AHSEC Class 12 students studying Finance Chapter -4 in 2024: In this article, we present a comprehensive Solution of AHSEC Class 12 Finance important questions and answers (English Medium) chapter -4 Role of the RBI in the economic Development of India , designed to elevate your exam preparation and propel you towards success. As the Assam Higher Secondary Education Council (AHSEC) endeavours to provide top-quality education, we are here to support your academic journey with targeted solutions. Explore the depths of H.S 2nd Year Finance Solution 2024 Pdf Chapter 4- ROLE OF THE RBI IN THE ECONOMIC DEVELOPMENT OF INDIA and equip yourself with the tools you need to excel.
CHAPTER 4
ROLE OF THE RBI IN THE ECONOMIC DEVELOPMENT OF INDIA
QUESTIONS:
A. Very Short Answer Questions: (1 Mark each)
1. In which year was the IDBI established?
Ans: IDBI (Industrial Development Bank of India) was established in 1964.
2 . In which year was the Credit Guarantee Corporation of India Ltd. established?
Ans: The Credit Guarantee Corporation of India Ltd. was established in on January 14, 1971
3. In which year were the RRBS established?
Ans:Regional Rural Banks (RRBs) were established on 26th September, 1975.
4. In which year was the Agriculture Refinance and Development Corporation established?
Ans: The Agriculture Refinance and Development Corporation (ARDC) was established in 1963.
B. Short Answer Questions: (2 Marks each)
1. Write two names of priority sectors.
Ans: Two names of priority sectors are agriculture and micro, small, and medium enterprises (MSMEs).
2. Write two financing facilities provided by the RBI to the cooperative sector.
Ans: Two financing facilities provided by the RBI to the cooperative sector are Refinance Facilities and Special Liquidity Facility (SLF) for Cooperative Banks.
C. Long Answer Questions (Type-I): 5 Marks each
1. Explain the promotional role of the RBI.
Ans: The Reserve Bank of India (RBI) plays a significant promotional role in the Indian economy in several ways:
1. Monetary Policy: The RBI formulates and implements monetary policies to regulate the money supply and interest rates. By adjusting the repo rate, cash reserve ratio (CRR), and other policy tools, it influences the cost and availability of credit, which can stimulate economic growth or curb inflation, thus promoting economic stability.
2. Credit Control: RBI controls the flow of credit in the economy through tools like CRR and statutory liquidity ratio (SLR). By setting these ratios, it encourages banks to lend to specific sectors or restricts lending when necessary to control inflation or promote certain sectors.
3. Financial Inclusion: The RBI takes initiatives to promote financial inclusion by encouraging banks to extend their services to underserved and unbanked regions. This helps in spreading the benefits of the formal financial system to a wider population.
4. Payment Systems: RBI oversees and promotes efficient payment systems, including digital payment methods, which are crucial for a modern economy. This fosters convenience and transparency in financial transactions.
5. Developmental Functions: RBI establishes and supports various financial institutions like the National Housing Bank (NHB) and Small Industries Development Bank of India (SIDBI) to provide funds and credit to specific sectors, thereby promoting their growth.
6. Regulation and Supervision: By regulating and supervising banks and financial institutions, RBI ensures the stability of the financial sector, which is essential for promoting investor confidence and economic growth.
7. Exchange Rate Management: RBI intervenes in the foreign exchange market to stabilize the rupee's exchange rate. This promotes international trade and economic stability.
In summary, the RBI's promotional role extends to influencing monetary policy, regulating credit, fostering financial inclusion, developing financial institutions, and maintaining stability in the financial sector. These functions collectively contribute to the overall economic growth and stability of India.
D. Long Answer Questions (Type-2):
8 Marks each
1. Discuss the role of the RBI in the field of industrial finance.
Ans: Role of the RBI in Industrial Finance:
The Reserve Bank of India (RBI) plays a crucial role in the field of industrial finance, contributing significantly to the development and regulation of the industrial sector in India. Here are key aspects of its role in industrial finance:
1. Credit Policy: RBI influences industrial finance through its credit policies, particularly by setting the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). These ratios determine the amount of funds that banks must keep in reserve, affecting their capacity to lend to industries.
2. Regulation of Banks: RBI regulates commercial banks, which are the primary sources of industrial finance. It ensures that banks provide loans and credit facilities to industries in a transparent and accountable manner. It also supervises their lending practices to maintain financial stability.
3. Priority Sector Lending: RBI mandates that a portion of bank lending (priority sector lending) must be directed towards industries in sectors like agriculture, small-scale industries, and microenterprises. This ensures that industrial finance reaches marginalized and economically weaker sections.
4. Refinancing and Developmental Institutions: RBI has established specialized financial institutions like the National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of India (SIDBI). These institutions provide refinancing and credit support to industrial sectors, including agriculture and small-scale industries.
5. Export Credit: RBI facilitates industrial growth by promoting export finance through various schemes and incentives. It ensures that exporters have access to credit facilities to expand their production and export activities.
6. Exchange Rate Management: A stable exchange rate policy by RBI supports industrial growth by providing a predictable environment for trade. This helps industries plan their international business strategies.
7. Financial Inclusion: RBI encourages banks to extend their services to underprivileged and underserved areas, including those with industrial potential. This promotes access to industrial finance for marginalized communities.
8. Research and Data Analysis: RBI conducts research and analysis related to industrial finance trends, which helps policymakers make informed decisions and develop strategies for promoting industrial growth.
In conclusion, the RBI's role in industrial finance is multi-faceted, encompassing monetary policy, regulation of banks, promotion of priority sectors, establishment of developmental institutions, support for export finance, exchange rate management, financial inclusion, and research. These efforts collectively contribute to the development and sustainability of the industrial sector in India.
2. Discuss the role of the RBI in the field of agriculture Finance.
Ans: Role of the RBI in Agriculture Finance:
The Reserve Bank of India (RBI) plays a crucial role in agriculture finance, aiming to support the growth and development of the agricultural sector in India.
Here are key aspects of its role in agriculture finance:
1. Priority Sector Lending: RBI mandates that a significant portion of banks' lending (priority sector lending) must be directed towards agriculture and related activities. This ensures that farmers have access to credit for crop cultivation, farm machinery, and other agricultural needs.
2. Refinancing Institutions: RBI established specialized institutions like the National Bank for Agriculture and Rural Development (NABARD) to provide refinancing and credit support to agriculture. NABARD refinances commercial banks and cooperative banks, which, in turn, lend to farmers and rural borrowers.
3. Interest Rate Policy: RBI influences interest rates, affecting the cost of agricultural loans. It implements policies to keep interest rates affordable for farmers, making credit more accessible.
4. Crop Insurance: RBI collaborates with the government to promote crop insurance schemes, reducing the financial risks faced by farmers due to natural disasters and crop failures.
5. Financial Inclusion: RBI encourages the expansion of banking services in rural areas to improve financial inclusion among farmers. This includes the establishment of rural and cooperative banks, as well as the promotion of mobile banking and digital payment methods in rural regions.
6. Research and Development: RBI conducts research on agriculture finance trends and issues, providing valuable insights for policymakers and financial institutions. This research helps in designing effective policies and initiatives.
7. Farm Credit Cards: RBI has promoted the use of farm credit cards, enabling farmers to access short-term credit for their agricultural needs more conveniently.
8. Loan Waivers: In times of agricultural distress, RBI may work with the government to implement loan waiver schemes to alleviate the debt burden on farmers.
9. Microfinance: RBI regulates and supervises microfinance institutions that often serve the financial needs of rural and small-scale farmers.
In summary, the RBI's role in agriculture finance is vital for ensuring the availability of affordable credit to farmers, promoting rural financial inclusion, mitigating risks through crop insurance, and supporting the overall growth and sustainability of the agriculture sector in India. These efforts are essential for food security and economic development in the country.
Additional Question Answer
1. What are the promotional roles of RBI?
Ans: A country's economic progress is gauged by the effectiveness of its banking and financial systems, as well as advancements in sectors like industry, agriculture and infrastructure. Within India's banking landscape, the Reserve Bank of India (RBI) holds a pivotal position as the apex institution. It actively contributes to the advancement of industry, agriculture, the banking sector and the financial market. Through its multifaceted role, the RBI plays a crucial part in fostering growth and development across these vital sectors of the economy.
The Reserve Bank of India (RBI) plays a crucial promotional role in the economic development of India through various initiatives and institutions. Some of these promotional roles include:
1. Promotion of Banking Habit (Licensing and Regulation): The RBI issues licenses for banks to establish branches in underserved areas, fostering the habit of banking among the masses. It also regulates banking practices to ensure trust and transparency. Initiatives like the Banking Ombudsman Scheme and customer protection measures contribute to promoting banking habits.
2. Promotion of Foreign Trade (ECGC and EXIM): The RBI supports foreign trade by providing refinancing assistance to institutions like Export Credit and Guarantee Corporation (ECGC) and Export-Import Bank (EXIM). These institutions facilitate foreign trade through insurance, long-term financing and foreign currency credit, thus contributing to trade growth.
3. Promotion of Agriculture (NABARD, RRBs, Schemes): The RBI promotes agriculture by establishing institutions like the National Bank for Agriculture and Rural Development (NABARD) and endorsing schemes such as priority sector lending, Kisan Credit Card and credit guarantee schemes. These initiatives facilitate agricultural financing and development.
4. Promotion of Industry (IFCI, SIDBI, SFCs): Industrial development is supported through institutions like Industrial Finance Corporation of India (IFCI), Small Industries Development Bank of India (SIDBI) and State Finance Corporations (SFCs). These institutions provide financial assistance, guidance and policy support for industrial growth.
5. Development of the Financial System (Institutions and Markets): The RBI contributes to building a robust financial system by fostering various financial institutions such as commercial banks, cooperative banks and non-banking financial companies (NBFCs). It also encourages the development of financial markets and instruments, ensuring a well-functioning financial ecosystem.
2. What are the roles of RBI in industrial finance?
Ans: The Reserve Bank of India (RBI) plays a pivotal role in advancing industrial finance, recognizing industrialization as a catalyst for economic growth. While not directly involved in industrial finance, the RBI collaborates with the central government to establish key industrial financial institutions and implement strategic schemes. Notable contributions include:
1. Term Lending Institutions:
a. IFCI (Industrial Finance Corporation of India): The RBI has invested in IFC's capital and provided both long-term and medium-term financing. IFCI aids corporations and cooperatives with extended credit.
b. SFCs (State Finance Corporations): The RBI offers technical guidance, subscribes to their share capital and extends banking and rediscounting facilities. It assists in their organizational setup and monitors operations.
c. IDBI (Industrial Development Bank of India): Established as an RBI subsidiary, IDBI directly finances industrial entities, fostering development and bridging gaps in the industrial landscape.
d. UTI (Unit Trust of India): The RBI contributed to UTI's capital and maintained regulatory oversight, facilitating UTI's role in investment and capital market operations. e. RCI (Refinance Corporation for Industry Ltd.): Created in partnership with commercial banks and LIC, RCI offered refinance support to member banks for medium-term loans to private sector medium-sized industries.
2. Industrial Credit Department: Established in 1957, the Reserve Bank of India (RBI) founded the Industrial Finance (or Credit) Department. It primarily oversaw the administration of the Credit Guarantee Scheme for small-scale industries. However, due to the discontinuation of the Credit Guarantee Scheme and the emergence of the Deposit Insurance and Credit Guarantee Corporation, the department ceased its operations in 1981.
3. Credit Guarantee Schemes:
a. Credit Guarantee Scheme for Small Scale Industries: Introduced in July 1960 by the Indian government, this scheme aimed to incentivize bank lending to small industries. The Reserve Bank of India actively managed this scheme. Its objective was to safeguard losses incurred by banks and credit institutions in relation to advances granted to small-scale industries. The scheme concluded its operations after 1981.
b. Credit Guarantee Corporation of India (CGCI): In 1971, the RBI fostered the CGCI to establish an extensive system of loan guarantees for underserved borrowers. In July 1978, the CGCI merged with the Deposit Insurance Corporation, leading to the formation of the Deposit Insurance and Credit Guarantee Corporation of India (DICGC).
c. The Small Loans (Small Scale Industries) Guarantee Scheme: Introduced in 1981 as a successor to the Credit Guarantee Scheme, this initiative came under the administration of the RBI on behalf of the Central Government. Credit Authorization Scheme (CAS), Introduced by the Reserve Bank of India (RBI) in November 1965, the Credit Authorization Scheme aimed to control excessive borrowing.
Key points of the scheme include: Authorization Requirement: Commercial banks needed RBI's authorization to extend fresh credit exceeding Rs. 1 crore to a single party. The limit was raised progressively to Rs. 4 crores in November 1983 and further to Rs. 6 crores from April 1986.
Objectives:
a. Inflation Control: CAS aimed to regulate credit to manage inflation by controlling excessive credit creation.
b. Financial Discipline: The scheme enforced financial discipline on commercial borrowers, curbing indiscriminate borrowing.
c. Productive Credit: It promoted credit allocation towards productive activities.
d. Aligned with Planning: CAS ensured credit allocation aligned with national economic planning.
e. Monopoly Curbing: The scheme aimed to prevent monopolistic tendencies in credit sanctioning.
NOTE: The Credit Authorization Scheme was replaced by the Credit Monitoring Arrangement (CMA) in October 1988.
4. What are the roles of RB in agricultural development?
Ans: The Reserve Bank of India (RBI) plays a pivotal role in the development of the agricultural sector in India through various initiatives and measures.
Here's a breakdown of its contributions:
i. Agricultural Credit Department (ACD): The RBI established the ACD in 1935 to expand and coordinate credit facilities to the rural sector. It maintains expert staff to study agricultural credit matters, ensuring alignment with government policies and effective coordination with cooperative banks and other banking organizations.
ii. All India Rural Credit Survey Committee: In 1951, this committee was formed to enhance agricultural credit, focusing on cooperative credit systems. Its recommendations led to the Integrated Scheme of Rural Credit, emphasizing state partnership, coordination, efficient administration and production-oriented lending.
iii. Regional Rural Banks (RRBs): Initiated in 1975, RRBS were set up based on the recommendations of the "Working Group on Rural Banks". These banks provide rural credit and have transformed the credit landscape, meeting farmers' requirements through formal institutional sources.
iv. National Agricultural Credit (Long-Term Operations) Fund (NACLTOF): Established in 1956, NACLTOF offers long-term loans to Land Development Banks and State Governments for co-operative banks and credit societies. It promotes sustained agricultural development.
v. National Agricultural Credit (Stabilization) Fund (NACSF): Formed in 1956, NACSF grants medium-term loans to State Co-operative Banks to convert short-term loans in times of calamities like drought or famine, helping maintain financial stability.
vi. National Agricultural Credit (Relief and Guarantee) Fund (NACRGF): Created to provide grants to co-operative credit institutions through state governments, it aids institutions in writing off irrecoverable arrears due to severe famines.
vii. All-India Rural Credit Review Committee: This committee, established in 1955, reviewed rural credit developments since 1954. It emphasized the involvement of nationalized banks in rural finance, promoting cooperation and coordination between cooperative and commercial banks.
viii. Agricultural Refinance and Development Corporation (ARDC): Founded in 1963 and later renamed ARDC, it refinances medium-term and long-term agricultural credit, supporting credit delivery to farmers and rural areas.
ix. Agricultural Credit Board (ACB): Established in 1970, the ACB formulated and reviewed rural finance policies, ensuring coordination between cooperative credit institutions and RBI operations.
X. Priority Sector Lending (PSL): Introduced in line with National Credit Council recommendations, PSL emphasizes lending to priority sectors, including agriculture and small-scale industries, vital for national development.
5. How has the Reserve Bank of India (RBI) contributed to agricultural finance and development in India?
Ans: The agriculture sector is vital to India's economy, providing livelihoods for a significant portion of the population. It encompasses various activities like crop cultivation, livestock rearing, forestry and fisheries.
i. Policy Thrusts: The Government of India has introduced policy thrusts to enhance agricultural productivity. This has led to significant agricultural revolutions such as the Green Revolution (cereal production), White Revolution (milk production), Gene Revolution (cotton production) and Blue Revolution (fisheries productivity).
ii. Emergence as a Net Exporter: These policy initiatives have borne fruit, transforming the agriculture sector. India has achieved self-sufficiency and even emerged as a net exporter of various agricultural commodities like rice, marine products and cotton.
iii. RBI's Special Role: The RBI holds a distinct responsibility in expanding and coordinating credit facilities for the rural sector. It plays a pivotal role in providing financial support to rural and agricultural activities.
iv. Initiatives for Agricultural Finance: The RBI has introduced several initiatives to foster agricultural finance and development:
v. Agricultural Credit Department: Established in 1935, this department focuses on expanding and coordinating credit facilities for rural sectors. It offers expert guidance and maintains coordination with cooperative banks and other financial institutions.
vi. Priority Sector Lending (PSL): The RBI introduced PSL, emphasizing lending to sectors like agriculture and small-scale industries. This encourages banks to allocate a certain percentage of their lending to priority sectors.
vii. Regional Rural Banks (RRBs): RRB was Set up in 1975, These cater specifically to rural credit needs, bridging the gap between formal financial institutions and rural borrowers.
viii.Long-Term Operation Funds: The RBI established funds for long-term credit needs, such as the National Agricultural Credit (Long-Term Operations) Fund and the National Agricultural Credit (Stabilization) Fund.
ix. Agricultural Credit Board: Constituted in 1970, the board formulates and reviews rural finance policies, ensuring coordination between cooperative credit institutions and RBI operations.
X. Contributing to Agricultural Growth: Through these measures, the RBI contributes significantly to the growth and development of the agricultural sector. It ensures that the financial needs of rural communities and agricultural activities are adequately met, fostering economic stability and prosperity.
6. What was the significance of the All India Rural Credit Survey Committee appointed by RBI in 1951?
Ans: The All India Rural Credit Survey Committee was established by RBI in 1951 with the aim of exploring possibilities for expanding agricultural credit, particularly through the cooperative credit system. Here are the key points about its significance and recommendations:
a. Purpose and Focus: The committee was formed to address shortcomings in the agricultural credit system and to devise strategies for providing better credit access to rural areas. It aimed to establish a robust credit delivery system for financing agricultural and allied activities.
b. Critical Assessment: The committee observed that agricultural credit was insufficient in quantity, often misaligned in purpose and failed to reach the intended beneficiaries. It emphasized the need for credit to be appropriate in type and purpose and to be directed to the right people.
c. Importance of Cooperation: While acknowledging the failures of the cooperative credit movement, the committee believed that cooperative efforts were vital for rural credit success. It stated that despite past challenges, cooperation within the cooperative credit system must be made to succeed.
d. Integrated Scheme of Rural Credit: To strengthen the cooperative credit movement, the committee proposed the Integrated Scheme of Rural Credit.
The scheme had several key features:
i. State Partnership: It envisioned state participation through contributions to the share capital of cooperative credit institutions.
ii. Coordination: The scheme emphasized full coordination between credit activities and other agricultural functions, such as marketing and processing.
ili. Effective Administration: Administration was to be managed by a capable and responsive staff, catering to the needs of the rural population.
iv. Production-Oriented Loan Policy: The scheme promoted a crop loan system, facilitating short-term cooperative credit to farmers with a focus on productive agricultural activities.
Short Answer Type:
1. In which year was the IDBI established?
Ans: The IDBI (Industrial Development Bank of India) was established in the year 1964.
2. In which year was the Credit Guarantee Corporation of India Ltd. established?
Ans: The Credit Guarantee Corporation of India Ltd. was established in the year 1971.
3. In which year were the RRBs established?
Ans: The Regional Rural Banks (RRBs) were established in the year 1975.
4. In which year was the Agriculture Refinance Corporation established?
Ans: The Agriculture Refinance Corporation was established on July 1, 1963.
5. What are the major agricultural revolutions that have been instrumental in enhancing the productivity of various sectors in India?
Ans: The Government of India has implemented policy thrusts that led to significant agricultural revolutions, including:
1. Green Revolution in Cereal Production (late 1960s-early 1980s): This revolution aimed to increase cereal production through the adoption of high-yielding varieties of seeds, improved irrigation techniques and the application of modern agricultural practices. It resulted in a substantial increase in food production and played a pivotal role in ensuring food security.
ii. White Revolution in Milk Production (starting in the 1970s): The White Revolution focused on increasing milk production through the establishment of cooperatives, promoting dairy farming and introducing advanced dairy technologies. This revolution transformed India from a milk-deficient nation to one of the world's largest milk producers.
iii. Gene Revolution in Cotton Production (in early 2000): The Gene Revolution involved the adoption of genetically modified Bt cotton varieties that were resistant to pests, reducing the need for excessive pesticide use. This led to increased cotton production and improved livelihoods for cotton farmers.
iv. Blue Revolution for Fisheries Production and Productivity (1973-2002): The Blue Revolution targeted the fisheries sector, aiming to enhance fish production through aquaculture, modern fishing techniques and better fishery management practices. This initiative boosted fish production, employment opportunities and economic growth in coastal regions.
6. What is Priority Sector Lending (PSL)?
Ans: Priority Sector Lending (PSL) is a concept introduced on the recommendations of the National Credit Council. It emphasizes that commercial banks should increase their focus on financing sectors deemed as 'national priority' to ensure equitable development.
7. Which sectors are included in the Priority Sector?
Ans: The description of priority sectors was formalized in 1972, based on a report submitted by the Informal Study Group on Statistics relating to advances to Priority Sectors, constituted by the Reserve Bank of India in May 1971.
The priority sectors include:
(i) Agriculture (ii) Micro, Small and Medium Enterprises (MSMEs) (iii) Export Credit (iv) Education (v) Housing (vi) Social Infrastructure (vii) Renewable Energy (vill) Others
8. Why is Priority Sector Lending important?
Ans: Priority Sector Lending is crucial for several reasons:
i. Inclusive Growth: PSL ensures that sectors vital for inclusive growth, such as agriculture and MSMES, receive adequate financial support.
ii. Rural Development: Sectors like agriculture and rural housing directly benefit from PSL, contributing to rural development.
iii. Employment Generation: PSL aids sectors like MSMEs, known for generating employment opportunities.
iv. Economic Stability: Investment in priority sectors strengthens the backbone of the economy, contributing to overall stability.
V. Reducing Regional Disparities: PSL helps bridge the gap between developed and underdeveloped regions by ensuring adequate credit flow to all regions. vi. Sustainable Development: Supporting sectors like renewable energy and social infrastructure promotes sustainable development practices.
9. How does PSL benefit the economy?
Ans: PSL aligns financial activities with the broader national development agenda. It ensures that sectors critical for economic, social and environmental progress receive the necessary financial resources. This not only strengthens these sectors but also contributes to overall economic growth and stability.
10. What role does the Reserve Bank of India play in PSL? What impact has PSL had on India's development?
Ans: The RBI sets PSL targets for banks and monitors their compliance. It periodically reviews and revises these targets based on changing economic conditions and development priorities. PSL has significantly contributed to the growth and development of priority sectors, leading to improved livelihoods, increased production and enhanced access to financial services in crucial areas of the economy. It has helped uplift rural and marginalized communities and fostered sustainable economic practices.
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