Bank credit to the industrial sector has started shrinking

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

Answer: C

Explanation

Option A is incorrect. The passage specifically talks about the decline of credit to the industrial sector. From this statement, we cannot infer the banking system’s role on economic growth.

Option B is incorrect. The passage mentions about the incompleteness of reforms. There was scope of including many other things in the reform process, including a resolution corporation for banks, as stated in the Passage. Thus, the statement given in this option cannot be construed as a logical inference from the given passage.

Option C is correct. The passage mentions the institutional change that could have been included in the 1991 reforms in the form of a resolution corporation for banks and the consequence of such omission i.e. the lack of capacity to deal with bank failures.

Option D is incorrect: As the decline of credit by the banks to the industrial sector is the premise mentioned. The passage talks about the lack of institutional mechanisms to deal with bank failures. The passage does not mention encouraging foreign investments in our industrial sector as a resolution this problem.

  • Exam Year: 2020