Unit 7 Banking and Financial Institutions PYQ’s 3rd January 2026 Shift 1

The correct answer is – Chit-fund Companies

Key Points

• Chit-fund Companies are not part of the formal financial system.
  • They operate in the unorganized financial sector, which is outside the scope of regulation by formal institutions such as RBI, SEBI, or IRDAI.
  • Chit-funds are non-banking entities and are often regulated under state-specific legislation, such as the Chit Funds Act, 1982.
  • They primarily serve as an informal method of savings and credit, often catering to individuals excluded from formal banking systems.
• The formal financial system includes regulated entities such as banks, insurance companies, and capital markets.

Additional Information

• Components of the Formal Financial System
  • Financial Markets: These are platforms where financial instruments like stocks, bonds, and derivatives are traded. Examples include the stock market and money market.
  • Financial Instruments: These include assets like shares, bonds, or derivatives used for investment or hedging purposes.
  • Financial Services: These encompass activities such as banking, insurance, wealth management, and other advisory services provided by licensed institutions.
• Unorganized Financial Sector
  • Includes moneylenders, chit-fund companies, and other informal savings and credit mechanisms.
  • Lack of oversight and regulation increases risks such as fraud and misuse in this sector.

The correct answer is – Principle of Subrogation

Key Points

• Principle of Subrogation
  • This principle allows the insurer to step into the shoes of the insured after compensating for the loss.
  • It gives the insurer the right to recover from an alternative source or a third party responsible for the loss.
  • Subrogation ensures that the insured does not make a profit from the insurance claim, upholding the indemnity principle.
  • For example, if a car insured under an insurance policy is damaged in an accident caused by a third party, the insurer can recover the compensation amount from the third party after settling the claim.

Additional Information

• Principle of Insurable Interest
  • This principle states that the insured must have a financial interest in the subject matter of the insurance contract.
  • It ensures that the insured will suffer a financial loss if the insured event occurs.
• Principle of Causa Proxima
  • This principle refers to the nearest cause of the loss, determining the exact cause leading to the insured loss.
  • Only the closest and most direct cause is considered for claim settlement.
• Principle of Contribution
  • It is applicable when the insured has taken multiple policies for the same subject matter.
  • This principle ensures that the claim amount is shared proportionally among all insurers to avoid over-compensation.

The correct answer is – (A) is correct but (R) is not correct

Key Points

• RTGS (Real-Time Gross Settlement) is a system where funds are transferred from one bank to another on a real-time (processed immediately) and gross basis (processed individually).
• The minimum amount that can be transferred using RTGS is ₹2,00,000. This means there is a lower limit for RTGS transactions.
• Hence, the Reason (R), which states that there is no minimum ceiling for RTGS transactions, is incorrect.
• The Assertion (A) is correct because RTGS ensures immediate and individual fund transfers between banks.

Additional Information

• Features of RTGS:
  • RTGS is primarily used for high-value transactions.
  • There is no upper limit for RTGS transactions, but the minimum amount is ₹2,00,000.
  • Transactions are processed in real-time, i.e., without any waiting period.
• Difference between RTGS and NEFT:
  • RTGS: Real-time, gross settlement; used for high-value transactions; minimum transaction amount is ₹2,00,000.
  • NEFT: Settled in batches, no minimum transaction amount; suitable for low-value transactions.
• Applicability:
  • RTGS is ideal for corporates and individuals who need to transfer large sums of money securely and instantly.
  • Available during bank working hours, including extended hours for online banking.

The correct answer is – Financial Inclusion

Key Points

• Financial Inclusion
  • Refers to the process of ensuring access to appropriate financial products and services.
  • It focuses on providing these services to all segments of society, especially vulnerable groups like weaker sections and low-income groups.
  • These services are made available at an affordable cost in a fair and transparent manner.
  • It involves the participation of mainstream institutional players, such as banks, financial institutions, and cooperative societies.
  • The objective is to promote economic growth and reduce income inequality by increasing access to financial services.

Additional Information

• Benefits of Financial Inclusion
  • Encourages the habit of savings among individuals, leading to better financial security.
  • Promotes access to credit for small businesses, enabling entrepreneurship and employment generation.
  • Helps in reducing dependency on informal and exploitative credit sources, such as moneylenders.
• Examples of Financial Inclusion Initiatives
  • Pradhan Mantri Jan Dhan Yojana (PMJDY): A government initiative aimed at providing universal access to banking facilities.
  • Microfinance Institutions (MFIs): Organizations that provide small loans to individuals or groups who lack access to traditional banking services.
  • Digital Payment Systems: Tools like UPI, mobile wallets, and online banking improve accessibility to financial services.
• Key Challenges of Financial Inclusion
  • Lack of financial literacy in underserved communities.
  • Geographical barriers in rural and remote areas where banking infrastructure is limited.
  • Challenges in ensuring affordable and sustainable financial services for all segments of society.

The correct answer is – Entry Load

Key Points

• Entry Load
  • It is a fee or charge collected from investors when they purchase units of a mutual fund scheme.
  • This charge is expressed as a percentage of the investment amount and is used to cover the expenses incurred by the fund house for distribution and marketing.
  • For example, if the entry load is 2% and an investor invests ₹10,000, ₹200 will be deducted as the entry load, and ₹9,800 will be invested in the mutual fund.
  • The concept of entry load has been phased out in India since 2009 by the Securities and Exchange Board of India (SEBI), making mutual fund investments more transparent.

Additional Information

• Exit Load
  • This is a fee charged by mutual funds when investors sell or redeem their units before a specific period.
  • It is levied to discourage early withdrawals and ensure investors stay invested for the recommended tenure.
• Switch
  • This refers to transferring investments from one mutual fund scheme to another, usually within the same fund house.
  • Switching may involve charges or tax implications, depending on the fund and regulatory guidelines.
• Sale Price
  • It is the price at which mutual fund units are sold to investors, typically equal to the Net Asset Value (NAV) plus any applicable entry load.

The correct answer is – A, E, D, B, C

Key Points

• Narsimham Committee – I was formed in 1991 to address banking sector reforms.
• Rashid Jilani Committee was formed in 1995 to study the operational efficiency of the banking system.
• Saraf Committee was established in 1997 to focus on banking technology and electronic funds transfer.
• Padmanabhan Committee was formed in 1999 to review risk management systems in banks.
• Verma Committee was constituted in 2001 to study weak banks and provide recommendations for their revival.

Additional Information

• Narsimham Committee
  • It was constituted under the chairmanship of M. Narasimham.
  • Focused on financial sector reforms and suggested measures to enhance banking efficiency.
• Rashid Jilani Committee
  • Recommended changes to improve operational efficiency in the banking sector.
  • Focused on customer service improvement.
• Saraf Committee
  • Emphasized electronic funds transfer and the adoption of technology in banking systems.
  • Key contributor to the digitalization of Indian banking.
  • Padmanabhan Committee
  • Examined risk management practices in Indian banks.
  • Suggested frameworks for better handling of risks and compliances.
  • Verma Committee
  • Focused on identifying weak banks and proposing revival strategies.
  • Played a key role in stabilizing underperforming banks in India.

The correct answer is – Type II

Key Points

• Type II complaints
  • Complaints related to non-receipt of dividends by investors are categorized under Type II.
  • This type of complaint generally includes issues where investors have not received their declared dividends from the company.
  • SEBI ensures that companies comply with their obligations to disburse dividends promptly and address investor grievances in this category.
• Role of SEBI
  • SEBI, as a market regulator, is responsible for addressing and resolving complaints related to investor grievances.
  • Complaints are classified into different types to streamline the grievance redressal mechanism.

Additional Information

• Types of complaints under SEBI grievance mechanism
  • Type I: Complaints related to non-receipt of securities (e.g., shares or debentures).
  • Type II: Complaints related to non-receipt of dividends, interest, or redemption proceeds.
  • Type III: Complaints related to non-adherence to guidelines or regulations by intermediaries.
  • Type IV: Complaints related to unfair trade practices or alleged frauds in the securities market.
• SEBI SCORES Platform
  • SEBI provides the SCORES (SEBI Complaints Redress System) platform for investors to lodge and track complaints online.
  • This platform ensures transparency, accountability, and prompt resolution of complaints.

The correct answer is – Bonus Issue

Key Points

• Bonus Issue
  • A Bonus Issue refers to the issuance of additional shares to existing shareholders without any monetary payment.
  • It is not a method of raising funds from the public, but rather a way to reward existing shareholders by capitalizing the company’s reserves.
  • This makes it distinct from methods like Public Issue through Prospectus, Right Issue, or Book Building, which are specifically used to raise new capital.

Additional Information

• Public Issue through Prospectus
  • Involves issuing shares to the public through a detailed prospectus that provides key information about the company and the offering.
  • It is one of the most common methods used by companies to raise funds in the primary market.
• Right Issue
  • This allows existing shareholders to purchase additional shares at a discounted price, in proportion to their current holdings.
  • It helps companies raise capital while giving preference to existing shareholders.
• Book Building
  • A process used during an Initial Public Offering (IPO) where investors bid for shares at various price levels.
  • The final price is determined based on demand, ensuring efficient price discovery.

The correct answer is – B, C, D, E Only

Key Points

• Cash Reserve Ratio (CRR)
  • CRR is the percentage of a bank’s total deposits that must be kept as reserves with the Reserve Bank of India (RBI).
  • This is a tool used to control the money supply and liquidity in the economy.
• Open Market Operations (OMO)
  • Refers to the buying and selling of government securities by the RBI in the open market.
  • It helps in regulating the liquidity and controlling inflation or deflation in the economy.
• Statutory Liquidity Ratio (SLR)
  • SLR is the percentage of a bank’s net demand and time liabilities (NDTL) that must be invested in prescribed securities like government bonds.
  • It helps in maintaining the credit flow and ensuring financial discipline among banks.
• Repo Rate
  • Repo rate is the rate at which the RBI lends money to commercial banks in case of a shortfall of funds.
  • It is a key tool used by the RBI to control inflation and ensure liquidity in the market.

Additional Information

• Monetary Policy Tools
  • The RBI uses various tools to control liquidity, inflation, and economic growth.
  • These tools include Quantitative Measures (e.g., CRR, SLR, OMO, Repo Rate) and Qualitative Measures (e.g., credit rationing, moral suasion).
• Objectives of Monetary Control
  • To regulate inflation and deflation.
  • To stabilize the currency and ensure economic growth.
  • To control the supply of money in the economy.
• Excluded Option – Loans and Advances to Industries
  • This is not a monetary control technique but rather a direct measure to support specific sectors like industries.
  • It does not align with the indirect tools generally used by RBI for monetary control.

The correct answer is – A-II, B-III, C-IV, D-I

Key Points

• EXIM Bank
  • EXIM Bank is associated with financing exports and imports as part of its core mandate.
  • It provides financial assistance to promote international trade and improve the country’s export competitiveness.
• NHB (National Housing Bank)
  • The NHB is tasked with promoting housing finance institutions and developing the housing finance sector in India.
  • It regulates housing finance companies and provides them financial assistance.
• IDBI (Industrial Development Bank of India)
  • IDBI plays a critical role in financing, promoting, and developing industries.
  • It supports industrial growth by offering both financial and technical assistance.
• NABARD (National Bank for Agriculture and Rural Development)
  • NABARD is primarily focused on advancing credit for agriculture and rural economic activities.
  • It supports rural development and agriculture by providing financial and developmental assistance.

Additional Information

• EXIM Bank
  • Established in 1982, EXIM Bank facilitates India’s international trade by offering various financial products such as loans, guarantees, and advisory services.
• National Housing Bank
  • Founded in 1988, NHB is a wholly owned subsidiary of the Reserve Bank of India (RBI).
  • It ensures stability and growth in the housing finance sector.
• IDBI
  • Created in 1964, IDBI was initially set up as a subsidiary of the RBI before becoming an independent entity.
  • It supports industrial development through loans, guarantees, and other financial services.
• NABARD
  • Established in 1982, NABARD focuses on enhancing rural prosperity by supporting agriculture and small-scale industries.
  • It plays a pivotal role in implementing government schemes for rural and agricultural development.