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Mahendras has started special quizzes for IBPS & SBI Exam so that you can practice more and more to crack the examination. This IBPS & SBI Exam special quiz series will mold your preparations in the right direction and the regular practice of these quizzes will be really very helpful in scoring good marks in the Examination. Here we are providing you the important question of reasoning ability for the IBPS & SBI Exam.
Read the following passage carefully and answer the questions given below it. Certain words have been given in bold to help you locate them while answering some questions.
The cash reserve ratio (CRR) has lost all relevance, especially after the stringent rules laid down under Basel III norms. Which is why the country’s topmost commercial banker is reported to have advocated abolishing the CRR.
Unfortunately, this timely and sage advice does not seem to have been considered by the authorities. CRR, as widely understood, is the amount of cash held by commercial banks in relation to their deposit liabilities. Cash should include cash in the bank’s vaults and deposits with the Reserve Bank of India. In India, cash, for CRR purposes, means only the deposits with the RBI and not cash held in banks’ vaults. Deposit liabilities would generally mean deposits held by the public with banks. In India, the RBI has included virtually all external liabilities, including FCNR (B) and NRE deposits (payable in foreign currency) and call money borrowings, etc. Commercial banks are expected to maintain 4 per cent of their total outside liabilities, excluding some dues to the RBI and a few other government agencies, in the form of deposits with the RBI.
The two original objectives for which CRR is stipulated worldwide were: (a) banks should have sufficient cash at all times to meet the payment demands of their deposit customers; and (b) it is a tool of monetary policy to control money supply in the economy. Both the objectives are not relevant these days. In fact, central banks of countries such as the UK, Canada, Australia, New Zealand and Sweden reportedly do not prescribe CRR.
CRR as a bulwark against a ‘run’ on a bank is an outdated concept. However, a few decades ago, there were reports of depositors clamouring for withdrawal of money from a commercial bank in India. The bank was stable and sound, but some rumours allegedly spread about its financial health. The RBI acted promptly and had its own currency chests and those of State Bank of India kept open 24/7 on all days, including Sundays, and supplied cash to the affected bank. The panic subsided in a short period and normalcy was restored. In a panic situation, the own CRR of a bank would be of no use. It could, at best, meet the demands of public depositors to the extent of about 10 per cent (depending on the component of non-public deposits in the total portfolio). Usually, depositors would demand their money back prematurely only when they suspect the financial soundness of a bank.
Strangely, till the early 1990s, there was no minimum capital requirement for banks in relation to their deposits: on the other hand, banks insisted that borrowers had some minimum capital vis-à-vis borrowings. The dichotomy was sought to be resolved by the rules developed by the Bank for International Settlement (BIS) based in Basle, Switzerland. All countries have adopted these rules, commonly known as the Basel norms. What started as the need for minimum capital for a given level of borrowings (mainly deposits) morphed into a ratio of capital to assets of the banking system? Thus evolved CRAR or capital to risk-weighted assets ratio. Since many international experts got into the act, they made it as complex as possible. The word ‘capital’ was stretched to include even a category of loans. As for assets, the full amount was not taken, but only a portion depending on their riskiness. And the risk of loans (the major component of assets) was measured either by credit rating agencies or by the banks themselves.
The RBI has asked banks in India to adopt a leverage ratio. Banks should have a minimum equity capital of 4.5 per cent of their total assets and off-balance sheet items such as guarantees, letters of credit, etc by 2017-18. This means the conventional debt-equity ratio of a commercial bank should not be higher than 21:1. Although this is much higher than what banks insist on with regard to business concerns borrowing from them — a maximum of about 4 — the fact is that banks and financial institutions do have larger borrowings and debt component would include contingent liabilities. To conclude, CRR is well past its ‘sell by’ date and by abolishing it, the RBI will save the time and manpower of various commercial banks.
1 What should be the conventional debt equity ratio of a commercial bank?
01. Lower than 20:1
02. Higher than 21:4
03. Not higher than 21:1
04. 4.5%
05. Not mentioned in the passage
2 What would be the results of abolishing CRR according to the author?
01. It would affect the banks credibility
02. The rate of bankruptcy of banks would increase in India
03. It would support broke commercial banks
04. It will save the time and manpower of various commercial banks.
05. All of the above
3 What were the objectives for which the CRR is stipulated worldwide?
A. banks should have sufficient cash at all times to meet the payment demands of their deposit customers; and
B. It is a tool of monetary policy to control money supply in the economy.
C. RBI should get a share of bank’s net profit
D. All commercial banks should follow the Basel norms
01. Only A
02. Only B
03. Only D
04. Both A and B
05. All of the above
4 Commercial banks of which of the following countries do not prescribe CRR?
01. Sweden
02. Canada
03. Australia
04. New Zealand
05. All of the above
5 Which of the following statement/s define CRR the best as given in the paragraph?
01. CRR is well past its ‘sell by’ date and by abolishing it will save the time and manpower of various commercial banks.
02. CRR stands for capital to risk-weighted assets ratio
03. It is the amount of cash held by commercial banks in relation to their deposit liabilities
04. CRR is commonly known as Cash Reserve Ratio.
05. Not mentioned in the passage.
6 Which of the following statements is/are NOT TRUE in context to the passage?
01. The RBI has asked banks in India to adopt a leverage ratio.
02. CRAR or capital to risk-weighted assets ratio
03. The amount of cash held by commercial banks in relation to their deposit liabilities is called CRR
04. Banks should have a minimum equity capital of 4.5 per cent
05. All are true
7 Which of the following is the most similar to the word 'dichotony' as given in the passage?
01. disagreement
02. similarity
03. likeness
04. duplexity
05. submission
8 Which of the following is the most similar to the word 'clamouring' as given in the passage?
01. silence
02. roar
03. vociferate
04. conceal
05. laud
9 Which of the following is the most opposite in meaning to the word ‘conventional’ as given in the passage?
01. Unusual
02. Traditional
03. Mundane
04. Prevalent
05. Onerous
10 Which of the following is the most opposite to the word 'stipulated' as given in the passage?
01. calculate
02. denied
03. accustomed
04. habituated
05. imposed
Answers:-
Q.1 (3)
Q.2 (4)
Q.3 (4)
Q.4 (5)
Q.5 (3)
Q.6 (5)
Q.7 (1)
Q.8 (3)
Q.9 (1)
Q.10 (2)
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