[Banking] Nachiket Committee_ Remove SLR, Reduce CRR, Raise PSL to 50%, Increase Loan Access_...

2/3/2014 [Banking] Nachiket Committee: Remove SLR, Reduce CRR, Raise PSL to 50%, Increase Loan Access: Issues, implications explained Mrunal

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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?

What if PSL target not met?

Additional safeguards under PSL

PSL target raised to 50%

Base Rate

Agri. interest subvention scheme

Debt relief= bad habits

PSL: Misc. Issues/recommendations

Mock Questions

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 article4. Better access to investment5. Better access to insurance6. Consumer protection.

In this article, well see vision #3: better access to loans (Credit). Nachiket has three major recommendations in this regard:

1. Remove SLR, reduce CRR2. Remove interest subvention, Remove debt relief3. Priority sector lending: raise from 40% to 50%4. 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 public2. Gives these deposits for loan / investment3. Deposited Money can be withdrawn by cheque (and other means like Debit card, ATM card, netbanking etc.)

Bank accepts mainly two types of deposits:

TimeDeposit

They mature at a particular time e.g. Fixed deposit for 1 year @9% interest rate. If youdemand this money before expiry of one year= they cut penalty.

Fixed deposit, recurringdeposits, cash certificates

Demand

Savings account (forgeneral public)

HOME ECONOMY JANUARY 18TH, 2014 40 COMMENTS



Deposit You can demand / takeout money without as per your wish. current account (forbusinessmen)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 t^hese net demand and time liabilities (NDTL.)

Incoming (Time and Demand Liabilities) suppose its 100 crores

CRR: Cash reserve ratio. (4%)4 cr.gone here. (Bank earns noprofit/interest here)

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

23 cr. gone here. (someinterest/profit earned)

Money left with bank 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, youvePriority sector lending requirements.)

So, Nachiket recommends reforms:

SLR CRR

What Nachirecommends?

Remove SLRrequirement.(gradually)

CRR should be counted only on the Demand deposit.Ignore Time deposits for thiscalculations= CRR will be reduced automatically.

WHY? Explained belowMoney kept under CRR doesnt earn additional money. it is a dead asset. So let money keptin CRR=better.For more points, click me to know why SBI hates CRR?

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 handyduring emergency for example: When many people simultaneously come to take out money from their savings/current accountduring 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 andsound, 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 shouldinvest 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 SLRIf banks have to keep money aside for both LCR+SLR => less money available for lending=not good for economy. So, betterabolish 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 marketeconomy (where RBI and Government donot interfere with the system)?

Loan customer Bankers thought processHow much interest shouldbank charge on the loan?



Farmer Maximum risk, because his income depends on the vagaries ofmonsoon. He is mostly to default on the loan.

High (50%)

Small businessmanLess Risky than farmer but still he may make losses during highinflation/recession and default on loan.

High (45%)

Student Hell not repay until he finishes graduation and gets a job. High (40%)

Salaried middleclass family Minimum risk. Low (10%)

High net-worth individual(HNI), Big businessman

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

Obviously, farmers, small business and students:

1. Will be exploited with high interest rate OR2. 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.

Late60s

RBI asks the banks to increase lending to agro + small Industries (but did not give any targets

70sRBI required the banks to submit data on how much money do they lend to agro+small industries? (RBI had not imposedany targets on the banks yet)

80s Finance minister comes up with the idea of 40% lending to priority sectors.

Priority sector includes following categories:

1. Agriculture and allied activities: (dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture.)

Direct lending Indirect lending

Individual farmer, self-help groups (SHG), cooperativesocieties

Food processing industry, other Corporates and firms engaged in thissector.

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 forpriority sector lending under respective categories.Weaker sectionWithin priority sectors, bank has to give some of the loans to weaker section of society. Weaker section means:

1. Small and marginal farmers;

Farmer Landholding upto

Small more than 1 ht. but less than 2 ht.

Marginal upto 1 hectare

1. Artisans, village and cottage industries2. Beneficiaries National Rural Livelihood Mission (NRLM); Swarna Jayanti Shahari Rozgar Yojana (SJSRY); and Manual

scavangers rehab. scheme3. Scheduled Castes and Scheduled Tribes;4. Women, self-help groups5. Distressed people in the clutches of non-institution lenders (private Moneylenders, loan-sharks, financers etc.)

Overall, PSL targets are as following

TargetDesi Banks. (+foreign banks with 20 branches ofmore)

Foreign banks with less than 20branches

Agro 18% No specific targets

Weaker sections 10% No specific targets

Remaining categories underPSL

Whatever left to reach the 40% target No specific targets

Overall PSL target 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 40%

Public sector banks gave 36.3%

Private sector banks gave 37.5%

So what happens when bank fails to meet PSL target?

Desi Banks. Foreign banks (with 20 or more branches)Foreign bank with lessthan 20 branches.

Theyve to send remaining target money to RIDF To SEDF

RIDF=Rural infra. Development fundSEDF= small enterprisesdevelopment fund

NABARD manages RIDF SIDBI manages SEDF

NABARD pays interest rate to the bank for this money (RBI decides the rate) Same by SIDBI

State governments get money from this RIDF fund to launch various infra. Projects. But this isntfree money. The state will have to repay money with interest rate.

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 nothave photograph.)

2. Branch manager is given discretionary powers while handling loan applications of weaker section. He can approve suc loanapplication 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 mustforward 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, thenwithin four weeks)

5. During natural calamities, floods, cyclones etc. bank has to restructure the loan repayment terms so the victim doesnt suffermore.

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 loan-applications, along with reasons. RBI has powers to inspect

these records.

PSL target raised to 50%

Mohan

Ok so far, I understood:

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 toPriority sector=high NPA, system will collapse, like it happened during Subprime crisis. (Because American banksgave too much home loans to people who did not have the aukaat to repay. Technically called Sub-primeborrowers.)Most banks even fail to reach 40% target. Howll they reach the 50% Obviously, theyll fail and all the money goesto RIDF =>State government=>chowed down by local politicians, bureaucrats and contractors in bogusinfrastructure projects.Besides, If banks have to give half of their loans to PSL/weaker section, then where will middleclass get loan? Isthis another election gimmick or what? MAN! I thought youre an IIM graduate but your mindset is of a jholachhapNGO/NAC member.

NachiHold 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 asloans to priority sector areas. BUT, SBI is free to give this loans- anywhere 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 afarmer is more likely to repay the loan, compared to a farmer in Assam or Arunachal Pradesh. ObserveTherefore, I recommend a new system: if bank gives loan to hardship areas, then theyll get more marks, and they must getminimum 50% marks to reach PSL target. Thats our new system. Observe:

Financial inclusion at the moment District Direct agro. Weaker section Other sectors

highest Pattanamthitta, Kerala 1.25 1.1 1

high Namakkal, TN 1.38** 1.21** 1.10**

medium Rajkot, Guj 1.43** 1.25** 1.14**

medium Muzzaffarnagar, UP 1.46** 1.28** 1.16**

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 SBIhas 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%) New (adjusted) PSL system (50%)

Whether SBI gives loan to farmer in Assam or inTN, its counted one and same.

hardship area will get more weightage.

40%=40 crores target 50%=50 crores target

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

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

Meaning, only 100-40=60 crore left for giving outas 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 givingout 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 be50%).Plus, youve already recommended removal of SLR, and reduction in CRR.So, youre not a jholachhap NGO as I had thought.

NachiRight, Im totally opposite of that. And to prove it, I give another recommendation: government stopping giving debtreliefs and interest subvention to farmers.

Mohan But why??

Nachi 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 chargedon such loans?

From2003

Benchmark prime lending rate (BPLR).

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 atcheaper interest rates.Even if RBI changed its repo rate, the banks will not change their loan interest rates.

From2010

RBI abolished above BPLR system. Introduced Base Rate

Under base rate system, the individual bank is free to determine its own base rate. (7%, 8%, 9% whatever.) bank isfree 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 Calculation result

Car loan 0.75% above Base rate 10.75%

Two wheeler loan 8.25% above base rate 18.25%

Education loan (upto 4 lakh) 3.5% above base rate 13.5%

Home loan for women (upto 75 lakh) 0.10% above base rate 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 arate below the base rate. But Problem comes with the

Agri. interest subvention scheme

By government of IndiaApplies to scheduled commercial banks (both public + private)Target beneficiary: farmersIf 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)

Mohan Ok man but whats the problem?

NachiThis interest subvention scheme is inconsistent with RBIs base rate system. Recall that a bank cannot give loan to anyonebelow the base rate. Most banks have base rate higher than 8% but government will give subvention only if farm loansgiven @7%.

Mohan So what do you recommend?

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.

MohanWhatever dude. In the election year, it is unlikely that government will scrap down interest subvention scheme just becauseNachiket 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 farmerI dont need to repay loans on time because government will again waive all the farm loans before next generalelection!

Honestfarmer

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 moresuch loan waivers schemes would follow before state/general election, so they dont repay loan installments on time.This also hurt taxpayers becauseGovernment 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 moreon 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 onloans. 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 benefittransfer- 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 aperson 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 ofcredit.Banks dont have that much money to lend to a specific sector. If banks divert all of the incoming money to business/agro loansthen 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 commercialborrowing 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 onhimself for health, food, life insurance and disability insurance premiums, clothing, shoes etc. => hell have to borrow again tomanage 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 side-expenses. 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 muchfrom PSL.

Nachiket recommends:

Loan given to small/marginal farmer and landless labourer= should be counted under PSL target, irrespective of whatever it is meantfor 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-sectorintermediary 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 inputsusing 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 (Becausedealer 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 bankingombudsman model)

Nachi recommends: This Real-sector intermediary model should be used only as a stop-gap arrangement. Bank should focus onincreasing penetration in rural area by direct branch or business correspondence model.

March Rush

Season Kharif Rabi

Months when farmer needs the loan desperately June, July, September December and January

But, statistics indicate that most of the loans are given in March month. Why? Because PSL-compliance is calculated at Marchend.This is similar to March rush in government departments. Parliament sanctions budget =>government gives crores of rupeesdepartments=> 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 andproject 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=>Morechances 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 heregularly 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 beprocessed easily.In Brazil, phone companies share all data records that would predict creditworthiness of low-income borrowers. (e.g. how manytimes 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 creditworthiness.

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 machineryBut 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 CropInsurance Scheme (WBCIS)Such insurance schemes give protection from crop loss during

Adverse monsoon: Both excess rainfall and drought situation.Adverse weather: frost, heat, relative humidity, and un- seasonal 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 theloss 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 encourageentrepreneurs 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 ifyou 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 theproperty from the seller= nuisance of real estate mafias and property disputes pending in courts = difficult for the victim to getloans. 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,SilosNBFCs 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 targetBut 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 energyB. Small industries, housing loansC. both A and BD. 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 ownedC. This classification is based on number of crops cultivated on the land ownedD. None of above.

3. Correct statement about Priority sector lending targetsA. These are administered by Finance ministryB. 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 RBIB. borrowing from World bankC. 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 targetsC. Both A and BD. 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 depositsB. As per RBI norms, Banks cannot pay interest rate lower than the base rate to time and demand depositsC. 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 policyB. Finance Ministry through gazette notificationsC. 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 schemeB. Removal of Priority sector lending targetsC. Both A and BD. Neither A nor B

9. Which of the following will be detrimental to the objective of financial inclusion?A. Removal of interest subvention schemeB. Removal of Priority sector lending targetsC. Both A and BD. 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, afew of the naxalites had surrendered, spent jailtime and resumed family life after release. One day, a former Naxal turned farmerapproaches you, complaining how the branch manager of a public sector bank has rejected his loan application for agriculturalinputs. 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 bankd. 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 farmersc. SLR system should be gradually removed.

Answer choices

a. only 1 and 2b. only 1 and 3



c. only 2 and 3d. None of above.

Q12. According to the current PSL-system:

a. Banks are required to allot 23% of their deposits into SLR securitiesb. Banks are required to allot comply with BASEL-III norms by 2018c. Banks are required to allot 18% of their credit to North Eastern States

Answer choices

a. only 1 and 2b. only 1 and 3c. only 2 and 3d. 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 Ab. Both the statements are individually true but Statement R is not the correct explanation of Statement Ac. Statement A is true but Statement R is falsed. 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 sectorbanks 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 steelsector 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 sourcesof 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 inthe 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 | 200words)

4. Nachiket Committees new model of Adjusted Priority sector lending targets, will be a win-win situation for both the banks andthe 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 thepromotion list is prepared. Now, Nachiket Committee has a new system under which, if a bank lends money in the hardshipdistricts, they get additional score under PSL target. Following the same logic, if Personnel ministry gives you an option to pick adifficult state cadre in North East or Red-corridor, well give you faster promotion and pay grades. Will you change your cadrepreference? Yes/ No and why?

Visit Mrunal.org/Economy For more on Economy.

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40 comments to [Banking] Nachiket Committee: Remove SLR, Reduce CRR, Raise PSL to 50%,

Increase Loan Access: Issues, implications explained

JiteshReply to this comment

Gud one mrunal, nice effort.

meekReply to this comment

hiif possible provide study plan and books suggestion for csat paper- iithanks in advance

KartikReply to this comment

Sir,

Great article, looking forward for rest of the parts and also separate article on Basel norms though u have discussed it earlier itself.

Regards

unni ushasReply to this comment

1 A2 A3 C4 B5 B6 C7 D8 A9 D10 B11 C12 C13 D14 A15 C..PLZ CORRECT ME .

nehaReply to this comment

should the ans for 9th not be B? If PSL removed, access to credit will decrease==> harder to get loans for these ppl==> one aspect offinancial inclusion.

Or may be i gave too much thought :P

Mukund



Reply to this comment

Yeah The answer to the 9th que. shud be B

ashishReply to this comment

mrunal sir. SSC CGL 2014 notification is out..but i am unable to fill up tht form.i used IE version 11 but it says netscape is notsupported use IE or OPERA .then i used netscape navigotor old version (bcoz i think computer softwares running in GOVT OFFICES aremuch much older version and outdated like s/w of 90s era)but it also giving the same msg..then finally i used OPERA version 8 released10 or 12 yrs agoopera is not giving tht same message (may be it is supporting netscape) but now the problem with the opera is thessconline.nic.in website is not accepting my DOB which 01 SEP 1991 it says Date of Birth entered by you is not a valid date.Please enter a valid date

mrunal sir give me a solution..how can i fill up tht formi tried each and every software frm new to old but met with failure.

waitinf 4 ur response.

MrunalReply to this comment

@Ashish,SSC online form will start working from 19th January 2014. (as per their official notification.)

mrithyunjaya b uReply to this comment

sir can u please upload advaned topic of agri of gs paper

koolReply to this comment

thanks mrunal

patelReply to this comment

that akshay kumar photo lolzzzzzzzzzz

PMReply to this comment

1C 2A 3D 4C 5D 6C 7C 8C 9D 10B 11C 12A 13D 14C 15B

nehaReply to this comment

should the ans for 9th not be B? If PSL removed, access to credit will decrease==> harder to get loans for these ppl==> one aspect offinancial inclusion.

Or may be i gave too much thought :P

harshReply to this comment

agree with u .B answer

PMReply to this comment

You are right.I missed it

MayankReply to this comment

To MrunalFor the economy section I have one doubt regarding 12th five year plan. Its been suggested to read 12th plan. So I want to ask do we needto read entire plan document? Even you have suggested it will provide us with a lot of fodder points. Will it suffice if I just go throughsummary of the 12th plan or approach paper of the plan. What do you think would be the best option??Thanks & Regards

neha



Reply to this comment

1 A2 A3 D4 C5 B6 C7 D8 A9 B10 B11 C12 D13 D14 C15 B

unni ushasReply to this comment

may be there is a chance of c..becz subvention schemes are paid from tax payers..so ..

RamReply to this comment

As always.great article by Mrunal

Could not stop myself.LoLwhich reading this

Mohan: If banks have to give half of their loans to PSL/weaker section, then where will middleclass get loan? Is this another election gimmickor what? MAN! I thought youre an IIM graduate but your mindset is of a jholachhap NGO/NAC member.

BajrangiReply to this comment

My first comment on this site Hats off Mrunal !!!

khushbooReply to this comment

Sir,at what rate Indian banking industry is growing?

priyaReply to this comment

nice article..explained very well..i have become a big fan of your way of expressin

shreejalReply to this comment

sirif you could tell us what does Vertically Differentiated Banking System

gauravReply to this comment

Sir, if slr removed and we start compying basel 3 then we have to keep aside some money for lcr.what will be the rate of lcr and if its sameas slr than nothing is going to change except name.

mansimerReply to this comment

hats off sir

J AReply to this comment

1-D2-A3-D4-C5-B6-C



7-D8-A9-B10-B11-C12-D13-D14-D15-B


1-A..REST I THINK ARE CORRECT ACCORDING TO ME..MRUNAL SIR,PLS PROVIDE CORRECT ANS.

p kumarReply to this comment

Nicely explained.

Prashant KumarReply to this comment

I just started preparing for RBI grade B.

pradeepReply to this comment

Demand Drafts (DD) Cant be type oF deposits. or they are???

sudhakarReply to this comment

JA ALL YOUR ANSWERS ARE CORRECT 1 IT IS NOT A IT IS D ONLY AS HOUSING LOANS AND AGRI PROCESSING INDUSTRYINDUSTRY WILL FALL UNDER PRIORITY SECTOR LENDING ONLY


hmmm..ok thanx..got it

JosephReply to this comment

Beautiful sir! Can we expect an article on Urjit panel report?

DheerajReply to this comment

Great explanation..

vihalReply to this comment

mrunal sir please provide answers at end for every article

kapil ahlawatReply to this comment

Hi sir,one of our friend rightly said that if lcr is same as that of slr then only name is going to be change..now can u plz brief us what is the basicdifference between,lcr and slr and how this lcr is better than slr ?

SONI SINGHReply to this comment

WONDERFULLY EXPLAINED..I COULD VERY WELL CONNECT TO THE ARTICLE AS I AM DEALING WITH ALL THIS.. MRUNALSIR YOUVE CLEARED MUCH OF MY DOUBTS RELATING TO PSL & ITS IMPLICATIONS.



Shlok SrivastavaReply to this comment

1-D2-A3-C4-D5-B6-C7-D8-D9-B10-D11-C12-D13-D14-A15-B

pls correct me with explanations if i am wrong

samirReply to this comment

1d, 2a, 3d, 4d, 5b, 6c, 7d, 8a, 9c, 10bc, 11c, 12a, 13d, 14b, 15b. Mrunal please provide answers.

Koushik BisoyeeReply to this comment

Sir.pls provide the correct set of answers.Otherwise all the efforts will end in confusion.

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