Chapter 5: FINANCE

Bank Asset classification

No performing asset is one where principal or interest overdue for 90 days. Substandard asset is NPA for >12 months. Doubtful asset is substandard for 12 months. RBI mandates that banks keep some funds aside as insurance for these NPA's and hence banks profits are reduced. Stressed assets are NPA and loans written off.

61% of NPA are from the five sectors: Textile, Steel, Aviation, Infrastructure and Mining.

Bank Boards Bureau

Setup in 2016 to professionalize the appointment of public sector bank chief and directors.


  1. Chairman: Two year term
  2. 3 full time members.
  3. 3 ex-officio members: Financial services secretary, Deputy governor RBI, Secretary public enterprises.
  4. Search committee: RBI governor, secretary financial services, Secretary of Dept of personnel and training.


  1. Search and select C.E.O, M.D., non executive chairmen and whole time directors of P.S.B.
  2. Help create a holding company of P.S.B [ Bank investment committee] and mergers and acquisitions in P.S.B to reduce numbers from 27 to 10.
  3. Raise capital and help recover from N.P.A.
  4. To improve governance in P.S.B and link between government and P.S.B's.

Bankruptcy and Insolvency code

Government of India seeking to consolidate existing laws on bankruptcy into a single framework. The bill received president's assent in May-2016 and is in force.


  1. Insolvency Resolution: The code outlines insolvency resolution process for individuals, companies and partnership firms. The process may be initiated by debtors or creditors. A time limit of 180 days is setup for resolution of companies and individuals.
  2. Insolvency regulator: Insolvency and bankruptcy board of India to oversee insolvency proceedings . Board has 10 members including representatives of Finance ministry, RBI, Law ministry.
  3. Insolvency professionals: These control the assets of debtor during the process. They need licenses.
  4. Bankruptcy and insolvency adjudicator: Insolvency resolution shall be done by National company law tribunal for companies and limited liability partnerships and by Debt recovery tribunals for individuals and partnerships.
  5. Insolvency and Bankruptcy fund: It creates this fund but doesn't specify how it shall be used.
  6. Information utilities: These shall be created to collect, collate, disseminate information related to companies and may help in resolution.


  1. The act put added burden on debt recovery tribunals who already have a low clearance and high pendency rate. This may make the act ineffective.
  2. Code creates multiple I.U.'s but doesn't specify how much information each shall maintain.
  3. The repayment order says that government dues shall be repaid after all creditors have been repaid.

Marginal Cost of funds based lending rates

New loans shall be under M.C.L.R which became effective from 1st April 2016. M.C.L.R makes banks lending rates more responsive to repo rates.

M.C.L.R is dependent on marginal cost of funds and especially by deposit rates and repo rate. Any change in repo rate brings change in marginal cost and so M.C.L.R also has to be changed.

Need for M.C.L.R:

The RBI has reduced the repo rate by 125 bais points i.e. 1.25% but the banks did not fully pass this lower lending rate to borrowers but they reduced the time deposit rates by large margin.

High interest rates meant that the entrepreneurs or consumers couldn't get cheap credit and so the investment of the economy remained low. GDP thus was stagnant.

Reason for banks to not reduce lending rates / Incomplete monetary transmission:

  1. High returns on gold, real estate meant that people preferred them to bank deposits. Banks need term deposits for lending as they are cheap source of stable credit than demand deposits.
  2. Real interest rate remained negative for bank deposits and so public put more investment in alternate channels.
  3. Presence of small savings instruments like PPF, Kisan vikas patra meant that lowering lending rates and also deposit rates by large margin would make bank deposits unattractive compared to small saving instruments.
  4. BASEL- III norms meant that banks in order to be BASEL complaint had to divert credit to Government securities.
  5. R.B.I using S.L.R, C.R.R forces banks to invest in G-Secs and thus while government got credit at cheap rates, private sector remained credit starved.

Differential Banks

Payments Bank - Concept from Kenya
  1. Minimum equity capital of Rs. 100 crore required.
  2. Must be registered as public limited company under Banking regulation Act, 1949.
  3. Majority directors should be independent. Cant give loans or credit cards. Max amount of Rs. 1 lakh per customer per year. Cant take N.R.I money.
  4. Can have time and demand deposits.
  5. Must pay interest on deposits. 49% automatic F.D.I, 74% with approval.
  6. Can open branch, A.T.M, business correspondents; Can sell mutual funds, foreign currency, insurance, pension.
  7. C.R.R, S.L.R applicable. 75% of demand deposits in G-secs, T-bills. 25% deposits in other Scheduled commercial banks.

Application to setup payment banks can be made by super market chains, mobile telephone companies, N.B.F.C's, Pre-paid instrument providers like digital wallets, companies, cooperatives controlled by residents.

Small Banks - Concept from Community banks of U.S.A

Application can be made by individuals with 10 years experience in field of banking, microfinance companies, N.B.F.C's.

  1. Registered as a public ltd company under banking regulation act. Minimum Rs. 100 cr equity capital.
  2. Majority directors must be independent.
  3. Must pay interest on deposits. 49% automatic F.D.I, 74% with approval.
  4. Can open branch, A.T.M, business correspondents; Can sell mutual funds, foreign currency, insurance, pension.
  5. C.R.R, S.L.R applicable.
  6. Focus on north east, central India. Provide credit to un-served, under-served areas, small - marginal farmers, micro and small industries.
  7. 75% PSL loans. 25% loans should be of value under 25 lakhs. 25% branches in rural areas with <9999 people.
  8. Cant become business correspondent of other banks. Can evolve into universal bank after 5 years.

Wholesale Banks

  1. Only accept deposits > Rs. 5 crore.
  2. CRR, SLR present. Can give loans only to infrastructure and corporates.
  3. SARFAESI powers.
  4. Wholesale investment banks have less than 20 branches [rural branches no limit]. Wholesale consumer banks have more than 20 branches [ rural branches - 25%]

Custodian Bank

  1. safeguarding of securities, derivatives, metals, commodities, foreign currency etc
  2. Keep client informed about yield, AGM
  3. Execute deals for clients.


Indradhanush: Key performance indicators to link performance of CEO / MD of PSB with bonus.

Monetary policy framework committee to have 6 members i.e.  3 from RBI [RBI Governor, RBI Deputy governor and RBI executive director] and 3 from Govt of India. The chief shall be RBI governor and decisions shall be made by majority.

A search and selection committee shall be of Cabinet secretary, RBI Governor and Secretary, Dept of Economic Affairs for the three outside members. Three members from outside RBI shall be experts in field of banking, economics, monetary policy.

If CRR / SLR not maintained then penalty of bank rate + [3 - 5] %

RBI has set the target of 75% Priority sector lending for Regional rural banks. They have to furnish data to NABARD. The PSL target for foreign banks with <20 branches to be increased to 40% from current 32%.

National Payments corporation of India created the Unified Payment Interface from 1-4-2016.

Public sector banks have 70% of India’s ATM’s. Maharashtra and Tamil Nadu topped the list in number of ATM’s. There are 2.15 lakh ATM’s in India of which 48000 are in these states. Although 69% population is rural it has 45% ATMs compared to urban areas that are 31% of India and have 54% of ATM’s.

Q.The term ‘Domestic Content Requirement’ is sometimes seen in the news with reference to (UPSC CSAT 2017)

  1. Developing solar power production in our country

  2. Granting licenses to foreign T.V. channels in our country

  3. Exporting our food products to other countries

  4. Permitting foreign educational institutions to set up their campuses in our country

Ans . A

Q.Consider the following statements:
1. India has ratified the Trade Facilitation Agreement (TFA) of WTO.
2. TFA is a part of WTO’s Bali Ministerial Package of 2013.
3. TFA came into force in January 2016.
Which of the statements given above is/are correct? (UPSC CSAT 2017)

  1. 1 and 2 only

  2. 1 and 3 only

  3. 2 and 3 only

  4. 1, 2 and 3

Ans . A

  1. TFA came into force from February 2017

Q.Broad-based Trade and Investment Agreement (BTIA)’ is sometimes seen in the news in the context of negotiations held between India and (UPSC CSAT 2017)

  1. European Union

  2. Gulf Cooperation Council

  3. Organization for Economic Cooperation and Development

  4. Shanghai Cooperation Organization

Ans . A

Q.The term ‘Digital Single Market Strategy’ seen in the news refers to (UPSC CSAT 2017)

  1. ASEAN

  2. BRICS

  3. EU

  4. G20

Ans . C

Q. The Fair and Remunerative Price of Sugarcane is approved by the(UPSC CSAT 2015)

  • Cabinet Committee on Economic Affairs

  • Commission for Agricultural Costs and Prices

  • Directorate of Marketing and Inspection, Ministry of Agriculture

  • Agricultural Produce Marketing Committee

Ans . A

  1. CACP recommends the fair and remunerative prices based on inter-crop price parity, inflation considerations, fair return to farmers and a host of other factors.

  2. It is the cabinet Committee on Economic affairs that finally approves it.

Q.Convertibility of rupee implies: (UPSC CSAT 2015)

  • being able to convert rupee notes into gold

  • allowing the value of rupee to be fixed by market forces

  • freely permitting the conversion of rupee to other currencies and vice versa

  • developing an international market for currencies in India

Ans . C

  1. Rupee convertibility means the system where any amount of rupee can be converted into any other currency without any question asked about the purpose for which the foreign exchange is to be used.

  2. Non-convertibility can generally be defined with reference to transaction for which foreign exchange cannot be legally purchased (e.g. import of consumer goods etc), or transactions which are controlled and approved on a case by case basis (like regulated imports etc).

  3. A move towards free convertibility implies a reduction in the number / volume of the above types of transaction.


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