[ESB16] Economic Survey → Banking → Why Incomplete Transmission of Monetary Policy, MCLR, PSL-Certificates, New Differential Banks?

1. Prologue
2. ESB161/P6: Monetary Policy Framework between RBI & FinMin
3. ESB161/P7: Decline in Bank Deposit & Credit Growth & incomplete transmission of monetary Policy?
4. ESB161/P8: MCLR Vs. Base Rate, Small Savings Schemes & incomplete transmission of monetary Policy?
5. ESB161/P9-Priority Sector Lending Certificates: Features, Purpose
6. ESB161/P10: Differential Banks- Small Finance Banks, Payment Banks, Wholesale Bank, Custodian Banks

Prologue

• Continuation of last week’s lecture on banking sector updates with main focus on budget and economic survey.
• last time we had focused on NPA related issues such as twin balance-sheet problem, insolvency and bankruptcy code 2015 among other.
• this new lecture focuses mainly on the factors behind incomplete transmission of monetary policy.
• Powerpoints available under Mrunal.org/download (goto mediafire folder=>Economy=>Banking)

ESB161/P6: Monetary Policy Framework between RBI & FinMin

• Recap of the previous lecture: Chakravyuh Challenge, Twin Balance sheet problem, classification of bank’s assets, SARFAESI and NPA, new insolvency and bankruptcy code 2015, BASEL-III norms on recapitalization of public sector banks; Indradhanush reforms.
• Quick revision of quantitative tools of monetary policy and UPSC-2015 prelim questions from this topic.
• Latest bimonthly monetary policy on April 2016; changes in the policy corridor
• Overall trend of monetary policy rates in last three years.
• Reforms in Monetary policy: Urjit Patel Committee, Monetary policy framework with flexible inflation targeting (FIT) and Budget-2016 announcement for amending RBI Act 1934

Youtube Link: https://youtu.be/bhhwvCwou0g

ESB161/P7: Decline in Bank Deposit & Credit Growth & incomplete transmission of monetary Policy?

• Factors/Reasons behind incomplete transmission of monetary policy?
• Revision of the cash reserve ratio (CRR) and statutory liquidity ratio (SLR)
• question asked in UPSC 2015 prelims: When RBI reduces the Statutory Liquidity Ratio by 50 basis points, what will happen?
• How does a high SLR rate lead to financial repression of public sector banks on asset side?
• High level of stressed assets encourage PSB to overinvestment in risk free G-sec to maintain a respectable risk-weighted capital adequacy ratio to comply with BASEL-III
• Why is growth in deposit and credit either negative or sluggish?
• Connection between real interest rate and growth in bank deposits- substitution effect and wealth effect.
• How liberalized remittance scheme (LRS) is creating negative spillover on the economy?
• Double financial repression of public sector banks on both asset and liability side.
• Four factors behind sluggish growth in Bank credit (Y-o-Y) in India? 1) incomplete transmission of monetary policy 2) corporates have halted their expansion plans and banks are reluctant to loan them anyway. 3) lucrative rates offered in the bond market 4) oil marketing companies are borrowing less from commercial banks.

Youtube Link: https://youtu.be/hv5XmW6h5lE

ESB161/P8: MCLR Vs. Base Rate, Small Savings Schemes & incomplete transmission of monetary Policy?

• How small savings schemes have hindered the complete transmission of monetary policy? Why did Government reduce the small savings rates?
• Who decides the loan interest rates of banks? Base rate system vs Marginal cost of funds based lending rates (MCLR)?
• List of structural rigidities that are preventing complete transmission of monetary policy?
• Why Monetary Policy alone can’t combat inflation/low-growth?

Youtube Link: https://youtu.be/do7d1ci839o

ESB161/P9-Priority Sector Lending Certificates: Features, Purpose

• Which banks have to comply with the PSL norms?
• List of new categories added in the priority sector from 2015?
• Definition of small and marginal farmers, MSME industry.
• Does Jan Dhan Overdraft count as PSL lending to weaker section?
• What happens if banks fail to meet PSL target?
• New categories in PSL: renewable energy, social infrastructure
• RBI’s Deepak Mohanty Committee on Med-term path on financial inclusion and its recommendations about replacing Interest subvention scheme with universal crop insurance subsidy.

Youtube Link: https://youtu.be/vyOnVxZQHkA

ESB161/P10: Differential Banks- Small Finance Banks, Payment Banks, Wholesale Bank, Custodian Banks

• Recap of the classification of financial intermediaries
• Local area banks: origin, restrictions, features.
• What is a scheduled bank? What are the disadvantages of not being a scheduled bank?
• Small finance bank and Payment banks: origin, purpose, equity requirement, CRAR norms, functions, similarities, differences.
• Usha Thorat Committee and list of 10 winners of small finance bank license
• Nachiket Mor Committee and list of 11 winners of payment bank license.
• Criticism against small finance bank and payment banks by Subramanium Swami and Arundhati Bhattacharya.
• Proposed Differential banks: wholesale banks and custodian banks
• Side topic: National payment Corporation of India (NPCI)’s unified payment system (UPI)

Youtube Link: https://youtu.be/8Qlj6eqd4SY
This concludes (most of the) Banking topics from this year’s budget and economic survey.