Capital Markets and Financial Inclusion — Practice Questions
UPSC Prelims-pattern practice questions on depository receipts, SEBI and commodity markets, MUDRA, small finance banks and primary vs secondary markets, with explanations.
Questions
These are original UPSC-pattern practice questions. Attempt each one before revealing the answer.
Consider the following pairs:
| Instrument | Feature | |
|---|---|---|
| 1. | American Depository Receipt | Issued in the United States against shares of a non-US company |
| 2. | Indian Depository Receipt | Issued in India against shares of a foreign company |
| 3. | Global Depository Receipt | Issued in India by Indian companies to domestic investors |
How many of the pairs given above are correctly matched?
Solution
Pairs 1 and 2 are correct. Pair 3 is wrong — a GDR is issued in international markets outside India so that a company can raise equity from foreign investors; it is not a domestic instrument.
Answer: B
Which one of the following currently regulates commodity derivatives trading in India?
Solution
The Forward Markets Commission was merged with SEBI in September 2015, so SEBI now regulates commodity derivatives along with securities. The FMC no longer exists; the RBI regulates the money, government securities and forex markets; and the consumer affairs ministry was the FMC’s earlier parent ministry, not a regulator.
Answer: A
With reference to the Micro Units Development and Refinance Agency (MUDRA), consider the following statements:
- It is a subsidiary of the Small Industries Development Bank of India.
- Shishu loans under PM MUDRA Yojana are of up to ₹50,000.
- MUDRA lends directly to micro enterprises through its own branches.
Which of the statements given above is/are correct?
Solution
Statements 1 and 2 are correct. Statement 3 is wrong — MUDRA is a refinancing agency; the loans are given by banks, NBFCs and microfinance institutions, which MUDRA refinances.
Answer: D
Small finance banks in India are required to extend what proportion of their adjusted net bank credit to priority sectors?
Solution
Small finance banks must lend 75% of adjusted net bank credit to priority sectors, and at least 50% of their loan portfolio must be loans of up to ₹25 lakh. 40% is the general priority sector target for domestic scheduled commercial banks; 60% and 90% are not prescribed figures.
Answer: C
Consider the following statements:
- In an offer for sale, the proceeds go to the company whose shares are sold.
- The secondary market provides liquidity and price discovery for existing securities.
- India completed its transition to a T+1 settlement cycle for equities in January 2023.
- A bonus issue raises fresh capital for the company.
How many of the above statements are correct?
Solution
Statements 2 and 3 are correct — two. Statement 1 is wrong: in an offer for sale, existing shareholders (often the government, in disinvestment) sell and receive the money. Statement 4 is wrong: a bonus issue gives free shares out of reserves; no money is raised.
Answer: B
Mains
Examine the role of differentiated banks — payments banks and small finance banks — in furthering financial inclusion in India.
Solution
Introduction: Following the Nachiket Mor Committee (2013), the RBI issued guidelines in 2014 for two niche bank categories meant to reach households and enterprises that universal banks found costly to serve.
Body:
- Payments banks: small deposits (up to ₹2 lakh per customer) and payments; no lending; leverage mobile and retail networks; useful for migrants’ remittances and DBT receipts.
- Small finance banks: savings plus credit for the underserved; 75% priority sector lending; at least half the loans of up to ₹25 lakh; many evolved from microfinance institutions, bringing credit expertise into a regulated deposit-taking structure.
- Contribution: last-mile access, lower-cost deposits for the poor, formal credit for micro enterprises, competition in small-ticket banking.
- Limitations: payments banks’ thin margins (no lending income) led some licensees to surrender licences; SFBs face concentration risk in microfinance and higher deposit costs; both depend on digital and agent networks prone to fraud and service gaps.
Conclusion: Differentiated banks complement PMJDY and the JAM platform; their sustainability needs viable business models, strong supervision and financial literacy among customers.