Unit 7 Banking and Financial Institutions PYQ’s 9 Sep 2026 Shift 2

The correct answer is: A, E, C, D, B.

Key Points

• A. The Banking Regulation Act (1949):
  • Enacted in 1949, this is one of the most fundamental laws governing the banking sector in India.
  • It provides a framework for the supervision and regulation of commercial banks by the Reserve Bank of India (RBI), covering aspects like licensing, management, and operations.
• E. Securities and Exchange Board of India Act (1992):
  • While SEBI was established as a non-statutory body in 1988, it was given statutory powers through the SEBI Act, 1992.
  • This Act empowers SEBI to protect the interests of investors in securities and to promote the development and regulation of the securities market.
• C. Insurance Regulatory and Development Authority of India Act (1999):
  • The IRDA Act was passed in 1999 following the recommendations of the Malhotra Committee.
  • It led to the establishment of the IRDAI as the statutory autonomous body to regulate and develop the insurance industry and opened the sector to private players.
• D. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act (2002):
  • Enacted in 2002, this Act allows banks and other financial institutions to auction residential or commercial properties to recover loans.
  • It provides a mechanism for the reconstruction of financial assets and enforcement of security interests without the intervention of a court.
• B. The Pension Fund Regulatory and Development Authority (PFRDA) Act (2013):
  • The PFRDA Act was passed by Parliament in 2013 and came into force in 2014.
  • It provides the statutory framework for the PFRDA to promote old age income security by establishing, developing, and regulating pension funds, including the National Pension System (NPS).

Additional Information

The chronological sequence based on the years 1949, 1992, 1999, 2002, and 2013 corresponds to the order A, E, C, D, B.

The correct answer is ‘Narasimham Committee’

Key Points

• Narasimham Committee (1975):
  • The Regional Rural Banks (RRBs) were established based on the recommendations of the Narasimham Working Group on Rural Banks.
  • The committee identified that the existing commercial banks and cooperative societies were unable to meet the credit needs of the rural poor, especially small and marginal farmers, agricultural laborers, and rural artisans.
  • Following the committee’s report, the Regional Rural Banks Ordinance was promulgated on 26th September 1975, which was later replaced by the RRB Act, 1976.
  • The first RRB, Prathama Bank, was established on 2nd October 1975 in Moradabad, Uttar Pradesh.
  • The equity of RRBs is held by the Central Government (50%), the Sponsor Bank (35%), and the State Government (15%).

Additional Information

• Goiporia Committee:
  • This committee was formed to suggest improvements in customer service in banks in India. It focused on enhancing the efficiency of banking operations and grievance redressal mechanisms.
• L. C. Gupta Committee:
  • This committee was appointed by SEBI to look into the introduction of derivatives trading in the Indian stock market. It laid the regulatory framework for financial derivatives in India.
• Tarapore Committee:
  • There were two Tarapore Committees (1997 and 2006) appointed by the RBI to provide a roadmap for Capital Account Convertibility (CAC) in India.

The correct answer is – Only A, B and D

Key Points

• Principle of Proximate Cause (Causa Proxima)
  • It states that the nearest and most effective cause of a loss must be identified to determine whether the insurer is liable.
  • It is an important principle used for deciding claims in insurance contracts.
• Principle of Subrogation
  • It allows the insurer, after compensating the insured, to acquire the legal rights and remedies of the insured against third parties responsible for the loss.
  • This prevents the insured from recovering more than the actual loss.
• Principle of Indemnity
  • It ensures that the insured is compensated only for the actual financial loss suffered.
  • The objective is to restore the insured to the same financial position as before the loss, not to provide profit.

Additional Information

• Principles of Insurance
  • Principle of Utmost Good Faith
    • Both parties must disclose all material facts related to the insurance contract.
  • Principle of Insurable Interest
    • The insured must have a financial or legal interest in the subject matter of insurance.
  • Principle of Contribution
    • When multiple insurers cover the same risk, each insurer contributes proportionately towards the loss.
• Incorrect principles in the question
  • Principle of Premium Maximization is not a recognized principle of insurance.
  • Principle of Guarantee is not included among the fundamental principles governing insurance contracts.

The correct answer is ‘April 1, 1935’

The Reserve Bank of India (RBI) is India’s central bank and regulatory body responsible for the regulation of the Indian banking system. It manages the country’s main payment systems and works to promote its economic development.

Key Points

• Establishment: The Reserve Bank of India was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934.
• Hilton Young Commission: The bank was set up based on the recommendations of the Royal Commission on Indian Currency and Finance (also known as the Hilton Young Commission) of 1926.
• Initial Ownership: Though originally set up as a shareholders’ bank, it was fully owned by private shareholders at its inception.
• Central Office: The Central Office of the Reserve Bank was initially established in Calcutta (now Kolkata) but was permanently moved to Mumbai in 1937.

Additional Information

• Nationalization: Following India’s independence, the RBI was nationalized on January 1, 1949, under the Reserve Bank (Transfer of Public Ownership) Act, 1948. Since then, it has been fully owned by the Government of India.
• First Governor: The first Governor of the RBI was Sir Osborne Smith. The first Indian Governor was C.D. Deshmukh.
• Preamble of RBI: The Preamble describes the basic functions of the RBI as “to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”
• Other Dates in Options:
  • April 1, 1934: This year marks the passing of the RBI Act, but the bank had not yet commenced operations.
  • April 1, 1949: This period is close to the date of nationalization (January 1, 1949), marking its transition to a government-owned entity.
  • April 1, 1950: This date follows the commencement of the Constitution of India but is not related to the founding of the RBI.

The correct answer is: 90 days.

In the banking sector, a Non-Performing Asset (NPA) is a classification used by financial institutions for loans and advances on which the principal or interest payment remains overdue for a specified period. This classification is a key indicator of the health of a bank’s loan portfolio and its overall financial stability.

Key Points

• Definition of NPA for Term Loans:
  • A term loan is treated as a Non-Performing Asset if the interest and/or instalment of principal remains overdue for a period of more than 90 days.
  • Once a loan is classified as an NPA, the bank stops recording interest income from that loan on an accrual basis and only recognizes it when the interest is actually received.
• Asset Classification Categories:
  • Standard Assets: Assets that do not disclose any problems and which do not carry more than normal risk attached to the business.
  • Sub-standard Assets: An asset which has remained NPA for a period less than or equal to 12 months.
  • Doubtful Assets: An asset which has remained in the sub-standard category for a period of 12 months.
  • Loss Assets: An asset where loss has been identified by the bank or internal/external auditors or the RBI inspection, but the amount has not been written off wholly.

Additional Information

• Agricultural Loans:
  • For agricultural loans, the NPA criteria differ based on the crop season. A loan is classified as NPA if the instalment of principal or interest remains overdue for two crop seasons for short-duration crops and one crop season for long-duration crops.
• Overdraft/Cash Credit (OD/CC):
  • An account is treated as ‘out of order’ (and thus an NPA) if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days.
• Impact of NPAs:
  • High levels of NPAs reduce the liquidity of banks, affect their profitability due to provisioning requirements, and can lead to a decrease in the bank’s stock valuation and public confidence.

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

Key Points

Additional Information

• Securities Trading Corporation of India (1994): Established by the Reserve Bank of India (RBI) to develop a secondary market in Government Securities and to provide liquidity to the market.
• Delivery versus Payment (DvP) System (1995): This system was introduced to synchronize the transfer of securities with the transfer of funds, thereby eliminating settlement risk in the secondary market.
• Ways and Means Advances (WMA) Scheme (1997): Introduced to replace the system of ad-hoc Treasury Bills. It provides a mechanism for the Central Government to meet temporary mismatches in its receipts and payments.
• Trading on Stock Exchanges (2003): To widen the investor base and enhance transparency, the RBI and SEBI facilitated the trading of Government Securities on the screen-based trading systems of the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

The correct answer is ‘Liquidity Adjustment Facility’

Key Points

• Liquidity Adjustment Facility (LAF):
  • The Liquidity Adjustment Facility (LAF) is a primary tool used by the Reserve Bank of India (RBI) to manage day-to-day liquidity mismatches in the banking system.
  • It was introduced in June 2000 based on the recommendations of the Narasimham Committee on Banking Sector Reforms.
  • The LAF operates through two main instruments: Repo (Repurchase Option) and Reverse Repo.
  • In these transactions, the RBI acts as the counter-party. Commercial banks borrow money from the RBI by pledging government securities (Repo) or park their excess funds with the RBI (Reverse Repo).
• Repo Rate:
  • The rate at which the RBI lends money to commercial banks against the collateral of government securities. It is used to inject liquidity into the system.
• Reverse Repo Rate:
  • The rate at which the RBI borrows money from commercial banks. It is used to absorb excess liquidity from the banking system.

Additional Information

• Moral Suasion:
  • This is a qualitative method of monetary control where the RBI uses persuasion, pressure, or informal suggestions to convince commercial banks to align their lending policies with the central bank’s objectives.
• Selective Credit Controls:
  • These are qualitative tools used to regulate the flow of credit to specific sectors of the economy (e.g., fixing margins for loans against essential commodities) to prevent speculative hoarding or inflation in those sectors.
• Open Market Operations (OMO):
  • This involves the outright purchase and sale of government securities by the RBI in the open market to regulate the long-term money supply. Unlike LAF, OMOs are generally used for durable liquidity management rather than daily adjustments.

The correct answer is: E, C, A, D, B.

Key Points

• E. Launch of S&P CNX Nifty (April 1996):
  • The National Stock Exchange (NSE) launched its flagship index, the S&P CNX Nifty (now known as Nifty 50), on April 22, 1996.
  • It was designed to provide a benchmark that reflects the overall market performance of the Indian equity market.
• C. Commencement of Derivatives Trading in Index Futures (June 2000):
  • NSE commenced trading in Derivatives with the launch of Index Futures on June 12, 2000.
  • The index futures were based on the Nifty 50 Index, marking a significant shift in the Indian capital market towards risk management tools.
• A. Launch of Exchange Traded Funds (January 2002):
  • The first Exchange Traded Fund (ETF) in India, known as Nifty BeES (Benchmark Exchange Traded Scheme), was launched on the NSE in January 2002.
  • ETFs combined the features of open-ended mutual funds and listed stocks, allowing investors to trade the entire Nifty portfolio as a single share.
• D. Launch of Futures and Options on Bank Nifty Index (June 2003):
  • NSE introduced Futures and Options (F&O) on the Bank Nifty Index in June 2003.
  • This provided a specialized tool for investors to hedge or speculate on the performance of the Indian banking sector.
• B. Launch of Mutual Fund Service System (November 2009):
  • The Mutual Fund Service System (MFSS) was launched by NSE on November 30, 2009.
  • This online platform allowed brokers to use the existing exchange infrastructure to facilitate the purchase and redemption of mutual fund units for their clients.

Additional Information

• National Stock Exchange (NSE):
  • Established in 1992 and recognized as a stock exchange in 1993, NSE was the first exchange in India to provide a fully automated, screen-based electronic trading system.
  • It revolutionized the Indian financial markets by bringing transparency and efficiency, replacing the traditional floor-based ‘open outcry’ system.
• Chronological Summary Table:

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

Key Points

Additional Information

• Industrial Finance Corporation of India (IFCI):
  • Established on July 1, 1948, it was the first Development Financial Institution set up by the Government of India to provide medium and long-term finance to the industrial sector.
• Industrial Development Bank of India (IDBI):
  • Established in 1964 under an Act of Parliament as a wholly-owned subsidiary of the Reserve Bank of India (RBI). In 1976, the ownership was transferred to the Government of India. It was later transformed into a commercial bank.
• National Bank for Agriculture and Rural Development (NABARD):
  • Established on July 12, 1982, based on the recommendations of the B. Sivaraman Committee. It is the apex regulatory body for the overall regulation and licensing of regional rural banks and apex cooperative banks in India.
• Small Industries Development Bank of India (SIDBI):
  • Established on April 2, 1990, under an Act of Parliament. It serves as the principal financial institution for the promotion, financing, and development of the Micro, Small, and Medium Enterprise (MSME) sector.

The Correct answer is: A, C, and D Only

Key Points

• Coexistence of Formal and Informal Sectors (Statement A):
  • This statement is correct.
  • In most developing countries like India, the financial system is dualistic. The formal sector (banks, NBFCs) and the informal sector (money lenders, indigenous bankers) coexist.
  • While the formal sector is regulated, the informal sector often serves rural or low-income populations where formal banking reach is limited.
• Regulation of Markets (Statement B):
  • This statement is incorrect.
  • The Reserve Bank of India (RBI) primarily regulates the money market (short-term funds) and the banking system.
  • The Securities and Exchange Board of India (SEBI) is the regulatory body for the capital market (long-term funds/stocks/bonds). The statement incorrectly swaps their roles.
• Components of Financial Systems (Statement C):
  • This statement is correct.
  • A formal financial system is a complex network comprising Financial Institutions (Banks, Insurance companies), Financial Markets (Money and Capital markets), Financial Instruments (Shares, Debentures, T-bills), and Financial Services (Leasing, Underwriting).
• Organized Financial Markets in India (Statement D):
  • This statement is correct.
  • The Indian organized financial market is broadly divided into the Money Market, which deals in short-term credit (maturity up to one year), and the Capital Market, which deals in long-term debt and equity.
• Primary vs. Secondary Markets (Statement E):
  • This statement is incorrect.
  • The Primary Market is the market for new issues (Initial Public Offerings or IPOs) where securities are created.
  • The Secondary Market (Stock Exchange) is where outstanding or existing securities are traded among investors. The statement provides the definitions in reverse order.

Additional Information

• Money Market Instruments:
  • Common instruments include Treasury Bills (T-Bills), Commercial Paper, Certificates of Deposit, and Call Money. These are highly liquid and have low risk.
• Capital Market Functions:
  • It facilitates the mobilization of savings for long-term investment in the economy. It includes the Equity Market and the Debt Market.