Daily Quiz: UPSC Prelims Marathon – October 23, 2018

Statement 1 is correct. According to RBI, bank loan becomes non-performing when interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan.

Statement 2 is correct. In case of an agricultural loan, a loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons.

Statement 1 is incorrect. A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

Statements 2 and 3 are correct. NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available
• to depositors of NBFCs, unlike in case of banks.

The term ‘Sterilisation by RBI’ refers to the process by which the RBI takes away money from the banking system to neutralise the fresh money that enters the system. RBI often uses its instruments of money creation for stabilising the stock of money in the economy from external shocks. Suppose the RBI decides to buy US dollars (USD) from the market. Now, the money held by the RBI does not form part of the banking system. So, if the RBI releases rupees from its coffers to buy dollars, the money supply in the banking system increases. That can be a problem. More money in the banking system means higher bond prices. Because banks will have more money, they will buy more bonds. And that will push up bond prices. Since bonds carry an inverse price-yield relationship, higher bond prices means lower yields. The problem is that lower yields will force the RBI to cut interest rates further. If the RBI does not want to cut rates, it will reduce (sterilise) liquidity that causes the yields to fall. It will do so by selling the government bonds that it holds in its books. This means that sterilisation is possible only to the extent that the RBI holds government bonds in its portfolio. This process of selling government bonds to reduce liquidity is part of its open market operations.

In India, Spot Exchanges refer to electronic trading platforms which facilitate purchase and sale of specified commodities, including agricultural commodities, metals and bullion by providing spot delivery contracts in these commodities. This market segment functions like the equity segment in the main stock exchanges. Alternatively, this can be considered as a guaranteed direct marketing by sellers of the commodities. Spot Exchanges leverage on the latest technology available in the stock exchange framework for the trading of goods. This is an innovative Indian experiment in the trading of goods and is distinct from what is commonly known as “commodity exchanges” which trade in futures contracts in commodities.

Insider trading is the buying or selling of a security by someone who has access to material nonpublic information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still nonpublic.

By India’s public debt we mean the internal and external debt of the Government of India. The most comprehensive definition of public debt would include the indebtedness of all the three levels of government and all public enterprises, to the domestic private sector and to the external sector. Internal debt comprises treasury bills, market stabilisation schemes, ways and means advance, and securities against small savings.

Statement 1 is incorrect. India cannot devalue its currency because the Indian Rupee exchange rate is market determined. A devaluation is an official lowering of the value of a country’s currency within a fixed exchange rate system.

Statement 2 is incorrect. Reduction in import duties will increase current account deficit.

Statement 3 is correct. If the government pursue a tight fiscal and monetary policy, it will reduce demand. Tight monetary policy involves increasing interest rates which will leave people with less money to spend. Thus, they will reduce their consumption of imports.

Statement 4 is correct. Export subsidies will make export cheaper which will increase exports in turn and reduce Current Account Deficit.