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[Banking] Nachiket Committee: Remove SLR, Reduce CRR, Raise PSL to 50%, Increase Loan Access: Issues, implications

explained
Prologue Accepting Deposits: Why Remove SLR? Why Priority sector lending? 1. What if PSL target not met? 2. Additional safeguards under PSL 3. PSL target raised to 50% 4. Base Rate 5. Agri. interest subvention scheme 6. Debt relief= bad habits 7. PSL: Misc. Issues/recommendations 5. Mock Questions

1. 2. 3. 4.

Prologue So far, weve seen RBI appointed Nachiket Mor Committee on financial products for small businessmen and poor people (low-income households). Nachiket cameup with six-point vision.

1. Universal bank accounts for everyone (already done click me)

2. Better access to payment services, payment banks (already done click me) 3. Better access to loans (Credit) discussed in this article 4. Better access to investment 5. Better access to insurance 6. Consumer protection. In this article, well see vision #3: better access to loans (Credit). Nachiket has three major recommendations in this regard: 1. 2. 3. 4. Remove SLR, reduce CRR Remove interest subvention, Remove debt relief Priority sector lending: raise from 40% to 50% Other Misc. recommendations to increase access to credit (loans).

Accepting Deposits:
Bank is an organization who got license from RBI (under Banking regulation act) A bank must have three features: 1. Accepts deposit from public 2. Gives these deposits for loan / investment 3. Deposited Money can be withdrawn by cheque (and other means like Debit card, ATM card, netbanking etc.) Bank accepts mainly two types of deposits:
They mature at a particular time e.g. Fixed deposit for 1 year @9% interest rate. If you demand this money before expiry of one year= they cut penalty.

Time Deposit

Fixed deposit, recurring deposits, cash certificates

Demand Deposit

You can demand / takeout money without as per your wish.

Savings account (for general public) current account (for businessmen) Demand Drafts (DDs)

For bank, both of them are liabilities. Because bank has to repay this money sooner or later. RBI counts SLR and CRR only on ^these net demand and time liabilities (NDTL.)

Incoming (Time and Demand Liabilities) suppose its 100 crores 4 cr.gone here. (Bank earns no profit/interest here)

CRR: Cash reserve ratio. (4%)

SLR (23%): Bank has to keep aside some money in liquid assets such as gold, government security other RBI approved securities of public/private companies. Money left with bank

23 cr. gone here. (some interest/profit earned)

100-(23+4)=73 cr.

Now whatever car loan, home loan, and education loans the bank wants to give, they have only 73 rupees left. (even there, youve Priority sector lending requirements.) So, Nachiket recommends reforms:
SLR Remove SLR requirement. (gradually) CRR CRR should be counted only on the Demand deposit.Ignore Time deposits for this calculations= CRR will be reduced automatically. Money kept under CRR doesnt earn additional money. it is a dead asset. So let money kept in CRR=better.For more points, click me to know why SBI hates CRR?

What Nachi recommends?

WHY?

Explained below

Why Remove SLR?

SLR=Statutory liquidity ratio =banks have to keep aside some assets into liquid form= cash / gold / government securities / RBI approved securities of public and private sector companies.

these assets are called liquid, because you can easily sell them and recover money in cash form. This cash comes handy during emergency for example: When many people simultaneously come to take out money from their savings/current account during festivals, after natural calamity, or when someone rumours that bank is going to collapse. When customers make such bank runs, bank can sell away the SLR securities and quickly arrange cash for customers. So, in a way SLR=one type of emergency backup. But SLR securities=very safe, low risk securities. And in market, low-risk = low reward. Banks hardly earn ~8% interest/dividend on such investment. So most bankers consider the SLR investment = lazy investment or even dead investment. BASEL norm

BASEL norms=lengthy topic, needs separate discussion. For the moment, just know that

BASEL is a town in Switzerland, where bankers across the world met, to decide how to make banking sector more safe and sound, and how to prevent repeat of sub-prime crisis. This leads to various terms: Capital adequacy requirements, tier I, tier II assets and so on. Third version of this system =BASEL III. Effective from 2013. Bankers agreed we must keep some money apart, as emergency backup (just like our SLR). They came up with a new concept called Liquidity Coverage Ratio (LCR). The basics are similar to our SLR, that bank should invest part of their money into liquid assets like Treasury bonds / government securities and highly rated shares & bonds. RBI has been talking with BASEL board to include SLR securities into this LCR system. Indian banks have to comply with BASEL-III norms by 2018.

Nachikets argument is following

SLR = lazy investment (Because it gets barely ~8% return)

In future, weve to comply with BASEL-III norm. and theyve LCR system that is very similar to our SLR If banks have to keep money aside for both LCR+SLR => less money available for lending=not good for economy. So, better abolish SLR and just follow the BASEL norms.

Overall, SLR removed + CRR reduced = more money available for banks, for lending to needy people = access to loans increased =financial inclusion.

Why Priority sector lending?


Youre aware of the common sense principle no risk no reward=>high risk high reward. So, What will happen in a free market economy (where RBI and Government donot interfere with the system)?
How much interest should bank charge on the loan?

Loan customer

Bankers thought process

Farmer

Maximum risk, because his income depends on the vagaries of monsoon. He is mostly to default on the loan. Less Risky than farmer but still he may make losses during high inflation/recession and default on loan. Hell not repay until he finishes graduation and gets a job.

High (50%)

Small businessman

High (45%)

Student

High (40%)

Salaried middleclass family High net-worth individual (HNI), Big businessman

Minimum risk.

Low (10%)

Minimum risk.

Low (5%) because minimum risk=minimum reward.

Obviously, farmers, small business and students:

1. Will be exploited with high interest rate OR 2. Will never get any loan. Therefore, RBI requires the banks to give part of their loans to the weaker sections of society. This is called Priority sector lending (PSL) requirement.
Late 60s RBI asks the banks to increase lending to agro + small Industries (but did not give any targets RBI required the banks to submit data on how much money do they lend to agro+small industries? (RBI had not imposed any targets on the banks yet) Finance minister comes up with the idea of 40% lending to priority sectors.

70s

80s

Priority sector includes following categories: 1. Agriculture and allied activities: (dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture.)
Direct lending Individual farmer, self-help groups (SHG), cooperative societies Indirect lending Food processing industry, other Corporates and firms engaged in this sector.

2. Micro and Small industries (upto 2 crores) 3. Education loans (10 lakh in India, 20 lakh for going abroad) 4. Housing loans (upto max. 25 lakh in metropolitan cities) 5. Renewable Energy: Loans for solar and renewable energy solutions. Note: Export credit is not a separate category. Export credit to eligible activities under agriculture and MSE will be reckoned for priority sector lending under respective categories. Weaker section

Within priority sectors, bank has to give some of the loans to weaker section of society. Weaker section means: 1. Small and marginal farmers;
Farmer Small Marginal Landholding upto more than 1 ht. but less than 2 ht. upto 1 hectare

1. Artisans, village and cottage industries 2. Beneficiaries National Rural Livelihood Mission (NRLM); Swarna Jayanti Shahari Rozgar Yojana (SJSRY); and Manual scavangers rehab. scheme 3. Scheduled Castes and Scheduled Tribes; 4. Women, self-help groups 5. Distressed people in the clutches of non-institution lenders (private Moneylenders, loan-sharks, financers etc.) Overall, PSL targets are as following
Target Desi Banks. (+foreign banks with 20 branches of more) 18% 10% Foreign banks with less than 20 branches No specific targets No specific targets

Agro Weaker sections Remaining categories under PSL Overall PSL target

Whatever left to reach the 40% target

No specific targets

40% of net loans given**

32%

**To be technically correct that is Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off Balance Sheet Exposure (CEOBE),

whichever is higher? But such minute technical details not important for exams.

What if PSL target not met?


Most banks miss their PSL targets.
Year 2013 Official loan target of PSL Public sector banks gave Private sector banks gave % 40% 36.3% 37.5%

So what happens when bank fails to meet PSL target?


Desi Banks. Foreign banks (with 20 or more branches) Theyve to send remaining target money to RIDF Foreign bank with less than 20 branches. To SEDF SEDF= small enterprises development fund SIDBI manages SEDF

RIDF=Rural infra. Development fund

NABARD manages RIDF NABARD pays interest rate to the bank for this money (RBI decides the rate) State governments get money from this RIDF fund to launch various infra. Projects. But this isnt free money. The state will have to repay money with interest rate.

Same by SIDBI

Similar case.

Additional safeguards under PSL just for general awareness, not much important for exam:

1. Bank itself has to arrange for applicants photograph. (in other words, Bank cannot reject application because poor man did not have photograph.) 2. Branch manager is given discretionary powers while handling loan applications of weaker section. He can approve suc loan application without consulting his boss. 3. If an SC/ST person has applied for loan under priority sectors, then Branch manager cannot reject. If he wants to reject, he must forward the file to boss. 4. If loan application is less than Rs.25000, Branch manager must clear it within 15 days. (and for bigger amount than Rs.25k, then within four weeks) 5. During natural calamities, floods, cyclones etc. bank has to restructure the loan repayment terms so the victim doesnt suffer more. 6. Bank cannot charge penal interest, if borrower delays repayment. (for loans upto Rs.25000) 7. A farmer took loan but late in repayment, still bank cannot charge compound interest rate on his dues. 8. At regional level, banks have to setup special machinery to handle complaints of PSL-borrowers. 9. Bank has to maintain a separate register for all rejected PSL loanapplications, along with reasons. RBI has powers to inspect these records.

PSL target raised to 50%


Ok so far, I understood:

Mohan

That you want to remove SLR, reduce CRR = increase availability of loans for people. What is Priority sector lending, its features.

Now, tell me your next ambitious but unrealistic target! Nachiket well, I suggest PSL target should be raised from 40% to 50%

Mohan

Whoa, whoa, whoa.PSL borrowers often default on loan repayment. If bank has to give half of its deposits to Priority sector=high NPA, system will collapse, like it happened during Subprime crisis. (Because American banks gave too much home loans to people who did not have the aukaat to repay.

Technically called Sub-prime borrowers.) Most banks even fail to reach 40% target. Howll they reach the 50% Obviously, theyll fail and all the money goes to RIDF =>State government=>chowed down by local politicians, bureaucrats and contractors in bogus infrastructure projects. Besides, If banks have to give half of their loans to PSL/weaker section, then where will middleclass get loan? Is this another election gimmick or what? MAN! I thought youre an IIM graduate but your mindset is of a jholachhap NGO/NAC member.

Nachi

Hold on man. Dont jump the gun so quickly. 50% doesnt mean 50% of 100 rupees. It is a weighted scoring system. Allow me explain:

Existing situation

There are no regional targets under PSL. Suppose SBIs plans to give total 100 crore as loans, then theyve to give 40 crore as loans to priority sector areas. BUT, SBI is free to give this loansanywhere in India. As a result, most of the PSL-loans are given in rich-n-developed states e.g. Gujarat, Andhra, TN, Punjab, Haryana etc. where a farmer is more likely to repay the loan, compared to a farmer in Assam or Arunachal Pradesh. Observe Therefore, I recommend a new system: if bank gives loan to hardship areas, then theyll get more marks, and they must get minimum 50% marks to reach PSL target. Thats our new system. Observe:
District Direct agro. 1.25 1.38** 1.43** 1.46** Weaker section 1.1 1.21** 1.25** 1.28** Other sectors 1 1.10** 1.14** 1.16**

Financial inclusion at the moment highest high medium medium

Pattanamthitta, Kerala Namakkal, TN Rajkot, Guj Muzzaffarnagar, UP

lowest

Kurung Kumey, Arunanchal

1.56**

1.37**

1.24**

Suppose SBIs net credit (ANBC)=100 Crore. So their (new) Adjusted PSL target =50%=50 crore rupees. If SBI gives agri.loan of Rs.1 lakh to a farmer in Kurung Kumey district of Arunanchal, then under the (new) PSL target, well say SBI has given 1 lakh x 1.5617=1,56,170 rupees loan under PSL target. Now, Observe from SBI bank managers point of view:
Earlier PSL-system (40%) Whether SBI gives loan to farmer in Assam or in TN, its counted one and same. 40%=40 crores target New (adjusted) PSL system (50%)

hardship area will get more weightage.

50%=50 crores target Not necessary to give exactly 50 crore rupees. Suppose SBI focuses only where they get multiplier of at least 1.3. then how much money does SBI need to give out?50 crore / 1.3 = approx. 38 crores.

To reach this target, SBI will have to give away exactly 40 crore rupees.

Meaning, only 100-40=60 crore left for giving out as normal loans (car loan, business loans etc. where SBI earns more profit margin)

Meaning, 100-38 crores=62 crores left. So additional two crores for giving out as normal loans=more profit than previous (40%) system.

In other words, this is win-win situation for both parties:


Banks earn more profit (Because theyve to give out less money in PSL). Loan seekers in hardship areas, get more attention from banks.

Mohan

HmmInteresting. In your example SBIs new PSL target actually reduced to 38% (although on paper it will be 50%). Plus, youve already recommended removal of SLR, and reduction in CRR.

So, youre not a jholachhap NGO as I had thought.

Nachi Mohan Nachi

Right, Im totally opposite of that. And to prove it, I give another recommendation: government stopping giving debt reliefs and interest subvention to farmers. But why?? For that, youve to understand the concept of Base rates.

Base Rate
Banks accepts deposits from people and gives it as loan to others. But who or what decides how much interest rate should be charged on such loans?
Benchmark prime lending rate (BPLR). From 2003

Banks would use this complex formula to calculate the rates for various loans. Drawbacks: system was opaque, middleclass had to pay high interest rates, while rich corporates got big loans at cheaper interest rates. Even if RBI changed its repo rate, the banks will not change their loan interest rates.

RBI abolished above BPLR system. Introduced Base Rate

From 2010

Under base rate system, the individual bank is free to determine its own base rate. (7%, 8%, 9% whatever.) bank is free to adopt a formula, as long as RBI feels it is consistent. Banks have to publish the Base rate on their website. Banks cannot lend money below the base rate.

Benefit: System more transparent, all type of loans are linked with Base rate. For example: SBI s Base rate is 10% (as of Nov 2013)
SBIs Car loan Calculation 0.75% above Base rate result 10.75%

Two wheeler loan Education loan (upto 4 lakh) Home loan for women (upto 75 lakh)

8.25% above base rate 3.5% above base rate 0.10% above base rate

18.25% 13.5% 10.10%

If tomorrow, SBI changes the base rate, then all these loan interest rates will change accordingly. SBI cannot give loan to anyone, at a rate below the base rate. But Problem comes with the

Agri. interest subvention scheme


By government of India Applies to scheduled commercial banks (both public + private) Target beneficiary: farmers If farmer is given loan upto 3 lakhs @7% interest rate, THEN government will give 2% interest subvention. In other words, farmer has to pay only 7 MINUS 2 =5% interest rate to bank, and that remaining 2% will be given by government (From tax payers money)
Ok man but whats the problem? This interest subvention scheme is inconsistent with RBIs base rate system. Recall that a bank cannot give loan to anyone below the base rate. Most banks have base rate higher than 8% but government will give subvention only if farm loans given @7%. So what do you recommend?

Mohan

Nachi

Mohan

Nachi

government should stop giving interest subvention. If government wants to give any benefit/subsidy/relief to farmer, then give it under direct (cash) benefit transfer. (DBT) to farmers bank account. This would ensure that the banking system is able to price loans in a sustainable manner based on the risks involved. Itll also protect credit discipline amongst its borrowers.

Mohan

Whatever dude. In the election year, it is unlikely that government will scrap down interest subvention scheme just because Nachiket the great recommends so!

Debt relief= bad habits


2008= Government waived all the debts taken by farmers. (so they get happy and vote for UPA in 2009 election.)
Lazy farmer Honest farmer

I dont need to repay loans on time because government will again waive all the farm loans before next general election!

if other lazy farmers are not repaying loan on time, why should I bother?

Thus, governments debt waiver scheme has created negative implications for the banking system. Farmers now expect more such loan waivers schemes would follow before state/general election, so they dont repay loan installments on time. This also hurt taxpayers because Government waived farmers loans=>government pays to the banks on behalf of farmer. But money doesnt fall from sky. Such freebies =fiscal deficit increased and it leads to plethora of new problems. (To learn more on negative effects of high fiscal deficit click me)

Nachiket recommends that:


From now on, government should stop giving debt waiver or interest subvention. Bank should bundle farm loans with weather based insurance scheme, that way, during crop failure, the farmer doesnt default on loans. His insurance money will cover the loan payment. In case of large scale loan defaults after natural calamity, banks should work closely with insurance companies to recover money. (instead of relying on state or central government to pay bank losses from budget.) If at all, government wants to give relief to debt ridden farmers, then transfer money to their bank account via DBT (Direct benefit transfer- just like in LPG subsidies). Dont directly waive everyones loan.

Every loan defaulter should be reported to credit bureaus (e.g. CIBIL)- be it small farmer, self help group or big businessman. Then people will automatically become cautious to protect their credit history, and repay loans on time. Why? Because if a person has low score in CIBIL, next time bank will not give him loan easily.

PSL: Misc. Issues/recommendations


to increase access to credit/loans among small businessmen and low income households: PSL Insufficient

Banks alone cannot fulfill the credit/loan requirements. Entire MSME (micro-small-medium) enterprises need 4 lakh cores of credit. Banks dont have that much money to lend to a specific sector. If banks divert all of the incoming money to business/agro loans then middle class will have hard time getting loans.

Nachi recommends:

Legal/regulatory framework should be relaxed to help NBFC to raise more money from capital market, FII, External commercial borrowing etc. So NBFC can also lend more money to needy people. Setup Wholesale banks. (well see it in detail, in a separate article) Middle & Large farmer benefits most

Small/marginal farmer= relies on self-labour. So, apart from seeds, fertilizer, pesticide and irrigation, he has to spend money on himself for health, food, life insurance and disability insurance premiums, clothing, shoes etc. => hell have to borrow again to manage expenses during the off-season. But such items are not counted as Agricultural lending under PSL. So banks have no interest in helping farmers for those sideexpenses. And even if bank gives the loan, itll charge higher interest rate under personal loan.

On the other hand, Middle / Large Farmer= Already has some machines (tractors, harvesters, diesel pumpset etc). So labor= Not his main factor of production and he has sufficient money to survive even in the off-season. Thus, medium and large farmers have benefit the most from PSL target. But small-marginal farmers have not benefitted much from PSL.

Nachiket recommends: Loan given to small/marginal farmer and landless labourer= should be counted under PSL target, irrespective of whatever it is meant for buying direct agricture Inputs or indirect wage components. Middleman model failed

Banks cannot open branches in each and every village (and still they have to fullfill the PSL targets), so they tried the real-sector intermediary model. In this model: fertilizer dealers, Sugarmill owners, APMC agents etc. disburse loans to farmers on behalf of the bank.

What is Problem in this model?

Overconsumption of fertilizers and pesticides. How? Because fertilizer dealer will invariably advice the farmer to buy more inputs using the loan money. And farmer would fear that dealer will create some hurdle in loan-processing if he doesnt use complay. Dealer will increase the price of seeds, fertilizer and pesticides. And farmer has no alternative but to buy at higher price (Because dealer processes the loan papers.) Sugarmill owner will deliberately give less price to farmers sugarcane.

+None of these agents have any complaint/redressal facility where farmer can quickly seek justice. (unlike the regular bank and banking ombudsman model) Nachi recommends: This Real-sector intermediary model should be used only as a stop-gap arrangement. Bank should focus on increasing

penetration in rural area by direct branch or business correspondence model. March Rush
Season Months when farmer needs the loan desperately

Kharif June, July, September

Rabi December and January

But, statistics indicate that most of the loans are given in March month. Why? Because PSL-compliance is calculated at March end. This is similar to March rush in government departments. Parliament sanctions budget =>government gives crores of rupees departments=> but if department doesnt spend it before 31st March, all the unspent money will go back. For the entire year, sarkari babus sleep, but during March, they rush to buy new office equipment, start clearing all tenders and project files. Same happens in Banks for PSL-target. Result?

1. In the haste, banks dont thoroughly verify the credit history of farmer=more chance of loan default. 2. Farmer gets the money when he doesnt need. (in the march month). He is more likely to spend it on unproductive things such as festivals, weddings, pilgrimage to Amarnath/Nashik etc.=> Only a small part of a loan money to agriculture inputs=>More chances of loan default. Nachiket recommends: PSL counting should be done on quarterly basis (every three months) rather than yearly basis (12 months). Thatll prevent the March rush among banks. Customer Data Architecture

When you apply for loan, Bank Officer will first check your credit worthiness.

For city folks, this is no problem because they already have xerox passbook showing their balance history, income tax records, salary slips, land possession titles, vehicle registration and so on. But most villagers and city poors dont have such records. In banking parlance theyre called Thin file clients. (Because their credit record, bank balance history is very thin). Banks dont give loans easily to these Thin file clients. =100% financial inclusion not achieved. Solution? Make their file thicker.

But how? Ans. Via customer data Architecture. But Again how?

Even if the person doesnt have a thick file record to show his credit worthiness, he may still have some evidence that he regularly pays his dues e.g. lightbill, phone bill, gas-cable bills etc. In Italy, even water utility bill is counted in credit score. If you pay your water bill regularly, your loan application will be processed easily. In Brazil, phone companies share all data records that would predict creditworthiness of low-income borrowers. (e.g. how many times did the person recharge his phone, average monthly call/sms/internet usage and so on.) In India, even the poors without toilets, have mobile phones. Banks can crosscheck with mobile company about their credit worthiness.

Nachiket Committee recommends 1. New guidelines so mobile companies can share data with banking and finance companies.- even with prospective employer, landlord, or creditor, whether bank or non-bank. 2. But only with written authorization from user. (=the mobile phone customer) 3. Special IT system to prevent misuse of information (e.g. only an officer above ** grade can login the system and check data, data cannot be copied in Usb and so on) Weather stations

Farmers need loan to buy seeds, pesticides, fertilizers and machinery But their loan repayment capacity depends on the vagaries of monsoon. Therefore, most banks sell agriculture loans along with weather based insurance cover. For example, the Weather Based Crop Insurance Scheme (WBCIS) Such insurance schemes give protection from crop loss during o Adverse monsoon: Both excess rainfall and drought situation. o Adverse weather: frost, heat, relative humidity, and unseasonal rains during Rabi season. So whats the problem? Lack of weather monitoring stations. So even if there is crop loss, it is difficult for farmer to prove the loss was because of bad weather. For complete coverage we need ~40,000 weather monitoring stations across India.

Nachiket Committee recommends: 1. If bank gives loan to setup weather station, it should be counted under PSL target (priority sector lending). This will encourage entrepreneurs to setup weather stations. 2. If farmer suffers crop loss due to bad weather, he should be given the compensation before next cropping season, without delay. 3. Setup Automatic Weather Stations (AWSs) and Automatic Rain Gauge (ARGs). Land Registries

You can get loan more easily if youve an immovable collateral (e.g. apartment, factory, farmhouse in your name.) because even if you default on loans, the bank can take over that property and sell it to recover money under SARFAESI act. But most poors dont have land records to prove their ownership over immovable collaterals. Therefore, banks dont give them loans easily= 100% financial inclusion not achieved. In India, registration is compulsory for sale of land and property. But the authorities dont verify the history or ownership of the property from the seller= nuisance of real estate mafias and

property disputes pending in courts = difficult for the victim to get loans. Solution? reforms in the Tenancy reform acts. Complimentary infrastructure If bank gives equity investment in following, then it should also be counted under PSL target:

warehouses, market yards, godowns, Silos NBFCs operating in district with low financial inclusion. Weather monitoring stations in rural areas.

In other words, Nachiket recommends that complementary infrastructure for rural Development should be brought under PSL targets. Bond purchase in MFI

If bank gives loans to an NBFC Microfinance institutions (MFI)= counted under PSL target But if bank buys the bonds of such NBFC-MFI= not counted under PSL. Nachiket says count such bond purchases under PSL. Warehouse receipts

Basics Already explained click me Nachiket recommends that Food Corporation of India (FCI) and State Governments should use warehouse receipts to raise money, rather than being reliant only on bank credit.

Mock Questions
1. Which of the following, is/are not a part of priority sector lending? A. Food processing industry. renewable energy B. Small industries, housing loans C. both A and B D. Neither A nor B

2. Which of the following is/are correct about classification of Small vs Marginal farmers? A. This classification is based on total hectares of land owned. B. This classification is based on total income from the land owned C. This classification is based on number of crops cultivated on the land owned D. None of above. 3. Correct statement about Priority sector lending targets A. These are administered by Finance ministry B. If a bank fulfills its PSL targets, RBI gives it permission to open more branches in Metropolitan cities. C. Within the PSL targets, a bank is required to give 18% of the loans to weaker sections of society. D. None of above. 4. NABARD administers a fund called Rural infra. Development fund. What is the major source of its funding? A. borrowing from RBI B. borrowing from World bank C. Penalties levied from foreign banks who fail to meet PSL targets. D. None of above 5. Correct statements about small enterprises development fund? A. It is administrated by Ministry of Commerce. B. It gets funding from certain types of banks that fail to meet PSL targets C. Both A and B D. Neither A nor B 6. What do you understand by Base Rate? A. As per RBI norms, Banks cannot pay interest rate higher than the base rate to time and demand deposits B. As per RBI norms, Banks cannot pay interest rate lower than the base rate to time and demand deposits C. As per RBI norms, Banks cannot charge interest rate lower than the base rate to any borrower. D. As per RBI norms, Banks cannot charge interest rate higher than the base rate to any borrower. 7. Who decides Base rate of a bank?

A. RBI through monetary policy B. Finance Ministry through gazette notifications C. Meeting among the representatives of RBI, Finance ministry and the respective banks. D. None of above. 8. Which of the following will reduce the fiscal burden of the government? A. Removal of interest subvention scheme B. Removal of Priority sector lending targets C. Both A and B D. Neither A nor B 9. Which of the following will be detrimental to the objective of financial inclusion? A. Removal of interest subvention scheme B. Removal of Priority sector lending targets C. Both A and B D. Neither A nor B 10. (Paper II Decision Making) Youre posted as a District Magistrate in an area affected by left wing extremism. With your efforts, a few of the naxalites had surrendered, spent jailtime and resumed family life after release. One day, a former Naxal turned farmer approaches you, complaining how the branch manager of a public sector bank has rejected his loan application for agricultural inputs. What youll do? a. Call up the Branch manager, order him to pass the loan. b. Call up the SP, order him to write a police verification certificate for the said farmer, so he can avail the loan again. c. Ask the farmer to approach higher authorities within the said bank d. ask a journalist friend of yours to unearth the truth and get justice for this farmer. Q11. RBI appointed Nachiket Committee has recommended a. RBI should Abolish Marginal Standing facility system. b. Government should stop giving debt waiver and interest subvention to farmers c. SLR system should be gradually removed.

Answer choices a. b. c. d. only 1 and 2 only 1 and 3 only 2 and 3 None of above.

Q12. According to the current PSL-system: a. Banks are required to allot 23% of their deposits into SLR securities b. Banks are required to allot comply with BASEL-III norms by 2018 c. Banks are required to allot 18% of their credit to North Eastern States Answer choices a. b. c. d. only 1 and 2 only 1 and 3 only 2 and 3 None of above.

Assertion Reasoning: Assertion reasoning instructions: Each of the following questions contain a set of Assertion (A) and Reasoning (R) statements. Answer codes are as following: a. Both the statements are individually true and Statement R is the correct explanation of Statement A b. Both the statements are individually true but Statement R is not the correct explanation of Statement A c. Statement A is true but Statement R is false d. Statement A is false but Statement R is true Question statements 13. (A) In the recent years, most of the public sector banks have full filled or even over crossed their PSL targets (R) Public sector banks are given interest subvention benefit by government of India.

14. (A) In the recent years, the farmers in Southern states have received large amount of agricultural loans under PSL targets (R) Southern States have highest % share in gross cropped area in India. 15. (A) In recent years, Public sector banks have suffered large NPAs. (R) Delay in environmental clearance in power, iron and steel sector have reduced the industrial output. Descriptive/Mains 1. Despite the robust guidelines under PSL, the small and marginal farmers continue to suffer from lack of access to formal sources of credit. Examine the reasons and suggest remedies. (10m | 200 words) 2. Lack of timely access to credit, has been one of the main factor behind the dismal performance of micro and small industries in the Eastern and North Eastern Sector. Examine the reasons, and suggest remedies. (10m | 200 words) 3. Examine the access to credit as a factor for geographical distribution of secondary and tertiary industries in India. (10m | 200 words) 4. Nachiket Committees new model of Adjusted Priority sector lending targets, will be a win-win situation for both the banks and the borrowers, do you agree? Justify your stand. (10m | 200 words) Interview 1. Are you in favor of the removal of SLR? Dont you think itll make our banks more vulnerable? 2. Youre aware of the PSL targets and all the issues about farmer debts, financial inclusion and NPA. What are your thoughts on following alternative: I. government orders the banks to submit 40% of their deposits to the consolidated fund of India II. A separate department is created loans for weaker section. They receive money directly from consolidated fund of India, and dole it out to the farmer via district collectors office or post office.

III.

Whatever interest is earned, that is directly given back to bank account holders.

Dont you think this is a better alternative than existing PSL? Why should we even trust the banks to give economic justice to farmers? Shouldnt the government and the executive take up this job? 3. (looking at your DAF form) In banking sector, if an officer serves in a hardship area, he is given additional points while the promotion list is prepared. Now, Nachiket Committee has a new system under which, if a bank lends money in the hardship districts, they get additional score under PSL target. Following the same logic, if Personnel ministry gives you an option to pick a difficult state cadre in North East or Red-corridor, well give you faster promotion and pay grades. Will you change your cadre preference? Yes/ No and why?
Recommendations of the Urjit R Patel committee:
RBI should adopt the new Consumer Price Index (CPI) for anchoring the monetary policy. Set the inflation target at 4% with a band of +/- 2% around it. Monetary policy decision making should be vested in a Monetary Policy Committee (MPC) that should be headed by the Governor. The two schemes- Dependence on Market Stabilisation Scheme (MSS) and Cash Management Bills (CMBs) may be discontinue and the government debt and cash management must be taken over by the governments Debt Management Office. All fixed income financial products should be treated on par with the bank deposits for the purposes of taxation and TDS. Detachment of Open Market Operations (OMOs) from the fiscal operations and instead linked solely to the liquidity management. OMOs should not be used for managing yields on government on government securities. Main objective of the committee was to recommend what needs to be done to revise and strengthen the current monetary policy framework with a view to making it transparent and predictable.

Urjit Patel Committee on Monetarty Policy Framework Some reflections


What does a RBI Deputy Governor do when he is appointed by the RBI Governor to look at a revamping mon pol framework (whatever that means)? Of course he looks at whether the Governor has written on the matter and simply work around it. In this recent committees case, this is clearly the case. There is hardly any difference between what the Governor said in his 2009 report andwhat this comm says in 2013. (The same is true for Mor committee on financial

inclusion). And then recent report on FSLRC also has similar ideas on RBI. One wonders what purpose do these committees serve other than generating hype. Another thing which aids the Comm is that you need to just look around the central banks and see what they are doing. Lot of work has been done on this design aspect so makes it easier. No wonder the comm has picked up insights from central banks around the world BoE, Fed etc. So soon, RBI will be in global company of central bank policies. Much was already known about the committee and written upon. Things like targeting CPI, having an inflation target, forming a MPC etc have been written by several people in the past. So, the committee is bang on expected lines. Some thoughts:

The committee does not bite the core inflation bullet. So if the proposal goes through headline CPI will be the target.CPI has nearly 60% of food and fuel items and if you just follow core, you are targeting just 40% of the index. That is really nothing to target. Moreover, food inflation hits inflation expectations so one has to be weary. This is a catch 22 situation really. If you target headline CPI you expose yourself to food shocks which could be persistent as seen recently. If you dont hike you are doomed and if you hike you know it may not work. So you end up with hi gh rates, low growth and still high inflation.

The committee says RBI should target CPI at 4% with a band of +-2%. This threshold level of inflation has always been there and explained by several RBI officials in the past. Most know RBI targets an inflation of 4-6%.

It says RBI should bring the inflation to 8% in next 12 months and 6% in not more than 24 months before adopting 4% target. Well, what does this mean now? Will RBI hike rates after the pause in Dec? You cannot say food prices are responsible for high CPI. This is a given now..

Another thing is markets have already moved to CPI. WPI has become a secondary data. So why should there be so much hype around this change which has already changed..

The next issue is who sets this inflation target. In BoE case, Govt does it. In Fed case, they have done it themselves. The comm does not really bring Govt into equation here which has obviously effected the government.

On MPC, it says in India, the decision to make policy vests with Governor who is accountable to Government. These powers should be given to MPC which will have Gov as Chairman, DG for Mon Pol area as VC and two external members. What will other 3 DGs do? Moreover, how does it really matter whether policy is framed by Guv or MPC? Do we have cases where decisions have been made against the Guv/Chairman. At most there have been dissents but the Governor has usually won the battle. In Indias case till current Governor is around, one might not even see any dissent.

Again who appoints MPC members? If MPC is the way to go, the appointments should be made by the Government. Just like government appoints Deputy Governors for key policy roles, same applies to MPC members as well. They will be responsible for mon policy and their role is nothing different from Guvs/DGs. This will make them accountable to the Government as is the case everywhere. The powers with Governor could make MPC another cosy club. Some might say no this will lead to government intervention. Well if it could choose the current Governor, it can make appointments on MPC.

Things like semiannual inflation reports, writing letters in case targets are missed are like bells and whistles. BoE kept missing the inflation target and Governor kept writing letters but nothing much happened. It just became an exercise. The point is it works well in normal times but is ineffective in bad times.

The committee makes one major assumption of fiscal consolidation and asks government to stick to its fiscal plans. Well, this is where the trouble has been for recent years. It is not just fiscal consolidation but all kinds of policies which have led to sustained food and overall inflation. If government had remained discipline there was no real need for this framework. Much of literature celebrating successes of inflation targeting central banks is silent on the roles played by government/fiscal policy. It is as if just a change to inflation targeting has delivered the results. It was part of overall reforms which led to lower inflation in these economies. As the government became irresponsible before and during the crisis, the central banks of these economies are in trouble.

What was once seen as a gold standard (inflation targeting/IT), has come under huge scanner during this crisis. The central banks have been criticised for keeping a very narrow focus on inflation ignoring the other risks. The moment you get into IT, this is bound to happen. That is how these central banks have projected themselves. So it is not really a magic pill as media suggests. In RBIs case this even gets more interesting as it has always kept away from this global hype and stuck to indegenised version of mon pol balancing several things. And like everything in policy, there are trade-offs. So by getting into IT, RBI will have to think of ways to manage its other tasks as well. With IT, people do not expect you to do anything else.

Ideally such committees (if they are to be floated again and again), should be floated by the Government. And then in consultation with RBI it can be implemented. Moreover, if these proposals came from the government they could have been implemented far more smoothly as both Government and Governor would be on the same page. It can be done much smoothly. And then FSLRC implementation would have anyways got us to the proposed model. Efforts could be made to speeden the effort.

The bottom line is yes this will be a new framework but in reality things are just the same and one has to stick to the basics. India has a much better record on inflation (historically) compared to its peers. This was not because of any framework really but because of its history and intent. RBI has always known inflation hits poor the most and as a result has stood against the tide to cut rates. Whenever inflation has remained persistent above threshold, RBI has acted to bring it down. The persistent inflation is usually because of some supply or fiscal shock. The RBI has been vigilant to inflation risks for much part of its history. Frameworks come and go, basics remain.