money supply, banking & financial institutions section 12 Practice Questions Answers Test with Solutions & More Shortcuts

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: (c)

Devaluation is a reduction in the exchange value of a country’s monetary unit in terms of gold, silver, or foreign currency.

By decreasing the price of the home country’s exports abroad and increasing the price of imports in the home country, devaluation encourages the home country’s export sales and discourages expenditures on imports, thus improving its balance of payments.

Answer: (d)