UPSC Prelims 2020 CSAT Paper II · Q61 of 80 Comprehension medium

Passage

Bank credit to the industrial sector has started shrinking. Its decline has been a serious concern as credit growth is essential to revive investment. The problem's origins lie in the incomplete reforms of the last 25 years. An institutional change that should have followed the 1991 reforms should have been setting up of a resolution corporation for banks. In a market economy with booms and busts, banks should be allowed to be set up and to fail. Today, we cannot shut down banks because there is no proper system to shut them down. Weak loss-making banks continue to need more capital.

Which one of the following is the most logical and rational inference that can be made from the above passage?

  1. (a) Indian banking system is not able to help the country in its economic growth.
  2. (b) Economic reforms that started in 1991 have not helped in improving the economy to expected levels.
  3. (c) India lacks the institutional mechanism to deal with the failure of banks. ✓ UPSC's answer
  4. (d) Encouraging the foreign investments in our industrial sector is a good alternative to this sector's dependence on banks for credit.

Why the answer is (c)

• The passage explicitly states that 'we cannot shut down banks because there is no proper system to shut them down.'

• It identifies the missing institutional change as the 'setting up of a resolution corporation for banks' following the 1991 reforms.

• The text argues that in a market economy, banks should be allowed to fail, but the current lack of a resolution mechanism prevents this.

• Consequently, weak loss-making banks continue to operate and require more capital, hindering credit growth.

• Therefore, the most logical inference is that India lacks the institutional mechanism to deal with the failure of banks.

Why the other options are wrong

(a) Indian banking system is not able to help the country in its economic growth.
The passage states that credit growth is essential to revive investment, implying the banking system is intended to help growth but is currently constrained by structural issues, not that it is inherently unable to help.
(b) Economic reforms that started in 1991 have not helped in improving the economy to…
The passage attributes the problem to 'incomplete reforms' and a specific missing institutional change, not a general failure of the 1991 reforms to improve the economy to expected levels.
(d) Encouraging the foreign investments in our industrial sector is a good alternative to…
The passage focuses on the internal structural deficiency of the banking sector (lack of resolution mechanism) and does not suggest foreign investment as an alternative to bank credit.

Asked in the CSAT Paper II of the UPSC Civil Services Preliminary Examination 2020, held on 4 October 2020. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

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