Unit 7 Banking and Financial Institutions PYQ’s 27th June 2025

The correct answer is – Commercial Paper

Key Points

• Commercial Paper (CP):
  • A short-term, unsecured promissory note issued by creditworthy corporates, primary dealers, and financial institutions.
  • Issued at a discount to face value and is negotiable and transferable by endorsement and delivery.
  • Has a fixed maturity period ranging from 7 days to 1 year.
  • Used as a tool for short-term financing to meet working capital requirements.
• Commercial Paper is an alternative to other instruments like Treasury Bills and Certificates of Deposit.

Additional Information

• Comparison with Other Instruments:
  • Treasury Bills (T-Bills):
    • Issued by the Government of India, making them a risk-free investment.
    • Have maturities of 91 days, 182 days, and 364 days.
  • Certificates of Deposit (CDs):
    • Issued by banks and financial institutions as a time deposit.
    • Have a fixed tenure, typically ranging from 7 days to 1 year.
  • Repo (Repurchase Agreement):
    • A secured short-term borrowing instrument involving the sale and repurchase of securities.
    • Primarily used by banks and financial institutions.
• Regulations and Eligibility:
  • Corporates must meet credit rating requirements to issue Commercial Paper.
  • Governed by the guidelines of the Reserve Bank of India (RBI).

The correct answer is – 90 days

Key Points

• Non-Performing Asset (NPA)
  • A term loan is classified as a Non-Performing Asset (NPA) when the borrower fails to pay either the interest or the principal amount for a specified period.
  • The threshold period for a loan to be classified as NPA is 90 days as per the Reserve Bank of India (RBI) guidelines.
• Overdue Status
  • If the interest or principal repayment remains unpaid for more than 90 days, it is considered overdue, leading to NPA classification.
  • This classification helps financial institutions maintain their asset quality and monitor risks effectively.

Additional Information

• Categories of NPAs
  • NPAs are categorized based on the duration for which the asset has remained non-performing:
  • Substandard Asset: When the asset has been non-performing for a period less than or equal to 12 months.
  • Doubtful Asset: When the asset remains non-performing for more than 12 months.
  • Loss Asset: When the asset is identified as uncollectible by the bank or auditors.
• Importance of NPA Classification
  • Classifying loans as NPAs ensures that banks maintain transparency in their financial records.
  • It helps regulators and stakeholders assess the financial health of banks and other financial institutions.
• Role of RBI Guidelines
  • The Reserve Bank of India (RBI) has set strict guidelines for the classification of NPAs to ensure uniformity across all banks.
  • These guidelines are crucial for maintaining the stability of the banking sector and protecting the interests of depositors.

The correct answer is – 1955

Key Points

• State Bank of India (SBI)
  • SBI is India’s largest and oldest public sector bank.
  • The bank was established on July 1, 1955, following the reconstitution of the Imperial Bank of India.
  • The reconstitution was done under the State Bank of India Act, 1955.
• Historical Significance
  • The transformation of the Imperial Bank of India into SBI marked a crucial step toward providing banking services across rural and urban areas of India.
  • SBI was tasked with the role of acting as a principal agent for the Reserve Bank of India (RBI) in handling banking transactions for government bodies.
• Reason for Establishment
  • The aim was to create a strong banking institution capable of driving economic development post-independence.
  • The bank’s establishment was part of India’s efforts to strengthen its financial infrastructure.

Additional Information

• Imperial Bank of India
  • The Imperial Bank of India was formed in 1921 by merging three presidency banks: Bank of Bengal, Bank of Bombay, and Bank of Madras.
  • It operated as a commercial bank and was one of the largest banking institutions during the British era.
  • Post-independence, it was converted into SBI to better serve the nation’s financial needs.
• Nationalization of Banks
  • India witnessed the nationalization of banks in two phases, in 1969 and 1980.
  • However, SBI was already a state-owned entity since its inception in 1955.
• Role of SBI
  • SBI plays a pivotal role in supporting India’s economy by providing banking services to diverse sectors such as agriculture, industry, and infrastructure.
  • It has a vast network of branches, which makes banking accessible to remote areas.

The correct answer is – A, B, C, D

Key Points

• IFCI (Industrial Finance Corporation of India) was established in 1948, making it the first development financial institution in India.
• IDBI (Industrial Development Bank of India) was set up in 1964 to provide credit and other facilities for the development of industries.
• NABARD (National Bank for Agriculture and Rural Development) came into existence in 1982 to promote sustainable and equitable agriculture and rural development.
• SIDBI (Small Industries Development Bank of India) was established in 1990 to cater to the financial and developmental needs of micro, small, and medium enterprises.
• Thus, the correct chronological order (old to new) is A (IFCI), B (IDBI), C (NABARD), D (SIDBI).

Additional Information

• Development Financial Institutions (DFIs)
  • DFIs are specialized institutions set up to provide long-term finance for the industrial and economic development of a country.
  • They focus on sectors such as industry, agriculture, and small-scale enterprises that are often underserved by commercial banks.
• Role of DFIs in India
  • Filling the credit gap in areas not adequately funded by private financial institutions.
  • Promoting industrialization by supporting large infrastructure projects.
  • Encouraging entrepreneurship and innovation through financial assistance.
• Key DFIs in India
  • IFCI: The first DFI in India, initially focusing on providing long-term industrial finance.
  • IDBI: Played a crucial role in planning, promoting, and developing industries.
  • NABARD: Focused on agriculture, rural development, and microfinance.
  • SIDBI: Concentrates on small-scale and medium enterprises to promote self-reliance and entrepreneurship.