UPSC Prelims 2021 CSAT Paper II · Q43 of 79 Comprehension medium

Passage

Passage - 3 The resolution of bankruptcy cases of Indian banks under the Insolvency and Bankruptcy Code should help bring non-performing assets (NPA) situation under some control. Despite the slow pace of resolutions by the National Company Law Tribunal, the Code can be helpful in cleaning up bank books in future credit cycles. The recapitalisation of public sector banks too can help increase the capital cushion of banks and induce them to lend more and boost economic activity. But bad debt resolution and recapitalisation are only a part of the solution as they, by themselves, can do very little to rein in reckless lending that has pushed the Indian banking system to its current sorry state. Unless there are systemic reforms that address the problem of unsustainable lending, future credit cycles will continue to stress the banking system.

Which one of the following statements best reflects the most logical, rational and practical suggestion implied by the passage given above ?

  1. (a) Lending by the banks should be closely monitored and regulated by the Central Government.
  2. (b) Interest rates should be kept low so as to induce banks to lend more, promote credit growth and thereby boost economic activity.
  3. (c) Merger of many banks into a few large banks alone is the long-term solution to make them viable and prevent their bad performance.
  4. (d) Indian banking system requires structural reforms as a long-term solution for bad loans problem. ✓ UPSC's answer

Why the answer is (d)

• The passage explicitly states that bad debt resolution and recapitalisation are only partial solutions and cannot rein in reckless lending on their own.

• It concludes that unless there are systemic reforms addressing unsustainable lending, future credit cycles will continue to stress the banking system.

• Therefore, the most logical and practical suggestion implied is the need for structural or systemic reforms as a long-term solution.

• Option (d) directly aligns with this conclusion by identifying structural reforms as the necessary long-term fix for the bad loan problem.

Why the other options are wrong

(a) Lending by the banks should be closely monitored and regulated by the Central Government.
The passage does not suggest direct monitoring and regulation by the Central Government, but rather calls for systemic reforms to address unsustainable lending practices.
(b) Interest rates should be kept low so as to induce banks to lend more, promote credit…
While the passage mentions that recapitalisation can induce banks to lend more, it explicitly states that this is only a part of the solution and does not address the root cause of reckless lending.
(c) Merger of many banks into a few large banks alone is the long-term solution to make them…
The passage does not mention bank mergers as a solution; it focuses on the need for systemic reforms to address the problem of unsustainable lending.

Asked in the CSAT Paper II of the UPSC Civil Services Preliminary Examination 2021, held on 10 October 2021. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

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