money supply, banking & financial institutions section 8 Practice Questions Answers Test with Solutions & More Shortcuts

Question : 1 [UPPCS (Mains) 2007]

Scheduled bank is a bank which is

a) Not Nationalised

b) Included in the second schedule of RBI

c) Based in foreign country

d) Nationalised

Answer: (b)

Question : 2

Which of the following statements are true regarding the term "Crowd funding"?

  1. It is a method of financing through the internet/social media
  2. Small amounts of money are raised from a large number of investors
  3. It has the potential to increase entrepreneurship
  4. It is also referred to as marketplace financing
Select the correct answer using the code given below:

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

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

c) (i) & (ii) only

d) All of the above

Answer: (d)

Crowd funding or marketplace financing refers to a method of funding a project or new venture through small amounts of money raised from a large number of people, typically through a portal (internet/social media) acting as an intermediary.

Crowd funding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together.

Crowd funding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners.

Question : 3

Consider the following statements regarding ‘Additional Tier 1 bonds’:

  1. They are part of capital under Basel III norms
  2. They are perpetual in nature and have no maturity period
  3. They can be written down in case of bank failure
Select the correct answer using the code given below:

a) (iii) only

b) (i) & (iii) only

c) (ii) only

d) All of the above

Answer: (d)

Additional Tier 1 Bonds (AT-1) bonds have several unusual features lurking in their fine print, which make them very different from normal bonds.

One, these bonds are perpetual and carry no maturity date. Instead, they carry call options that allow banks to redeem them after five or 10 years. But banks are not obliged to use this call (redeem) option and can opt to pay only interest on these bonds for eternity.

Two, banks issuing AT-1 bonds can skip interest payments for a particular year or even reduce the bonds’ face value without getting into hot water with their investors, provided their capital ratios fall below certain threshold levels. These thresholds are specified in their offer terms.

Three, if the RBI feels that a bank is tottering on the brink (called point of non-viability) and needs a rescue, it can simply ask the bank to cancel its outstanding

AT-1 bonds without consulting its investors. AT-1 bonds are risky but people invest as it offers a higher interest rate. In case of a Yes Bank crisis, AT-1 bonds worth Rs. 8415 were written down in March 2020. (This means now investors will not get any interest or principal in future).

Under Basel III norms, banks need to have an 11.5% capital requirement in which 9.5% in Tier 1 capital and 2% is Tier 2 capital. Out of 9.5% Tier 1 capital, Additional Tier 1 capital (AT-1 bonds) can be 1.5%.

Question : 4

Consider the following statements with regard to Statutory Liquidity Ratio (SLR) :

  1. To meet SLR, Commercial banks can use cash only.
  2. SLR is maintained by the banks with themselves.
  3. SLR restricts the banks leverage in pumping more money into the economy.
Which of the statements given above is/are correct?

a) 1 and 3

b) 1, 2 and 3

c) 2 and 3

d) only 2

Answer: (c)

SLR used by bankers indicates the minimum percentage of deposits that the banks have to maintain in the form of gold, cash or other approved securities.

Question : 5

Consider the following statements regarding an economy facing deflation:

  1. Companies defer their investments
  2. People defer their expenditures
  3. Demand decreases
  4. Unemployment increases
Select the correct answer using the code given below:

a) (iii) only

b) (iii) & (iv) only

c) (i) & (ii) only

d) All of the above

Answer: (d)

When the economy is facing deflation, that means prices are decreasing. In such a situation, whatever I can buy today in Rs. 100, the same Rs. 100 is able to purchase more in the next year.

This leads to postponement of purchase decisions by the people and the demand in the economy decreases. When the demand decreases, companies defer their production and investment decisions which lead to an increase in unemployment.

So, all the statements are correct.

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