Unit 7 Banking and Financial Institutions PYQ’s 17th Oct 2020 Shift 2

The correct answer is – Identifying fraudsters copying vital information from credit cards

Skimming” in e-banking refers to Identifying fraudsters copying vital information from credit cards

Key Points

• Skimming is an illegal practice used by identity thieves to capture credit card information from a cardholder surreptitiously.
• Fraudsters often use a device called a skimmer that can be installed at gas pumps or ATM machines to collect card data.
• Some machines act like point-of-sale technology. An acquired card is swiped, and a touchpad allows the user to enter a security code.
• Card users are warned to keep their cards in their sight at all times and to cover the pin pad when inputting security codes at ATMs.

The correct answer is – Absorb liquidity

Reverse Repo Rate is a tool used by the Reserve Bank of India primarily to absorb liquidity.

Key Points

• The Reverse Repo Rate is an important Monetary Policy tool used by the Reserve Bank of India (RBI) to control liquidity and inflation in the economy.
• Under the Reverse Repo Rate, banks deposit excess funds with the RBI and earn interest for it.
• Reverse Repo rate is the rate at which the Reserve Bank of India borrows funds from the commercial banks in the country.
• In other words, it is the rate at which commercial banks in India park their excess money with the Reserve Bank of India usually for the short-term.
• This is another financial instrument used by the RBI to control the supply of money in the nation.
• In case the RBI is falling short on money, they can always ask commercial banks to pitch in with funds and offer them great reverse repo rates in return.
• This gives banks and other financial institutions the opportunity to earn a profit on excess funds.
• The current Reverse Repo Rate of 2022 is 3.35%.

The correct answer is – A, B and D only

Following aptly aims to alleviate the financial stress of the borrowers at bottom of the pyramid by reducing their cost of credit in the covid – 19 pandemic

A. A generic loan moratorium to the borrowers

B. Two percent interest subvention on Sishu loans under the Pradhan Mantri Mudra Yojana

D. Financial incentives to Farmer Producer Organisations (FPOs) and Micro, Small and Medium Enterprises (MSMEs)

Key Points

A 360-day tenor special repo facility, and a credit guarantee scheme for exporters, farmers, and SMEs to facilitate the implementation of the government’s stimulus packages

The government decided to provide a 2 percent interest subvention to borrowers under the ‘Shishu’ category of the flagship Pradhan Mantri MUDRA Yojana (PMMY). Under the Shishu category, collateral-free loans of up to Rs 50,000 are given to beneficiaries. These loans are classified as MUDRA loans under PMMY.

The government announced a Rs 15,000 crore infrastructure development fund with an interest subsidy scheme to promote investment by private players and MSMEs in dairy, meat processing, and animal feed plants, a move which is expected to create 35 lakh jobs.

Important Points

In the official paper, this question remains canceled and marks awarded to all candidates appeared in the test.

The correct answer is – A, B and D only

Basel III is a list of comprehensive reforms whose goal is to strengthen the regulation, supervision, and risk management of the banking sector. Basel III framework is built upon the Basel I and Basel II framework.

Key Points

Pillars of Basel III accord:

• Pillar 1 – Enhanced Minimum capital and liquidity requirements.
• Pillar 2 – Enhanced Supervisory review process of firm-wide risk management and capital planning.
• Pillar 3 – Enhanced Risk disclosure and market discipline.

Therefore, the three mutually reinforcing pillars of Basel-III capital regulations are based upon Minimum capital standards, Supervisory review of capital adequacy, and Market discipline.

Additional Information

Regulatory elements of Basel III:

• Higher Tier 1 and Tier 2 capital requirements – this serves as a buffer to absorb shocks during a financial crisis.
• Capital conservation buffer – this is mandatory additional capital that is required to behold over and above its minimum capital requirement.
• Counter critical measures – there are regulations to deal with cyclical changes in the balance sheet of banks.
• Liquidity standards – Liquidity coverage ratio and Net stable funding ratio are the two liquidity standard ratio mandated.
• Capital leverage ratio – this is used to determine the capital adequacy of the banks and also puts a constraint on how banks may leverage their capital.

The correct answer is – A, B and C

A. Provisioning of collateral-free automatic loans worth Rs. 3 lakh crores

B. Provision of 100% credit guarantee coverage to banks and NBFCs on principal and interest for loans to NBFCs

C. Redefined MSMEs to include both investment and turnover criteria

These 3 Statements are correct.

Key Points

• The package announced by the government includes INR 3 trillion for collateral-free loans to MSMEs of four-year tenure with no payments due for one year.
• The government will offer a 100 percent credit guarantee cover on ₹3-lakh crore worth of loans that banks and non-banking finance companies (NBFCs) are expected to give to businesses, including micro, small and medium enterprises (MSMEs), which have been badly hit due to the pandemic.
• Union Cabinet has approved the revised new definition of the MSME. The MSMEs have been redefined on the basis of investment limit and turnover size. The Medium Units will now be defined as companies with up to Rs 50 crore investment and turnover of Rs 250 crore.
• The Government has informed the Supreme Court that loans up to ₹2 crores taken by individuals and Micro, Small, and Medium Enterprises (MSMEs) will be eligible for a waiver of compound interest during the six-month moratorium period, i.e., March-August 2020. Hence point E is incorrect as there is the only waiver of interest and not the principal.

The correct answer is – A, B and C only

Capital adequacy ratio (CAR) is the ratio of a bank’s capital in relation to its risk-weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

Key Points

CAR is measured as:

• CAR = [Tier 1 + Tier 2 + Tier 3 (Capital funds)] / Risk weighted assets.
• The risk-weighted assets take into consideration credit risk, market risk, operational risk.

Therefore, in order to calculate the capital adequacy ratio, the banks are required to take into consideration credit risk, market risk, operational risk.

Additional Information

Credit risk is a possibility of loss due to the borrower’s failure to repay a loan or meet contractual obligations.

Market risk is a possibility of loss due to changes in the market sector.

Operational risk is a possibility of loss due to inadequate or failed internal processes, control, system, people, or external events.

Important Points

The Basel III norms stipulated a CAR of 8%.

However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9%, and Indian public sector banks are required to maintain a CAR of 12%.

The correct answer is – A and R both are correct and R is the right explanation of A

Key Points

Credit market:

• The credit market was characterized by credit controls and direct lending.

• Credit markets perform the critical function of intermediation of funds between savers and investors and improve the allocative efficiency of resources.
• Banks, which are major players in the credit market, play an important role in providing various financial services and products, including hedging of risks.
• Credit markets in developing countries, in particular, play an important role, where apart from the industry, agriculture is also an important segment of the economy.
• Besides, there are also a large number of small and medium enterprises in the industrial and service sectors, which are not able to access the capital market and have to depend on the credit market for their funding requirements.
• Thus, the importance of banks and other lending institutions in developing countries can hardly be overemphasized.
• Later, various loans and restrictions were gradually phased out and the Reserve Bank of India has gradually relaxed various controls in the credit market.

• Agricultural credit is being rendered by all banking institutions like scheduled commercial banks, regional rural banks (RRBs), and cooperative institutes.
• The agricultural credit flow has increased consistently over the years exceeding the target set for each fiscal.
• Also, every bank has given importance to financing SMEs in its strategic growth plan because SMEs are a fast-growing sector in the Indian economy.
• Thus, credit flows to SME sectors have increased as well in recent years.

Therefore, statements A and R both are correct and R is the right explanation of A.

The correct answer is – a-iv, b-iii, c-i, d-ii

Below is the explanation of different types of banking:

1. Relationship banking is a strategy used by banks to offer a variety of different products, strengthen customer loyalty, and generate additional revenue. Small, mid-sized, and large money center banks all use relationship banking strategies.
2. Merchant banking is a combination of banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial, and legal matters. Consultancy means to provide advice, guidance, and service. It helps a business person to start a business. It helps to raise (collect) finance.
3. Indigenous bankers constitute the ancient banking system of India. According to the Indian Central Banking Enquiry Committee, an indigenous banker or bank is defined as an individual or private firm which receives deposits, deals in hundies, or engages itself in lending money.
4. Development banks are financial institutions that provide long-term credit for capital-intensive investments spread over a long period and yielding low rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.

Therefore, the correct match is:

Hence Option 3 is the correct answer.

The correct answer is – Investment intermediary

Key Points

• From the first sentence of the passage, ‘A mutual fund is a special type of investment institution which acts as an investment conduit.‘ which indicates that a mutual fund is an investment intermediary.
• Conduit – channel, intermediary.

Hence, the correct answer is ‘ Investment intermediary’

The correct answer is – Trustee

Key Points

• From the passage ‘The trustees of the mutual fund hold its property for the benefit of unit-holders. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of the SEBI regulations by the mutual fund.’ it is clear that trustees monitor the compliance with SEBI regulations.
• Sponsor – The trust is established by the sponsor who is like the promoter of a company.
• AMC – The AMC manages the funds by making an investment in various types of securities
• Custodian – The Custodian holds the securities of the various schemes of the mutual fund in its safe custody.

Hence, the correct answer is ‘Trustee.’

The correct answer is – Promoter of a company

Key Points

• From the passage ‘The trust is established by the sponsor who is like promoter of a company.’ clearly says that a sponsor is someone who is a promoter of the company.
• Trustees – They monitor the performance and compliance of the SEBI regulations by the mutual fund.
• AMC – The AMC manages the funds by making an investment in various types of securities
• Custodian – The Custodian holds the securities of the various schemes of the mutual fund in its safe custody.

Hence, the correct answer is ‘Promoter of a company.’

The correct answer is – Various types of securities

Key Points

• From the passage ‘The AMC manages the funds by making an investment in various types of securities’ it is clear that Asset Management Company (AMC) manages the funds by investing funds in various types of securities.
• Trustees – They monitor the performance and compliance of the SEBI regulations by the mutual fund.
• Sponsor – The trust is established by the sponsor who is like the promoter of a company.
• Custodian – The Custodian holds the securities of the various schemes of the mutual fund in its safe custody.

Hence, the correct answer is ‘Various types of securities.’

The correct answer is – Depository

Key Points

• From the passage ‘A mutual fund is set up in the form of a trust which has (i) a sponsor, (ii) trustee, (iii) Asset Management Company (AMC) and (iv) custodian.’ which indicates that the sponsor, trustee, Asset Management Company (AMC) and custodian together form a trust.
• The ‘depository’ is not mentioned in the passage, Hence it cannot be a part of the trust.

Hence, the correct answer is ‘Depository’.