Banking and Financial Institutions Questions and Answers

Answer: D

Commercial banks' lending rates are usually higher than the bank rate.

The bank rate is the rate at which the central bank lends to or rediscounts bills for commercial banks. It is the cost at which banks can obtain funds from the RBI, so banks lend to their customers at a margin above it to cover their costs, risk and profit. When the bank rate rises, lending rates generally rise too.

For the same reason lending rates are not lower than the bank rate, and they are not unrelated to or unaffected by it, since the bank rate is a signal and a cost that feeds through to the rates banks charge.

Answer: C

Such banks are called unit banks.

Unit banking is a system in which each bank operates through a single office, with no branches, and serves a limited local area. It was traditionally common in the United States. Its advantages are local knowledge and independent management; its drawbacks are limited resources and inability to spread risk across regions.

It is contrasted with branch banking, as in India, where one bank works through many branches. Central banks are monetary authorities such as the RBI. 'Urban banks' usually means urban co-operative banks, and 'metro banks' is not a recognised category.

Answer: B

Money lent or borrowed for one day is call money.

In the Indian money market, banks lend surplus funds to each other to meet day-to-day shortfalls, including their reserve requirements. Funds lent overnight, for one day, are call money and the rate is the call rate.

Funds for 2 to 14 days are notice money, and funds for 15 days to one year are term money. Near money refers to highly liquid assets, such as time deposits or treasury bills, that can be turned into cash easily but are not money themselves.

Answer: A

The first Indian Governor of the RBI was C. D. Deshmukh.

Sir Chintaman Dwarkanath Deshmukh, an ICS officer, became Governor in August 1943, after the British Governors Sir Osborne Smith and Sir James Taylor, and served until 1949. He oversaw the bank's nationalisation in 1949 and later became Union Finance Minister.

Benegal Rama Rau (spelt Bengal in the paper) was Governor from 1949 to 1957, the longest tenure. R. K. Shanmukham Chetty was independent India's first Finance Minister, not an RBI Governor, and K. G. Ambegaonkar served briefly as acting Governor in 1957.

Answer: B

The capital of an RRB is shared with the sponsoring bank.

Regional Rural Banks were set up from 1975 under the Regional Rural Banks Act, 1976 to provide credit to small farmers, labourers and artisans in rural areas. Each RRB is sponsored by a commercial bank, and its issued capital is held by the Central Government (50 per cent), the sponsor bank (35 per cent) and the State Government (15 per cent).

The RBI regulates the banking system and NABARD supervises and refinances RRBs, but neither holds the share described. SBI is one of many sponsor banks, not the shareholder for every RRB.

Answer: B

Banks act as financial intermediaries.

A financial intermediary stands between those who have surplus funds and those who need funds. Banks accept deposits from savers, pool them, and lend them to borrowers such as businesses and households, transforming small, short-term, liquid deposits into larger, longer-term loans and bearing the risk in between. Mobilising savings and lending them as credit is exactly this role.

A capital market is the market for long-term securities, not a role played by a bank. A forex dealer buys and sells foreign currency. A lender of last resort is the central bank, which lends to banks in a crisis, not the commercial banks that lend to the public.

Answer: D

The incorrect statement is RBI is lender to the large industrial corporations.

The Reserve Bank of India does not lend to companies. Industrial and commercial borrowers obtain credit from commercial banks, financial institutions and the capital market; the RBI regulates and supports that system rather than taking part in it as a lender to firms.

The other three are its core functions. It is the bank of issue, with the sole right to issue currency notes other than one-rupee notes and coins. It is banker to the Central and State Governments, managing their accounts and public debt. And it is the bankers' bank: it holds the cash reserves of commercial banks, provides them credit and acts as lender of last resort.

Answer: C

Basel II is mostly concerned with the capital adequacy ratio.

The Basel II accord, issued by the Basel Committee on Banking Supervision in 2004, revised the rules on how much capital banks must hold against their risks. Its three pillars are minimum capital requirements (covering credit, market and operational risk, with capital of at least 8 per cent of risk-weighted assets), supervisory review, and market discipline through disclosure.

Non-performing assets are dealt with by income recognition and provisioning norms, which affect capital but are not the subject of the accord. The Central Vigilance Commission is an Indian anti-corruption body, and foreign direct investment is governed by investment policy, so neither is related to Basel II.

Answer: C

The risk not considered before venture capital financing is dividend risk.

A venture capitalist invests in young, unproven businesses, usually through equity, and expects to earn its return from capital gains when it exits by a sale or a public issue, not from regular dividends. Before investing, it therefore evaluates the risks that could make the venture fail: whether the product will work and be accepted (product risk), whether there is a market and how competitors will react (market risk), whether the technology is sound and will not be overtaken (technological risk), and the competence of the management.

Product, market and technological risk are all central to the appraisal. Dividend risk is not, since the investor does not expect dividends from a start-up in the first place.

Answer: A

It is known as a call option.

An option gives its holder a right, but not an obligation, to buy or sell an asset at a fixed price within a given period. A call option is the right to buy (to 'call' the securities from the seller); the buyer pays a premium and exercises the call only if the market price rises above the agreed price.

A put option is the opposite right, to sell (to 'put' the securities on the counterparty). A double option gives the holder the right either to buy or to sell, combining a call and a put. 'Option' alone is the general term and does not say which right was acquired.