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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Consider the following statements:
- National Payments Corporation of India (NPCI) helps in promoting financial inclusion in the country.
- NPCI has launched RuPay, a card payment scheme.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 3 — Both 1 and 2
The National Payments Corporation of India (NPCI) is an umbrella organization established to promote retail payments and financial inclusion by developing payment infrastructure and enabling wider participation in the digital payments ecosystem. Both statements correctly describe NPCI's role and initiatives.
✅ Statement 1 – Correct: NPCI promotes financial inclusion by developing innovative payment systems like UPI, IMPS, and RuPay, which enable affordable and accessible digital payment solutions for all segments of society, including the unbanked and underbanked populations.
✅ Statement 2 – Correct: NPCI launched RuPay in 2012 as India's domestic card payment network to provide an alternative to international schemes like Visa and Mastercard, thereby reducing transaction costs and promoting indigenous payment infrastructure.
Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?
Detailed Explanation:
Answer: Option 1 — Mobile wallets will not be necessary for online payments.
The Unified Payments Interface (UPI) is a real-time payment system that enables instant bank-to-bank transfers directly through mobile applications without requiring intermediate instruments like mobile wallets. By allowing users to make payments directly from their bank accounts, UPI eliminates the need to first load money into a separate wallet for online transactions.
✅ Statement 1 – Correct: UPI enables direct bank-to-bank transfers through mobile apps, removing the need for intermediate mobile wallets as users can pay directly from their bank accounts.
❌ Statement 2 – Incorrect: While UPI promotes digital transactions and financial inclusion, it will not completely replace physical currency in about two decades as cash continues to play a significant role in the Indian economy, especially in rural areas and for small transactions.
❌ Statement 3 – Incorrect: UPI is a domestic payment infrastructure designed for retail payments and has no direct causal relationship with Foreign Direct Investment (FDI) inflows, which depend on factors like economic policies, business environment, and regulatory framework.
❌ Statement 4 – Incorrect: Direct Benefit Transfer (DBT) schemes primarily use Aadhaar-linked bank accounts and NEFT/RTGS systems for subsidy distribution, not UPI, though UPI may facilitate some secondary transactions.
What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI?
- These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances
- These guidelines help ensure availability of bank credit & interest rates which are fair to the borrowers as well as the banks
Select the correct answer using the code given below:
Detailed Explanation:
Answer: Option 3 — Both 1 and 2
✅ Statement 1 – Correct: MCLR framework mandates banks to adopt a standardized, transparent methodology for determining lending rates. Banks must disclose their MCLR calculation components (marginal cost of funds, operating costs, tenor premium, and negative carry) publicly, improving transparency compared to the earlier Base Rate system.
✅ Statement 2 – Correct: MCLR ensures fairness by linking lending rates to actual marginal cost of funds, enabling faster transmission of policy rate changes to borrowers. This balances borrower interests (lower rates when RBI cuts rates) with bank viability (covering costs and maintaining reasonable margins), thereby ensuring both availability of credit and fair pricing.
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The establishment of “Payment Banks’ is being allowed in India to promote Financial Inclusion. Which of the following statements is/are correct in this context?
- Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks.
- Payment Banks can issue both credit cards and debit cards.
- Payment Banks cannot undertake lending activities.
Select the correct answer using the code given below:
Detailed Explanation:
Answer: Option 2 — 1 and 3 only
✅ Statement 1 – Correct: Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks under RBI guidelines. This provision enables entities with extensive reach and distribution networks to promote financial inclusion among unbanked populations.
❌ Statement 2 – Incorrect: Payment Banks are permitted to issue only debit cards and ATM cards linked to their deposit accounts. They cannot issue credit cards as they are not authorized to undertake any lending activities, which is a prerequisite for credit card issuance.
✅ Statement 3 – Correct: Payment Banks are explicitly prohibited from undertaking lending activities under RBI regulations. They can only accept deposits (up to ₹2 lakh per customer) and provide payment/remittance services, thereby focusing solely on facilitating transactions and savings rather than credit creation.
The term ‘Core Banking Solution’ is sometimes seen in the news. Which of the following statements best describes/describe this term?
- It is networking of a bank’s branches which enables customers to operate their accounts from any branch of the bank on its network regardless of where they open their accounts.
- It is an effort to increase RBI’s control over commercial banks through computerization.
- It is a detailed procedure by which a bank with huge non-performing assets is taken over by another bank.
Select the correct answer using the code given below:
Detailed Explanation:
Answer: Option 1 — 1 only
✅ Statement 1 – Correct: Core Banking Solution (CBS) is a centralized banking system that networks all branches of a bank, enabling customers to operate their accounts and perform banking transactions from any branch on the network, regardless of where the account was originally opened. This provides 'anytime, anywhere' banking within the bank's network.
❌ Statement 2 – Incorrect: CBS is not designed to increase RBI's control over commercial banks. It is an internal banking software platform adopted by individual banks to enhance operational efficiency, streamline processes, and improve customer service delivery.
❌ Statement 3 – Incorrect: CBS refers to the centralized software infrastructure for managing daily banking operations such as deposits, withdrawals, and account management. It has no connection with procedures for bank takeovers or resolution of Non-Performing Assets (NPAs).
With reference to Indian economy, consider the following :
- Bank rate
- Open market operations
- Public debt
- Public revenue
Which of the above is/are component/components of Monetary Policy?
Detailed Explanation:
Monetary Policy instruments are tools used by the Reserve Bank of India (RBI) to control money supply and credit in the economy.
✅ Bank Rate (Statement 1): Rate at which RBI lends to commercial banks; a key quantitative tool of monetary policy.
✅ Open Market Operations (Statement 2): Buying/selling of government securities by RBI to control liquidity in the banking system.
❌ Public Debt (Statement 3): Total government borrowing; part of fiscal policy, not monetary policy.
❌ Public Revenue (Statement 4): Government income from taxes and non-tax sources; component of fiscal policy, not monetary policy.
‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to -
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.
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
Detailed Explanation:
Statutory Liquidity Ratio (SLR) is the minimum percentage of Net Demand and Time Liabilities (NDTL) that commercial banks must maintain in liquid assets (cash, gold, government securities).
✅ Statement 3 – Correct: Reducing SLR by 50 basis points frees up funds previously locked in government securities, increasing loanable funds with banks, enabling them to cut lending rates to stimulate borrowing.
❌ Statement 1 – Incorrect: SLR reduction is a monetary policy tool with moderate impact; GDP growth depends on multiple factors, not just one policy change causing 'drastic' increase.
❌ Statement 2 – Incorrect: Foreign Institutional Investors (FIIs) respond to interest rate differentials, equity market returns, and global conditions, not domestic SLR adjustments.
❌ Statement 4 – Incorrect: SLR reduction increases liquidity in the banking system by releasing funds for lending, not reducing it.
The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in the news, are used in relation to
Detailed Explanation:
Marginal Standing Facility (MSF) Rate is the rate at which banks borrow overnight funds from the Reserve Bank of India (RBI) against government securities when facing acute liquidity shortfalls.
Net Demand and Time Liabilities (NDTL) represents the aggregate of a bank's demand deposits (current and savings accounts) and time deposits (fixed deposits), used to calculate statutory requirements like CRR and SLR.
If the interest rate is decreased in an economy, it will
Detailed Explanation:
When interest rates decrease, the cost of borrowing falls, making loans cheaper for businesses and entrepreneurs.
This encourages firms to take credit for capital investment in machinery, equipment, infrastructure, and expansion projects, thereby increasing investment expenditure in the economy.
Lower interest rates also reduce returns on savings (making saving less attractive) and stimulate consumption through cheaper EMIs, but the most direct and significant impact is on investment decisions by businesses.
In the context of Indian economy which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?
- To enable the Central Bank to control the amount of advances the banks can create
- To make the people’s deposits with banks safe and liquid
- To prevent commercial banks from making excessive profits
- To force the banks to have sufficient vault cash to meet their day-to-day requirements
Select the correct answer using the code given below.
Detailed Explanation:
✅ Statement 1 – Correct: Statutory Reserve Requirements (CRR and SLR) are the primary quantitative tools used by the RBI to control the credit-creation capacity and advances that commercial banks can make, thereby regulating money supply in the economy.
❌ Statement 2 – Incorrect: While reserves help liquidity management, the safety of deposits is ensured by DICGC (Deposit Insurance and Credit Guarantee Corporation) and Basel norms (Capital Adequacy Requirements), not by statutory reserves as a primary purpose.
❌ Statement 3 – Incorrect: Statutory reserves are monetary policy instruments designed to control liquidity and credit, not to regulate or prevent bank profits.
❌ Statement 4 – Incorrect: CRR is maintained with the RBI and SLR in liquid assets like government securities; banks maintain separate vault cash for daily operational needs, which is distinct from statutory requirements.
An increase in the Bank Rate generally indicates that the:
Detailed Explanation:
Bank Rate is the rate at which the central bank (RBI) lends funds to commercial banks.
An increase in Bank Rate makes borrowing costlier, reduces liquidity in the economy, and signals a tight/contractionary monetary policy to control inflation.
Consider the following liquid assets:
- Demand deposits with the banks
- Time deposits with the banks
- Savings deposits with the banks
- Currency
The correct sequence of these decreasing order of Liquidity is
Detailed Explanation:
Liquidity refers to the ease and speed of converting an asset into cash without loss of value.
Currency is the most liquid asset as it is already in cash form.
Demand deposits can be withdrawn on demand anytime without notice or penalty, making them highly liquid.
Savings deposits can be withdrawn but may require prior notice or have withdrawal limits, making them moderately liquid.
Time deposits (Fixed Deposits) have a fixed maturity period and early withdrawal attracts penalty, making them the least liquid.
Decreasing order of liquidity: Currency (4) > Demand deposits (1) > Savings deposits (3) > Time deposits (2) = 4-1-3-2
In the context of Indian economy, Open Market Operations’ refers to:
Detailed Explanation:
Open Market Operations (OMO) is a monetary policy tool where the Reserve Bank of India (RBI) buys or sells government securities in the open market to regulate money supply and liquidity.
When the RBI purchases securities, it injects liquidity into the banking system, lowering interest rates; when it sells securities, it absorbs excess liquidity, raising interest rates to control inflation.
The Reserve Bank of India regulates the commercial banks in matters of -
- Liquidity of assets
- Branch expansion
- Merger of banks
- Winding-up of banks
Select the correct answer using the codes given below.
Detailed Explanation:
The Reserve Bank of India (RBI) regulates commercial banks comprehensively under the Banking Regulation Act, 1949. It controls liquidity of assets through CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio), regulates branch expansion by granting licenses for new branches, oversees merger of banks to ensure financial stability and depositor protection, and initiates winding-up of banks in cases of severe financial distress. All four regulatory functions are core powers of the RBI.