7.RBI (Part 3) Flashcards
What is the interest rate corridor?
*The interest rate corridor is the range between the highest rate of interest (currently MSF) and the lowest rate of interest (currently SDF) set by RBI.
*The Standing Deposit Facility (SDF) acts as the floor or lower limit, while the Marginal Standing Facility (MSF) acts as the ceiling or upper limit within this corridor.
What is the variable repo rate?
*The variable repo rate is a rate at which banks can borrow or lend money from or to RBI.
*This rate may vary and is determined based on the prevailing market conditions and monetary policy objectives.
What is rationing of credit?
*Rationing of credit refers to the practice of controlling credit ceilings by RBI, which determines the maximum amount of credit that Scheduled Commercial Banks (SCBs) can grant.
*Under this measure, RBI allocates credit based on the priorities of the economy and the importance of different sectors.
*It ensures that credit is distributed in a way that supports the overall economic goals.
What are the priority sectors for lending in India?
The priority sectors for lending in India include agriculture, micro, small, and medium enterprises (MSMEs), export credit, education, renewable energy, backward sections of society, housing, social infrastructure, and others.
What is the division of priority sector lending in India?
*Indian banks are required to lend 40% of their total lending to the priority sector annually.
*Out of the 40% priority sector lending, 18% is reserved for the agriculture sector, 11.5% for weaker sections, and 7.5% for micro-enterprises.
*In 2022-23, 9.5% of the agriculture sector lending is reserved for small and marginal farmers, and in 2023-24, it will be 10% for marginal farmers.
*Similarly, in 2022-23, 11.5% of priority sector lending is reserved for weaker sections, and in 2023-24, it will be 12% for weaker sections, which include SC, ST, disabled people, self-help groups, and farmers under debt.
Do foreign banks operating in India follow the same rules for priority sector lending?
*Yes, foreign banks that have more than 20 branches in India are required to follow the same rules for priority sector lending as Indian banks.
*Foreign banks with less than 20 branches can allocate up to 32% of their lending for exports and the remaining 8% for any other priority sector.
What are Priority Sector Lending Certificates (PSL)?
PSL certificates are instruments that banks can purchase to fulfill their priority sector lending targets and sub-targets in case of a shortfall. They allow surplus banks to sell their excess achievement over the target, thereby promoting lending to categories under the priority sector.
What is the purpose of PSL certificates?
PSL certificates incentivize banks to achieve their priority sector lending targets by providing a mechanism to purchase obligations and meet the targets. They also enable surplus banks to sell their excess achievement, thereby enhancing lending to priority sectors.
How does the PSL certificate mechanism work?
In the PSL certificate mechanism, the seller fulfills their priority sector lending obligation, while the buyer purchases the obligations without assuming the risk associated with the loan assets. This mechanism helps banks meet their targets and sub-targets without transferring the risk of loan assets.
What is meant by “variation in margin requirements”?
Variation in margin requirements refers to the authority of the RBI to instruct banks to increase margins on loans for essential commodities. This measure is implemented to prevent hoarding, speculation, and black marketing in the market.
What does it mean when RBI regulates loans for consumption purposes?
When RBI regulates loans for consumption purposes, it sets limits and restrictions on the loans given by banks for non-productive or consumption-related purposes. This is done to ensure that excessive consumption does not contribute to inflationary pressures in the economy.
What is moral suasion in the context of banking?
Moral suasion refers to a combination of persuasion and pressure used by the central bank, in this case, the RBI, to influence and guide the actions of commercial banks. It involves discussions, letters, speeches, hints, meetings, and other forms of communication to encourage banks to comply with RBI’s directions and policies.
How does moral suasion work in selective credit control?
In selective credit control, moral suasion is used as a psychological and informal means to influence banks’ lending decisions. The RBI may request banks, through moral suasion, to take specific measures aligned with the trends and objectives of the economy. For example, the RBI may advise banks not to provide certain types of loans.
What is direct action taken by the RBI?
Direct action refers to punitive measures taken by the RBI against banks that do not comply with its moral advice or act against the interests of the RBI and depositors. These measures can include imposing penalties, withdrawing refinancing facilities, temporarily suspending bank operations, or even canceling bank licenses.
What are some examples of direct action by the RBI?
Examples of direct action by the RBI include charging penalty rates of interest, refusing to refinance banks, imposing moratoriums on banks, and, in extreme cases, canceling bank licenses. These actions are taken to enforce compliance and protect the stability of the banking system.
