay, on the other hand, is a credit card payment system launched by the NPCI. RuPay has been created with the intent to fulfill RBI's vision of establishing a 'domestic, open and multilateral system of payments'.
• Therefore, the correct answer is: RuPay 

Additional Information

• The National Payments Corporation of India (NPCI) is an umbrella organization for all retail payment systems in India.
• It was established in 2008 by the Reserve Bank of India (RBI) and the Indian Banks' Association (IBA) with a vision to create a robust Payment and Settlement Infrastructure in India.
• NPCI has played a pivotal role in revolutionizing the payment systems in India and making them globally recognized.
• It has developed numerous payment systems and products, such as Automated Clearing House (ACH), Immediate Payment Service (IMPS), National Automated Clearing House (NACH), Unified Payments Interface (UPI), and most notably, India's homegrown card network, RuPay.