By: Basava Uppin

Prelims 2016 Prelims 2015

The establishment of 'Payment Banks' is being What is the purpose of setting up of Small Finance
allowed in India to promote financial inclusion. Which Banks (SFBs) in India ?
of the following statements is/are correct in this 1. To supply credit to small business units.
context? 2. To supply credit to small and marginal farmers.
1. Mobile telephone companies and supermarket 3. To encourage young entrepreneurs to set up
chains that are owned and controlled by residents business particularly in rural areas.
are eligible to be promoters of Payment Banks.
2. Payment Banks can issue both credit cards and Select the correct answer using the code given below :
debit cards. (a) 1 and 2 only
3. Payment Banks cannot undertake lending (b) 2 and 3 only
activities. (c) 1 and 3 only
(d) 1, 2 and 3
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3
By: Basava Uppin
 Practice MCQ Practice MCQ
By: Basava Uppin
With reference to Payment banks in India, consider the following With reference to Small Finance Banks (SFBs), consider the following
statements: statements:
1. The Payment banks cannot accept deposits of more than Rs 1 1. The area of operation of small finance banks is restricted as per
lakh from a single customer. the RBI's guidelines.
2. The Payment banks can issue both debit and credit cards. 2. The Small finance Banks (SFBs) can undertake both deposit and
3. The payment banks are required to invest minimum 75% of its lending activity.
deposits in the Government Securities (G-Secs). 3. The Small Finance Banks (SFBs) have been exempted from
priority sector lending requirements in order to make them
Which of the statements given above is/are incorrect? financially viable.
(a) 1 only
(b) 1 and 2 only Which of the statements given above is/are correct?
(c) 3 only (a) 1 and 2 only
(d) 2 and 3 only (b) 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Practice MCQ
With reference to Payment Banks and Small Finance Banks, consider the following statements:
1. Both Payment Banks and Small Finance Banks have been set up based upon recommendations of Nachiket Mor Committee.
2. The Priority sector Lending (PSL) targets are applicable to both Payment Banks and Small Finance Banks.
3. Both Payment Banks and Small Finance Banks can accept deposits up to Rs 2 lakh only.

Which among the statements given above is/are correct?

(a) 1 only (b) 1 and 2 only
(c) 1 and 3 only (d) 2 and 3 only
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Prompt Corrective Action Framework
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PRELIMS 2020
What is the importance of the term "Interest Coverage Ratio" of a firm
in India?
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.

Select the correct answer using the code given below:

(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
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Details about PCA Framework

Introduction: Introduced by RBI in 2002 as a structured early intervention mechanism along the lines of the US Federal Deposit
Insurance Corporation’s PCA framework. Subsequently, the RBI reviewed the framework in line with international best practices
in 2017. The 2017 framework has further been revised now.
Rationale: Tool used by the RBI to monitor the financial health of the Banks and take corrective action in the early stages.
Indicators used:
• Capital to Risk weighted Asset Ratio (CRAR) and Common Equity Tier-1 Ratio.
• Net Non-Performing Assets (NPA) and
• Leverage ratio
When does it get triggered: When the above 3 Indicators breach the threshold target. ( Example: If Net NPA Is greater than or
equal to 6%)
What happens if a Bank is placed under PCA framework?
• Halting branch expansion
• Stopping dividend payment
• Undertake special audit, restructuring operations and activation of recovery plan.
• Banks’ promoters can be asked to bring in new management.
• The RBI can also supersede the bank’s board.
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Modified PCA Framework for Banks
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Criteria Conventional Banking Shadow Banking

Source of Funds Deposits Raise funds through market-based instruments such as
Commercial paper, Debentures etc. (Larger Share)
Can also raise funds through deposits (Lower share)
Deposits insured? Yes. No.
Lend Loans Yes Yes.
Create Money Yes. No. (But entities accepting deposits and giving loans can also
create money)
Regulation Strict Regulation Partly Regulated or Unregulated.
Transparent More Transparent Less Transparent
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IDENTIFICATION OF NBFCs
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Category Details Example
Investment and • Financing of Assets such as automobiles, tractors • Shriram Transport; Bajaj Finance; Mahindra
Credit Company etc. Finance (Deposit Taking)
(ICC) • Lending of loans for other purposes • Aditya Birla Capital (Non-Deposit Taking)
• Investment in securities • ICICI Securities Ltd.
Infrastructure At least 75% assets in form of loans to infrastructure • Aseem Infrastructure Finance
Finance Company sector • Indian Railway Finance Corporation (IRFC)
(IFC) • Power Finance Corporation (PFC)
Core Investment At least 90% assets in form of shares, Bonds, Securities L&T Finance; Reliance Capital; Tata Capital
Company (CIC)
Infrastructure Debt Raise resources through issue of Rupee or Dollar • Kotak Infrastructure Debt Fund Limited
Fund (IDF) denominated bonds of minimum 5-year maturity. • India Infradebt Limited
Microfinance Provide small value loans without any collateral • Muthoot Microfinance
Institutions • Annapurna
Factoring Factoring of Trade Invoices of MSMEs Siemens Factor Ltd; SBI Global Factors
Companies
P2P lending Platform to bring together borrowers and lenders Lendbox
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 Practice MCQ By: Basava Uppin
Practice MCQ Which among the following activities is/are allowed to be
Which among the following is/are considered as Non-Banking carried out by the NBFCs?
Financial Institutions (NBFIs)? 1. Giving Loans
1. Non-Banking Financial Companies (NBFCs) 2. Acquisition of Shares/Bonds
2. All India Financial Institutions (AIFIs) 3. Leasing
3. Primary Dealers 4. Insurance

Select the correct answer using the code given below: Select the correct answer using the code given below:
(a) 1 only (a) 1 and 2 only
(b) 1 and 2 only (b) 2 only
(c) 2 and 3 only (c) 1, 2 and 3
(d) 1, 2 and 3 (d) 1, 2, 3 and 4

Practice MCQ Practice MCQ

The “50-50” Test adopted by the Reserve Bank of India deals With respect to NBFC sector, consider the following statements:
with which among the following? 1. Companies whose Principal business is Agriculture, Industrial
(a) Regulation of Differentiated Banks in India activity, sale/purchase of immovable property cannot be
(b) Regulation of External Commercial Borrowings registered as NBFCs.
(c) Investment Limits on G-Secs 2. All the NBFCs are registered with RBI but may be regulated by
(d) Criteria for the identification of companies as NBFCs. other entities

Which among the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
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Invoice Factoring through NBFCs
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Invoice Factoring through NBFCs
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Account Aggregator Framework
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Practice MCQ Practice MCQ

Which among the following statements related to Account In which among the following ways the recently unveiled
Aggregators (AA) is incorrect? Account Aggregator (AA) framework benefit Indian
(a) The Account Aggregators are registered as NBFCs with the Economy?
RBI. 1. Improve Credit Creation
(b) The AAs act as intermediaries and provide necessary financial 2. Enable Banks to extend credit without collateral.
data of the prospective borrowers to the Banks. 3. Digital Banking will completely replace physical Banking
(c) The AAs maintain centralized database of financial data of all
the borrowers. Select the correct answer using the code given below:
(d) The AAs can enable cash flow-based lending to the MSMEs. (a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
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NBFC-P2P
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Practice MCQ Practice MCQ
Which among the following account for the highest share of Consider the following statements about Non-Banking Financial
microfinance loans in India? Company (NBFC) – Micro Finance Institution (MFI) in India:
(a) Scheduled Commercial Banks 1. Currently, only NBFC-MFI lend microfinance loans in India.
(b) Regional Rural Banks 2. NBFC-MFI microfinance loans are not backed by collateral.
(c) NBFC-MFIs 3. NBFC-MFIs are free to charge the interest rate on the
(d) Cooperative Banks microfinance loans based on market principle.

Which of the statements given above are correct?

Practice MCQ A. 1 and 2 only
With respect to RBI’s recent guidelines on Microfinance sector, B. 2 and 3 only
consider the following statements: C. 1 and 3 only
1. The guidelines have been made applicable only to NBFC- D. 1, 2 and 3
MFIs.
2. The RBI has decided to fix a ceiling on the interest rates Practice MCQ
charged by the financial institutions on the microfinance Which among the following statements is incorrect about Micro-
loans. Finance sector?
(a) Micro-finance loans are given by Scheduled commercial
Which among the statements given above is/are correct? banks, Cooperative banks and NBFC-MFIs
(a) 1 only (b) The Interest rate on the micro-finance loans is completely
(b) 2 only market determined.
(c) Both 1 and 2 (c) RBI’s guidelines on micro-finance sector is applicable only to
(d) Neither 1 nor 2 NBFC-MFIs.
(d) The loan repayment obligation cannot be more than 50% of
monthly household income.
 By: Basava Uppin

Practice MCQ
Which among the following best describes the concept of Microfinance loan in India?
(a) Loans given to rural households for income generating activities.
(b) Collateral free small value loans given by NBFC-MFIs only.
(c) Low interest rate loans given by Banks and Financial institutions.
(d) Collateral free loans given to households having an annual income below a threshold level.
 By: Basava Uppin
Scale based Regulation of NBFCs
 By: Basava Uppin
Scale based Regulation of NBFCs

Regulatory changes under the SBR Framework

Applicability: Any regulatory stipulation applicable to a lower layer under the new NBFC categorisation will automatically
apply to a higher layer, unless otherwise notified by the RBI.
Increase in Net owned Fund (NOF) requirement: The RBI has increased the minimum net owned fund (NOF) requirement for
NBFC-ICC from Rs 2 crores to Rs 10 crores. For NBFC-MFI and NBFC-Factor, the NOF requirement has been increased from Rs 5
crores to Rs 10 crores.
Changes to NPA classification norms: Presently, all NBFCs classify loans as NPA if it is due for more than 180 days. The RBI has
prescribed a uniform overdue period of more than 90 days for classification of loans as NPA for all categories of NBFCs. Hence,
going forward, the NPA classification requirements for banks and NBFCs would be aligned.
 By: Basava Uppin

Practice MCQ
With reference to Scale Based regulation of NBFCs, consider the following
statements:
1. The scale based regulation covers all the Deposit-taking and Non-Deposit
taking NBFCs irrespective of their assets size.
2. Under the scale based regulation, all the NBFCs would be placed under 4
different layers.
3. The RBI has prescribed a uniform overdue period of 180 days for
classification of loans as NPA for all categories of NBFCs

Which among the statements given above is/are correct?

(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
 By: Basava Uppin

PCA Framework for NBFCs

Applicability • All Deposit Taking NBFCs
• All Non-Deposit Taking NBFCs in Middle, Upper and Top Layers. (Non-Deposit Taking NBFCs with assets more
than Rs 1000 crores)
Exempted Categories • Non-Deposit Taking NBFCs in Base level i.e., with assets less than Rs 1000 crores.
• Government Companies
• Housing Finance Companies
Indicators • Capital to Risk weighted Asset Ratio (CRAR)
• Tier-1 Capital Ratio.
• Net Non-Performing Assets (NPA)
Actions which RBI can • Halting branch expansion
take? • Stopping dividend payment
• Undertake special audit, restructuring operations and activation of recovery plan.
• NBFCs' promoters can be asked to bring in new management.
• RBI can also supersede the NBFC's board.
By: Basava Uppin
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National Bank for Financing Infrastructure Development (NaBFID)
Established under NaBFID Act, 2021 with authorized share capital of Rs 1 lakh crores. Initially, 100% owned by Government. To be
later reduced to 26%
Shared of NaBFID can be Centre; Banks; Financial Institutions; Multilateral Institutions; Sovereign Wealth Funds, Insurance and Pension
held by funds etc.
Functions Development: Development of market for Bonds for Infrastructure financing.
Financial: Directly or indirectly lend to infra projects which are entirely or partly in India.
(a) Extend Loans
(b) Take over loans given by Banks
(c) Attract investors including foreign investors
(d) Negotiate with Government to reduce dispute resolution related to Infrastructure.
Source of Funds Raise money either in Rupees or foreign currencies.
Borrow from Centre, RBI, Scheduled commercial Banks, International institutions such as World Bank
Management Board of Directors appointed by Government. Chairperson appointed by Government in consultation with RBI
Governor.
Other important NaBFID Act also provides for setting up of private DFIs to be licensed and regulated by RBI.
Provisions
By: Basava Uppin
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Practice MCQ Practice MCQ
With respect to National Bank for Financing Infrastructure and With reference to National Bank for financing Infrastructure and
Development (NaBFID), consider the following statements: development (NaBFID), consider the following statements:
1. The NaBFID would mobilize deposits from the Banks and 1. The National Bank for Financing Infrastructure and
people to fund Infrastructure projects. Development will be completely owned by the Government
2. The Banks and financial institutions are allowed to be of India at all the times.
shareholders of NaBFID. 2. In order to support Internationalization of Rupee, the Bank
3. The role of NaBFID is limited to only lending loans to has been prohibited from raising loans in foreign currencies.
infrastructure projects.
Which of the statements given above is/are correct?
Which among the statements given above is/are correct? (a) 1 only
(a) 1 only (b) 2 only
(b) 1 and 2 only (c) Both 1 and 2
(c) 2 only (d) Neither 1 nor 2
(d) 1, 2 and 3
By: Basava Uppin
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Factsheet on Public Sector Banks (PSBs)
Number of Public Sector 12 (including State Bank of India)
Banks
Dominance of PSBs in the 70% of the market share in the Banking Sector
Banking Sector
Poor Financial Position of PSBs • 80% of the overall NPAs of the Banking sector.
• Total losses worth Rs 66,000 crores in 2019-20. This was equivalent to budgetary
allocation for Primary Education.
• Every one rupee of the taxpayers' money which is invested in PSBs fetches a market
value of 71 paise. In case of Private Banks, it fetches a market value of Rs 3.70 i.e., more
than five times as much value as that of a rupee invested in PSBs. (Eco Survey 2019-20)
Underdeveloped Banking • India’s banking sector has remained dwarf when compared to size of the economy
Sector (GDP), development of the economy (GDP per capita) and population.
(Eco Survey 2019-20) • India has only one bank in the global top 100. India's top ranked Bank, SBI has been
placed at 55th Position at the global level.
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Present Status of Public Sector Banks (PSBs)
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