Banking and Financial Institutions Questions and Answers

Answer: C

The first mutual fund scheme in India was introduced by the Unit Trust of India (UTI).

UTI was set up in 1963 under the Unit Trust of India Act, at the initiative of the Government of India and the Reserve Bank, to mobilise the savings of small investors. Its first scheme, Unit Scheme 1964 (US-64), was launched in 1964 and remained India's best-known mutual fund for decades. UTI held a monopoly until public sector banks and insurers were allowed to start mutual funds in 1987, and private funds came in 1993.

The Reserve Bank and the Government sponsored UTI but did not themselves launch the scheme, and SBI Mutual Fund, the first non-UTI fund, was started only in 1987.

Answer: D

It is operational risk.

The Basel Committee defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Human error, technical faults, breakdown of infrastructure and faulty systems are exactly these.

Exchange risk arises from movements in exchange rates; settlement risk is the risk that the other party fails to deliver when a transaction is settled; and gap risk comes from mismatches between assets and liabilities that reprice at different times.

Answer: C

The system is SWIFT.

The Society for Worldwide Interbank Financial Telecommunication, founded in 1973 and based in Belgium, provides a secure network through which member banks and financial institutions across the world send standardised, authenticated financial messages such as payment instructions.

RTGS and NEFT are domestic Indian fund transfer systems run by the RBI, which move money within India rather than carrying messages across the globe. FINFAST is not the global messaging network.

Answer: B

The instrument is the Liquidity Adjustment Facility (LAF).

Introduced by the RBI in 2000, the LAF lets banks borrow from the RBI through repo and park surplus funds with it through reverse repo. It is used to adjust day-to-day liquidity mismatches and to keep short-term money market rates within a corridor, which is the function described.

The Market Stabilisation Scheme absorbs more durable surplus liquidity, especially from capital inflows. The Credit Authorisation Scheme and Credit Monitoring Arrangement were selective controls over large loans to individual borrowers.

Answer: D

The balance should be paid to the legal representative of X, Y and Z.

When a joint account carries no survivorship mandate (such as 'either or survivor'), the deceased's share does not pass automatically to the other holders. On the death of X, the bank pays the balance jointly to the survivors Y and Z and the legal representatives of X, so that X's estate receives its share.

Paying Y and Z alone, or either of them, would require a survivorship clause, and paying X's legal representative alone would ignore the rights of the living account holders.

Answer: A

It is refinance.

Refinance is the support given by an apex institution to banks or institutions that have already lent to the end borrower. The primary lender is reimbursed, wholly or in part, for loans it has made, so the apex institution finances the credit portfolio a second time. NABARD's refinance to banks for agricultural loans and SIDBI's refinance for small industry loans are examples.

Supplementary, counter and demand based finance are not the terms for this secondary support to primary lenders.

Answer: C

Pre-mature payment of a term loan creates embedded option risk.

A borrower who may repay before maturity holds an option embedded in the loan. When interest rates fall, borrowers prepay and refinance more cheaply, so the bank loses the high-yielding asset and must reinvest at lower rates. The risk arising from such options is called embedded option risk.

Basis risk comes from imperfect correlation between rates on assets and liabilities, yield curve risk from changes in the shape of the yield curve, and mismatch or gap risk from repricing at different dates.

Answer: D

The one that is not a function of the financial system is social functions.

A financial system mobilises savings and channels them to investment (savings function), provides liquidity by letting assets be converted into money (liquidity function), and spreads and manages risk through insurance, diversification and derivatives (risk function). It also provides payment and information services.

Social functions are not among its standard functions.

Answer: B

This is a Right issue.

In a rights issue a company offers new shares to its existing shareholders in proportion to their present holdings (for example one new share for every four held), usually at a price below market. Shareholders may take up the offer or renounce it.

A public issue is offered to the general public, a bonus issue gives free shares out of reserves and raises no fresh capital, and a private placement sells securities to a selected small group of investors.

Answer: C

The paper's key is 'Y' in trust for 'X'.

A minor cannot make a binding contract with a bank, so a guardian must operate the account. Of the four styles, only (C) names both persons and shows the guardian acting for the minor: Y is the person who deals with the bank and X is the beneficiary. A plain 'X' Account or 'X' Account-Minor leaves out the guardian, and a plain 'Y' Account leaves out the minor and would make the money Y's own.

I could not confirm this style in a banking source. Current Indian practice usually opens the account in the minor's name, operated by the natural guardian, so the answer rests on the key and on the reasoning above.