money supply, banking & financial institutions section 5 MCQ Questions & Answers Detailed Explanation

Answer: (c)

The type of organised sector of Indian money market are Call Money Market, Treasury Bill Market, Commercial Bill Market and Collateral loan market

Answer: (a)

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount.

In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

Answer: (d)

When there is a default in the debt market, everyone wants to sell the debt paper and hold cash which results in a shortage of liquidity and an increase/hardening of interest rates.

A liquidity crisis may also be caused if foreign portfolio investors are running out and selling their bond holdings in the Indian bond markets. To resolve the liquidity crisis, RBI may buy government bonds.

i.e. open market operations and pump liquidity in the economy.

Answer: (c)

Urban cooperative banks (UCB) are also called Primary cooperative banks and are under dual regulation of Central/State Governments and the RBI.

Though the Banking Regulation Act came into force in 1949, the banking laws were made applicable to cooperative societies only in 1966 through an amendment to the Banking Regulation Act, 1949. Since then there is a ‘duality of control’ over cooperative banks (urban and rural both) between the State Registrar of Cooperative Societies/Central Registrar of Cooperative Societies and the Reserve Bank of India.

The Reserve Bank regulates and supervises the banking functions of UCBs/StCB/DCCB under the provisions of Section 22 and 23 of Banking Regulation Act, 1949 and the non-banking aspects like registration, management, administration and recruitment, amalgamation and liquidation are regulated by the State/ Central Governments.

PACS and long-term credit co-operatives (SCARDB and PCARDB), which are basically rural cooperative banks, are outside the purview of the Banking Regulation Act, 1949 and are hence not regulated by the Reserve Bank.

Cabinet approved an Amendment on 5th Feb 2020 in Banking Regulation Act 1949 and Govt. is planning to bring management functions also of UCB/StCB/DCCB under RBI but not administrative.

Urban Cooperative Banks are under the supervision of RBI but supervision of all rural cooperative banks including StCB/DCCB has been delegated to NABARD by RBI.

For a detailed understanding, you can refer to the book on Indian Economy by Vivek Singh.

Answer: (a)

Hot money is a term that is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/ or anticipated exchange rate shifts.

These speculative capital flows are called "hot money" because they can move very quickly in and out of markets, potentially leading to market instability.

Answer: (d)

Scheduled Commercial banks are mandated to give a portion (40%) of their total credit to the priority sectors. Priority sector guidelines do not lay down any preferential rate of interest for priority sector loans.

Typically, these are small value loans to those sectors of the society/economy that impact large segments of the population and weaker sections, and to the sectors which are employment-intensive such as agriculture and small enterprises.

The following have been declared as the priority sectors by RBI:

1. Agriculture,
2. Education,
3. Housing,
4. Micro, Small & Medium Enterprises (MSME),
5. Export Credit,
6. Social Infrastructure (Schools, hospitals etc),
7. Renewable Energy and
8. Others (weaker sections like artisans, village cottage industries, SC/ST, Self Help Groups etc.)

RBI has classified loans to food & agro-based processing units and Cold Chain under agriculture activities for Priority Sector Lending (PSL).