money supply, banking & financial institutions section 11 MCQ Questions & Answers Detailed Explanation

Answer: (b)

The objectives of setting up payment banks are to promote financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganized sector entities and other users.

The following will be the scope of activities for payment banks:

1. Acceptance of demand deposits (savings and current) but no time deposits
2. No lending activity
3. Issuance of ATM/debit cards but not credit cards
4. Payments and remittance services through various channels
5. Acting as Banking Correspondent (BC) of another bank
6. Distribution of simple financial products like mutual funds/insurance products, etc.

Payment banks will be required to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The total deposits of the public must be invested in government securities and/ or deposited in other commercial banks (i.e. no lending is allowed).

This makes the public deposit in payment banks safe. Payment banks will be set up as differentiated banks for serving niche interests. (Differentiated banks have restrictions either in geography or in operation or both. Opposite of differentiated banks are universal banks).

Answer: (c)

Answer: (b)

Through Masala bonds money is raised from abroad in foreign currency but the bonds are denominated in Rupee. Masala Bonds are a kind of ECB where the bonds are issued outside India but denominated in Indian Rupees, rather than the local currency. Masala is an Indian word and it means spices.

Unlike dollar bonds, where the borrower takes the currency risk, Masala bond makes the investors bear the risk. ECB MASALA Bonds USD 1 = Rs. 70 (2019) USD 1 Bond was issued to foreign investors and the borrower (Indian company) got USD 1 for one year.

Money is raised in foreign currency and the borrower issued a Dollar-denominated bond to the foreign investor. Rs. 70 Bond was issued to foreign investors and the borrower (Indian company) got USD 1 (as the rupee-dollar rate was USD 1=Rs.70) for one year.

Money is raised in foreign currency but the borrower issued Rupee denominated bond to the foreign investor. USD 1=Rs. 80 (2020) In 2020, the borrower needs to return USD 1 to the foreign investor and for that he will have to spend Rs. 80 to get USD 1.

The conversion/exchange risk is of the borrower (Indian company). In 2020, the borrower needs to return Rs. 70 to the foreign investor rather than USD 1.

The conversion/exchange risk from Rupee to Dollar is of the foreign investor.

Answer: (a)

Answer: (c)

“Teaser Loans” is the unofficial term used to describe housing loans that carry ultra-low fixed rates in the initial years, but charge market-linked rates thereafter.

These products were first launched in 2009-10 by SBI. This scheme was termed a ‘teaser loan’ scheme by market players because it lured the borrower with low rates in the initial years, only to bump up the rates later.

Home loans in India face a very low incidence of default, even amid NPAs. But RBI was worried because in case of a teaser home loan, offering borrowers ultra-low rates in the first few years may tempt them to take on a far bigger housing bet than they can afford. In a rising rate cycle, a transition from a fixed to a floating rate can well throw a salary earner's EMI calculation out of their range.

While such teaser products are not banned by the regulator, the standard asset provisioning requirement is higher for such loans. For normal home loans, the standard asset provisioning is 0.4% but for teaser loans, it is 2%. RBI, to discourage such products, had increased the provisioning by five times for such loans since these loans are perceived as riskier.

Answer: (d)