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

Answer: (a)

Higher NPAs worsens the financial health of a bank. To tackle the NPA or bad assets problem, RBI has designed several mechanisms. An important among them is the Provisioning norms.

In banking lexicon, provisioning means to set aside or provide some funds to cover up losses if things go wrong and some of their loans turn into bad assets.

The banks need to provision some funds as a percentage of their loans/advances. For standard asset (which have not turned NPAs), the requirement of provisioning is very less (0.4%) but for NPAs, it may be quite high.

The provisioning coverage ratio is the prescribed percentage of funds to be set aside by the banks for covering the prospective losses due to bad loans –most probably from their profit. For example, if the provisioning coverage ratio is 70% for a particular category of loan, then banks have to set aside funds equivalent to 70% of those loans out of their profits.

Answer: (d)

Answer: (a)

Gresham’s law is an observation in economics that “bad money drives out good.”

More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation.

Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham’s law in the 19th century.

Answer: (d)

Islamic banking is a banking system that is based on the principles of Islamic law, also referred to as Shariah law and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and the prohibition of the collection and payment of interest by lenders and investors.

In order to earn money without charging interest, Islamic banks use equity-participation systems. This means that if a bank loans money to a business, the business pays back the loan without interest, but it gives the bank a share in its profits. If the business defaults on the loan or does not earn any profits, the bank does not receive any profit either.

The depositors put their savings in an Islamic bank and allow the bank to use this money, with the assurance that they would get the full amount back. The bank is not liable to pay interest to the savers. However, some banks do give a certain sum back to the account holder as profit accrued from their operations.

While an Islamic bank is a bank totally based on and runs with Islamic principles in mind, an "Islamic window" in a bank refers to conventional banks offering Islamic banking services (in addition to conventional banking services) through dedicated windows.

The RBI has proposed the opening of an "Islamic window" in conventional banks for the gradual introduction of Sharia-compliant banking in the country to ensure the financial inclusion of those sections of society that remain excluded due to religious reasons.

Answer: (c)

If there is inflation in the economy then it means the rupee is losing value with respect to goods and services.

Now, when the rupee loses value with respect to goods and services in the economy (and the only purpose of the rupee is to purchase goods and services in the economy) then anyone selling dollars and demanding rupees will now demand more rupees per unit of dollar and rupee will depreciate.

But if the rupee is depreciating, then it means the rupee is losing value with respect to a specific item i.e. dollar. That does not mean the rupee will lose value with respect to all the goods and services in the economy.

(Layman’s explanation: If the rupee is losing value with respect to onions means onion becoming costlier. That does not mean the rupee will lose value with respect to all goods and services, and prices of other goods and services will not increase.)