Unit 7 Banking and Financial Institutions PYQ’s 17th Oct 2020 Shift 1

The correct answer is – (C), (D) only

A merger is an agreement that unites two existing companies into one new company. Mergers are a way for companies to expand their reach, expand into new segments, or gain market share. A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity.

Key Takeaways

ICICI Bank:

1. ICICI Bank was established by the Industrial Credit and Investment Corporation of India (ICICI), an Indian financial institution, as a wholly-owned subsidiary in 1994 in Vadodara.
2. The parent company was formed in 1955 as a joint-venture of the World Bank, India’s public-sector banks, and public-sector insurance companies to provide project financing to the Indian industry.
3. The bank was founded as the Industrial Credit and Investment Corporation of India Bank before it changed its name to ICICI Bank.
4. The parent company was later merged with the bank.

IDBI Bank:

1. The Industrial Development Bank of India (IDBI) was established in 1964 under an Act of Parliament as a wholly-owned subsidiary of the Reserve Bank of India.
2. In 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting, and developing industry in India.

Important Note

• In September 2003 the company diversified its business domain further by acquiring the entire shareholding of Tata Finance Ltd in Tata Home finance Ltd.
• The fully-owned housing finance subsidiary was renamed ‘IDBI Home Finance Ltd‘.
• In October 2004 the company was transformed into a banking company to undertake all kinds of banking activities while continuing to play their secular Development Financial Institution role.
• Also, they changed their name to the Industrial Development Bank of India Ltd.
• In 2005 Industrial Development Bank of India Ltd merged their banking subsidiary IDBI Bank with themselves.

Thus, option 3 is the correct answer.

The correct answer is – Is the rate at which the RBI lends to Banks in case of short maturity

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in the case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Key Takeaways

In the event of inflation, central banks increase the repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Thus, option 3 is the correct answer.

Additional Notes

Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market. The banks benefit from it by receiving interest for their holdings with the central bank.

During high levels of inflation in the economy, the RBI increases the reverse repo. It encourages the banks to park more funds with the RBI to earn higher returns on excess funds. Banks are left with lesser funds to extend loans and borrowings to consumers.

The correct answer is – (C), (D) (A), (B), (E)

A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

Key Points

To arrange the initiatives taken by the Government of India to tackle Non-Performing Assets (NPAs) in their ascending order of chronology, we need to understand the timeline of each initiative:

1. The Debt Recovery Tribunals (DRTs): Established in 1993 under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
2. Corporate Debt Restructuring (CDR): Introduced in 2001 as a voluntary non-statutory mechanism.
3. Credit Information Bureau (CIBIL): Set up in 2000, India’s first credit information company.
4. Compromise Settlement: A method employed for settlement of NPAs through compromise or negotiated settlements.
5. SARFAESI Act: The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, enacted to allow banks and financial institutions to auction properties (residential and commercial) to recover loans.

The correct answer is – (A), (B), (C) only

IMPS (Immediate Payment Service):

• It is an inter-bank electronic funds transfer service where transactions can be initiated online through net banking or mobile phones.
• The service is available 24×7 throughout the year including bank holidays.
• It is managed by the National Payments Corporation of India (NPCI) through its existing NFS(National Financial Switch).
• IMPS is open for use 24 hours a day, 7 days a week, including Sundays and bank holidays.
• So users need not wait for the banking hour of online transfer and if the amount is to be transferred urgently, IMPS is the best mode.
• Some banks charge a nominal fee for using IMPS depending on the amount to be transferred.
• IMPS is instant and in real-time and unlike RTGS and NEFT, your order is processed as soon as you initiate it, rather than being bundled with other transactions.

Key Takeaways

Objectives of IMPS

1. Immediate payment service facilitates bank customers to use their phones for accessing their bank accounts and to carry out an online money transfer.
2. It makes payment simpler just with the mobile number and MMID (mobile money identifier) of the Receiver.
3. It also serves the goal of the Reserve Bank of India (RBI) in interbank electronic fund transfer services.
4. Immediate payment service aims to build the foundation for a full range of cell phone-based Banking services.
5. It is beneficial where instant payments are a matter of concern.

Thus, option 1 is the correct answer.

The correct answer is – (A), (B), (C), (D) only

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

Key Takeaways

NBFC is defined as a company registered under the Companies Act, 2013 and also under the RBI act 1934 under section 45-IA. These type of companies provides banking services without holding any banking license.

NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:

i. NBFC cannot accept demand deposits;

ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves;

iii. the deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.

Thus, option 2 is the correct answer.