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?

The passage explicitly states that "An institutional change that should have followed the 1991 reforms should have been setting up of a resolution corporation for banks" and "Today, we cannot shut down banks because there is no proper system to shut them down." This directly points to a lack of an institutional mechanism to deal with bank failures.

Analysis of Options:

A) Indian banking system is not able to help the country in its economic growth: While the passage highlights a problem with credit shrinking, it attributes this to "incomplete reforms" and a missing "proper system to shut down banks," not a fundamental inability of the entire banking system to help. It's a specific structural issue, not a total failure.

B) Economic reforms that started in 1991 have not helped in improving the economy to expected levels: The passage mentions "incomplete reforms" and a missing piece, but it does not state that the reforms haven't helped or that the economy hasn't improved to expected levels. It focuses on a specific deficiency in the reform process.

C) India lacks the institutional mechanism to deal with the failure of banks: This is the most direct and logical inference. The passage clearly states that a "resolution corporation for banks" should have been set up and that "there is no proper system to shut them down," which is precisely an institutional mechanism for dealing with bank failures.

D) Encouraging the foreign investments in our industrial sector is a good alternative to this sector's dependence on banks for credit: The passage diagnoses a problem within the banking system and suggests an institutional reform for banks. It does not discuss or propose foreign investment as an alternative solution to the credit issue. This option introduces an idea not inferred from the text.

The final answer is C