Q. With reference to the Indian Banking Industry, consider the following statements:
1.The Liquidity Adjustment Facility (LAF) allows scheduled commercial banks to borrow from the RBI for short-term needs through repos and lend surplus funds through reverse repos.
2.As per the Narasimhan Committee-II recommendations on the 3-Tier Banking Structure, a big Universal Bank can be created by merging strong and weak banks.
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

Answer: A
Notes:

Explanation:

  • Statement 1: The repo and reverse repo instruments, which are part of the LAF, allow banks to borrow from the RBI by selling government securities (repo) and to lend their surplus funds to the RBI by purchasing government securities (reverse repo). These are important tools for liquidity management.
  • Statement 2: While the Narasimhan Committee-II did recommend a three-tier banking structure involving mergers, it advised against merging “weak banks/FIs with either weak or strong banks/FIs”.
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