UPSC Essentials | Daily subject-wise quiz : Economy MCQs on Liquidity Adjustment Facility, evergreening of loans and more (Week 66)

1. The FI-Index has been constructed without any ‘base year’.

2. The index is released by the Department of Economic Affairs.

3. The index is published quarterly.

4. It is a comprehensive index incorporating details of banking and investment sectors but does not cover insurance and postal sectors.

How many of the statements given above are correct?

(a) Only one

(b) Only two

(c) Only three

(d) All four

Explanation

— The Reserve Bank of India (RBI) said that the Financial Inclusion Index (FI-Index), which captures the extent of financial inclusion across the country, stood at 64.2 in March 2024 from 60.1 in March 2023. Hence, statement 2 is not correct.

— The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion.

— The FI-Index comprises three broad parameters, each consisting of various dimensions, which are computed based on several indicators.

(i) Access (having a weight of 35 per cent in the index);

(ii) Usage ( weight 45 per cent); and

(iii) Quality ( weight 20 per cent).

— The index has been conceptualised as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with government and respective sectoral regulators. Hence, statement 4 is not correct.

— The FI-Index has been constructed without any ‘base year’ and as such it reflects cumulative efforts of all stakeholders over the years towards financial inclusion. Hence, statement 1 is correct.

— The FI-Index is published annually in July every year. Hence, statement 3 is not correct.

Therefore, option (a) is the correct answer.

QUESTION 2

With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of: (UPSC 2024)

(a) Bond market

(b) Forex market

(c) Money market

(d) Stock market

Explanation

— The G-Secs market primarily caters to long-term investors, whereas the money market offers short-term investment opportunities.

— Money market transactions are typically used to fund transactions in other markets, including the G-Secs market, and to address short-term liquidity shortages.

— Money markets have a maximum tenor of one year. Within one year, depending on the tenors, the money market is divided into:

i. Overnight market – The tenor of transactions is one working day.

ii. Notice money market – The tenor of the transactions is from 2 days to 14 days.

iii. Term money market – The tenor of the transactions is from 15 days to one year.

— Money market instruments include call money, repos, T- Bills, Cash Management Bills, Commercial Paper, Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO).

Therefore, option (c) is the correct answer.

(Source: rbi.gov.in)

QUESTION 3

With reference to the Liquidity Adjustment Facility (LAF), consider the following statements:

1. It is a facility extended by RBI to the scheduled commercial banks and regional rural banks.

2. It enables liquidity management on a monthly basis.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Explanation

— LAF is a facility extended by RBI to the scheduled commercial banks (excluding RRBs) and PDs to avail of liquidity in case of requirement or park excess funds with RBI in case of excess liquidity on an overnight basis against the collateral of G-Secs including SDLs. Hence, statement 1 is not correct.

— LAF offers day to day liquidity management. Hence, statement 2 is not correct.

— The LAF operates through repurchase agreements (repos and reverse repos), with the RBI serving as the counter-party to all transactions.

— The RBI periodically fixes the interest rate in LAF.

— LAF is a valuable instrument for monetary policy and liquidity management. The accounting requirements that market participants must follow for repo/reverse repo transactions under RBI’s LAF and MSF (Marginal Standing Facility) are consistent with the accounting guidelines established for market repo transactions.

Therefore, option (d) is the correct answer.

(Other Source: rbi.gov.in)

QUESTION 4

With reference to the commercial paper (CP), consider the following statements:

1. It is an unsecured money market instrument issued in the form of a promissory note.

2. It is held in a dematerialised form through any of the depositories approved by and registered with SEBI.

3. A CP is issued in a minimum denomination of ₹1 lakh.

4. Companies, including NBFCs and co-operative societies in India with a net worth of ₹100 cr or higher are eligible to issue Commercial papers.

Which of the statements given above are correct?

(a) 1 and 4 only

(b) 1, 3 and 4 only

(c) 1, 2, 3 and 4

(d) 1, 2 and 4 only

Explanation

— Commercial Paper (CP) is an unsecured money market instrument that is issued in the form of a promissory note and kept in dematerialised form at any of the depositories permitted and registered with SEBI. Hence, statements 1 and 2 are correct.

— A CP is issued in minimum denominations of ₹5 lakh and multiples thereof, with a discount to face value. No issuer’s CP shall be underwritten or co-accepted, and options (call/put) on a CP are not permitted. Hence, statement 3 is not correct.

— Companies with a net worth of ₹100 cr or higher in India, including NBFCs and AIFIs, co-operative societies, government entities, trusts, limited liability partnerships, and other entities permitted by RBI, are eligible to issue commercial papers, subject to certain conditions. Hence, statement 4 is correct.

— All residents and non-residents who are entitled to participate in CPs under the Foreign Exchange Management Act (FEMA) of 1999 are eligible to do so; however, no one may invest in CPs issued by connected parties in the primary or secondary market.

Therefore, option (d) is the correct answer.

(Other Source: rbi.gov.in)

QUESTION 5

With reference to the evergreening of loans, consider the following statements:

1. It is a process whereby a lender tries to revive a loan that is on the verge of default by extending more loans to the same borrower.

2. It is also known as a revolving loan.

3. Credit cards are an example of the evergreening of loans.

How many of the statements given above are correct?

(a) Only one

(b) Only two

(c) All three

(d) None

Explanation

— The Reserve Bank of India (RBI) cautioned banks against having “lakhs of accounts” used for fraudulent transactions and evergreening of loan accounts.

— Evergreening of loans is a process whereby a lender tries to revive a loan that is on the verge of default by extending more loans to the same borrower. Hence, statement 1 is correct.

— Evergreening loans is often a temporary solution for banks. Credit cards are among the most popular types of evergreen loans. Hence, statement 3 is correct.

— Evergreen loans often take the form of a line of credit that is continuously paid down, leaving the borrower with funds accessible for credit purchases. Evergreen loans can also be referred to as “standing” or “revolving” loans. Hence, statement 2 is correct.

— Non-revolving credit differs in that it assigns a principal amount to a borrower when the loan is accepted. It then demands the borrower to pay a certain amount over the course of the loan until it is paid off. When the loan is repaid, the borrower’s account is closed, and the lending relationship terminates.

Therefore, option (c) is the correct answer.

(Other Source: http://www.investopedia.com)

Previous Daily Subject-Wise-Quiz

Daily subject-wise quiz — Polity and Governance (Week 66)

Daily Subject-wise quiz — History, Culture, and Social Issues (Week 66)

Daily subject-wise quiz — Environment, Geography, Science and Technology (Week 66)

Daily subject-wise quiz — Economy (Week 65)

Daily subject-wise quiz – International Relations (Week 65)

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