[DAY 22] 60 DAY RAPID REVISION (RaRe) SERIES for UPSC Prelims 2022 – ECONOMICS, CURRENT AFFAIRS & CSAT; Test Series, Videos & Notes!

Solution (b)

Basic Info:

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/ debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/ purchase/ construction of immovable property. 

A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). 

They raise funds from the public, directly or indirectly, and lend them to ultimate spenders.
They advance loans to the various wholesale and retail traders, small-scale industries and selfemployed persons.

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

• NBFC cannot accept demand deposits
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Solution (a)

Basic Info:

Under RBI’s Market Stabilisation Scheme (MSS), the RBI issues Market Stabilisation Bonds (MSBs)to withdraw the excess liquidity in the economy. These bonds are government bonds provided by the central government to the RBI for the dedicated purpose of withdrawing excess liquidity under the MSS. 

The value of bonds in rupees will be treated as net RBI debt to the government. This is because the proceeds from MSS will not go to the government, though it is the government who provided the bonds.

The proceeds from the Market Stabilization Scheme are held in a separate identifiable cash account by the government. The fund is appropriated only for the redemption of the treasury bills or dated securities issued under the MSS. 

In the usual case, T-bills or dated securities of the government are used to cover the fiscal deficit of the government. But in the case of the MSS, the proceeds cannot be used by the government. 

The undesirable aspect of the MSS exercise is that the interest paid out on MSS bonds shall be beard by the government and is accounted in the budget. The interest payments for MSS securities represent the budgetary burden for ensuring price stability. This interest payment is often referred as carrying cost of sterilisation.

Solution (a)

Basic Info:

Instruments of monetary policy are the tools with the RBI that can be used to realize its set targets and objectives. Monetary policy instruments are divided into direct and indirect depending upon their nature of impact on the targets:

Direct instruments are the ones which enable the RBI to hit the target (money supply, liquidity) without the policy action by others. The direct instruments are:

• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)

Indirect instruments are the instruments of the RBI where policy actions/responses in institutions like commercial banks are also necessary for hitting the targets and objectives set by the RBI. Indirect instruments are:

• Repo rate
• Liquidity Adjustment Facility (LAF)
• Open Market Operations
• MSF (Marginal Standing Facility)
• Market Stabilization Scheme (MSS)

Solution (c)

Basic Info:

The interest rate that the RBI charges when commercial banks borrow money from it is called the repo rate. The interest rate that the RBI pays commercial banks when they park their excess cash with the central bank is called the reverse repo rate. Since RBI is also a bank and has to earn more than it pays, the repo rate is higher than the reverse repo rate

Using these two rates, the RBI sets the tone for all other interest rates in the banking system, and through that route, in the broader economy. For instance, when the RBI wants to encourage economic activity in the economy, it reduces the repo rates.

Doing this enables commercial banks such as the SBI to bring down the interest rates they charge (on their loans) as well as the interest rate they pay on deposits. This, in turn, incentivises people to spend money, because keeping their savings in the bank now pays back a little less, and businesses are incentivised to take new loans for new investments because new loans now cost a little less as well.

It is for this reason that the repo and reverse repo rates are often referred to as the “benchmark” interest rates in the economy.

Solution (c)

Basic Info:

MSF or Marginal Standing Facility enables banks to borrow funds from RBI (Reserve Bank of India) in emergency situations when their liquidity absolutely dries up. This short-term borrowing scheme facilitates the scheduled banks to get funds from the central bank of India overnight in case of serious cash shortage by offering their approved government securities. 

MSF rate or Marginal Standing Facility rate is the interest rate at which the Reserve Bank of India provides money to the scheduled commercial banks who are facing acute shortage of liquidity. This rate differs from the Repo rate and the banks can get overnight funds from RBI by paying the exclusive MSF rate. RBI can vary the rate of borrowing and the percent of borrowing under MSF to maintain stability in the Indian economy.

When the commercial banks are in dire need of funds, they pledge RBI to provide funds at a higher rate compared to the Repo rate under LAF or Liquidity Adjustment Facility. Generally, the MSF rate is 0.25% or 25 basis points more than the repo rate. 

Using this facility, all the scheduled banks under RBI can avail money in emergency situations up to 1% of their NDTL (net demand and time liabilities) or SLR securities. This special facility can only be pledged by banks under emergency circumstances when the inter-bank liquidity freezes completely.

Solution (c)

Basic Info:

Every scheduled commercial bank has to keep a certain proportion of their demand and time deposits with the RBI as cash reserves. By varying the cash reserve ratio, the central bank can vary the volume credit (money circulation) in the economy. 

When the RBI raises the CRR, money supply reduces and liquidity with the banking system comes down.

 Also the banking system’s credit creation capacity comes down with immediate effect. There is no time lag involved in the deployment of CRR.

Keeping CRR with RBI provides monetary stability and safety to the public deposits. It also ensures solvency of banks i.e. staying in business and proper functioning of the banks. 

Since banks do not earn interest on the CRR, so it is idle money for the banks which increases costs for banks. 

Solution (b)

Basic Info:

Statutory Liquidity Ratio, or SLR refers to the percentage of Net Demand and Time Deposits, that the banks are obligated to keep with themselves as reserves at any point in time, in the form of:

• Cash
• Gold 
• Investments in the given instruments:
• Treasury Bills of Government of India
• Dated securities issued from time to time by the government under the market borrowing programme and the Market Stabilization Scheme;
• State Development Loans (SDLs) issued from time to time by the State Government under the market borrowing programme; and
• Any other instrument stipulated by the central bank

Objectives of SLR

• To limit the expansion of bank credit.
• To increase the bank’s investment in government securities.
• To ensure the solvency of banks.
• To control inflation and propel growth.

A higher SLR reflects that that banks will have less money for commercial transactions and extension of credit.

Solution (d)

Basic Info: 

The total stock of money in circulation among the public at a particular point of time is called money supply.

The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets.

RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.

• M1 = CU + DD
• M2 = M1 + Savings deposits with Post Office savings banks
• M3 = M1 + Net time deposits of commercial banks
• M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)

CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks.

The word ‘net’ implies that only deposits of the public held by the banks are to be included in money supply.

The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.

M1 and M2 are known as narrow money. M3 and M4 are known as broad money. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.

M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.

Solution (b)

Basic Info:

As per RBI Act 1934, Monetary Policy Committee (MPC) has been constituted consisting of 6 members. 

• • The Governor of RBI—(Chairperson),Member, ex officio; 
  • Deputy Governor of RBI, in charge of Monetary Policy—Member, ex officio; 
  • One officer of RBI to be nominated by the Central Board of RBI—Member, ex officio; and 

• Three persons to be appointed by the Central Government—Members. 

The RBI shall organise at least four meetings of the Monetary Policy Committee in a year. As of now, RBI is conducting 6 meetings in a year, once in every two months.

The main objective of the Monetary Policy Committee is to determine the Policy Rate required to achieve the inflation target.

The decision of the Monetary Policy Committee shall be binding on the Bank.

Solution (c)

Basic Info:

When importers buy dollars in the foreign exchange market, rupee depreciates as the demand of dollars increases in the forex market. But if they directly deal with RBI (and take dollars from RBI) and don’t go in the forex market then it may not impact the rupee-dollar rate. 

When RBI increases the repo rate, the interest rate in the market increases which may attract foreign investors in debt instruments resulting in rupee appreciation. 

When RBI sells dollars in forex market, the supply of dollar increases and dollar depreciates and rupee appreciates.

Solution (d)

Basic Info:

The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate that a bank can lend at.

The RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016. It replaced the base rate structure, which had been in place since July 2010.

MCLR is linked to the actual deposit rates. Hence, when deposit rates rise, it indicates the banks are likely to hike MCLR and lending rates are set to go up.

As per the RBI, the MCLR will bring in the following benefits:

• Transmission of policy rate into the lending rates of banks to improve;
• computation of the interest rates by banks will get more transparent;
• Cost of loan will be fairer to the borrowers as well as the banks.
• It will help the banks to become more competitive and enhance their long-run value.

Solution (d)

Basic Info:

Scheduled Banks: Banks registered under the second schedule of the RBI Act. Comprised of PSBs, Private Banks, Foreign Banks, RRBs and Scheduled Cooperative Banks. RBI gives special privileges to them and banks have to follow RBI guidelines. They have to keep CRR.

Public Sector Banks: Banks owned by the government (SBI, Nationalized Banks and IDBI). These banks have high NPAs at present and government is injecting capital into them.

Differentiated Banks: Banks that offers limited products (savings, credit payment and a combination of these). Small Finance Banks and Payment Banks are differentiated banks. Differentiated banks were started to promote financial inclusion and payments.

Universal Banks: Universal Banks are the banks that can offer any products under RBI’s regulations. The mainstream commercial banks including SBI, Bank of Baroda etc. are universal banks.

Regional Rural Banks: Banks started to provide lending in rural areas especially agriculture. These banks are declining in number and are jointly owned by central government, state government and sponsoring bank.

Small Finance Bank SFBs are differentiated bank that can offer savings, credit and payments subjected to regulations. Small Finance Banks are just starters in the banking system. They are licensed by the RBI under the new differentiated banking policy.

Payment Banks: PBs are differentiated banks and can accept deposit and make payment facilities. Payment Banks comes under differentiated license. Several new payment banks are started by dedicated digital payment companies. The Postal Department has started a payment bank.

Solution (a)

Basic Info:

The capital adequacy ratio (CAR) is a measurement of a bank’s available capital expressed as a percentage of a bank’s risk-weighted credit exposures. The capital adequacy ratio, also known as capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of financial systems around the world. 

• CAR is critical to ensure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent.
• CAR is used by regulators to determine capital adequacy for banks and to run stress tests.
• Two types of capital are measured with CAR. Tier-1 capital can absorb a reasonable amount of loss without forcing the bank to stop its trading, while tier-2 capital can sustain a loss if there’s a liquidation.
• The downside of using CAR is that it doesn’t account for the risk of a potential run on the bank, or what would happen in a financial crisis.

The Basel III Norms have prescribed a CAR of 8%. In India, the Reserve Bank of India mandates the CAR for scheduled commercial banks to be 9%, and for public sector banks, the CAR to be maintained is 12%.

Solution (a)

Basic Info:

Based on the Malegam Committee recommendations, RBI came out with detailed guidelines for microfinance institutions in 2011. These guidelines introduced a new category of NBFCs, viz NBFC-MFIs (microfinance institutions).

It also set norms for income criteria for clients of MFIs, repayment period, borrower loan limits, interest rate norms and caps, limits on a number of lenders to a borrower and a host of other norms and criteria.

Raja Chelliah Committee: Tax reforms in India

Narasimhan Committee: Banking Reforms

Tarapore Committee: Capital Account Convertibility

Solution (c)

Basic Info:

White Label ATMs:

ATMs set up, owned and operated by non-bank entities are called white label ATMs.

They are authorized under the Payment and Settlement Systems Act, 2007, by the RBI.

Cash in ATMs is provided by the sponsored bank while ATM machine does not have any branding of Bank.

Their role is confined to enabling the transactions of all banks customers by establishing technical connectivity with the existing authorized, shared ATM Network Operators or Card Payment Network Operators.

The operators are entitled to receive a fee from the banks for the use of ATM resources by the bank’s customers and are not permitted to charge bank customer directly.

Tata Communications Payment Solutions Limited (Indicash) is the first company authorized by RBI to open WLAs in the country.

RBI directly involved because these white label Companies have to separately get license/permission from RBI to run business.

Brown Label ATMs: Brown Label ATM are those Automated Teller Machines where hardware and the lease of the ATM machine is owned by a service provider–but cash management and connectivity to banking networks is provided by a sponsor bank .

The private company owns & operates the ATM machine, pays office rent. They negotiate with the landlord, electricity company, telecom company and so on.

The bank (which has outsourced this work) provides cash for that ATM.

ATM has logo of that bank (which has outsourced this work).

RBI is not involved directly. These outsourcing companies have contractual obligation with their respective banks.

Solution (b)

Basic Info:

Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner.

Objectives:

• Ensure access of financial products & services at an affordable cost
• Use of technology to lower cost & widen reach

Basic tenets of the scheme

• Banking the unbanked – Opening of basic savings bank deposit (BSBD) account with minimal paperwork, relaxed KYC, e-KYC, account opening in camp mode, zero balance & zero charges
• Securing the unsecured – Issuance of Indigenous Debit cards for cash withdrawals & payments at merchant locations, with free accident insurance coverage of Rs. 2 lakh
• Funding the unfunded – Other financial products like micro-insurance, overdraft for consumption, micro-pension & micro-credit

The scheme was launched based upon the following 6 pillars: 

• Universal access to banking services  – Branch and BC
• Basic savings bank accounts with overdraft facility of Rs. 10,000/- to every eligible adult
• Financial Literacy Program– Promoting savings, use of ATMs, getting ready for credit, availing insurance and pensions, using basic mobile phones for banking
• Creation of Credit Guarantee Fund – To provide banks some guarantee against defaults
• Insurance – Accident cover up to Rs. 1,00,000 and life cover of   Rs. 30,000 on account opened between 15 Aug 2014 to 31 January 2015
• Pension scheme for Unorganized sector

Solution (b)

Basic Info:

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. A nominal interest rate refers to the interest rate before taking inflation into account.

If inflation and banks offer deposit rate are same then nobody will deposit money in banks as whatever banks are offering will be eaten away by inflation. People deposit money in banks to earn something and this is possible only when real interest rate is positive. 

So, if inflation is 5% and banks are offering deposit rate 7% then the real interest rate will be 2%. This means the depositors are actually/really getting 2% return.

When real interest rate is positive then it leads to people saving (depositing) money in banks, and somewhat reduction in their consumption. 

Solution (c)

Basic Info:

Liquidity Trap is a situation where the Central Bank wants to increase the money supply in the economy in case of recession but fails to lower the interest rate as the interest rates (repo rate and bank deposit rates) almost reaches zero. This makes the monetary policy ineffective as further repo rate reduction is not possible. 

In such a situation people would like to hold on to their cash as the interest rate is almost zero. 

People are not willing to spend and demand in the economy declines, that is why economy enters into liquidity trap.

When the interest rate has come down to almost zero then the yield will also be close to zero as interest and yield are directly proportional.

Solution (a)

Basic Info: 

Monetary policy transmission is the process by which the central bank’s policy action is transmitted in order to achieve the ultimate goals of inflation and growth.

All the above tools can help in impacting the interest rate in the economy.

Solution (d)

Basic Info:

Open Market Operations (OMO) is one of the quantitative monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.

OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.

The central bank sells g-secs to remove liquidity from the system and buys back g-secs to infuse liquidity into the system.

These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.

RBI carries out the OMO through commercial banks and does not directly deal with the public.

The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.

Solution (b) 

Statement Analysis:

Context – First ship under Project 15B got commissioned

Solution (c)

Statement Analysis:

Context – The Jal Shakti Ministry released a guide for the safe rescue and release of stranded Ganges River Dolphins.

Solution (b) 

Statement Analysis:

Context – Skills Strengthening for Industrial Value Enhancement (STRIVE) programme was launched recently

Solution (a) 

Statement Analysis:

Context – AERA was in news 

Solution (b)

According to Mission 2070: A Green New Deal for a Net-Zero India, the country’s transition to a net zero economy could create over 50 million jobs and contribute more than $1 trillion in economic impact by 2030 and around $15 trillion by 2070. It is released by World Economic Forum.

Context – The report was in news

Solution (b)

Let the radius of the wheel be π

Then 5000 * 2πr = 1100000cm

r = 1100000/(10000*3.1416)

r = 35 cm

Solution (c)

Let outer radius = R

Inner radius = r = R – 14

2πR = 220 => 35 cm

r = 35 – 14 = 21 cm

Area of track = πR2 – πr2 = π(R2– r2) = ( 352 – 212 ) = π ( 1225 – 441) = 2464

Cost of leveling it = 2464* (0.5 ) = 1232 rupees

Solution (c)

Since they stand on the same base, their radius is same 

Volume of cone = πr2h/3

Volume of hemisphere = 2πr2/3

Volume of cylinder = πr2h

Ratio =  πr2h/3 : 2πr2/3 : πr2h

• h/3 : 2r/3 : h 
• h : 2r : 3h
• radius of a hemisphere = height 
• so, h : 2h : 3h => 1 : 2 : 3

Solution (a)

The volume of mud dug out = 10 * 6 * 4.5 = 270 m3

The remaining ground rise by ‘h’ m

Then ((20 * 12) – (10 * 6)) h = 270

180 h = 270

h = 27/18 = 3/2 = 1.5m

Solution (a)

The main idea of the passage is to show how Japanese culture has led to Japan enjoying a competitive advantage.

The passage does not make any claim about the sour labour relations in Japan. Hence option b is wrong.

The passage states that Japanese culture is less supportive of entrepreneurial activity than their western counterparts. Hence, option c is wrong.

The main subject of the passage is the competitive advantage enjoyed by the Japanese. The sluggishness of the American firms is a secondary tangential point.

Option ‘a’ brings out the main idea of the passage efficiently and hence it is the correct answer.