03 September 2022

Q1. Which of the following statements are correct:

1. RBI supervises the credit activities of lenders in the formal as well as informal sector
2. Banks have to maintain a minimum cash balance out of the deposits they receive
3. Banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.

Select the correct answer using the code given below:

1. 1 and 2 only
2. 1 and 3 only
3. 2 and 3 only
4. 1, 2 and 3

C – Explanation:

The Reserve Bank of India supervises the functioning of formal sources of loans. For instance, we have seen that the banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors that the banks actually maintain the cash balance. Similarly, the RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc. There is no organisation which supervises the credit activities of lenders in the informal sector.

Q2. Which of the following statements are correct with respect to ‘Systematically Important banks (SIBs)’:

1. Domestic SIBs are identified by BCBS (BASEL Committee on Banking Supervision).
2. HDFC, SBI and ICICI are recognized as SIBs in India.

Select the correct answer from the code below

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2

B – Explanation:

Systematically Important Banks (SIBs):

• SIBs are perceived as certain big banks in the country/world. They enjoy a huge customer base and also engage in cross sector activities (insurance/pension). They are perceived as ‘Too Big to Fail (TBTF)’.
• As they command such a huge consumer base as well have NBFC subsidiary therefore they have expectation of government support at the time of distress. Due to this perception these banks may indulge in reckless practices.
• There are two types of SIBs:
• Global SIBs; the identified by BCBS (BASEL Committee on Banking Supervision)
• Domestic SIBs; by central Bank of the country
• RBI has identified HDFC as Domestic SIB, Earlier, RBI has identified SBI and ICICI as Domestic SIBs.

Q3. Consider the following statements with respect to the Prompt Corrective Action (PCA) and choose the correct ones:

1. It is the initiative of Finance Ministry to put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled.
2. It allow the regulator to place certain restrictions such as halting branch expansion

Select the correct answer using the code below

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2

B – Explanation:

Prompt Corrective Action (PCA):

• To ensure that banks don’t go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled.
• The process or mechanism under which such actions are taken is known as Prompt Corrective Action, or PCA.
• The PCA framework is intended to encourage banks to restrict certain riskier activities and focus on conserving capital so that their balance sheets can become stronger.
• Role of Regulator under PCA norms
• PCA norms allow the regulator to place certain restrictions such as halting branch expansion and stopping dividend payment. It can even cap a bank’s lending limit to one entity or sector.
• Other corrective actions that can be imposed on banks include special audit, restructuring operations and activation of recovery plan.
• Banks’ promoters can be asked to bring in new management, too. The RBI can also supersede the bank’s board, under PCA.
• Why the need for PCA?
• As the financial health of banks had deteriorated over the last 3-4 years, there was a search for appropriate supervisory strategies to avoid bank failures as they can have a destabilising effect on the economy.
• To avoid such situation, the Reserve Bank of India (RBI) revises norms for prompt corrective action and promptly imposed those norms on a couple of public sector lenders.

Q4. Which among the following is not a pillar of Basel III?

1. Minimum capital standards
2. Supervisory review
3. Market discipline
4. Consolidation of assets

D – Explanation:

• The Basel III framework is based on 3 components called 3 pillars, which include
• Minimum capital standards, Pillar
• Supervisory review and Pillar

Q5. Which of the following are the examples of Tier I capital:

1. Banks own capital
2. Provisions held for standard assets
3. Long term bonds

Select the correct answer using the code below

1. 1 and 2 only
2. 2 and 3 only
3. 1 and 3 only
4. 1, 2 and 3

B – Explanation:

Capital of banks being defined as the banks own capital and reserves as the capital (Tier I) and also a component of supplementary capital (Tier II) is available to banks but less readily like the revaluation of assets, provisions held for standard assets and long term bonds raised by the banks (Subordinated debts).

Q6. Digital transactions bring in better transparency, scalability and accountability however it suffers from fraud. Which of the following statement defines the term skimming, a form of plastic fraud?

1. It is a process where genuine data on a card’s magnetic stripe is electronically copied onto another.
2. It occurs when a new or replacement card is stolen from the mail, never reaching its rightful owner.
3. It occurs when merchant employees work with fraudsters to defraud banks.
4. It occurs when fraudsters clone an entire site or just the pages from which order is placed.

A – Explanation:

Skimming: Most cases of counterfeit fraud involve skimming, a process where genuine data on a card’s magnetic stripe is electronically copied onto another. Skimming is fast emerging as the most popular form of credit card fraud. Employees/cashiers of business establishments have been found to carry pocket skimming devices, a battery- operated electronic magnetic stripe reader, with which they swipe customer’s cards to get hold of customer’s card details. The fraudster does this whilst the customer is waiting for the transaction to be validated through the card terminal. Skimming takes place unknown to the cardholder and is thus very difficult, if not impossible to trace. The details obtained by skimming are used to carry out fraudulent card-not- present transactions by fraudsters. The cardholder is unaware of the fraud until a statement arrives showing purchases they did not make.

Q7. Referring to the digital economy following initiatives for establishing cashless society have been taken. Consider the following statements related to it:

1. Digi Shala TV channel is launched by Ministry of Information & Broadcasting.
2. The NITI Aayog has constituted Chandrababu Naidu committee on the promotion of cashless society.
3. The Ministry of Electronics and Information Technology launched the DigiDhan Campaign.

Which of the above stated initiatives are correct?

1. 1 and 3 only
2. 1 and 2 only
3. 2 and 3 only
4. All

C – Explanation:

• The Union Ministry of Electronics and Information Technology (MeitY) has launched a TV channel named ‘DigiShala’ to promote cashless transactions. The channel was launched as part of the ‘Digidhan’ campaign which aims to spread awareness about digital transactions.
• The NITI Aayog has constituted a 13 member Committee chaired by Chandrababu Naidu on promotion of cashless society and digital economy to promote financial inclusion, transparency and healthy financial ecosystem nationwide. To give a boost to adoption of digital payments systems by people at grass root levels and small businesses.
• Benefits of digitization of payments:
• Enhances financial inclusion by overcoming physical barriers.
• Enhances access to financial services rapidly.
• Enables formalization of all financial transactions.
• Increases transparency and plugging leakages from the system.

Q8. A perpetual bond:

1. has no fixed interest rates
2. has no fixed maturity
3. has no fixed underlying assets

Which among the above is / are correct?

1. 1 and 2 only
2. 2 only
3. 2 and 3 only
4. 1, 2 and 3

B – Explanation:

Perpetual Bonds do not have any maturity date and are hence perpetual. Since they are never redeemed, such debt instruments give the issuers the comfort that equity capital offers in their capital base. Hence treated as equity by issuers, particularly the banks. Even regulators allow them to treat such bonds as a part of a bank’s tier-I capital, which traditionally comprise equity instruments. (While tier-II capital of a bank comprises debt instruments). But on the flip side, unlike equity, they have to be serviced perpetually by way of paying interest to the subscribers of such bond. Hence, option (b) is the correct answer.

Q9. Which among the following is / are asset(s) for a bank?

1. Cash Deposits of Customers
2. Investments made by Bank’s customers in its financial Products
3. The loans disbursed by Bank to its customers

Choose the correct option from the codes given below:

1. 1 and 2 only
2. 2 and 3 only
3. 3 only
4. 1 and 3 only

C – Explanation: The loans disbursed by Bank to its customers are assets for a bank.

Q10. What is sold and purchased during Open Market Operations by RBI?

1. Government Securities
2. Commercial Papers
3. Certificates of Deposits

Choose the correct option from the codes given below:

1. 1 only
2. 1 and 2 only
3. 2 and 3 only
4. 1, 2 and 3

A – Explanation:

Commercial paper is a money-market security issued (sold) by large corporations to obtain funds to meet short-term debt obligations. A certificate of deposit is issued by a bank to a person depositing money for a specified length of time at a specified rate of interest. Hence, option (a) is the correct answer.