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    निर्देश : Read the following passage carefully and answer the questions given below it. Certain words have been printed in the bold to help you locate them while answering some of the questions.

    [Para1]“Do you fear a run on the banks?” This was the question asked by some of the MPs in the parliamentary Standing Committee on Finance to the Governor of RBI.
    [Para2]Had the Governor answered the question, he would probably have listed out scenarios that could result in a bank run. Since the 2008 global financial crises, central bankers are actively engaged in the issue of financial stability and pre-emption of bank runs. The RBI too has been bringing out half yearly Financial Stability Reports since 2010, and the reports contain sophisticated stress tests that gauge the risk to the banking system based on liquidity-cum-insolvency contagion scenarios. Any professional banker would never deny the possibility of a bank run. Banking is a risky business. A bank lends out money received from its depositors. There is liquidity risk if the bank is unable to repay on demand the money it has accepted from the depositors. There is credit risk if the bank is unable to discover its loans. The central bank, as a regulator, ensures that a bank is prepared to meet liquidity and credit risks. The capital to risks (weighted) assets ratio (CRAR) is a safeguard that the capital base of a bank is not eroded. The statutory liquidity ratio (SLR) is a safeguard that a bank is able to return deposits of customers on demand.
    [Para3]In order to further these risks, the RBI is adopting international standards prescribed by the Basel Committee on Bank Supervision and the Financial Stability Board. It has directed banks to give up forbearance in the classification and reporting of non-performing assets (NPA) from April, 2015. In simple terms this means as banks playing ‘pretend’, the loans that were earlier classified as ‘standard’ assets will now be downgraded, leading to an increase in the loan defaults. Excess provisioning will lead to a decline in profits: in some cases even chipping away bank capital. This declining trend is discernible in the bank performance during 2015-16. Credit risk covers possibilities of defaults by individual borrowers and borrower groups. For example, if because of borrower default, one bank fails, it is likely to trigger a domino effect across banks – since banks have financial linkages with each other besides exposures to the same big borrower groups. However, a bank with adequate CRAR would be able to withstand this credit shock.
    [Para4]The December 2016 FSR reveals interesting results of stress tests conducted using 10 different scenarios based on the information of group borrowers. The tests show that CRAR would fall below 9% for two banks if there is default of the top 1 borrower group; five banks if the top two borrower groups default; 12 banks if the top five borrower group default and as many as 22 banks if the top 10 borrower groups default. A typical liquidity risk scenario covers unexpected deposits withdrawals in banks on account of loss of depositor confidence. The December 2016 FSR analyses the liquidity risks to the banking system on the assumption of increased withdrawals of the uninsured 10% deposits and unutilised portion of 75% sanctioned working capital limits. The tests show that only 49 out of the 60 banks in the sample will remain resilient in such a scenario. In case of incremental shocks in the extreme crises, banks will be able to withstand withdrawals of 15% of deposits using their remaining SLR investments. In other words, 11 out of the 60 banks will fail the liquidity test. The reports do not disclose the names of these 11 banks.

    What are the basic functions of CRAR and SLR?

    Options :-

    1. They are the protection mechanism for the banks against capital erosion and liquidity risk
    2. These are formulated by the central bank to strengthen the capital base of the banks.
    3. These are formulated by the central bank to maintain liquidity in banks.
    4. These are statutory ratios and have to be maintain by the banks on certain percentage.
    5. A & D
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