Daily Quiz: UPSC Prelims Marathon – January 15, 2019

First, bank rate is the rate at which central bank (in case of India, it is RBI) of a country provides re-financing facilities or provides loans to the commercial banks.

When bank rate is lowered, it is called ‘cheap money policy’. Money supply in the economy is increased. Commercial banks now can borrow from the RBI at cheaper rates and can pass on this change to their customers through by providing loans at cheaper rate. Now, say if you want to get a home loan, your cost of getting that loan gets decreased. Generally, RBI lowers the bank rate during a period of recession/slowdown or sluggish economic activity. Reduced costs of loans, encourage companies/manufacturing units etc to borrow more for increasing production and consumers to spend more. Thus, economic activity in the country picks up.

When RBI increases bank rate, it is called ‘dear money policy’. Money becomes costlier. RBI, does so, generally, during a period of inflation. Commercial banks are compelled to pay higher interest to the RBI which in turn prompts them to raise the interest rates on loans they offer to customers. The customers then are dissuaded in taking credit from banks, leading to a shortage of money in the economy and less liquidity. So, while on the one hand, inflation is under controlled as there is less money to spend, growth suffers as companies avoid taking loans at high rates, leading to a shortfall in production and expansion.

ADB is multilateral lending agency based in Manila, Philippines.  It is dedicated to reduce poverty in Asia and the Pacific region through inclusive economic growth, environmentally sustainable growth, and regional integration.

Statement 2 is wrong:

ADB has 67 members – 48 from the Asia-Pacific region including India and is collectively owned by these 67 members. The non Asia pacific region members are only developed countries.

Most of the ADB’s lending (~80%) is concentrated public sector lending in five operational areas viz. Education; Environment, Climate Change & Disaster Management; Finance Sector Development; Regional Cooperation & Integration and Private sector lending.

It provides finance to both sovereign countries as well as private parties. It provides hard loans to middle income countries while soft loans to poorer countries.

Net national product (NNP) refers to gross national product (GNP), i.e. the total market value of all final goods and services produced by the factors of production of a country or other polity during a given time period, minus depreciation

Statement 1 is wrong :

The Council is chaired by the Union Finance Minister

Members of FSDC :

Governor, Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs; Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance; Chairman, Securities and Exchange Board of India; Chairman, Insurance Regulatory and Development Authority and Chairman, Pension Fund Regulatory and Development Authority.

Bank Rate

When banks borrow long term loans from RBI, they’ve to pay a fixed interest rate to RBI Bank can borrow money without pledging government securities to RBI Bank rate is linked with penal rates viz. If CRR, SLR not maintained Penalty → Bank rate + 3% For repeat offender → Bank rate + 5% If Bank Rate is increased banks will have less money  → Cost of Borrowing increases. Bank Rate decreased → More money with banks → Cost of borrowings decreases.

Angel investors invest in small startups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages. Angel investors provide more favorable terms compared to other lenders, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.

Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. These are affluent individuals who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool in capital.

Capital Expenditures

Capital Expenditure is that expenditure which results in increasing of government asset (giving out loans) or reduce in some liability (paying back old loans). Following are the key examples of capital expenditures.

Loan disbursals

The loans given by the Government to the states, PSUs and other governments come under Capital Expenditures because such loans are assets of the government.

Loan Repayments

The loans that were borrowed in past but are now returned back are included in the capital expenditures; because they result in reduction of liability.

Expenditures  resulting in asset creation

The government’s budget expenditures on infrastructure, machinery, land, roads, bridges etc. and purchase of arms and equipments, modernization of the army etc. are also Capital Expenditures.