Direction for the following 6 (six) items: Read the following five passages and answer the items (61-66) that follow. Your answers to these items should be based on the passages only.

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 no 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?

Correct Answer: India lacks the institutional mechanism to deal with the failure of banks.

Step-by-Step Explanation / Logical Reasoning:

1. Analyze the Passage:

The passage highlights a core issue in the banking and industrial sectors: bank credit to the industrial sector has declined, which hinders investment growth. It links the origin of this problem to incomplete reforms following the 1991 economic changes, specifically noting that an essential institutional change—setting up a resolution corporation for banks—was never implemented.

2. Identify Key Statements:

- "An institutional change that should have followed the 1991 reforms should have been setting up of a resolution corporation for banks."
- "Today, we cannot shut down banks because there is no proper system to shut them down."

3. Evaluate the Inference:

Because there is no "proper system" or "resolution corporation" to shut down weak, loss-making banks, it directly leads to the rational inference that India currently lacks the necessary institutional mechanism to handle or deal with bank failures.

4. Evaluate the Options:

- Option 1: "Indian banking system is not able to help the country in its economic growth." — Too broad and sweeping; the passage discusses specific structural and credit issues, not a complete inability to support growth.
- Option 2: "Economic reforms that started in 1991 have not helped in improving the economy to expected levels." — Overly broad generalization beyond the scope of bank resolution mechanisms.
- Option 3: "India lacks the institutional mechanism to deal with the failure of banks." — Directly supported by the explicitly stated lack of a resolution corporation or proper system to shut down failing banks.
- Option 4: "Encouraging the foreign investments in our industrial sector is a good alternative to this sector’s dependence on banks for credit." — Foreign investment is not mentioned or discussed anywhere in the passage.

Thus, the most logical and rational inference supported strictly by the passage text is that India lacks the institutional mechanism to deal with the failure of banks.