UPSC PREVIOUS YEAR's ECONOMICS QUESTIONS- Part-1

UPSC PREVIOUS YEAR's  ECONOMICS QUESTIONS- Part-1

Q.1 It is being suggested that the commercial banks in India should reduce their holdings of non-performing assets. Does it mean that the former should abandon social priorities? (250 words, 15 marks)

Ans: Banks play a very useful and dynamic role in the economic life of every modern state. The two basic functions of commercial banks are: mobilization of the savings of the people and disbursement of credit according to socio-economic priorities, thus accelerating the pace of economic development in the desired direction.

 But a major threat to banking sector is prevalence of Non-Performing Assets (NPAs). All those assets which do not generate periodical income are called as “Non-Performing Assets (NPA)” or “bad loans” If the customers do not repay principal amount and interest for a certain period of time then such loans become Non-Performing Assets (NPA).

In the last five financial years and governance failures on account of integrity and competence issues plague the banking system.

Even though bank serves social objective through its priority sector lending, mass branch networks and employment generation, maintaining asset quality and profitability is critical for banks’ survival and growth.

Presently, banks have to ensure that 40% of lending is to the priority sector. Priority sector lending is not the ideal avenue for banks as it pops up higher NPAs given the vulnerability of the segments.

The government should review the 40 per cent level of priority sector lending. While the weaker sections have to be supported, banks may not be the ideal medium as it weakens the genetic design of the system. It may be useful to consider hiving off all agricultural and social sector lending into a separate entity which may be government owned and controlled and allow the corporate lending part of the PSBs to be privatised.

Q.2 What has been the rationale for deregulating commercial bank's lending rates as a policy strategy? (10 marks, 150 words)

Ans: After nationalization of banks in 1969, RBI used to decide rate structure for deposits and for lending uniformly applicable for all banks. But after adoption of reformation policy in the year 1991, RBI removed the minimum level of interest rates on loans over Rs 2 lakh and left banks completely free to charge whatever rate they wish to. This was done in order to force banks to increase their efficiency.

This has increased the competition among financial institutions. Banks can now extend long-term loans to the corporate sector in low rates in addition to financing the latter's need for working capital. Banks can give loans to state level financial and industrial corporations, who in turn will lend it to the small-scale sector. This will be counted as part of the banks' priority sector lending obligations, but saves them from a lot of administrative problems.

The abolition of the ceiling on term loans and the exposure limit of banks towards project finance would also increase profitability. Banks could participate in the financing of mega-projects. For the corporate sector, the impact of a decline in interest rates is bound to be beneficial.

But while the Government has by and large followed the recommendations of the Narasimhan Committee to improve efficiency in the sector, it has not done enough to reduce the burden on banks of priority sector lending at concessional rates.

                                                                                        
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                                                                              SANJIT RAJ