money supply, banking & financial institutions section 1 Practice Questions Answers Test with Solutions & More Shortcuts

Question : 1

Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. Services rendered under microfinance is/are:

  1. Credit facilities
  2. Savings facilities
  3. Insurance facilities
  4. Fund transfer facilities
Select the correct answer using the codes given below the lists:

a) (i) & (iv) only

b) (ii) & (iii) only

c) (i) only

d) (i), (ii), (iii) & (iv)

Answer: (d)

Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services.

Microfinance includes microcredit (the provision of small loans to poor clients); savings and current accounts; microinsurance; and payment systems etc.

Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient

Question : 2

The acronym SRO, being used in the capital market for various market participants, stands for which one of the following?

a) Self Regulatory Organisations

b) Securities Roll-back Operators

c) Small Revenue Operators

d) Securities Regulatory Organisations

Answer: (a)

A self-Regulatory organization (SRO) is a nongovernmental organization that has the power to create and enforce industry regulations and standards.

The priority is to protect investors through the establishment of rules that promote ethics and equality.

Question : 3

In case of the recent Yes Bank crisis:

  1. RBI superseded the Board of ‘Yes Bank’ through RBI Act 1934
  2. RBI acted as ‘Lender of Last Resort’
Select the correct answer using the code given below:

a) (ii) only

b) Both (i) & (i)

c) (i) only

d) Neither (i) nor (ii)

Answer: (a)

When there is a liquidity crisis with a bank, then RBI acts as "Lender of last resort" and provides loans at a particular interest rate to the bank.

But when there is major mismanagement in the bank and there are chances of major default/bankruptcy, then RBI, in consultation with Govt. of India, can supersede the "Board of Directors" of banks in the public interest. (But RBI may not supersede the Board of PSU banks).

Once RBI supersedes the Board of Directors (management), then it appoints an "Administrator". This is done as per the "Banking Regulation Act 1949" Section 36ACA.

So, (i) statement is false as RBI supersedes a bank's Board under "Banking Regulation Act 1949" and not under RBI Act 1934

In case of the Yes Bank Crisis, RBI superseded the management of Yes Bank and it also acted as lender of last resort and provided a 90-day loan AT BANK RATE of 5.4% (at that time Bank Rate was repo plus 0.25%, which comes out as 5.15% + 0.25% = 5.4%), plus 3% (so basically RBI charged 5.4% + 3% = 8.4% as a penalty) to meet the immediate liquidity needs of the Yes Bank.

Under the Lender of Last Resort, RBI gives loans against eligible securities to financial institutions (Banks and NBFCs both) in emergencies.

Question : 4

Which of the following functions are part of the Reserve Bank of India (RBI) acting as Banker to Banks?

  1. Enabling banks to maintain their accounts with RBI for statutory reserve requirements
  2. Enabling settlement of interbank transfer of funds
  3. RBI provides short term loans and advances to banks
  4. Acting as lender of last resort
Select the correct answer using the code given below:

a) (i) & (ii) only

b) (i), (ii) & (iii) only

c) (i) only

d) All of the above

Answer: (d)

As a banker to the bank, RBI performs the following functions:

  1. RBI enables banks to open their (current) accounts with RBI for maintenance of statutory reserve requirements (CRR and may be SLR)
  2. RBI acts as a common banker for different banks to enable settlement of interbank transfer of funds
  3. RBI provides short term loans and advances to banks for specific purposes
  4. RBI acts as a lender of last resort may be in case of a bank run situation. (Bank Run is a situation that occurs when everybody wants to take money out of one’s bank account before the bank runs out of reserves.)

Question : 5 [SSC SO 2003]

Bank rate is that rate on which–

a) Central Bank of Country lends money to the commercial banks

b) Rural bank gives loan to cooperative societies

c) Any bank lends money to an individual

d) State Bank of India gives loan to the rural banks

Answer: (a)

The bank rate also referred to as the discount rate, is the rate of interest that the central bank charges on the loans and advances to a commercial bank. Repo (Repurchase) rate is the rate at which the central bank lends short-term money to the banks against securities.

A reduction in the repo rate will help banks to get money at a cheaper rate. The reverse repo rate is the rate at which the banks park surplus funds with the reserve bank, while the repo rate is the rate at which the banks borrow from the central bank.

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