Unit 7 Banking and Financial Institutions PYQ’s 25th Dec 2021 Shift 1

The correct answer is option 4.

Important Points

Following are the defects of the Indian money market:

• Dichotomy between Organised and Unorganised Sectors
• Predominance of Unorganised Sector
• Wasteful Competition
• Absence of All-India Money Market
• Inadequate Banking Facilities
• Shortage of Capital
• Seasonal Shortage of Funds
• Diversity of Interest Rates
• Absence of Bill Market

Therefore, the correct answer is B and D only.

The correct answer is D only

Provide information for determining adequacy of loan loss provision will not result in credit risk.

Key Points 

Credit Risk:

• The risk of losing money due to a borrower’s failure to repay a loan is known as credit risk.
• It refers to a lender’s risk of having its cash flows disrupted if a borrower fails to pay principal or interest on a loan.
• When a borrower does not have enough cash flow to pay a creditor or does not have enough assets to sell to make a payment, credit risk is deemed to be higher.
• The lender is more likely to demand compensation in the form of a higher interest rate if the risk of non-payment is greater.

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

Key Points 

Portfolio Manager:

• A portfolio manager is someone who is in charge of managing, advising, and supervising a portfolio on behalf of his clients.
• A portfolio is a collection of investments.
• Portfolio management is the service that is provided for managing a client’s funds.
• The portfolio manager is required to be capable of meeting the needs of its clients by investing the money in the most profitable way possible.
• He has a fiduciary responsibility and must behave in accordance with the portfolio manager’s and his client’s agreement.
• Portfolio managers are professionals that oversee their clients’ investments.

Important Points Steps of operation of the registration of portfolio managers:

(A) Prior approval of the SEBI: An individual who wants to be a portfolio manager shall apply online to SEBI and take its prior approval.

(B) Payment of fee: Application in Form A to the Board along with a non-refundable fee of INR 1 Lakh has to be submitted

(C) Adequate steps for redressal of investors grievances: If any complaint is received from an investor, the portfolio manager is required to take adequate grievances redressal steps. Such complaints must be resolved within one month.

(D) Maintenance of the specified capital adequacy requirements: As prescribed in Clause (g) of Regulation (6), the capital adequacy must not be less than the net worth of Rs 50 lakhs.

(E) Abide by the regulations under the SEBI Act: He shall abide by all the rules and regulations made under the Act.

The correct answer is A, B, D only

Key Points 

Financial Crises:

• A financial crisis is described as a situation in which one or more large financial assets, such as stocks, real estate, or oil, lose a considerable portion of their nominal value abruptly (and generally unexpectedly).
• They are often preceded by periods of economic boom and overextension of credit to borrowers.

Important Points 

Forms of Financial Crises:

1. Currency Crises:

• A currency crisis occurs when the value of a country’s currency drops suddenly and sharply, causing severe ripple effects across the economy.
• A currency crisis, unlike a currency devaluation as part of a trade war, is not a planned event and should be avoided.
• Central banks and governments can help stabilise a currency by selling foreign currency or gold reserves, or interfering in the FX markets.

2. Banking Crises: 

• A banking crisis occurs when a large number of banks in a country face major solvency or liquidity problems at the same time, either as a result of a common external shock or as a result of failure in one bank or a group of banks spreading to other banks in the system.
• A systemic banking crisis occurs when a country’s corporate and financial sectors have a high number of defaults and financial institutions and corporations have significant difficulty fulfilling contracts on time.

3. Foreign debt crisis: 

• A government, corporation, or private household can borrow money from the government or private lenders of another country.
• In recent decades, foreign debt has steadily increased, causing unwanted consequences in some borrowing countries, particularly developing economies.

The correct answer is Option 4

Key Points

Promissory Note:

A promissory note is a legal, financial instrument in which one party promises another to pay a debt on a specific date.

It’s a formal agreement signed by the drawer promising to pay the money on a certain date or whenever it’s requested.

Parties of Promissory Note

• Drawer: A drawer is a person who commits to pay the drawee a specific sum of money when the promissory note matures. He/she is also referred to as a maker.
• Drawee: He or she is the person for whom the note is written. Unless the promissory note is formally transferred in favour of the payee, the drawee is usually also the payee.
• For example, if Ram promises to pay Shyam Rs.5000, he is termed a drawer (Shyam is the drawee). If the identical promissory note is transferred to Rohan, however, Rohan becomes the payee.
• Payee: A payee is someone to whom the payment is made.

Important Points 

Template of Promissory Note

The correct answer is “Monetary control is exercised through cash reserve ratio and statutory liquidity ratio”

Key Points 

Statement 1: RBI has direct supervision over depositories and mutual funds.

• This statement is incorrect as the SEBI has direct supervision over depositories and mutual funds.
   

Statement 2: Monetary control is exercised through cash reserve ratio and statutory liquidity ratio.

• This statement is correct as RBI uses Cash Reserve Ratio and Statutory Liquidity Ratio to exercise monetary control in the country.

Statement 3: Primary dealers mainly deal in shares, mutual fund units.

• This statement is incorrect as primary dealers are RBI-registered companies with the authority to buy and sell government securities through RBI.

Statement 4: The decrease in statutory liquidity ratio contracts the credit creation.

• This statement is incorrect as decrease in SLR allows more funds with the banks to lend and creation extends.

Important Points 

Cash Reserve Ratio:

The Cash Reserves Ratio (CRR) is the percentage of commercial banks’ total deposits that they must retain as cash reserves with the central bank.

Statutory Liquid Ratio:

The statutory liquidity ratio (SLR) refers to the amount of liquid assets, such as cash, that commercial banks must keep on hand on a daily basis as a percentage of their total deposits.

Monetary Control through CRR and SLR

• There is an inverse relation between rate of CRR & SLR and money supply in the country.
• If RBI increases the rate CRR and SLR, banks are left with less money to lend, Hence money supply in the country decreases and vice-versa.