Abbreviations and Banking Terminology Questions and Answers

Answer: D

Correct answer: Wholesale Price Index

The WPI measures the change in prices at the wholesale stage, as against the Consumer Price Index, which measures them at retail.

Answer: B

Correct answer: Industrial Finance Corporation of India

The Industrial Finance Corporation of India was set up in July 1948, the first development finance institution in independent India.

The need was immediate: commercial banks confined themselves to working capital and the capital market was thin, so long-term industrial finance had no source at all. IFCI supplied medium and long-term credit to industrial concerns in the corporate and co-operative sectors. It heads the chronology that runs IFCI 1948, ICICI 1955, UTI 1963 and IDBI 1964.

Answer: B

Correct answer: Financial

SFMS is the Structured Financial Messaging System, the secure messaging backbone for interbank communication within India.

It carries the messages behind RTGS and NEFT and also inland letters of credit and bank guarantees, using standardised message formats so that one bank's system can act on another's instruction without manual intervention. It is in effect a domestic counterpart to SWIFT, which serves the same purpose internationally - the message layer, distinct from the settlement system it instructs.

Answer: A

Correct answer: Short Term Deposit

A short term deposit is a term deposit placed for a brief period, conventionally up to a year, as against the medium and long term deposits that run beyond it.

The classification matters for a bank's asset-liability management, since the maturity profile of its deposits determines how much it can safely lend long. It also affects pricing: short deposits usually carry lower rates, though an inverted curve can reverse that. The same three letters mean subscriber trunk dialling in telephony, which is the trap the distractors play on.

Answer: B

Correct answer: External

ECB is External Commercial Borrowing: a commercial loan raised by an eligible Indian entity from a recognised non-resident lender.

The word external marks the source of the funds as outside India, which is why the RBI regulates them - through limits on amount, minimum average maturity, permitted end-uses and an all-in-cost ceiling. The concern is currency risk and external debt: borrowing in foreign currency is cheap until the rupee moves. The same letters mean European Central Bank in another context entirely.

Answer: D

Correct answer: India Infrastructure Finance Company Limited

IIFCL was set up in 2006 as a wholly government-owned company to provide long-term finance for infrastructure projects.

It exists because commercial banks fund themselves largely with short deposits and cannot comfortably lend for twenty-year projects - the asset-liability mismatch that repeatedly strained bank balance sheets in the infrastructure cycle. IIFCL lends directly, refinances banks and provides credit enhancement to help project bonds reach investment grade so that bond investors can take on the tenor instead.

Answer: D

Correct answer: Bank for International Settlements

The Bank for International Settlements, founded in 1930 at Basel, is the oldest international financial institution and serves as a bank for central banks.

It holds their deposits, conducts research, and hosts the committees whose work sets global standards - most prominently the Basel Committee on Banking Supervision, whose Basel accords on capital adequacy every major banking system now follows. Note the preposition: it is a bank for international settlements, and the same three letters mean the Bureau of Indian Standards in a domestic context.

Answer: D

Correct answer: Cash Credit

Cash credit is a working capital facility under which a borrower may draw up to a sanctioned limit against the security of stock and receivables, interest being charged only on the amount actually outstanding.

It is the standard arrangement for financing a trading or manufacturing cycle, since the balance rises as inventory is built and falls as it is sold. The account is running rather than fixed, which distinguishes it from a term loan; and the limit is usually reviewed annually against a drawing power computed from the stock statement.

Answer: B

Correct answer: Equated Monthly Instalment

An equated monthly instalment is a fixed payment made each month over the life of a loan, covering both interest and principal.

The word equated is doing the work: the payment is level, but its composition is not. Early instalments are mostly interest, because the outstanding balance is large; later ones are mostly principal. The amount is

\[ E = \frac{P\,r\,(1+r)^{n}}{(1+r)^{n}-1} \]

with \( P \) the principal, \( r \) the monthly rate and \( n \) the number of instalments - which is why a small change in tenor alters the payment far less than it alters the total interest paid.

Answer: B

Correct answer: Infrastructure

An Infrastructure Debt Fund is a vehicle for channelling long-term debt into infrastructure projects, sponsored by banks and non-bank financial companies.

It exists because banks fund themselves with short deposits and cannot comfortably hold twenty-year project loans. An IDF refinances completed projects that are past construction risk, freeing bank capital for new lending and giving insurers and pension funds an instrument matched to their own long liabilities. It may be constituted either as a SEBI-registered mutual fund or as an RBI-registered NBFC.