Banking Reforms & NPAs MCQs for UPSC Prelims

62 practice questions on Banking Reforms & NPAs from the Economy section of the UPSC Prelims syllabus. 62 come with a written explanation and 12 are actual previous year questions. Try the sample set below - the answer stays hidden until you ask for it.

2 Easy 30 Medium 30 Hard 12 from past papers

Sample questions

Q1
Previous year question hard

With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements: 1. There is no minimum capital requirement for wholly owned banking subsidiaries in India. 2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals. Which of the statements given above is/are correct?

  1. A 1 only
  2. B 2 only
  3. C Both 1 and 2
  4. D Neither 1 nor 2
Show answer and explanation

Correct answer: B - 2 only

RBI norms require a wholly owned subsidiary of a foreign bank to have at least half of its board comprising Indian nationals, so statement 2 is correct. Statement 1 is wrong because there is a prescribed minimum initial capital requirement for such subsidiaries; capital adequacy is a core condition for licensing, not something that is waived. Hence only statement 2 is correct, making option (b) the answer.

Q2
Previous year question easy

Priority Sector Lending by banks in India constitutes the lending to

  1. A agriculture
  2. B micro and small enterprises
  3. C weaker sections
  4. D All of the above
Show answer and explanation

Correct answer: D - All of the above

Priority Sector Lending under RBI norms covers sectors deemed important for inclusive growth that may not otherwise get timely and adequate credit. The recognised categories include agriculture, micro and small enterprises, and weaker sections, along with others such as education, housing and export credit. Since all three listed options are individually part of the priority sector, the correct answer is 'All of the above'.

Q3
Previous year question medium

With reference to the 'Banks Board Bureau (BBB)', which of the following statements are correct? 1. The Governor of RBI is the Chairman of BBB. 2. BBB recommends for the selection of heads for Public Sector Banks. 3. BBB helps the Public Sector Banks in developing strategies and capital raising plans. Select the correct answer using the code given below:

  1. A 1 and 2 only
  2. B 2 and 3 only
  3. C 1 and 3 only
  4. D 1, 2 and 3
Show answer and explanation

Correct answer: B - 2 and 3 only

The Banks Board Bureau was headed by its own chairman, not the RBI Governor, so statement 1 is wrong. The BBB's mandate included recommending the selection of whole-time directors and heads of public sector banks, making statement 2 correct. It also advised these banks on strategy, governance and capital-raising plans, so statement 3 is correct. Hence only 2 and 3 are correct.

Q4
Previous year question medium

What was the purpose of Inter-Creditor Agreement signed by Indian banks and financial institutions recently?

  1. A To lessen the Government of India's perennial burden of fiscal deficit and current account deficit
  2. B To support the infrastructure projects of Central and State Governments
  3. C To act as independent regulator in case of applications for loans of Rs. 50 crore or more
  4. D To aim at faster resolution of stressed assets of Rs. 50 crore or more which are under consortium lending
Show answer and explanation

Correct answer: D - To aim at faster resolution of stressed assets of Rs. 50 crore or more which are under consortium lending

The Inter-Creditor Agreement was framed under the Sashakt framework to speed up the resolution of stressed loan accounts of Rs. 50 crore and above that are financed by multiple banks under consortium or multiple banking arrangements, so the last option is correct. It was a coordination mechanism among lenders, not a fiscal tool, so it has nothing to do with the government's fiscal or current account deficit. It was not designed to fund Central or State infrastructure projects, nor was it an independent regulator vetting loan applications; it merely lays down decision rules among the creditors themselves.

Q5
Previous year question medium

Consider the following statements: 1. According to the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the 'medium enterprises' are those with investments in plant and machinery between Rs. 15 crore and Rs. 25 crore. 2. All bank loans to the Micro, Small and Medium Enterprises qualify under the priority sector. Which of the statements given above is/are correct?

  1. A 1 only
  2. B 2 only
  3. C Both 1 and 2
  4. D Neither 1 nor 2
Show answer and explanation

Correct answer: B - 2 only

The answer is 2 only. Statement 2 is correct because, under RBI norms, all bank loans to MSMEs are classified as priority sector lending. Statement 1 is wrong because the revised MSME classification (effective 2020) defines medium enterprises by much higher investment and turnover thresholds, not the narrow Rs. 15 to 25 crore band. As only the second statement holds, the options including statement 1 or neither are incorrect.

Q6
Previous year question medium

Which of the following statements best describes the term 'Scheme for Sustainable Structuring of Stressed Assets (S4A)', recently seen in the news?

  1. A It is a procedure for considering ecological costs of developmental schemes formulated by the Government
  2. B It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties
  3. C It is a disinvestment plan of the Government regarding Central Public Sector Undertakings
  4. D It is an important provision in 'The Insolvency and Bankruptcy Code' recently implemented by the Government
Show answer and explanation

Correct answer: B - It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties

The Scheme for Sustainable Structuring of Stressed Assets (S4A) was an RBI scheme that allowed lenders to rework the financial structure of large corporate borrowers facing genuine difficulties by splitting their debt into sustainable and unsustainable parts. So option (b) is correct. It is not an ecological-cost appraisal, not a disinvestment plan for PSUs, and not a provision of the Insolvency and Bankruptcy Code, so the other options are wrong.

Q7
Previous year question medium

What is the importance of the term "Interest Coverage Ratio" of a firm in India? 1. It helps in understanding the present risk of a firm that a bank is going to give loan to. 2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to. 3. The higher a borrowing firm's level of Interest Coverage Ratio, the worse is its ability to service its debt. Select the correct answer using the code given below:

  1. A 1 and 2 only
  2. B 2 only
  3. C 1 and 3 only
  4. D 1, 2 and 3
Show answer and explanation

Correct answer: A - 1 and 2 only

Statements 1 and 2 are correct: the Interest Coverage Ratio helps a bank assess both the present and the emerging risk of a borrowing firm by measuring its ability to pay interest from earnings. Statement 3 is wrong because a higher Interest Coverage Ratio actually indicates a better, not worse, ability to service debt. Hence the answer is 1 and 2 only.

Q8
Previous year question easy

'Basel III Accord' or simply 'Basel III', often seen in the news, seeks to

  1. A develop national strategies for the conservation and sustainable use of biological diversity
  2. B improve banking sector's ability to deal with financial and economic stress and improve risk management
  3. C reduce the greenhouse gas emissions but places a heavier burden on developed countries
  4. D transfer technology from developed countries to poor countries to enable them to replace the use of chlorofluorocarbons in refrigeration with harmless chemicals
Show answer and explanation

Correct answer: B - improve banking sector's ability to deal with financial and economic stress and improve risk management

Basel III is a set of banking regulation norms issued by the Basel Committee on Banking Supervision after the 2008 financial crisis. It strengthens banks' capital adequacy, introduces leverage and liquidity standards such as the liquidity coverage ratio, and improves risk management and supervision so banks can absorb financial and economic shocks, which is option (b). Option (a) describes the Convention on Biological Diversity. Option (c) describes the Kyoto Protocol's principle of common but differentiated responsibilities. Option (d) describes the technology transfer arrangements of the Montreal Protocol's Multilateral Fund. None of these has anything to do with banking.

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