First In India Questions and Answers

Answer: A

Correct answer: Those borrowers who do not have a good credit history

Subprime lending means lending to borrowers who do not meet prime credit standards - a poor repayment record, thin credit history, low income relative to the loan, or high existing debt.

Such loans carry higher interest rates to compensate for the greater risk of default. The term became familiar through the United States housing crisis of 2007–08, where subprime mortgages were packaged into securities whose ratings assumed a diversification of risk that did not survive a nationwide fall in house prices. "Debit history" is not a term in credit assessment at all.

Answer: D

Correct answer: Underwriting

Underwriting is the acceptance of a risk in return for a fee. In a securities issue the underwriter agrees to take up whatever part of the offering the public does not subscribe, so the issuer is assured of its money whatever the market does.

The same word covers the parallel activity in insurance, where the insurer accepts the risk of a loss in return for a premium. An initial public offering is the issue that may be underwritten rather than the act of underwriting it, and the other two options name software and analytical techniques.

Answer: A

Correct answer: Bank Rate

The bank rate is the rate at which the Reserve Bank lends to commercial banks, historically by rediscounting bills of exchange - which is exactly the mechanism the question describes.

It is a policy rate, announced by the RBI and signalling the stance of monetary policy. In current practice it is aligned with the marginal standing facility rate and functions mainly as a penal rate, the repo rate having become the operative policy rate. The overnight rate is a market rate rather than a rate the RBI charges, and monetary policy is the framework rather than a rate at all.

Answer: A

Correct answer: Basel III norms

Indian banks have been on the Basel III framework since 1 April 2013, phased in fully by 2019, and it is what governs their risk management today. Basel III followed the 2008 financial crisis and tightened the definition of capital, raised the minimum ratios, added a capital conservation buffer and a countercyclical buffer, and introduced leverage and liquidity requirements that Basel II had lacked. Basel I and II are superseded, and Solvency II is the corresponding framework for insurers, not banks.

Answer: B

Correct answer: Cash Reserve Ratio

The cash reserve ratio is the proportion of a bank's net demand and time liabilities that must be held as a balance with the Reserve Bank.

Two features distinguish it from the statutory liquidity ratio. It must be held in cash with the RBI, not in gold or securities, and it earns no interest - so it is a direct cost to the bank as well as a monetary instrument. Raising it withdraws liquidity from the system and lowering it releases liquidity, which is why it is used as a structural tool alongside the repo rate.

Answer: B

Correct answer: Minimum Alternate Tax

Minimum Alternate Tax is levied under Section 115JB of the Income Tax Act on companies whose taxable income, after exemptions and deductions, would otherwise leave them paying little or no tax despite showing healthy book profits. It is charged on the book profit instead, and the excess paid over the normal liability may be carried forward as MAT credit and set off in later years.

Answer: B

Correct answer: Net Demand & Time Liabilities

Net Demand and Time Liabilities is the base on which a bank’s cash reserve ratio and statutory liquidity ratio are calculated. Demand liabilities are those payable on demand, chiefly current and savings deposits; time liabilities are those payable after a period, chiefly fixed deposits; and the figure is net of interbank balances. Since the reserve requirements are a percentage of it, the definition of NDTL determines how much a bank must lock away.

Answer: C

Correct answer: Double-dip Recession

A double-dip recession is one in which the economy contracts, recovers briefly, and then contracts again before the recovery is established - a W shape rather than the usual V or U. It is more damaging than a single recession of the same total depth, because the second fall arrives when confidence, reserves and policy room have already been spent on the first. Deflation is a fall in the general price level, which is a different phenomenon.

Answer: B

At the end of 1974, the central bank governors of the G10 countries established a Committee on Banking Regulations and Supervisory Practices. The Committee was designed as a forum for regular cooperation between its member countries on banking supervisory matters.

Answer: C

Correct answer: Net Asset Value

Net Asset Value is the per-unit value of a mutual fund: the market value of everything the scheme holds, less its liabilities, divided by the number of units outstanding. It is computed at the end of each business day, and it is the price at which units are bought and sold. A rising NAV reflects the performance of the underlying portfolio, so it is the fund’s scorecard rather than a measure of how cheap its units are.