Cause–effect analysis in banking regulation — RBI restricts a few small banks and the small private/co-operative banks cannot withstand competition from larger public sector banks: choose the correct causal linkage

Given data

• I: RBI recently put restrictions on a few small banks.
• II: Small banks in private/co-operative sector are not in a position to withstand competition from bigger public sector banks.

Concept/Approach

Supervisory restrictions typically arise from concerns about stability/competitiveness. The weakness described in II plausibly triggers the regulatory action in I.

Step-by-step classification
1) Competitive weakness (II) ⇒ prudential restrictions (I) to protect depositors/system.2) Therefore II is the cause, I is the effect.

Verification/Alternative

It is unlikely that RBI restrictions cause the pre-existing inability to compete; rather, they respond to it.

Common pitfalls

• Assuming regulation causes weakness rather than reacting to it.

Final Answer
Statement II is the cause and statement I is its effect.