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
Verbal Reasoning
Cause and Effect
Difficulty: Easy
Choose an option
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AStatement I is the cause and statement II is its effect
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BStatement II is the cause and statement I is its effect
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CBoth the statements I and II are independent causes
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DBoth the statements I and II are effects of independent causes
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EBoth the statements I and II are effects of some common cause
Answer
Correct Answer: Statement II is the cause and statement I is its effect
Explanation
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 classification1) 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 AnswerStatement II is the cause and statement I is its effect.