money supply, banking & financial institutions section 5 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (b)

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).

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: (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)

Securitization is the process of pooling and repackaging financial assets (like debt papers generally) into marketable securities that can be sold to investors.

For example, an NBFC has given loans to different companies. Now, these different loan papers are an asset for NBFC. Suppose all the loan papers is of Rs. 100 crores.

Now, one lakh shares have been created out of this asset worth Rs. 100 each and these shares can be sold to different people. NBFCs will get immediate liquidity/money and the share price will vary depending on whether the loan is being serviced/repaid properly or not.

If the companies to whom NBFC gave the loan are not returning the principal or interest, the price of security/share will fall.

Banks/NBFCs can sell these loan papers directly (“Direct Assignment" with certain restrictions) or they can also create security (“Securitization”) out of this loan paper and sell.

Both routes are adopted when they want liquidity. In other words, basically, securitization involves repackaging less liquid assets into saleable securities.