Insights Static Quiz -349, 2019–Economy

Solution: d)

‘Hindu’ rate of growth was coined to refer to the phenomenon of sluggishness in growth rate of Indian economy (3.5 per cent observed persistently during 1950s through 1980s).

The term, which owes to Professor Raj Krishna, Member, Planning Commission, captured popular imagination and was used synonymously to describe inadequacy of India’s growth performance.

Solution: d)

A typical ‘ponzi’ scheme involves the operator collecting a large amount of money from investors and paying them returns from their own money or the money collected from subsequent investors, rather than from profit earned by the person or the entity operating such a scheme.

The people or firms who are engaged in a ponzi scheme always try to attract new clients to make investments. The basic premise of the scheme is to gain continuous flow of money by attracting new clients. The scheme falls when this flow of money is stopped.

Source

Solution: a)

RBI’s Prompt Corrective Action (PCA) Framework is a set of guidelines for banks that are weak in terms of identified indicators including – poor asset quality, insufficient capital and insufficient profit or losses.

The PCA is an early intervention package or resolution guideline by the RBI when a bank turns weak in terms of the identified indicators.

The Reserve Bank has specified certain regulatory trigger points, as a part of prompt corrective action (PCA) Framework, in terms of three parameters, i.e. capital to risk weighted assets ratio (CRAR), net non-performing assets (NPA) and Return on Assets (RoA), for initiation of certain structured and discretionary actions in respect of banks hitting such trigger points.

The PCA framework is applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and FMIs.

Source

Solution: d)

Cash Reserve Ratio refers to the fraction of the total Net Demand and Time Liabilities (NDTL) of a Scheduled Commercial Bank held in India, that it has to maintain as cash deposit with the Reserve Bank of India (RBI). The requirement applies uniformly to all banks in the country irrespective of an individual bank’s financial situation or size. In contrast, certain countries e.g. China stipulates separate reserve requirements for ‘large’ and ‘small’ banks.

As per the RBI Act 1934, all Scheduled Commercial Banks (that includes public and private sector banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement. Non-Bank Financial Corporations (NBFCs) are outside the purview of this reserve requirement.

Presently, banks are not paid any interest on behalf of the RBI for parking the required cash. If a bank fails to meet its required reserve requirements, the RBI is empowered to impose a penalty by charging a penal interest rate.

CRR has been kept at 4% since January 2015.

Solution: a)

The objectives of setting up of small finance banks will be to further financial inclusion by (a) provision of savings vehicles, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.

Eligible promoters: Resident individuals/professionals with 10 years of experience in banking and finance; and companies and societies owned and controlled by residents will be eligible to set up small finance banks. Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.

Capital requirement: The minimum paid-up equity capital for small finance banks shall be Rs. 100 crores.

Foreign shareholding: The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

Prudential norms:

1. The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory provisions.
2. The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
3. At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.

Transition path: If the small finance bank aspires to transit into a universal bank, such transition will not be automatic, but would be subject to fulfilling minimum paid-up capital / net worth requirement as applicable to universal banks; its satisfactory track record of performance as a small finance bank and the outcome of the Reserve Bank’s due diligence exercise.