Banking & RBI — Interview Q&A

Q: What is the difference between Repo Rate and Reverse Repo Rate?

Repo Rate: RBI lends money TO commercial banks for overnight (or short-term) liquidity.

Banks pledge government securities as collateral.

When repo rate rises, bank borrowing becomes expensive → they raise lending rates → credit tightens → inflation reduces.

Reverse Repo Rate: Banks park EXCESS cash WITH RBI and earn interest.

Currently 25 bps below repo rate.

Acts as floor for short-term rates.

Q: What is CRR and SLR? How do they control liquidity?

CRR (Cash Reserve Ratio): Banks must maintain X% of their Net Demand and Time Liabilities (NDTL) as cash with RBI.

No interest paid.

If CRR rises, banks have less money to lend → credit shrinks.

SLR (Statutory Liquidity Ratio): Banks must hold Y% of NDTL in liquid assets (G-Secs, cash, gold).

Banks earn returns on G-Secs unlike CRR.

SLR requirement also limits how much banks can invest in risky assets.

Q: What is MCLR and how does it affect loan rates?

MCLR (Marginal Cost of Funds-based Lending Rate): Introduced April 2016 to replace Base Rate.

Minimum rate banks can charge for loans (except some specific categories).

Linked to RBI repo rate changes more transparently than Base Rate.

When repo rate changes, MCLR should ideally change too, passing on benefit to borrowers.

One-year MCLR is benchmark for most home and corporate loans.

Q: Explain the NPA problem in Indian banking.

NPA (Non-Performing Asset): Loan where principal or interest overdue for 90+ days.

Gross NPA = total NPAs before provisions.

Net NPA = after provisions deducted.

Causes: overlending during boom years (2005-2012), economic slowdown, willful defaulters, concentration in infrastructure sector.

Solutions: IBC (Insolvency and Bankruptcy Code 2016), SARFAESI Act enforcement, Asset Reconstruction Companies (ARCs), PSB recapitalization.

Q: What is Basel III and why does it matter for Indian banks?

Basel III: International capital adequacy standards by Bank for International Settlements (BIS).

Requires banks to hold sufficient capital against risk-weighted assets (RWA).

Three pillars: Minimum capital requirements (CAR 10.5%+ for India), Supervisory review process, Market discipline/disclosure.

India implemented fully by 2019.

Ensures banks can absorb losses and remain solvent during crisis.

Q: What is the Prompt Corrective Action (PCA) framework?

RBI's early warning system for stressed banks.

Triggers when bank breaches thresholds on: Capital Adequacy Ratio (CAR), Net NPA ratio, Return on Assets (RoA), Tier 1 leverage ratio.

Banks under PCA face restrictions: no new branches, no dividend distribution, limits on lending, management changes.

Goal: catch problems early before they become systemic.

Q: Difference between Scheduled Commercial Banks and Cooperative Banks?

SCBs: Licensed under Banking Regulation Act 1949, regulated by RBI, include PSBs, private banks, foreign banks, SFBs, payments banks.

Cooperative Banks: Registered under Cooperative Societies Acts, dual regulation (RBI + State govt for urban cooperative banks), organized on cooperative principles, serve specific communities/districts.

Primary cooperative banks (PCBs) are now under RBI regulation since 2020 amendment.