UPSC CSE Prelims
Money, Banking & Financial System Previous Year Questions (PYQs)
Showing solved Previous Year Questions for Chapter: Money, Banking & Financial System
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What was the purpose of Inter-Creditor Agreement signed by Indian banks and financial institutions recently?
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.
Which of the following is not included in the assets of a commercial bank in India?
Detailed Explanation:
Answer: Option 2 — Deposits
Deposits are liabilities for a commercial bank, not assets. They represent money that customers have placed with the bank, which the bank is obligated to repay on demand or at a specified time. In contrast, advances (loans), investments, and money at call and short notice are all assets as they represent resources owned by the bank or money owed to it.
📝 Short Notes: Bank Balance Sheet - Assets vs Liabilities
| Assets (What Bank Owns) | Liabilities (What Bank Owes) |
|---|---|
| Cash: Currency in hand and with RBI | Deposits: Demand deposits, savings deposits, fixed deposits |
| Balances with RBI: Statutory reserves (CRR) | Borrowings: From RBI, other banks, and financial institutions |
| Balances with other banks: Inter-bank deposits | Other liabilities: Bills payable, provisions |
| Money at call and short notice: Short-term lending to other banks | Capital and Reserves: Share capital, reserves and surplus |
| Investments: Government securities, bonds, shares | |
| Advances/Loans: Loans to customers, overdrafts, cash credit | |
| Fixed Assets: Bank premises, equipment, furniture |
The Services Area Approach was implemented under the purview of
Detailed Explanation:
Answer: Option 2 — Lead Bank Scheme
The Service Area Approach (SAA) was implemented as an improved version of the area approach under the Lead Bank Scheme. Under SAA, each commercial bank/RRB branch in rural and semi-urban areas is designated to serve 15-25 villages for planned and orderly development, ensuring effective linkages between bank credit, production, productivity, and income enhancement.
📝 Short Notes: Lead Bank Scheme & Service Area Approach
| Aspect | Details |
|---|---|
| Lead Bank Scheme | Launched in 1969 on the recommendation of Gadgil Study Group and Nariman Committee; aims to coordinate banking activities in each district |
| Service Area Approach (SAA) | Introduced in April 1989 as an improvement over the area approach of Lead Bank Scheme |
| Coverage | Each bank branch is allotted 15-25 villages in rural/semi-urban areas for comprehensive banking services |
| Objective | Ensure planned development, credit linkage with production, and prevent credit gaps in designated service areas |
| Responsibility | Designated branch meets all banking needs of its service area including deposit mobilization, credit delivery, and financial inclusion |
| Coordination | Lead bank coordinates with other banks, government agencies, and district authorities for comprehensive rural development |
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The money multiplier in an economy increases with which one of the following?
Detailed Explanation:
Answer: Option 2 — Increase in the banking habits of the population
The money multiplier increases when people deposit more money in banks rather than holding cash. This increases the deposit base available for banks to lend, thereby multiplying the money supply through the credit creation process. Higher banking habits mean lower currency-deposit ratio, which directly increases the money multiplier.
❌ Option 1 – Incorrect: Increase in Cash Reserve Ratio (CRR) reduces the money multiplier as banks must hold more reserves and can lend less.
✅ Option 2 – Correct: Increase in banking habits reduces cash holdings and increases deposits, thereby increasing the money multiplier.
❌ Option 3 – Incorrect: Increase in Statutory Liquidity Ratio (SLR) reduces the money multiplier as banks must hold more liquid assets and have less funds for lending.
❌ Option 4 – Incorrect: Population increase does not directly affect the money multiplier mechanism, which depends on reserve ratios and banking habits.
📝 Short Notes: Money Multiplier
- Money Multiplier Formula: m = 1/r, where r is the reserve ratio (CRR). Alternatively, m = (1 + cdr)/(cdr + rr), where cdr is currency-deposit ratio and rr is reserve ratio.
- Direct Relationship: Money multiplier increases with increase in banking habits (lower currency-deposit ratio) and decreases with increase in reserve requirements.
- Cash Reserve Ratio (CRR): Percentage of deposits banks must maintain with RBI as reserves. Higher CRR → Lower money multiplier.
- Statutory Liquidity Ratio (SLR): Percentage of deposits banks must maintain in liquid assets (gold, government securities). Higher SLR → Lower money multiplier.
- Currency-Deposit Ratio: Ratio of cash held by public to deposits in banks. Lower ratio (higher banking habits) → Higher money multiplier.
- Credit Creation: Banks create money through lending. If initial deposit is ₹100 and CRR is 10%, banks can lend ₹90, which when re-deposited creates ₹81 for further lending, and so on.
The Chairman of public sector banks are selected by the
Detailed Explanation:
Answer: Option 1 — Banks Board Bureau
The Chairman of public sector banks in India are selected by the Banks Board Bureau (BBB), an autonomous body established in 2016 based on the recommendations of the P.J. Nayak Committee Report (2014). The BBB is responsible for recommending candidates for appointments to the Boards of Directors and top management positions in Public Sector Banks (PSBs) and state-owned financial institutions, thereby bringing greater transparency and professionalism to the selection process.
📝 Short Notes: Banks Board Bureau
- Establishment: The Banks Board Bureau was established on 28th February 2016 as an autonomous body by the Government of India.
- Genesis: It was formed based on the recommendations of the P.J. Nayak Committee Report (2014) on governance reforms in PSBs.
- Key Functions: Recommends persons for appointment as Whole-Time Directors and Non-Executive Chairmen of PSBs; assists banks in developing strategies and capital-raising plans; evaluates performance of bank boards.
- Composition: The BBB comprises eminent professionals from banking and finance sectors, including former RBI Governors, bankers, and industry experts.
- Objective: To improve governance, enhance professionalism, and ensure merit-based selection in public sector banks and financial institutions.
- Status: The BBB functions as an autonomous body but provides recommendations to the government, which makes the final appointments.
Which one of the following statements correctly describes the meaning of legal tender money?
Detailed Explanation:
Answer: Option 2 — The money which a creditor is under compulsion to accept in settlement of his claims
Legal tender is any form of payment recognized by law that a creditor is legally obligated to accept for the settlement of a debt or financial obligation. The defining characteristic of legal tender is the legal compulsion on the creditor—if a debtor offers legal tender to settle a claim, the creditor cannot refuse it and subsequently sue for non-payment of the debt.
Why other options are incorrect:
❌ Option 1 – Incorrect: This misinterprets 'legal tender' as money used in legal proceedings, which is not the correct definition.
❌ Option 3 – Incorrect: Cheques, drafts, and bills of exchange are 'fiduciary money' whose acceptance depends on trust between parties; creditors are not legally compelled to accept them and can insist on cash payment.
❌ Option 4 – Incorrect: Legal tender includes both metallic coins and paper currency notes; defining it solely as metallic money is incomplete.
📝 Short Notes: Legal Tender Money
- Definition: Legal tender is the form of payment that must be accepted by law for settlement of debts and obligations within a jurisdiction.
- In India: Currency notes issued by the Reserve Bank of India (RBI) and coins issued by the Government of India constitute legal tender under the Reserve Bank of India Act, 1934 and the Coinage Act, 2011.
- Legal Compulsion: A creditor cannot refuse legal tender offered for debt settlement; refusal may result in the debtor being discharged from the obligation.
- Limitations on Coins: Under the Coinage Act, 2011, coins are legal tender only up to certain limits (e.g., ₹1,000 for coins of ₹10 denomination and below).
- Bank Money vs Legal Tender: Cheques, drafts, and bills of exchange are not legal tender as their acceptance is voluntary and based on mutual trust (fiduciary money).
- Demonetization Impact: When currency is demonetized (as in 2016), those notes cease to be legal tender from the specified date.
With reference to the governance of public sector banking in India, consider the following statements
- Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
- To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.
Which of the statements given above is/are correct?
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.
Which one of the following links all the ATMs in India?
Detailed Explanation:
Answer: Option 3 — National Payments Corporation of India
The National Payments Corporation of India (NPCI) operates the National Financial Switch (NFS), which is the largest network of shared ATMs in India. NFS links ATMs across all banks, enabling customers to access any bank's ATM for cash withdrawal and other banking services, facilitating seamless inter-bank ATM transactions nationwide.
📝 Short Notes: National Payments Corporation of India (NPCI)
- Establishment: NPCI was incorporated in 2008 as an umbrella organization for operating retail payments and settlement systems in India.
- Ownership: It is an initiative of the Reserve Bank of India (RBI) and Indian Banks' Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007.
- National Financial Switch (NFS): Launched in 2004, NFS is the largest network of shared ATMs in India, connecting over 1 lakh ATMs across banks.
- Key Services: NPCI operates multiple payment systems including UPI (Unified Payments Interface), IMPS (Immediate Payment Service), RuPay card scheme, BHIM, AePS (Aadhaar Enabled Payment System), and NFS.
- UPI: Unified Payments Interface is NPCI's flagship real-time payment system that has revolutionized digital payments in India.
- RuPay: India's own domestic card payment network, competing with Visa and Mastercard, launched by NPCI in 2012.
Consider the following events:
- The first democratically elected communist party government formed in a State in India.
- India's then largest bank, 'Imperial Bank of India', was renamed 'State Bank of India'.
- Air India was nationalised and became the national carrier.
- Goa became a part of independent India.
Which of the following is the correct chronological sequence of the above events?
Detailed Explanation:
Answer: Option 2 — 3 - 2 - 1 - 4
The correct chronological sequence of these historical events is determined by their occurrence dates: Air India nationalization (1953), Imperial Bank renamed to SBI (1955), first democratically elected Communist government in Kerala (1957), and Goa's integration into India (1961).
Chronological Analysis:
Event 3 – Air India Nationalisation (1953): Air India was nationalised following the Air Corporations Act, 1953, when the Government of India acquired majority stake from the Tata Group, making it the national carrier.
Event 2 – Imperial Bank renamed to SBI (1955): Based on the Gorewala Committee recommendations, the State Bank of India Act was passed, and on July 1, 1955, the Imperial Bank of India was officially renamed as State Bank of India.
Event 1 – First Communist Government (1957): In the 1957 Kerala Legislative Assembly elections, the Communist Party of India won a majority, and E.M.S. Namboodiripad formed the government, marking the first democratically elected Communist government in any Indian state.
Event 4 – Goa's Integration (1961): Goa was liberated from Portuguese rule on December 19, 1961, through Operation Vijay and subsequently incorporated into India as a Union Territory by the 12th Constitutional Amendment Act, 1962.
📝 Short Notes: Post-Independence Milestones (1950s-60s)
| Year | Event | Significance |
|---|---|---|
| 1953 | Air India Nationalisation | Air Corporations Act, 1953; establishment of national carrier |
| 1955 | State Bank of India created | Imperial Bank renamed; based on Gorewala Committee (All India Rural Credit Survey Committee) recommendations |
| 1957 | First Communist Government | Kerala - CPI under E.M.S. Namboodiripad; first democratically elected communist government worldwide |
| 1961 | Goa Liberation | Operation Vijay (December 19); ended 451 years of Portuguese rule |
| 1962 | Goa's Constitutional Integration | 12th Constitutional Amendment Act; Union Territory status |
| 1987 | Goa Statehood | Goa became 25th state of India (May 30) |
Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in the news?
Detailed Explanation:
Answer: Option 3 — The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
The Merchant Discount Rate (MDR) is a fee charged to merchants by banks or payment processors for enabling and processing digital payment transactions through debit cards, credit cards, or digital wallets. It is typically a percentage of the transaction amount and is deducted from the merchant's account. This fee covers the cost of providing the payment infrastructure, processing the transaction, and bearing the associated risks.
📝 Short Notes: Merchant Discount Rate (MDR)
- Definition: MDR is the fee charged to merchants by banks/payment processors for accepting card-based or digital payments from customers.
- Components: It typically includes interchange fees (paid to the card-issuing bank), network fees (paid to card networks like Visa/RuPay), and acquirer margin (retained by the merchant's bank).
- Rate Structure: MDR varies based on the type of card (debit/credit), transaction value, merchant category, and payment method used.
- Government Intervention (2020): The Government of India abolished MDR on digital payments made through RuPay debit cards and UPI to promote digital transactions and reduce merchant costs.
- Purpose: MDR compensates the payment ecosystem participants for infrastructure, technology, fraud prevention, and operational costs.
- Impact: While MDR enables seamless digital transactions, high rates can discourage small merchants from adopting digital payment methods.
Consider the following statements:
- Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
- CAR is decided by each individual bank.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 1 — 1 only
Capital Adequacy Ratio (CAR) is a regulatory measure that ensures banks maintain sufficient capital reserves to absorb potential losses from loan defaults and other financial risks, thereby protecting depositors' interests. Statement 1 correctly defines CAR as the capital banks must hold to offset losses if borrowers fail to repay dues, while Statement 2 is incorrect because CAR is mandated and regulated by the central bank (RBI in India), not decided by individual banks.
✅ Statement 1 – Correct: CAR represents the minimum capital that banks must maintain as a cushion against potential losses from loan defaults and other risks, protecting depositors and ensuring financial stability.
❌ Statement 2 – Incorrect: CAR is not decided by individual banks but is mandated and regulated by the Reserve Bank of India (RBI), which sets minimum CAR requirements to ensure uniformity and financial system stability.
📝 Short Notes: Capital Adequacy Ratio (CAR)
- Definition: CAR is the ratio of a bank's capital to its risk-weighted assets, expressed as a percentage.
- Regulatory Authority: In India, the Reserve Bank of India (RBI) sets and monitors CAR requirements for all banks.
- Purpose: Ensures banks have adequate capital buffers to absorb losses, protecting depositors and maintaining financial system stability.
- Minimum CAR in India: RBI mandates a minimum CAR of 9% for scheduled commercial banks (higher than Basel III's 8% requirement).
- Components: CAR includes Tier I capital (core capital like equity and disclosed reserves) and Tier II capital (supplementary capital like subordinated debt).
- Basel Norms: CAR requirements in India are aligned with Basel III international banking regulations.
- Impact: Higher CAR indicates a bank's greater capacity to withstand financial stress and protects against insolvency.
With reference to digital payments, consider the following statements:
- BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
- While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 1 — 1 only
Statement 1 is correct because BHIM app enables UPI-based direct bank-to-bank transfers using the recipient's UPI ID or QR code. Statement 2 is incorrect because BHIM requires three factors of authentication (device ID/mobile number, linked bank account, and UPI PIN), whereas a chip-pin debit card typically requires only two factors (card and PIN).
✅ Statement 1 – Correct: BHIM app allows money transfer to anyone with a UPI-enabled bank account using their UPI ID or by scanning QR codes.
❌ Statement 2 – Incorrect: BHIM app has three factors of authentication (device ID/mobile, bank account, UPI PIN), not two, while chip-pin debit cards have two factors (card possession and PIN).
📝 Short Notes: Digital Payment Systems in India
- BHIM (Bharat Interface for Money): A UPI-based mobile payment app launched by NPCI in December 2016 for instant bank-to-bank transactions.
- Three Authentication Factors in BHIM: (1) Device ID and registered mobile number, (2) Linked bank account, (3) UPI PIN for transaction completion.
- UPI (Unified Payments Interface): Real-time payment system enabling inter-bank transactions through mobile platform using unique Virtual Payment Address (VPA).
- Transaction Methods: UPI ID-based transfer, QR code scanning, mobile number-based transfer, and payment requests.
- Chip-Pin Debit Card Authentication: Two factors - physical card possession (something you have) and PIN (something you know).
- Security Advantage: BHIM's three-factor authentication provides higher security compared to traditional two-factor card-based systems.
Which of the following statements best describes the term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news?
Detailed Explanation:
Answer: Option 2 — It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.
The Scheme for Sustainable Structuring of Stressed Assets (S4A) was launched by the Reserve Bank of India on 13 June 2016 to address large stressed assets in the corporate sector. The scheme enabled deep financial restructuring of big debt-laden projects by allowing banks to convert part of the debt into equity, thereby restoring the viability of critical sectors including infrastructure.
✅ Option 2 – Correct: S4A is indeed an RBI scheme for financial restructuring of stressed corporate entities by allowing lenders to acquire equity.
❌ Option 1 – Incorrect: The scheme is not related to ecological costs of developmental schemes.
❌ Option 3 – Incorrect: S4A is not a disinvestment plan but a debt restructuring mechanism.
❌ Option 4 – Incorrect: While related to stressed assets, S4A is a separate RBI scheme, not a provision in the Insolvency and Bankruptcy Code.
Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)?
- It decides the RBI’s benchmark interest rates.
- It is a 12-member body including the Governor of RBI and is reconstituted every year.
- It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below :
Detailed Explanation:
Answer: Option 1 — 1 only
The Monetary Policy Committee (MPC) is the primary body responsible for deciding the RBI's benchmark interest rates, particularly the repo rate, which influences the overall monetary policy stance of the country. Only statement 1 is correct, while statements 2 and 3 contain factual inaccuracies regarding the composition and chairmanship of the MPC.
✅ Statement 1 – Correct: The MPC is mandated to decide the RBI's benchmark interest rates, especially the repo rate, which is the key policy rate for monetary policy decisions.
❌ Statement 2 – Incorrect: The MPC is a 6-member body (not 12), consisting of three members from the RBI (including the Governor) and three external members appointed by the Central Government for a four-year term; it is not reconstituted annually.
❌ Statement 3 – Incorrect: The MPC functions under the chairmanship of the Governor of RBI, not the Union Finance Minister.
What is the purpose of setting up of Small Finance Banks (SFBs) in India?
- To supply credit to small business units
- To supply credit to small and marginal farmers
- To encourage young entrepreneurs to set up business particularly in rural areas.
Select the correct answer using the code given below:
Detailed Explanation:
Answer: Option 1 — 1 and 2 only
Small Finance Banks (SFBs) were established by the Reserve Bank of India to promote financial inclusion by providing basic banking services to the unserved and underserved sections of the population. Their primary objective is to supply credit to small business units, small and marginal farmers, micro and small industries, and unorganized sector entities.
✅ Statement 1 – Correct: SFBs are specifically designed to provide credit facilities to small business units as part of their core mandate for financial inclusion.
✅ Statement 2 – Correct: Providing credit to small and marginal farmers is one of the primary objectives of SFBs to support agricultural and rural development.
❌ Statement 3 – Incorrect: While SFBs may indirectly benefit young entrepreneurs, their primary purpose is not specifically to encourage young entrepreneurs to set up businesses in rural areas; this is more aligned with schemes like MUDRA or Stand-Up India.