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Home/upsc: banking & monetary policy/Page 3

Mains Answer Writing Latest Questions

Ayushi jain
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Ayushi jainBegginer
Asked: June 25, 2024In:
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What is CBDC, or Central Bank Digital Currency? Talk about how implementing it in India will affect policy. (Answer in 150 words)

upsc: banking & monetary policy
  1. SNEHA
    SNEHA Begginer
    What is Central Bank Digital Currency (CBDC)? Discuss the policy implications of introducing it in India.
Ayushi jain
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Ayushi jainBegginer
Asked: June 25, 2024In:
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The internationalization of the rupee is not without risk, despite its many benefits. Talk about it. (Answer in 150 words)

upsc: banking & monetary policy
  1. Sanskriti Mahtolia
    Sanskriti Mahtolia Begginer

    In the process of internationalization of the rupee it comes with the multiple advantages like reduction in the dependence on the US dollar, enhancements in the globally trading Indian businesses and the most important strengthening of our economy. Promoting the rupee will also reduce the transactioRead more

    In the process of internationalization of the rupee it comes with the multiple advantages like reduction in the dependence on the US dollar, enhancements in the globally trading Indian businesses and the most important strengthening of our economy. Promoting the rupee will also reduce the transaction costs which will benefit the Indian importers and the exporters.

    But with every shift comes risk. Increasing exposures to financial markets globally can lead to greater unpredictability because the rupee would be more influenced by the international economical fluctuations. This would lead to higher inflation rates which will destabilize our domestic economy. Additionally the Indian financial system will face challenges in managing the liquidity as well as the exchange rate risks as we have relatively less developed financial infrastructure compared to other global currencies.

    Furthermore, there’s also the risk of revengeful measures from the other powers of the economy which will perceive this internationalization of the rupee as an upcoming threat to their economy.

    In conclusion, while internationalization of the rupee offers a variety of benefits but it comes with greater and parallel risks as well, so it requires careful management and risk mitigation techniques pre – planned to ensure that the advantages overpowers potential economic instabilites.

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Anshika Singh
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Anshika SinghLearner
Asked: June 25, 2024In:
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Order of importance India’s sector lending industry has a number of obstacles. Talk about its usefulness as a tool for policy in this situation. (Answer in 150 words)

upsc: banking & monetary policy
  1. Ritika Sharma
    Ritika Sharma Learner

    Priority Sector Lending (PSL) mandates increased lending by the banks towards specified sectors and activities in the economy, which may not get timely and adequate credit in the absence of the special dispensation. Presently, categories under priority sector include Agriculture; Micro, Small and MeRead more

    Priority Sector Lending (PSL) mandates increased lending by the banks towards specified sectors and activities in the economy, which may not get timely and adequate credit in the absence of the special dispensation. Presently, categories under priority sector include Agriculture; Micro, Small and Medium Enterprises; Export Credit; Education; Housing; Social Infrastructure; Renewable Energy; and Others. The rate of interest on PSL loans is charged as per the directives of the RBI.

    Challenges with Priority Sector Lending in India:

    • Sectoral issues: Doubling credit to PSL in the agricultural sector leads to an increase of just 11% of total credit in the agricultural sector as compared to 76% in the export sector and 41% in manufacturing sector. Also, agricultural sector’s susceptibility to vagaries of monsoon increases the credit risks of banks under PSL.
    • Lethargy in lending: Most public sector banks have been continuously underperforming on the total priority sector target. This may be due to difficulty in finding viable options to lend to the rural areas or the MSME sector.
    • Rising NPA: The Second Narasimham Committee (1998) observed that directed credit led to an increase in non-performing loans and adversely affected the efficiency and profitability of banks. It stated that 47% of all non-performing assets have come from the priority sector.
    • Costs of PSL in India: It hinders the banks from expanding their scale of lending, consequently, affecting the banking industry and the flow of credit in the economy as a whole. It also impacts the general lending power of banks and deposit rate, which ultimately impact the general public.

    Notwithstanding the challenges, PSL has proved useful for the following reasons:

    • Promotes equity: It promotes social equity and facilitates increase in employment and investment in less developed regions and gives an impetus to the vulnerable sections of the society.
    • Balanced development: Direct lending allows the commercial banks to generate high social returns along with profits and it also contributes to economic development by increasing investment in strategic sectors like exports.
    • Credit formalisation: It increases institutional credit (including commercial banks, cooperative banks and societies) to the agriculture sector compared to non-institutional credit (such as money lenders).

    Despite the challenges, the policy of priority sector lending (PSL) target has benefitted the vulnerable sections of society, which though creditworthy, are unable to access the formal banking system for adequate and timely credit. In this context, to make the PSL policy more effective, various steps such as Priority Sector Lending Certificates, timely revised guidelines by the RBI, continued increase of the target under PSL year-on-year, etc. have been taken, which are steps in the right direction.

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Ayushi jain
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Ayushi jainBegginer
Asked: June 19, 2024In:
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What is sterilization, in your opinion? How does the RBI guard against outside shocks by stabilizing the money supply? (Answer in 200 words)

upsc: banking & monetary policy
  1. Blazero
    Blazero Begginer

    Sterilization refers to the process by which a central bank offsets the effects of foreign exchange interventions on the domestic money supply. When a central bank buys or sells foreign currency to influence exchange rates, it affects the amount of domestic currency in circulation. To neutralize thiRead more

    Sterilization refers to the process by which a central bank offsets the effects of foreign exchange interventions on the domestic money supply. When a central bank buys or sells foreign currency to influence exchange rates, it affects the amount of domestic currency in circulation. To neutralize this impact and maintain control over domestic monetary conditions, the central bank conducts sterilization operations.

    The Reserve Bank of India (RBI) uses sterilization to stabilize the money supply against external shocks. When there is an influx of foreign capital, leading to an increase in foreign exchange reserves, the RBI might sell government securities to absorb the excess liquidity. Conversely, if there is an outflow of foreign capital, causing a reduction in foreign exchange reserves, the RBI might buy government securities to inject liquidity into the system. This ensures that the money supply remains stable despite external capital flows.

    By managing the liquidity through open market operations (OMOs), the RBI can control inflation and interest rates, thereby stabilizing the economy. This is crucial for maintaining economic stability, as uncontrolled fluctuations in the money supply can lead to inflation or deflation, adversely impacting growth and financial stability.

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Ayushi jain
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Ayushi jainBegginer
Asked: June 19, 2024In:
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What are assets that do not perform (NPAs)? Describe the steps the government has recently made to combat the threat posed by non-performing assets (NPAs) in India. (Answer in 200 words)

upsc: banking & monetary policy
  1. Diksha Jadhav
    Diksha Jadhav Begginer
    This answer was edited.

      NPA stands for Non-performing assets (NPAs). As per the Reserve Bank of India NPAs are loans or advances, due for more than 90 days. In other words, an asset becomes non-performing when it stops generating income for the bank. In case of agricultural advances cropping seasons are taken into cRead more

     

    NPA stands for Non-performing assets (NPAs). As per the Reserve Bank of India NPAs are loans or advances, due for more than 90 days. In other words, an asset becomes non-performing when it stops generating income for the bank. In case of agricultural advances cropping seasons are taken into consideration instead of 90 days. Increasing NPAs is not a good sign for the banking sector and economy as it shows the inability of people to repay the loan.

    Types of NPAs

    Non-performing assets are categorized into various types based on specific criteria.

    1. Substandard Assets: The assets have remained NPA for a period less than or equal to 12 months.

    2. Doubtful Assets: Assets that have remained in the substandard category for 12 months.

    3. Loss Assets: Assets where loss has been identified by the bank or external auditors or the RBI, but the amount has not been written off.

    Measures Taken to Control NPAs by the Government

    1. Insolvency and Bankruptcy Code (IBC), 2016:

    It aims to improve the ease of doing business and a single-step solution to resolve insolvency issues.

    To oversee the implementation of the law and insolvency professionals.

    The incorporation of the IBC has significantly improved the recovery rates of bad loans by providing quicker resolution and restructuring of assets.

    2. Asset Quality Review (AQR):

    The RBI introduces an AQR to identify stressed assets in the banking system. This exercise focused on bringing transparency and improving the recognition of NPAs on the bank’s books.

    3. Strategic Debt Restructuring (SDR), 2015:

    If corporations are unable to repay their bank loans, the banks have the option to convert part or all of the loans into equity shares.

    4. Mission Indradhanush:

    This initiative was launched to revise the functioning of PSBs and identify issues like accountability, governance, and the overall condition of the banking sector.

    It includes appointing professionals to major positions, empowering risk control measures, and improving the efficiency of bank operations.

    5. Debt Recovery Tribunal (DRT), 2013:

    It is governed by the Recovery of Debt Due to Banks and Financial Institutions Act, of 1993.

    The aim was to shorten the time needed for case settlements.

    6. Joint Lenders Forum (2014):

    This measure is implemented to prevent the situation where a loan is taken from one bank to repay loans from other banks.

    7. 5:25 Rule (2014):

    It is also known as the Flexible Restructuring of Long Term Project Loans to Infrastructure and Core Industries and involves the refinancing of long-term projects.

    8. Corporate Debt Restructuring (2005):

    It minimizes the company’s debt burden by extending the repayment period and lowering the interest rates.

    9. Asset Reconstruction Companies (ARC) 

    This measure helps in recovering value from distressed loans without going through the time-consuming process of court.

    10. The SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act), 2002:

    This act allows banks and financial institutions to auction residential or commercial properties to recover loans of defaulters.

    The amendment in 2016 aimed to encourage banks to take possession of collateral security and sell them without the interference of courts.

    11. Bad Bank – National Asset Reconstruction Company Limited (NARCL):

    The government suggested setting up a ‘bad bank’ to manage and dispose of stressed assets of banks.

    It will facilitate the aggregation and resolution of large-value NPAs along with the India Debt Resolution Company Limited (IDRCL).

    12. Empowering Governance in Banks:

    It includes the establishment of the Banks Board Bureau (BBB) to recommend appointments of directors and ensure the professionalization in bank management.

    Improved investigation and accountability norms to avoid the reoccurrence of large frauds.

    13. One-Time Settlement Schemes:

    Banks have been encouraged to offer one-time settlement schemes to borrowers, especially in the MSME sector, to expedite the recovery process.

    14. MSME Debt Restructuring:

    The government and RBI have provided relief to the MSME sector by allowing the restructuring of their stressed assets without devaluing them.

     

     

     

     

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Anshika Singh
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Anshika SinghLearner
Asked: June 19, 2024In:
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What is the exchange rate that is flexible? Describe the causes of the Indian rupee’s growth and decline in relation to the US dollar. (Answer in 200 words)

upsc: banking & monetary policy
  1. Firdausi Khatun
    Firdausi Khatun Begginer
    This answer was edited.

    Flexible exchange rate is also called as floating exchange rate which is a monetary policy. In this value of currency is determined by the foreign exchange market, this policy is in contrast with the fixed exchange rate in which value of currency is fixed by the government or the central bank of theRead more

    Flexible exchange rate is also called as floating exchange rate which is a monetary policy. In this value of currency is determined by the foreign exchange market, this policy is in contrast with the fixed exchange rate in which value of currency is fixed by the government or the central bank of the country.
    The value of currency can fluctuate because of the market forces such as supply and demand forces in the market.

    Appreciation of the Indian rupee in relation to the US Dollar means the rupee has become stronger against the dollar. We can buy more dollars with rupees than before.
    Factors leading to appreciation are as follows:-
    1. Increase in the value of Indian Rupee related to the US dollar.
    2. Rupee becomes stronger against the dollar.
    3. Eg.The value of 1 US Dollar decreased from ₹75 to ₹70.It means now we can buy $1 with ₹70 for which we used to pay ₹75 before.

    Depreciation of the Indian rupee is the opposite of appreciation of rupee.In this the Rupee becomes weaker in relation to the US Dollar, we will get less dollars with rupees now.
    Factors leading to depreciation of the Indian rupee are as follows:-
    1. Decrease in the value of Indian Rupee related to the US Dollar.
    2. Rupee has become weaker against the dollar.
    3. Eg. The value of Doller has increased from ₹70 to ₹75. It means earlier we used to pay ₹70 to buy $1 but now we have to pay ₹75 for the same.

    The appreciation and depreciation can be caused by many different factors such as Trade balances, inflation rate, political instability, export-import, interest rates, foreign investment etc.
    Appreciation of rupees leads to increase in purchasing power of Indian consumers but negatively impacts export and import of the country whereas depreciation benefits the export-import.

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Anshika Singh
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Anshika SinghLearner
Asked: June 19, 2024In:
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Talk about the necessity of privatizing public sector banks and the issues raised by this move. (Answer in 200 words)

upsc: banking & monetary policy
  1. Vidya Satya Sai Ankaraju
    Vidya Satya Sai Ankaraju Begginer
    Discuss the need and concerns associated with privatisation of public sector banks.

    Topic Privatisation of Banks

    Topic Privatisation of Banks

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Kamini g
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Kamini gLearner
Asked: June 19, 2024In:
  • 0

Describe how the RBI serves as a banker to both the government and commercial banks while highlighting the monetary policy tools at its disposal (Answer in 200 words)

upsc: banking & monetary policy
  1. Garima Singla
    Garima Singla Begginer

    Reserve Bank of India has many tools : 1).Repo Rate, the rate of interest at which banks responsible for the money of RBI borrow from the bank, is Repo Rate. 2).The rate at which the central bank borrows money from commercial banks is called Reverse Repo Rate (RRR). 3).The money in banks that shouldRead more

    Reserve Bank of India has many tools :

    1).Repo Rate, the rate of interest at which banks responsible for the money of RBI borrow from the bank, is Repo Rate.

    2).The rate at which the central bank borrows money from commercial banks is called Reverse Repo Rate (RRR).

    3).The money in banks that should be kept ready as cash, which is a part of deposits, is known as the Cash Reserve Ratio (CRR).

    4).When a commercial bank keeps at least a predetermined percentage of the customer’s deposits in the form of money, Gold, etc., it is called Statutory Liquidity Ratio ( SLR).

    5).Open Market Operations (OMO) stand for buy and sell-out of secur

    6).Marginal Standing Facility (MSF) is the instrument of RBI through which scheduled commercial banks can obtain available liquidity overnight.

    7).Bank Rate is the rate at which RBI reduces charges and transfers funds to commercial banks.

    These instruments enable RBI to act as a banker for:

    1).Regulating liquidity and credit growth

    2).Maintaining interest rates

    3).Promoting financial stability

    As a banker for the government, RBI:

    1).Manages public finances

    2).Acts as a fiscal agent

    3).Advances money on behalf of the state

    4).Provides advice on matters concerning public spending

    In addition, RBI also manages foreign exchange reserves, overseas payment systems in India, and superintends overall financial system stability across the country’s economy.

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