MONEY AND BANKING (Part – I)

Total Questions: 150

1. What was the purpose of Inter Creditor Agreement signed by Indian banks and Financial institutions recently? [U.P.S.C (Pre) 2019]

(a) To lessen the Government of india's perennial burden of fiscal deficit and current account deficit
(b) To support the infrastructure projects of Central and State Governments
(C) To act as independent regular in case of applications for loan of Rs.50 crore or more
(d) To aim at faster resolution of stressed assets of Rs. 50 crore or more which are-under consortium lending.

Correct Answer: (d) To aim at faster resolution of stressed assets of Rs. 50 crore or more which are-under consortium lending.

Solution:The Inter-Creditor Agreement (ICA) is part of the project 'Sashakt' approved by the government to address the problem of resolving bad loans. This was suggested by Sunil Mehra committee. On 23 July , 2018 around 22 public sector banks (including India post payments Bank), 19 private sector bank and 32 foreign banks signed ICA to fast truck the resolution of stressed assests. This agreement was also signed by 12 major financial institutions like LIC, HUDCO , among others. The ICA covers cases of stressed assets worth at least Rs.50 crore under consortium lending . The agreement says if 66 percent of lenders by value agree to resolution plan, it would be binding on all lenders.

2. What is the importance of the term ' Interest Coverage Ratio ' of a firm in India? [U.P.S.C (Pre) 2019]

1 . It helps in understanding the present risk of a firm that a bank is going to give loan to.
2 . It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
3 . The higher a borrowing firm's level of Interest Coverage Ratio , the worse is its ability to service its debt.

(a) 1 and 2 only
(b) 2 only
(C) 1 and 3 only
(d) 1, 2, and 3

Correct Answer: (a) 1 and 2 only

Solution:The 'Interest Coverage Ratio' (ICR) is a debt ratio and profitability ratio used to measure how easily a firm can pay interest on its outstanding debt. A higher coverage ratio is better , although the ideal ratio may vary by industry . Hence, statement 3 is incorrect . 'ICR' is also sometimes called the 'Times Interest Earned' (TIE) ratio. Lenders, investors and creditors often use this to determine a company's riskness relative to its current debt on for future borrowing. Hence, statement I is correct . This ratio is also used by creditors and prospective lenders to assess the risk of lending capital to a firm . Hence , statement 2 is also correct.

3. which one of the following is correct is respect of the below statements ? [U.P.S.C (Pre) 2023]

Statement-I : Interest income from the deposits in Infrastructure Investment Trust (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable.

Statement-II : InvITs are recognized as borrowers under the ' Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002' . Which one of the following is correct in respect of the above statements ?

(a)Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for statement_I
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
(C) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct

Correct Answer: (d) Statement-I is incorrect but Statement-II is correct

Solution:Infrastructure Investment Trusts (InvITs) are exchange-traded investments that offer investors partial ownership in infrastructure projects. InvITs are similar to mutual funds Like mutual funds, they pool small amounts from various individuals/ institutional investors and invest in infrastructure projects. These trusts are governed by SEBI regulation. The dividend and interest income from the deposits in InvITs is completely taxable as per the slab rate of the investor. Hence Statement-I is incorrect.
Statement-II is correct as InvITs (and REITs : Real Estate Investment Trusts ) are now recognized as borrowers under the ' Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act ,2002 and lenders to these trusts, have adequate statutory enforcement options, absence of which was earlier becoming a constraint for bankers to lend directly at trust level. This enables the investors, especially banks, to initiate action against the trustees of InvITs in case of any default.

4. Consider the following statements regarding insolvency and bankruptcy : [B.P.S.C (Pre) 2023]

1. Bankruptcy refers to a financial state in which an individual or entity is unable to pay off their debts as they become due.
2. Insolvency refers to a legal process, where the assets of the debtor are liquidated or reorganized for the benefit of creditors.
3. Bankruptcy is a state whereas insolvency is the conclusion.
4. The Insolvency and Bankruptcy Board of India (IBBI) is the regulatory body responsible for overseeing insolvency and bankruptcy proceedings.

Which of the above statements is/are correct?

(a) 2,3 and 4
(b) only 4
(C) 1,2 and 3
(d) only 1 and 2

Correct Answer: (C) 1,2 and 3

Solution:Insolvency refers to a financial state in which an individual or entity is unable to pay off their debts as they become due. While bankruptcy refers to a legal process , where the assets of the debtor are liquidated or reorganized for the benefit of creditors. Though both terms deal with excessive debts, insolvency is a state that can lead to declaring bankruptcy. Thus, insolvency is a state whereas bankruptcy is the conclusion. Hence statements 1, 2 and 3 are incorrect. Statement 4 is correct as the regulatory body responsible for overseeing insolvency and bankruptcy proceeding. It was established on 1 October, 2016 and given statutory powers through the 'Insolvency and Bankruptcy Code, 2016' .

5. Which of the following statements best describes the term ' Scheme for Sustainable Structuring of Stressed Assets (S4A)', recently seen in the news ? [U.P.S.C (Pre) 2017]

(a) It is a procedure for considering ecological costs of developmental schemes formulated by the Government.
(b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.
(C) It is a disinvestment plan of the Government regarding Central Public Sector Undertaking.
(d) It is an important provision in 'The Insolvency and Bankruptcy Code' recently implemented by the Government.

Correct Answer: (b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.

Solution:The Reserve Bank of India has introduced on 13 June, 2016 the 'Scheme for Sustainable Structuring of Stressed Assets (S4A)' to offer adequate deep financial restructuring opportunities to large borrowers (i.e. big corporate entities ) facing genuine difficulties. The S4A scheme aims to strengthen the lenders' ability to deal with large stressed assets facing genuine hardship and offers a realistic chance for reworking the financial structure of such entities. Under this scheme, a company's debt is bifurcated into two parts- sustainable and unsustainable, based on the cash flows of the company's project

6. Consider the following statements : [U.P.S.C (Pre) 2019]

The Reserve Bank of India's recent directives relating to 'Storage of Payment System Date', popularly Known as data diktat, command the payment system providers that

1. they shall ensure that entire data relating to payment systems operated by them are stored in a system only in India.
2. they shall ensure that the system are owned and operated by public sector enterprises.
3. they shall submit the consolidated system audit report to the Comptroller and Auditor General of India by the end of the calendar year.

Which of the Statement given above is/are correct?

(a) 1 only
(b) 1 and 2 only
(C) 3 only
(d) 1,2 and 3

Correct Answer: (a) 1 only

Solution:The Reserve Bank of India issued directives relating to 'Storage of payment System Data' on 6th April 2018 . These directives command the payment system providers that, they shall ensure that the entire data relating to payment systems operated by them are stored in a system only in India. This data should include the full end-to-end transaction details/ information collected/carried/processed as part of the message/payment instruction. Thus, statement 1 is correct. According to the directives, system providers shall submit the System Audit Report (SAR) on completion of the above requirement and the audit should be conducted by CERT- IN empanelled auditors. The SAR should be submitted to the Reserve Bank not later than December 31, 2018 . Thus statement 3 is not correct. On the other hand, statement 2 is also incorrect because it is not necessary that the systems are owned and operated by public sector enterprises. Therefore, option (a) is the right answer.

7. Which committee has been constituted by the Government of India to boost cashless transaction ? [B.P.S.C (Pre) 2016]

(a) Nachiket More Committee
(b) Shanta Kumar Committee
(C)H.R Khan Committee
(d) Neeraj Kumar Gupta Committee

Correct Answer: (d) Neeraj Kumar Gupta Committee

Solution:The Neeraj Kumar Gupta Committee was constituted in April, 2016 by the Government of India and the RBI to boost cashless transactions and reduce cash transactions in the economy. After the demonetization in November, 2016 the Government of India formed a new committee, headed by NITI Aayog CEO Amitabh Kant, to form a strategy to expedite the process of transforming India into a cashless economy.

The Nachiket Mor Committee, officially known as the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, was established by the Reserve Bank of India (RBI) in 2013. Headed by Nachiket Mor, the committee was tasked with developing a vision for financial inclusion and deepening in India.
The Shanta Kumar Committee, officially the High-Level Committee on Restructuring of Food Corporation of India (FCI), was established in August 2014 by the Indian government to suggest improvements to FCI's operations.
HR Khan Committee proposed that banks should be allowed to pledge corporate bonds as collateral to borrow funds from the Reserve Bank's overnight repo window.

8. Which one of the following best describes the term 'merchant Discount Rate' sometimes seen in news ? [U.P.S.C (Pre) 2018]

(a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.
(b) The amount paid back by bank to their customers when they use debit cards for financial transactions for purchasing goods or services.
(C) The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
(d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Scale (Pos) machines and debit cards

Correct Answer: (C) The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.

Solution:'Merchant Discount Rate' (MDR) is a fee charged from a merchant by a bank for accepting payments from customers through credit and debit card in their establishments. MDR compensates the card issuing bank, the lender which puts the Pos terminal and payments gateway such as MasterCard or Visa for their service. MDR charges are usually shared in pre-agreed proportion between the bank and a merchant and is expressed in percentage of transaction amount.

9. Which one of the following links all the ATMs in India ? [U.P.S.C (Pre) 2018]

(a) Indian Banks Association
(b) National Securities Depository Limited
(C) National Payments Corporation of India
(d) Reserve Bank of India

Correct Answer: (C) National Payments Corporation of India

Solution:National Financial Switch (NFS) was designed, developed and deployed by the RBI's Institution for Development and Research in Banking Technology (IDRBT) in 2004 ,with the goal of inter-connecting the ATMs in the country .NFS was taken over by the National Payments Corporation of India (NPCI) from IDRBT in December, 2009 . NFS provides the linkages to ATM network in India. Therefore, option (c) is the correct answer.

NPCI was established to create a robust, secure, and efficient infrastructure for payment and settlement systems in the country, to promote a cashless economy and enhance financial inclusion. The organization aims to standardize and streamline various payment systems, making them accessible, reliable, and cost-effective for consumers and financial institutions alike. Through its initiatives, NPCI strives to drive innovation, foster financial inclusion, and build a seamless digital payment ecosystem in India.
NPCI has launched several innovative payment systems to revolutionize the financial landscape of India. These initiatives aim to provide seamless, secure, and cost-effective solutions for digital transactions while promoting financial inclusion and supporting a cashless economy. Some of the most significant initiatives by NPCI include UPI, RuPay, IMPS, AePS, BBPS etc. Each of these initiatives has played a pivotal role in transforming the way individuals and businesses conduct financial transactions across the country.

10. consider the following statements : [U.P.S.C (Pre) 2017]

1. National Payments Corporation of India (NPCI) helps in promoting the financial inclusion in the country .
2. NPCI has launched RuPay, a card payment scheme.

Which of the statements given above is/are correct?

(a) 2 only
(b) 1 only
(C) both 1 and 2
(d) Neither 1 nor 2

Correct Answer: (C) both 1 and 2

Solution:The National Payments Corporation of India (NPCI) has been set up with the help of the RBI to foster better financial inclusion by creating high-impact infrastructure and business processed for better, cheaper, consolidated and more efficient banking and retail payment system in India and facilitating outreach of these banking services to those who normally do not use banks or do not have access to them. Thus, statements 1 is correct. Statement 2 is also correct as NPCI has launched 'RuPay card payment system is a step towards greater and deeper financial inclusion, as it bring in more banks and a wider spectrum of users into the system.

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