money supply, banking & financial institutions section 2 MCQ Questions & Answers Detailed Explanation

Answer: (c)

The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for the resolution of complaints relating to certain services rendered by banks.

The Banking Ombudsman Scheme was introduced under Section 35 A of the Banking Regulation Act, 1949 by RBI with effect from 1995.

Answer: (b)

Answer: (d)

RBI comes to the rescue of a bank that is solvent (has not gone bankrupt) but faces temporary liquidity (funds) problems by supplying it with much-needed liquidity when no one else is willing to extend credit to that bank.

RBI extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of a bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and thus on the economy.

Answer: (d)

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. (G-Secs are issued through auctions conducted by RBI.

Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. (Govt. issues only debt securities). There are four kinds of government securities.

Government Securities (G-Sec)

1. Treasury Bills
2. Cash Management Bills
3. Dated Securities
4. State Dev. Loans

SDLs are allowed to be kept under SLR by banks. SDLs have a maturity of more than one year. In terms of Sec. 21A (1) (b) of the Reserve Bank of India Act, 1934, the RBI may, by agreement with any State Government undertake the management of the public debt of that State.

Accordingly, the RBI has entered into agreements with 29 State Governments and one Union Territory (UT of Puducherry) for management of their public debt.

Answer: (c)

A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price. Supply shocks can be negative, resulting in a decreased supply, or positive, yielding an increased supply; however, they're often negative.

A supply shock inflation is caused because of the problem (negative supply shock) in the supply of goods and services rather than a change in demand.

If the exports from India increase because foreigners purchased more Indian products then it may result in a shortage in supply of that product in the domestic economy resulting in supply shock inflation.

Because of increased government expenditure, more money reaches the public resulting in increased demand and hence demand-pull inflation.

If there is more money/credit creation in the economy then it results in higher demand in the economy resulting in demand-pull inflation.

Answer: (d)

NBFCs rely on short-term financing like commercial papers to fund long-term investments (long term loans to businesses). So, the tenure of liability (the commercial papers issued by NBFCs) is short and the tenure of assets (loans given by NBFCs) is long. This is called Asset Liability Mismatch (ALM).

So, NBFCs are required to refinance these commercial papers at short frequencies of a few months. The frequent repricing of loans/advances (as they need to be raised again and again and interest rate keeps on changing in the market) exposes NBFCs to the risk of facing higher financing costs, and in the worst case, credit rationing. Such refinancing risks are referred to as rollover risks.

Credit rationing is the limiting by lenders of the supply of additional credit to borrowers who demand funds, even if the latter are willing to pay higher interest rates.