Banking Sector Reforms UPSC Prelims Practice Quiz

In the three decades following nationalisation, the geographical reach and financial reach of the country's banking system had exploded. As certain systemic weaknesses were discovered to have developed in the late 1980s, it was determined that they needed to be addressed for the financial system to fulfil its role in ushering in a more efficient and competitive economy. As a result, a high-level committee (Narasimham Committee) on Financial System (CFS) was established on August 14, 1991 to examine all aspects pertaining to the structure, organisation, function, and procedures of the financial system; based on its recommendations, a comprehensive reform of the banking system was implemented in fiscal 1992–93.

The RBI was advised not to use the CRR as a principal instrument of monetary and credit control, in place it should rely on open market operations (OMOs) increasingly. Two suggestions were made regarding the CRR: · CRR should be progressively reduced from the present high level of 15 per cent to 3 to 5 per cent; and RBI should pay interest on the CRR of banks in excess of the basic minimum at the same rate as banks' one-year deposits. Concerning the SLR it was advised to cut it to the minimum level (i.e., 25 per cent) from the present high level of 38.5 per cent in the next 5 years (it was cut down to 25 per cent in October 1997). (it was cut down to 25 per cent in October 1997). It was also suggested that the government gradually transition to a market-based borrowing programme so that banks receive economic benefits from their SLR investments.

Directed credit programme should be phased away progressively. As per the committee, agriculture and small-scale industries (SSIs) had already matured to a mature stage and therefore did not require any particular support; two decades of interest subsidy were enough. Therefore, concessional rates of interest could be dispensed with. Directed credit should not be a normal programme—it should be a case of extraordinary help to some vulnerable sections—besides, it should be temporary, not a permanent one. Concept of PSL should be modified to cover just the poorest sectors of the rural population such as marginal farmers, rural craftsmen, village and cottage industries, tiny sector, etc.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act of 2002 permits banks and other financial institutions to seize and sell the residential or commercial properties of loan defaulters in order to recoup outstanding debts.

The Basel Accords/Norms (i.e., Basel I, II and now III) are a set of agreements created by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in respect to capital risk, market risk and operational risk.

Debt Recovery Tribunals also known as DRTs were created to facilitate the speedy recovery of debt payable to banks and other financial institutions by their customers.

ARCs were introduced to India under the SARFAESI Act (2002), as specialists to resolve the burden of NPAs.

Acronym derived from the terms capital adequacy (C), asset quality (A), management (M), earnings (E), liquidity (L) and systems for control (S).

Both Statements are wrong.

The differential rate of interest (DRI) is a lending programme started by the government in April 1972 (Fourth five-year plan) that requires all public sector banks in India to lend 1% of their total lending from the previous year to "the poorest of the poor" at an annual interest rate of 4%.