UPSC CSE Prelims
Banking Reforms Previous Year Questions (PYQs)

Detailed Explanation:

Answer: Option 4 — To aim at faster resolution of stressed assets of Rs. 50 crore or more which are under consortium lending

The Inter-Creditor Agreement (ICA) was introduced as part of Project Sashakt (based on the Sunil Mehta Committee recommendations) to expedite the resolution of Non-Performing Assets (NPAs) in the Indian banking system. Under the ICA, if 66% of lenders by value agree to a resolution plan for stressed assets of ₹50 crore or more under consortium lending, the decision becomes binding on all lenders. This mechanism prevents individual dissenting banks from blocking recovery efforts, thereby enabling faster turnaround of bad loans and improving the health of the banking sector.

Detailed Explanation:

Answer: Option 3 — 2 only

This question evaluates statements about public sector banking reforms in India. Statement 1 is incorrect as capital infusion has not been steady but rather sporadic and need-based. Statement 2 is correct as the merger of SBI associate banks with the parent State Bank of India was indeed carried out as a reform measure.

❌ Statement 1 – Incorrect: Capital infusion into public sector banks by the Government has not been steady over the last decade. It has been sporadic and need-based, with significant infusions through recapitalisation bonds in certain years (especially post-2017) when banks faced high NPAs, rather than a steady increase throughout the decade.

✅ Statement 2 – Correct: As part of public sector banking reforms, the merger of five associate banks and Bharatiya Mahila Bank with State Bank of India was completed in 2017, creating a stronger banking entity and improving operational efficiency.

📝 Short Notes: Public Sector Banking Reforms in India

• Bank Recapitalisation: Government infuses capital into PSBs through budgetary support and recapitalisation bonds to strengthen their capital base and meet Basel III norms.
• SBI Merger (2017): Five associate banks (State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Hyderabad, State Bank of Patiala) and Bharatiya Mahila Bank were merged with SBI, creating India's largest bank with improved global ranking.
• Other PSB Mergers: In 2019-20, 10 PSBs were consolidated into 4 banks, reducing the total number of PSBs from 27 (in 2017) to 12 (by 2020).
• 4R Strategy: Recognition (of NPAs), Resolution (through IBC), Recapitalisation, and Reforms for PSB strengthening.
• Prompt Corrective Action (PCA): Framework by RBI to monitor weak banks based on capital adequacy, asset quality, and profitability parameters.
• Bank Board Bureau: Established in 2016 to improve governance and professionalism in PSBs through transparent board appointments and performance evaluation.

Detailed Explanation:

Basel III is a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS) in response to the 2007-2008 financial crisis.

It strengthens the banking sector's resilience through higher capital adequacy requirements, enhanced liquidity standards (Liquidity Coverage Ratio and Net Stable Funding Ratio), and improved risk management frameworks to absorb financial shocks.

Detailed Explanation:

The Lead Bank Scheme was introduced by the Reserve Bank of India (RBI) in December 1969 to ensure coordinated banking and credit facilities in rural areas.

Under this scheme, a lead bank is assigned to each district to take the lead role in promoting intensive banking development, coordinating credit flow, and ensuring branch expansion in underbanked areas.

The primary objective is district-level concentrated development, not competition among banks or merely opening offices.