Q1.

Elaborate important functions of RBI and how it influences inflation, exchange rate and loan
rates?

Reserve Bank of India or RBI is the central Bank of India. It sets the nation's monetary policy, oversees
the banking system, controls foreign exchange, prints money, manages inflation, and serves as a banker
to both the government and banks.

Monetary policy: By its monetary policy RBI affects inflation, bank credit management, interest rate
regulation, and preserving price stability while keeping the goal of growth in mind. In monetary policy
RBI generally decides:

Bank Rate: The rate at which central bank provides loan to commercial bank is called bank rate. This
instrument is a key at hands of RBI to control the money supply in long term lending. Increasing the
bank rates will make the loans more expensive for the commercial banks, leading to the banks
increasing the rate of lending. The public capacity to take credit at increased rates will be lower, leading
to a fall in the volume of credit demanded. Decreasing the bank rate increases the lending capacity of
banks as well as increases the public demand for credit and hence leads to rise in volume of credit
flowing in economy.

Repo Rates: The rate at which the RBI lends short-term money to banks against securities. When RBI
lends short term money to banks against securities. When repo rate increases borrowing from RBI
becomes more expensive. Repo rate is always higher than reverse repo rate.

Reverse Repo rate: The rate at which RBI borrows money from banks is called reverse repo rate. The
banks use this tool when they feel strucked with excess funds and are not able to invest anywhere for
reasonable returns.

Q2. Discuss the importance of Basel Norms in banking.

The Basel (Switzerland) Committee's Basel Norms are the primary worldwide banking regulations for
banking supervision. The major reason for creating the BASEL Norm was to enhance the global financial
system and coordinate all banking laws.

The BASAL norm was created because there are various types of borrowers borrowing from banks, and
thus various types of risk involved. Deposits from the public and the money market, such as the equity
and debt markets, are also included in the deposits that the commercial bank lends. As a result, they are
vulnerable to various risks and defaults. Therefore, it is necessary to reduce and minimize these risks.
This was one of the main purposes on why Basel norms were introduced. The latest Basel Norms are
Basel Norm III. It promotes a more resilient banking system which is primarily focused on parameters
like Capital, funding, liquidity and leverage.

Q3. Discuss the issue of NPAs in brief? When do you classify a loan as NPA, how is it impacting Indian
Banking and what are the steps taken by RBI and government to tackle it?

NPA mainly is a non performing asset, a loan or an advances for which the interest or the principal
amount has not been paid for a period of 90 days in case of banks and a period of 180 days in case of
NBFC. This can be further classified into:
 a. Substandard Assets wherein the asset has been an NPA for less or equal to twelve months.
b. Doubtful Asset wherein the asset has been doubtful for a period of 12 months.
c. Loss asset: In case the asset is uncollectible or of little value that it is not warranted as a
bankable asset; it will be known as a loss asset.

Some of the issue that NPA causes and the way it is impacting the banking sector are:

a. Higher interest rates are charged by the banks to prevent NPA and maintain the profit margin.
b. When it comes to public sector banks, an NPA leads to bad return hence its affects the
government of India as it gets less dividend.
c. NPA does not only increase profitability of banks but also its credibility. It threatens and brings a
risk to the capital base of the public banks.
d. Occurrence of NPA also affects the confidence of the depositor who might later not be willing to
deposit their money, thus affecting the banking structure as a whole.
e. Interest rate on saving accounts are also reduced due to pressure on the banks regarding NPA,
thus the difference between interest rate bank provides versus interest rate PPF and other non-
banking financial institutions provide will also result in people to shift there thus affecting
banking sector.

Steps taken by RBI:

a. Debt recovery tribunal: Wherein it was said to decrease the time for settling all cases regarding
NPA.
b. Bad banks: Introduction of bad banks who take up NPA, restructure it and try to further sell it.
The main purpose of Bad bank is to reduce the burden of commercial bank by taking over their
NPA so that they can provide loans when required.

Q4. How is a NBFC different from bank? Explain the drivers of housing finance industry in India?

NBFC is a non-banking financial company that is engaged in providing the loan and advances, stock,
bonds, securities, issued by the government. It mainly relates to asset institutions that provide financial
services without a bank license. Some of the examples of NBFC are Housing finance firms, chit fund
firms, stockbroking companies. Etc.

When it comes to bank it is a financial institution that received deposit and advances short term loans. It
also provides other services like investment banking, wealth management, currency exchanges and
lastly safe deposits.

NBFC:

a. NBFC lends money to people but does not hold a bank license
b. Demand Deposit are not accepted
c. Reserve ratio maintenance is not required
d. NBFC does not create credit

Bank:
 1. Holds a bank license and advances loans.
2. Demand deposit are accepted
3. Reserve ratio maintenance is required
4. Banks create credit

Q5. What is Marginal Standing Facility? What is the impact of external benchmarking on banks?

Marginal standing facility was introduced by RBI as a provision through which commercial bank could
avail and obtain liquidity overnight, if their liquidity in the bank has dried up. This cash is obtained by
dipping into their SLR and obtain support from the central bank. It can also be called as a window
through which banks can borrow cash from RBI in case an emergency arises. This rate is typically higher
than the repo rate under the LAF in short.

We all know banks must adhere to an external standard for their lending rates, they base their lending
rate on the many variables influencing the cost of capital. The Repo rate is the most frequently used
external benchmark. The RBI has the authority to alter lending rates in the nation because the interest
rate has a variable that can be adjusted. By altering the repo rate, RBI is able to keep the monetary
policy in place. The cost of the loans changes in accordance with the RBI's directive. It contributes to
either lower inflation or a faster rate of economic expansion. It aids in ensuring that a bank is not
engaging in any unethical marketing techniques where they lower the interest rate as well.