Loans, Advances and Interest Rates: MCLR to NPA

The correct answer is B, Kisan Credit Card. The Kisan Credit Card scheme was introduced in 1998 on the recommendation of the R V Gupta Committee and is worked by commercial banks, regional rural banks and cooperative banks. It gives a farmer a single revolving limit for seeds, fertiliser, labour and other crop expenses, valid for several years with a yearly review, so that he need not apply afresh every season. The limit has since been extended to animal husbandry and fisheries, and short-term crop loans under it carry an interest subvention with a further rebate for prompt repayment.

Option A, Krishi Credit Card, uses the Hindi word for agriculture and is the closest trap, but the scheme is named after the farmer, the kisan. Options C and D both end in Corporation, which would make the name that of an institution rather than of a credit instrument, so neither can be right.

The correct answer is C, the SAPAP model. The South Asia Poverty Alleviation Programme model is called the international model of self help group formation because it was taken up with the support of the United Nations Development Programme and followed the same design across South Asian countries, beginning in India in the districts of Andhra Pradesh. It builds a three-tier structure, the group of poor women at the bottom, a village organisation above it and a federation at the mandal level, with savings first and credit afterwards.

Option A, the CDF model, refers to the Cooperative Development Foundation work in Andhra Pradesh, which is a cooperative thrift model. Option B, the SEWA model, grew out of the Self Employed Women's Association of Ahmedabad and its own bank. Option D, DWCRA, the Development of Women and Children in Rural Areas, was a government programme of 1982 and is the domestic, not the international, model.

The correct answer is B, 1 April 2016. The Reserve Bank introduced the MCLR from that date so that the price of a loan would follow the marginal, that is the latest, cost of raising funds rather than the average cost of old deposits. The MCLR is built from the marginal cost of deposits and borrowings, the negative carry on the balance kept for the cash reserve ratio, operating cost and a tenor premium, and every bank publishes it for tenors from overnight up to one year.

Option A, 1 July 2010, is the date the base rate came into force. Option C, 1 October 2019, is the date from which new floating rate retail and small business loans had to be linked to an external benchmark such as the repo rate. Option D, 2003, is close to the year the Benchmark Prime Lending Rate system was brought in. The three dates in order are 2010, 2016 and 2019.

The correct answer is B, the Benchmark Prime Lending Rate. Under the BPLR system a bank announced a prime rate for its best customers and then lent to many borrowers below it, so the announced rate told a customer very little and the lending book was not transparent. The base rate, in force from 1 July 2010, was defined as the floor below which no bank could lend, apart from a short list of exceptions such as loans against a bank's own deposits and loans to its own staff.

Option A, the MCLR, came four years after the base rate, not before it. Option C, the external benchmark lending rate, came in 2019 and is the latest of the three regimes. Option D, the bank rate, is a Reserve Bank policy rate aligned with the marginal standing facility and is not a bank's own lending benchmark at all.

The correct answer is B, hypothecation. In hypothecation a charge is created on movable property, such as a financed vehicle or the stock in a trader's shop, while the borrower keeps and uses the goods. Because the lender does not hold them, it must first take possession of the asset before it can sell it, which is why a defaulting borrower's car has to be seized, and the SARFAESI Act of 2002 gives a secured creditor that power.

Option A, pledge, is the charge under which the goods are delivered to the lender, as with gold kept in a bank's strong room, and it is governed by the Indian Contract Act of 1872. Option C, lien, is the right of the lender to retain goods or securities already in its hands until its dues are paid. Option D, mortgage, is a charge on immovable property and so does not belong to this group at all.

The correct answer is B, the Transfer of Property Act, 1882. Section 58 of that Act defines a mortgage as the transfer of an interest in specific immovable property to secure a loan, and it names six kinds: simple mortgage, mortgage by conditional sale, usufructuary mortgage, English mortgage, mortgage by deposit of title deeds, which is also called an equitable mortgage, and the anomalous mortgage. Banks use the simple mortgage and the mortgage by deposit of title deeds most often in housing finance.

Option A, the Indian Contract Act of 1872, governs pledge and lien, which are charges on movable goods. Option C, the Negotiable Instruments Act of 1881, deals with cheques, bills of exchange and promissory notes. Option D, the Banking Regulation Act of 1949, governs the licensing and working of banks themselves, not the creation of security over land.

The correct answer is C, 90 days. Under the Reserve Bank's income recognition and asset classification norms, a term loan becomes a non-performing asset when interest or an instalment of principal stays overdue beyond ninety days, and a cash credit or overdraft account becomes one when it remains out of order for the same period. The ninety day norm was brought in from the year ended March 2004, replacing the earlier one hundred and eighty day rule.

Option A, thirty days, and option B, sixty days, are the boundaries of the special mention account stages, SMA-1 for thirty-one to sixty days and SMA-2 for sixty-one to ninety days, which are early warning categories and not yet NPAs. Option D, one hundred and eighty days, was the old rule and is the trap for a candidate reading an outdated book.

The correct answer is B, its statutory liquidity ratio securities. The marginal standing facility lets a bank borrow overnight from the Reserve Bank by dipping into the government securities it holds for the statutory liquidity ratio, up to a prescribed share of its net demand and time liabilities. It is priced above the repo rate because it is an emergency window, and the bank rate is aligned with the MSF rate, so the two move together.

Option A is wrong because the cash reserve ratio balance is a reserve kept as cash with the Reserve Bank and cannot be used as security. Option C is wrong because the window accepts only eligible government securities, not corporate bonds. Option D describes the standing deposit facility, under which the Reserve Bank absorbs money from banks without giving securities in exchange, which is the reverse of borrowing.

The correct answer is C, about 1 per cent. The real rate of interest is the nominal rate less the rate of inflation, so seven per cent minus six per cent leaves roughly one per cent. This is the relation stated by the Fisher equation, and it is what actually matters to a saver, because money that grows at seven per cent while prices rise at six per cent buys only about one per cent more goods at the end of the year.

Option A, thirteen per cent, comes from adding the two rates instead of subtracting, which is the commonest error. Option B, seven per cent, is the nominal rate itself and ignores inflation altogether. Option D, six per cent, is the inflation rate. Note that when inflation is higher than the nominal rate the real rate turns negative, which is what erodes the value of savings during a period of high prices.

The correct answer is C, 40 per cent. A domestic scheduled commercial bank must lend forty per cent of its adjusted net bank credit, or of the credit equivalent of its off balance sheet exposure if that is higher, to the priority sector. The categories are agriculture, micro, small and medium enterprises, export credit, education, housing, social infrastructure, renewable energy and the weaker sections, and a shortfall has to be placed in the Rural Infrastructure Development Fund and other funds with NABARD.

Option A, eighteen per cent, is the sub-target within that forty per cent for agriculture. Option B, twenty-five per cent, is not a priority sector figure at all. Option D, seventy-five per cent, is the much higher target set for regional rural banks and for small finance banks, which are meant to serve exactly these borrowers, so it is the trap for a candidate who mixes the bank categories.

The correct answer is B, Rs 50,000 to Rs 5 lakh. The Pradhan Mantri MUDRA Yojana was launched in April 2015 to refinance small business loans given by banks, non-banking finance companies and micro finance institutions to non-farm income generating activities. Its three original categories were named after the stages of growth, Shishu for the smallest loan, Kishore for the middle band and Tarun for the largest, and no collateral is required for these loans.

Option A, up to Rs 50,000, is the Shishu category, meant for a borrower just setting up. Option C, Rs 5 lakh to Rs 10 lakh, is the Tarun category as the scheme was launched. Option D describes a higher band added later for borrowers who had repaid an earlier MUDRA loan. The order Shishu, Kishore, Tarun in rising size is the point the examiner tests.

The correct answer is C, letter of credit. In a non-fund based facility the bank does not part with money at the time the facility is granted; it only undertakes to pay if the customer fails to, and it charges a commission for that undertaking. A letter of credit is such an undertaking given to a seller that the buyer's bill will be paid, and a bank guarantee is the other common example. The exposure becomes a funded one only if the promise is invoked.

Option A, cash credit, is a fund based running limit against stock and receivables. Option B, overdraft, is fund based because the customer actually draws money beyond the balance in the account. Option D, term loan, is plainly fund based, since the sanctioned amount is disbursed for a fixed asset. Bill discounting too is fund based, as the bank pays the seller at once.