money supply, banking & financial institutions section 6 MCQ Questions & Answers Detailed Explanation

Answer: (d)

Base Rate was introduced in July 2010 replacing the Benchmark Prime Lending Rate (BPLR) system. Base Rate is the minimum rate below which Scheduled Commercial Banks cannot lend. RBI publishes guidelines for the calculation of Base Rate and every bank calculates its own base rate.

Base rate calculation methodology was based on various factors like:

1. (Average) Cost of deposits/funds (the interest rate that the bank offers to its depositors)
2. Cost of maintaining CRR and SLR (if the banks are required to keep higher reserves like CRR and SLR, then they will be able to lend less money & will have to charge higher interest rates)
3. Operational Costs of Banks
4. Return on Net worth (investment)

From 1st April 2016, RBI has introduced a new methodology for calculation of the Base Rates based on marginal cost of funds rather than the average cost of funds. This new methodology is called Marginal Cost of Funds based Lending Rate (MCLR)

MCLR calculation methodology will be based on the following factors: -

1. The marginal cost of deposits/funds
2. Cost of maintaining CRR and SLR
3. Operational Costs of Banks
4. Tenor Premium (based on the time period for which the loan is given)

The basic difference between the previous Base Rate and the new MCLR based rate is the change from average to marginal.

(When RBI reduces the repo rate, generally banks reduce their deposit rate. Earlier the calculation of lending rate was based on the average cost of deposits to the banks.

So, due to reduction in repo rate and further reduction of deposit rates by banks, the average cost of deposits of the banks did not reduce immediately (it may reduce in future when new depositors will deposit money at lower deposit rate) because still, banks need to pay the higher deposit rate to all its previous depositors.

In the new method, banks will calculate the lending rate based on the marginal cost of deposits i.e. the new deposit rate. So, when RBI will reduce the repo rate and banks reduce the deposit rate, the marginal cost of deposits will get reduced and the banks will have to generally reduce the lending rates). This will help in better monetary policy transmission.

The banks shall review and publish their MCLR every month.

Answer: (c)

Peer to Peer (P2P) Lending:

P2P intermediaries (regulated by RBI) are a class of NBFCs that provide the platform which pairs borrowers and individual lenders. With P2P lending, borrowers take loans from individual investors who are willing to lend their own money for an agreed interest rate.

The profile of a borrower is usually displayed on a P2P online platform where investors can assess these profiles to determine whether they want to risk lending money to a borrower.

The repayments are also made through the NBFC-P2P which processes and forwards the payments to the lenders who invested in the loan. P2P lending is also called social lending or crowdlending.

RBI guidelines regarding P2P lending:

Fund transfer between the participants on the Peer to Peer Lending Platform shall be· through escrow account (a temporary pass-through account held by a third party during the process of a transaction between two parties) mechanisms operated by the NBFC-P2P. All fund transfers shall be through and from bank accounts and cash transaction is strictly prohibited.

NBFC - P2P shall:

1. not raise deposits
2. not lend on its own
3. not provide any credit guarantee
4. not facilitate or permit any secured lending linked to its platform
5. shall not provide any assurance for the recovery of loans.
6. undertake due diligence on the participants;
7. undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders;
8. require prior and explicit consent of the participant to access its credit information;
9. undertake documentation of loan agreements and other related documents;
10. provide assistance in disbursement and repayments of the loan amount;
11. render services for recovery of loans originated on the platform.
12. The total amount of money that an investor can invest across all P2P platforms is Rs. 50 lakhs

Answer: (b)

The LCR is calculated by dividing an institution (Banks/NBFCs) high-quality liquid assets (for example cash, govt. securities, securities issued or guaranteed by foreign governments etc.) by its total net cash flows, over a 30-day period.

In the background of the IL&FS and HDFL crisis, RBI on 24th May 2019 proposed introducing LCR for large NBFCs to help tackle liquidity issues in the sector.

NBFCs will have to maintain minimum high-quality liquid assets of 50% of total net cash outflows over the following 30 calendar days starting from Dec 1, 2020, and from Dec 1, 2024, 100%.

Suppose a bank's expected cash outflow/spending for the next 30 days is Rs. 150 and cash inflow is expected to be Rs. 50, which means net cash outflow for the next 30-day period is Rs. 100.

In such a case if the bank is holding cash and govt. securities (which are called High-Quality Liquid Assets) of Rs. 60,

then LCR = (High Quality Liquid Asset)/ (Banks Net cash outflow for 30-day period) = Rs. 60/ Rs. 100 = 60%.

Answer: (b)

Answer: (b)

Answer: (b)

The term “Strategic Disinvestment” means the sale of a substantial portion of the Government share-holding of a central public sector enterprise (CPSE) of up to 50%, or such higher percentage (to the strategic partner) along with transfer of management control.

(It has to be kept in mind that even by selling less than 50% stake to the strategic partner, the government can transfer the management control to the strategic partner, it is legally possible.)

In Strategic Disinvestment, management control must be transferred to the private strategic partner. Strategic disinvestment is a way of privatisation