The Tertiary Sector in the Indian Economy

Total Questions: 66

31. Consider the following statements: [2010]

The functions of commercial banks in India include

1. Purchase and sale of shares and securities on behalf of customers

2. Acting as executors and trustees of wills

Which of the statements given above is/are correct?

Correct Answer: (d) Neither 1 nor 2
Solution:

Commercial Banks in India perform several critical functions in the Indian Financial System, which makes them significant for the Indian economy. Some of their crucial functions and significance can be seen as follows:

• Accepting Deposits: They accept various types of deposits from the public which form the main source of funds.
• Providing Loans and Advances: Banks are the primary source of funds for personal finance, agriculture, industrial sectors, and other economic activities through loans and credit facilities.
• Financial Intermediation: They facilitate financial mobility by mobilizing savings from depositors to borrowers, thereby enhancing economic efficiency.
• Financial Inclusion: As the largest category of banking networks in India, they cater to the maximum number of banking customers in India. This aids the cause of Financial Inclusion in India.
• Promotion of Digital Economy: They also provide sophisticated digital banking services that include mobile banking, internet banking, etc. This helps in the promotion of the Digital Economy and makes financial transactions seamless and more accessible to the general public.

32. The International Development Association, a lending agency, is administered by the [2010]

Correct Answer: (a) International Bank for Reconstruction and Development
Solution:International Development Association (IDA), is that part of the World Bank that helps the world's poorest countries. It complements the World Bank's other lending arm the International Bank for Reconstruction and Development (IBRD) which serves middle-income countries with capital investment and advisory services. IDA was created in 1960.
The resource allocation by the International Development Association is done after evaluating various metrics which are given below.
  1. Only countries meeting the IDA eligibility criteria are allowed to receive funds from it.
  2. Allocation of funds is done annually through Performance-Based Allocation (PBA) System.
  3. The performance of a country is measured through Annual Country Policy and Institutional Assessment (CPIA).
  4. Gross National Income (GNI) per capita.
  5. The population of the country.
  6. Terms of IDA assistance are determined by the country's risk of debt distress.
  7. Special allocations to post-conflict and re-engaging countries.

33. The basic aim of Lead Bank Scheme is that [2012-1]

Correct Answer: (c) individual banks should adopt particular districts for intensive development
Solution:The basic aim of Lead Bank scheme is that the bank should adopt particular districts for intensive development by offering loans and banking services.

The Lead Bank Scheme is a scheme which aims at providing adequate banking and credit in rural areas through an 'service area approach', with one bank assigned for one area. It was introduced in 1969.

On the recommendation of the Gadgil Study Group and Banker's Committee, the Scheme was introduced by RBI. The committees found that the rural areas were not able to enjoy the benefits of banking. Also, that the commercial banks did not have adequate presence in rural areas and also lacked the required rural orientation which was hindering the growth of rural areas.

To address this issue it was decided that some areas or sector will be given to the banks whether private or public in which that bank had to play a lead role in providing financial services to the people.

D.R.Gadgil study group recommended the adoption of an 'AREA APPROACH' to evolve plans and programs for the development of adequate banking and credit structure in rural areas.
Prof. D R Gadgil committee recommended the following points:
• Banks should provide integrated banking facilities in unbanked areas,
• Adoption of 'Area Approach' -- in unbanked areas-each bank should adopt an area.
• Help Agriculture & Supplemental Security Income (SSI),
• 'District' identified as the smallest geographical unit for the scheme.

34. The Reserve Bank of India regulates the commercial banks in matters of : [2013-1]

1. liquidity of assets

2. branch expansion

3. merger of banks

4. winding-up of banks

Select the correct answer using the codes given below.

Correct Answer: (d) 1, 2, 3 & 4
Solution:RBI is called the banker's bank and regulates the banking sector in India. By using mechanisms like CRR, SLR, etc, it keeps a check on the liquidity of assets of the banks. Hence statement 1 is correct. Moreover, RBI also sets rules and regulations concerning the merger of banks, their winding-up operations, and branch expansion. Hence statements 2, 3, and 4 are correct.

35. An increase in the Bank Rate generally indicates that the: [2013-1]

Correct Answer: (d) Central Bank is following a tight money policy.
Solution:A tight monetary policy is a course of action undertaken by Central bank to constrict spending in an economy, or to curb inflation when it is rising too fast. The increased bank rate increases the cost of borrowing and effectively reduces its attractiveness.

• Bank Rate is the interest rate at which a central bank lends money to commercial banks or financial institutions within its jurisdiction. It acts as a benchmark for lending in the banking sector and serves as a key tool to regulate liquidity and influence overall interest rates in the economy. Typically higher than other policy rates, the bank rate reflects the central bank’s monetary policy stance and signals its approach toward credit and inflation management. Key Features include:
• Long-term lending: Unlike the Repo Rate, which addresses short-term liquidity needs, the Bank Rate is applied to long-term loans.
• No collateral: Loans provided at the bank rate do not require any security or collateral.
• Influence on other rates: Adjustments in the Bank Rate impact other interest rates in the economy, including lending rates for consumers and businesses.

36. Which of the following grants/grant direct credit assistance to rural households? [2013-1]

1. Regional Rural Banks

2. National Bank for Agriculture and Rural Development

3. Land Development Banks

Select the correct answer using the codes given below.

Correct Answer: (c) 1 & 3 only
Solution:Land development bank started financing long term loan for more significant rural development activities like rural and cottage industries, rural artisans etc. The main purpose of RRB's is to mobilize financial resources from rural/semi-urban areas and grant loans and advances mostly to small and marginal farmers, agricultural labourers and rural artisans.

NABARD doesnot give "direct" credit assistance. It provides credit Via intermediaries such as Microfinance companies, Cooperative society, RRB.

37. Consider the following statements: [2013-1]

1. Inflation benefits the debtors.

2. Inflation benefits the bondholders.

Which of the statements given above is/are correct?

Correct Answer: (a) 1 only
Solution:Those who benefit from higher inflation are debtors and those who suffer from it are creditors. If one has substantial debt, each rupee one has to repay would be worth less than when it was borrowed. In this way, one pays back less in real terms.

Effects of Inflation
Its effects on various sectors of the economy can be seen as follows.

  • Redistribution of Income and Wealth: It leads to the redistribution of income and wealth from one hand to another. It results into loss to some group of people and gains to another group of people.

○ Borrower (Debtor) Vs Lender (Creditor): The borrower (debtor) is the gainer, lender (creditor) is the loser.
▪ For example, suppose the debtor borrows 100/- at the interest rate of 5% per annum. So, he has to pay 105/- to the creditor next year. But, suppose inflation increases by more than 5% in a year, then what 100/- could buy this year cannot be bought by 105/- in the next year. So, the effective value of money for the creditor decreases.

○ Producer Vs Consumer: The purchasing power of money held by consumers falls. So, they have to pay more money to producers for the same amount of goods and services. Thus, the producer is the gainer, and the consumer is the loser.
○ Flexible Income Group Vs Fixed Income Group: Flexible income groups like sellers, self-employed etc, whose salary is adjusted according to inflation don’t get affected. On the other hand, fixed-income groups like daily-wage earners lose as the purchasing power purchasing power of their fixed income falls.
○ Debentures or Bond Holders Vs Issuers: Bond issuers gain, and the bond-holders lose. This is because the fixed rate paid for the bonds is not enough to compensate for inflation.
○ Equity Holders: The income of equity holders depends on the profit of the company. In an inflationary situation, companies earn more profit. So, equity holders also earn more income.

38. Consider the following liquid assets: [2013-1]

1. Demand deposits with the banks

2. Time deposits with the banks

3. Saving deposits with the banks

4. Currency

The correct sequence of these assets in the decreasing order of liquidity is

Correct Answer: (d) 4-1-3-2
Solution:
  • Currency: Currency is the most liquid asset as it is already in the form of cash and can be used immediately for transactions.
  • Demand deposits with the banks: These are very liquid because you can withdraw them on demand, typically without any limitations or penalties.
  • Savings deposits with the banks: Savings deposits are slightly less liquid than demand deposits. While they can generally be withdrawn without penalties, there might be some restrictions or limits on the number or amount of transactions.
  • Time deposits with the banks: These are the least liquid among the options. Time deposits, like fixed deposits, have a set maturity date, and withdrawing funds before this date often results in penalties or loss of accrued interest.

39. What is/are the facility/facilities the beneficiaries can get from the services of Business Correspondent (Bank Saathi) in branchless areas? [2014-1]

1. It enables the beneficiaries to draw their subsidies and social security benefits in their villages.

2. It enables the beneficiaries in the rural areas to make deposits and withdrawals.

Select the correct answer using the code given below.

Correct Answer: (c) Both 1 & 2
Solution:

• Business Correspondent is an extended arm of the Bank Branch who is provides Financial and Banking services to customers in unbanked and underbanked areas.
• The Reserve Bank of India issued RBI guidelines in 2006 for the engagement of Business Correspondents (BCs) by banks for providing banking and financial services.
• Business Correspondents are retail agents engaged by banks for providing banking services at locations other than a bank branch/ATM.
• BCs enable a bank to expand its outreach and offer a limited range of banking services at low cost, as setting up a brick-and-mortar branch may not be viable in all cases.
• BCs, thus, are an integral part of a business strategy for achieving greater financial inclusion.
• BCs are permitted to perform a variety of activities which include identification of borrowers, collection and preliminary processing of loan applications including verification of primary information/data, creating awareness about savings and other products, education and advice on managing money and debt counseling, processing and submission of applications to banks, promoting, nurturing and monitoring of Self Help Groups/ Joint Liability Groups, post-sanction monitoring, follow-up of recovery. It enables the beneficiaries to draw their subsidies and social security benefits in their villages. So, statement 1 is correct.
• They can also attend to the collection of small value deposits, disbursal of small value credit, recovery of principal/collection of interest, sale of micro insurance/ mutual fund products/ pension products/ other third party products and receipt and delivery of small value remittances/ other payment instruments. So, statement 2 is correct.

40. In the context of Indian economy, which of the following is/are the purpose/purposes of 'Statutory Reserve Requirements"? [2014-1]

1. To enable the Central Bank to control the amount of advances the banks can create

2. To make the people's deposits with banks safe and liquid

3. To prevent the commercial banks from making excessive profits

4. 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.

Correct Answer: (a) 1 only
Solution:1 is definitely correct as CRR. SLR is used to control money supply and credit off take. 2 may or may not be correct, to make people's deposit safe, capital adequacy ratio is the norm. 3 is definitely wrong as to control excess profit, margins would have to be reduced, not CRR, SLR.
• The statutory reserve requirements are liquidity measures prescribed by the Reserve Bank of India.
• These measures include the CRR or the Cash Reserve Ratio, SLR or Statutory Liquidity Ratio.
• During times of low credit offtake as well as to boost growth, the reserve requirements may be lowered to decrease the cost of capital While the reserve requirements may be increased to tighten the money supply and therefore control inflation. Further, the reserve requirements also help in ensuring liquidity in the banking system while ensuring there is no bank run and the deposits are safe. Thus, it enables the Central Bank to control the amount of advances the banks can create and control liquidity in the economy. So, point 1 is correct.
• Statutory Reserve Requirements are measures used by the Central bank to control money supply in the supply. It is not aimed at preventing the commercial banks from making excessive profits or to force them to have sufficient vault cash to meet their day-to-day requirements or to make people’s deposit with banks safe and liquid. These reserves are maintained so that banks have sufficient assets and can pay the account holders (when they want). So, point 2, 3 and 4 are not correct.