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

Answer: (c)

Priority sector lending is applicable to banks and not NBFCs.

RBI recently allowed that onward lending by registered Non-Banking Finance Companies (NBFCs) including Micro Finance Institutions (MFI) for the various priority sectors will be considered as Priority Sector Lending (PSL) by BANKS. RBI has done the above changes in order to boost credit to the needy segment of borrowers.

Under the revised on-lending model, banks can classify only the fresh loans sanctioned by NBFCs out of bank borrowing as priority sector lending (it will be considered as PSL by banks).

Bank credit to NBFCs for ‘On-Lending’ will be allowed up to a limit of five per cent of individual bank’s total priority sector lending on an ongoing basis.

Answer: (b)

The technical and most often used way to control inflation is by tightening the money supply.

The logic goes that when people do not have excess money, they will buy a lesser quantity of goods and services and postpone luxurious expenses.

This will reduce the demand for the products and thus lead to a reduction in prices. Most central banks use high-interest rates as the traditional way to fight or prevent inflation.

Answer: (b)

RBI has increased the income limit for each rural household to be eligible for microfinance from Rs. 1 lakh to Rs. 1.25 lakh, and from Rs. 1.6 lakh to Rs. 2 lakh for urban and semi-urban areas.

Second, RBI has also increased the lending limit per borrower from Rs. 1 lakh to Rs. 1.25 lakh.

Both these eligibility measures are necessary to qualify a loan as a microfinance asset by MFIs. (One individual can borrow from two MFIs at the most, no need to remember) Both measures are expected to expand the pool of beneficiaries at the bottom of the pyramid, as well as increase the flow of credit in absolute amounts through this channel.

The RBI board set up a sub-committee in 2011, under the chairmanship of Y.H. Malegam, to study issues and concerns relating to the microfinance industry. It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counselling, etc.

As a consequence of the Malegam committee report, RBI decided to set up a separate category of non-banking financial institutions: Non-banking financial company-micro finance institution (NBFC-MFI).

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: (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: (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.