money supply, banking & financial institutions section 12 MCQ Questions & Answers Detailed Explanation

Answer: (a)

Following are the amendments done in 2017 in Banking Regulation Act 1949 regarding the resolution of stressed assets/NPAs

The Central Government may, by order, authorize RBI to issue directions to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of Insolvency and Bankruptcy Code 2016

RBI may from time to time issue directions to any banking company for resolution of stressed assets

Based on the above amendments, RBI issued directions to banks (in general and not against any specific default) to move to IBC 2016 for resolution of stressed assets, then some lenders approached Court and the Supreme Court gave the following judgement dated 2nd April 2019:

“RBI can only direct banking institutions to move under the IBC Code 2016 if there is a central government authorization and it should be in respect of specific defaults.

Thus, any directions which are in respect of debtors, in general, would be ultra vires Section 35AA of Banking Regulation Act 1949”.

So, RBI in general can issue guidelines for resolution of stressed assets but it cannot force a banking company to move to IBC 2016 without Govt. of India authorization. And in case after Govt. approval, RBI is asking a banking company to move to IBC 2016 for resolution of stressed assets, then it should be in cases of specific defaults. Lenders do not require RBI permission to move to IBC Code 2016.

Answer: (c)

As per the amendment done in the Insolvency and Bankruptcy Code (IBC) in November 2017, Wilful Defaulters cannot bid for the companies put up for sale during the resolution process.

It also prohibits bidding any borrower (or promoter) whose account has been identified as an NPA for over a year and has not repaid the dues.

But if the borrower/promoter has made payment of all overdue amounts with interest and charges, then he can bid (submit a resolution plan) for the company.

[Ref: Economic Survey 2017-18 Vol 2 page 52]

Answer: (b)

Till the time, reserves are with RBI, it is not part of the money supply.

But if RBI gives its surplus reserves to the government which will ultimately spend this amount will result in this extra money reaching to the public resulting in higher inflation.

RBI paying dividends to the government is a part of budgetary resources of govt. of India and it helps in reducing the fiscal deficit.

Answer: (a)

Answer: (a)

In 2018-19, to increase liquidity in the economy, RBI purchased a lot of Govt. bonds (open market operations), on which it earned interest income, resulting in income (including from other sources) of Rs. 1.23 lakh crore. Rs. 53,000 crores were transferred from the ‘Contingency Fund’ to RBI’s income.

This resulted in total income and then a transfer of Rs. 1.76 lakh crore in 2018-19 from RBI to Govt.

RBI’s surplus/excess capital (a pie of which the government was trying to extract) consists of two distinct types of items:

Contingency Fund:

It is meant for meeting unexpected and unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks and any risk arising on account of the special responsibilities given to RBI.

[Based on the recommendations of the Jalan Committee, the excess risk provision amounting to Rs. 53,000 crores were written back from Contingency Fund to RBI’s income.

As per the Annual Report of RBI 2018-19, RBI’s income was Rs. 1.76 lakh crore in 2018- 19, out of which Rs. 53,000 crore was because of transfer from Contingency Fund and rest Rs. 1.23 lakh crore was regular income.

This regular income in 2018-19 was also quite high as compared to the previous year’s income of Rs. 60,000 cr to Rs. 70,000 crores because of RBI’s open market operations where RBI purchased government securities from the market to pump liquidity in the economy. Holding cash does not give any income to RBI but the holding of government securities gives RBI interest income.]

Asset Development Fund:

It is meant for investments in subsidiaries and associate institutions and meets internal capital expenditure.

In 2018-19, Rs. 64 crore provision was made towards the Asset Development Fund on account of new investments in the National Centre for Financial Education (NCFE) and Indian Financial Technology and Allied Services (IFTAS).

Answer: (b)