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Indian Financial
System
ISBN : 9789386146977
92 Indian Financial System
Indian Financial
8
Chapter
System
Introduction This system provides detailed information
A well established financial system about the players in the market such as
plays very important role in economic individuals, corporate houses, government
agencies etc.
development of any country. A financial
It also provides a mechanism for controlling
system consists of financial institutions,
risks involved in managing savings and
financial markets, financial instruments and
allocating funds.
financial services. This system provides a
It covers the whole gamut of demand for and
framework by which savings and surplus supply of funds for productive purposes.
funds are mobilized in a productive manner. The financial system promotes economic
A financial system servers as a link between development through mobilising savings
savers and investors and channelising these to investment
It promotes the capital formation by avenues.
bringing together supply of savings and The Indian financial system consists of both
demand for funds. short term and long term finances.
• Repurchase options (repos) and securities are called gilt or gilt edged
reverse repos have been introduced in securities.
order to even out sharp fluctuations • Should there arise a situation where
in the money market. Repos provide in the Government creates a security
an opportunity for RBI to repurchase for raising a public loan, an intimation
government securities from regarding the same is notified in the
commercial banks. Reverse repos are Official Gazette under the Government
government securities sold through
Securities Act, 2016.
auction at fixed cut-off rate of interest.
• Gilt–edged securities are a high –
• Liquidity Adjustment Facility (LAF)
grade investment with very low risk.
refers to RBI’s policy of using Repos
and Reverse Repos to adjust liquidity • High–grade bonds can also be issued
on a day-to-day basis. by private firms too, which flaunts a
long record of consistent earnings and
CAPITAL MARKET possess ability to pay its obligations on
Capital market deals with long-term time and not accrue any bad debts in
finance (more than 365 days) funds. It business transactions.
includes all facilities and institutional • The term, ‘gilt–edge’ initially
arrangements available for borrowing originated from Britain; then referred
and lending of term funds (including to the debt securities issued by the
medium-term). Bank of England, on behalf of His/ Her
The difference between money market Majesty’s Treasure.
and capital market is not so much in • Depending upon expiry date, government
the institutions involved as in their term securities are classified into the following:
of borrowing or lending. Long-term
funds are raised either by borrowing Short – term gilt: Long – term gilt:
from certain institutions or by issuing Maturity: Maturity:
securities. >1 year 5 /10 /15 yrs.
The main players in Indian capital • Additionally, these gilt–edged securities
markets are: provide safety due to the zero income
• Banks, indigenous and commercial. default, 100% liquidity and bulk
• Insurance companies investment opportunity owing to the
high rate of return.
• Development Finance Institutions
(DFI), (b) Corporate
• Non-Banking Finance Companies, • Corporate security identifies and
(NBFCs) effectively mitigates, at an early
• Non-Banking Financial Institutions. stage, any developments that may
The capital market may be divided into threaten the resilience and survival of
a corporation. It is a corporate function
(i) the securities market; and (ii) the that oversees and manages the close
financial institutions. coordination of all functions within
Securities the company that are concerned with
security, continuity and safety.
(a) Gilt–edged • Corporate securities or company
• There are securities issued by the securities are known to be the
government to borrow money from documentary media for mobilising
the market. These government issued funds by the joint stock companies.
96 Indian Financial System
• The need for corporate securities arises • Creditorship securities are also called
in the following: debentures and accounts for the debt
(a) Successful establishment of of a company. Debenture holders
business functions are regarded as the creditors of the
company and debentures account for
(b) Sponsoring of fund–intensive
the borrowed capital. A debenture may
expansion plans
be defined as an instrument executed
• There are two types of corporate by company under its common seal,
securities: acknowledging indebtedness to an
Ownership Creditorship individual or a group, to secure the
Securities Securities sum advanced. Debentures are usually
bonds issued by the company in series
• Ownership securities consist of of a fixed denomination e.g., `100,
preference shares and equity shares. `200, `500, `1,000 of face value and
Preference shares are those shares are offered to the public, by means of
which carry priority rights related a prospectus.
to dividend payment at a fixed rate
and repayment of capital, in the Financial Institutions
event of a company being wound (a) SEBI
up. The advantages of preference
• Established in 1988 and provided
shares include mobilizing funds from statutory powers in 1992, the Securities
investors who prefer stable earnings and Exchange Board of India (SEBI)
with assurance, flexibility in capital is the regulator for the Indian security
structure as desired, complete control market.
of business transactions within an • The Indian Parliament passed the SEBI
organization and increase in the profits Act on 12 April, 1992.
of the shareholders. Disadvantages
• SEBI is headquartered in Mumbai,
include not allowing investors to carry
Maharashtra.
voting rights, shares being expensive,
• Before the Government of India
income tax problems and redemption
enforced the existence of SEBI,
issues at the time of depression.
Controller of Capital Issues was the
• Equity shares are ordinary shares, regulatory authority.
devoid of special attributes with • The main motto behind constructing
respect to dividend or return of SEBI was to regulate and control the
capital, as in preference shares. Equity function of capital markets in India
shareholders are the residual claimants under the intervention of the Indian
against the assets and income of the Government.
corporation.”The financial risk is • The SEBI is managed by: (a) The
more with equity share capital, also Chairman – nominated by the Union
called ‘risk capital.’ Some of the Government of India; (b) two officers
advantages of these shares are long from the Union Finance Ministry; (c)
shelf – life of funds, shareholders’ one member from the RBI and five
right to participation in the affairs of members nominated by the Union
the company, increase in shareholders’ Government, among which three
assets and ownership rights of the should be whole – time members.
shareholders.
Indian Financial System 97
• The Bank has an aggregate balance • Mr. Kishor Kharat is captaining the
ship, being the CEO and MD.
statement of INR 3.74 trillion, at the
closure of the last Financial Year. • Some of the important portfolios
include consumer banking, corporate
• IDBI is classified as a development
banking, investment banking,
bank. Turning the pages of history,
mortgage loans, wealth management
development banking emerged after
and private equity.
the Second World War. India had a
fair development banking system and Commodity future market
was mainly targeted towards financing In the aftermath of the 2008 global financial
short–term capital requirements of the crisis, some regulatory reforms have been
industrial projects. On the contrary, DFI initiated in the US, European Union (EU)
– listed institutions like the NABARD, and some other countries to enhance market
SIDBI and NHB, were catering to the transparency and coordination among
100 Indian Financial System
regulatory authorities in the public interest, spot market. But if one wants to buy or
commodity future market is one of them. sell 15 tonne of rice at a future date, i.e.
Commodities are the primary products that after three months, one can buy or sell
can be bought, sold or traded in different the same through futures contracts at a
kinds of markets. These are the raw commodity futures exchange.
materials that are used to make secondary Let’s understand, a farmer enters into a
products which are consumed in everyday futures contract to sell 20 tonne of rice
life around the world, from food products at $ 50 per tonne to a miller on a future
to building material commodities. These are date. On that date, the miller will pay
grouped into: the full purchase price ($ 1,000) to the
i. Soft commodities: These are agricultural farmer and in exchange will receive the
products such as corn, wheat, coffee, 20 tonne of rice.
cocoa, sugar and soybean; and livestock. However, under the cash-settled
ii. Hard commodities: These are natural futures contract, the farmer and the
resources that need to be mined or miller would simply exchange the
processed such as crude oil, gold, difference between the spot price of
silver and rubber. rice on the settlement date and the
Commodity markets are of two types: agreed upon price as mentioned in the
i. Spot (physical) and ii. Derivatives (such futures contract and there would be no
as futures, options and swaps). actual delivery of rice. Following the
In a spot market, a physical commodity is above example, if on the settlement
sold or bought at a price negotiated between date the price of rice was $ 40 per
the buyer and the seller. The spot market tonne, while the agreed upon price of
involves buying and selling of commodities futures contract was $ 50 a tonne, the
in cash with immediate delivery. miller will pay $200 to the farmer in
cash and there will be no delivery of
Contracts in Derivative Markets rice to the miller. If, on the settlement
a. Forward Contract: It is a non- date, the price of rice was $ 60 a tonne,
standardized or customized contract the farmer will pay $ 200 to the miller
between two parties to undertake an in cash and no delivery of rice will take
exchange of the underlying asset at a place.
specific future date at a pre-determined c. Options Contracts: These are the
price. It is a bilateral agreement whose contracts that give the owner the right,
terms are negotiated and agreed upon but not the obligation, to buy or sell an
between two parties. It is transacted agreed amount of a commodity on or
over-the counter and is not traded on an before a specified future date.
exchange. The contract is executed by d. Swaps Contract: This contract is
both parties on the due date by delivery an agreement between two parties to
of asset by the seller and payment by exchange cash (flows) on or before
the buyer. a specified future date based on the
b. Future Contracts: These are underlying value of commodity,
agreements made on a futures currency, stock or other assets. Unlike
exchange to buy or sell a commodity at futures, swaps are not exchange-
a pre-determined price in the future. traded instruments. Swaps are usually
designed by banks and financial
For example, if one wants to buy 5
institutions that also arrange the trading
tonne of rice today, one can buy it in the of these bilateral contracts.
Indian Financial System 101
is portfolio investment and above 10%, In other words, M4 possesses the lowest
the investment will be counted as liquidity among all these measures.
Foreign Direct Investment (FDI). The reduction in liquidity indicates the
• All FPI taken together cannot acquire shifting from ‘medium of exchange’
more than 24% of the paid up capital to ‘store of value’. All these four
of an Indian Company. money stock measures are not of equal
• Foreign Portfolio Investors are Asset importance. Their relative importance
Management Companies, Pension varies from the point of view of monetary
Funds, Mutual Funds, and Investment policy
Trusts as Nominee Companies, Generally, in developed countries, the
Incorporated / Institutional Portfolio bank deposits are the most important
Managers or their Power of Attorney
component in money supply, while due
holders, University Funds, Endowment
to less banking habits in under-developed
Foundations, Charitable Trusts and
Charitable Societies. countries people want to keep their money
in the most liquid form i.e., currency.
• Qualified Foreign Investor is an
individual, group or association which M3 is the most important component
is a resident in a foreign country. among all money stock measures and is
generally termed as ‘Broad money’.
Acronym: In economics, the money supply or
BIS = Bank for International Settlements money stock is the total amount of
CDS = Credit Default Swap monetary assets available in an economy
CFTC = Commodity Futures Trading at a specific time. There are several ways
Commission to define ‘money’ but standard measures
FII = Foreign Institutional Investor usually include currency in circulation
FMC = Forward Markets Commission
and demand deposits.
ICEX = Indian Commodity Exchange
Money supply data are usually recorded
MCA = Ministry of Corporate Affairs
MCX = Multi Commodity Exchange of and published by the government or
India the central bank of the country. Public
NAFED = National Agricultural Co- and private sector analyst have long
operative Marketing Federation monitored changes in money supply
of India Limited because of its possible effect on the price
NBOT = National Board of Trade level inflation, exchange rate and the
NCDEX = National Commodity and business cycle.
Derivatives Exchange of India
NMCE = National Multi Commodity Inflation
Exchange • As per economics concept, there might
OCEIL = Online Commodity Exchange arise a condition where there is a steep
India Limited increase in the general price of goods
UCC = Unique Client Code
and services, over a time span. During
UNCTAD = United Nations Conference on
such a crisis, a conventional currency
Trade and Development
unit buys lesser goods and services.
Money Supply Thus, there is a reduction in the
M1 measure represents the most liquid purchasing power and affordability.
form of money among four money stock Also, the currency value might dip and
measures adopted by RBI. As we move this could hit export and import and
from M1 to M4, the liquidity gets reduced. wreck and economy.
Indian Financial System 103
• The banks which initiated operations • The short – term structures include the
after the liberalization in 1991, with the State Cooperative Banks (operate at
introduction of economic and financial the state apex level), District Central
reforms, are the new private sector Cooperative Banks (operate at the district
banks. levels) and the Primary Agricultural
• Some of the criteria for being enlisted Credit Societies (operate at the village
were: banks should have minimum net level).
worth of 200 crore; within 3 years of • On the contrary, the long – term
inception, the banks should be issuing structures are bifurcated into State
shares to public and the net worth should Cooperative Agriculture and Rural
rise to 300 crore and the promoters Development Banks (SCARDS) and
should be holding 25% of the paid – up Primary Cooperative Agriculture and
capital. Rural Development Banks (PCARDS)
• These banks are further classified into – • Since these banks follow a complex
Indian and Foreign banks. Some of the operational model, a forum called the
Indian banks are Kotak Mahindra Bank, State Level Task Force on Cooperative
Yes Bank, Bandhan Bank and ICICI Union Banks (TAFCUB) has been
Bank and some of the foreign players are established to supervise and address
HDFC Bank and Deutsche Bank.
grievances related to duality of control
Cooperative Banks (between the RBI and the NABARD).
• These banks have been organized under Scheduled and Non – Scheduled
the cooperative society’s law of the Banks
states.
• The RBI has classified the banks as
• The history of this concept dates back scheduled and non – scheduled.
to the days of poverty and deprivation
in Europe, when Hermann Schulze and
• The scheduled banks are those which
have a paid – up capital and reserve an
Friedrich Wilhelm had proposed this
aggregate value of not less than 5 lakh.
idea.
• Te concept centered round the easy • The scheduled banks form the majority
availability of credit to small businesses of the banking spectrum and comprises
and for the poor sections of the society. of commercial banks (domestic and
Today, microfinance institutions follow international), RRBs and the state –
a similar approach for economic cooperative banks.
development. • For the banks which have not been
• In India, the cooperative banks have included in the Second Schedule of the
been classified into: Urban Cooperative RBI Act, 1934, they were termed as the
Banks and Rural Cooperative Banks. non – scheduled ones.
• Banking protocols of the Urban • Non – scheduled banks are also called
Cooperative Banks are monitored by Local Area Banks (LABs) are further
the RBI and the Urban Cooperatives are classified into Coastal Local Area
further bifurcated into scheduled and Banks (Andhra Pradesh), Capital Local
non – scheduled institutions. Area Banks (Punjab), Krishna Bhima
• Alternatively, the Rural Cooperatives are Samruddhi Local Area Bank Ltd
divided into short – term and long – term (Karnataka and AP) and Subhadra Local
structures. Area Bank (Kolhapur).
108 Indian Financial System
Export – Import Bank of India • After RBI sold its stake in NABARD to
(EXIM) the Indian Government, the former holds
• EXIM Bank is the premier export finance 99% stake and NABARD has a corpus of
institution in India, established in 1982, more than 5000 crore.
under the Export – Import Bank of India • NABARD has been entrusted with
Act, 1981. matters concerning policy, planning
• Since its incorporation, EXIM Bank and operations in the verticals related to
has facilitated cross border trade and credit for agriculture and other economic
investments. activities in the rural areas of India.
• EXIM Bank aides the small and medium • Through assistance of Swiss Agency
for Development and Cooperation,
scale industries, through a varied
NABARD set up the Rural Innovation
portfolio of products and services, in
Fund. The Rural Infrastructure
the complete business cycle, starting
Development Fund (RIDF) is another
from import of technology, product noted scheme of 51,283 crore and have
development, marketing and export. been sanctioned for 2,44,651 projects
• EXIM Bank comprises of a Board of covering irrigation, rural roads and
Directors including representatives bridges, health and education, soil and
from the Government, RBI, Export water conservation schemes.
Credit Guarantee Corporation of India, • To provide mileage to the economic
public sector banks and the business development of the villages, NABARD
community. has process partnered with about 4000
• The main objectives of EXIM Bank is organisations in promoting SHG-Bank
financing, facilitating and promoting Linkage programme, tree-based tribal
foreign trade in India. Also, it is communities’ livelihoods initiative,
responsible for discharging duties of watershed approach in soil and
coordinating the activities of various water conservation, increasing crop
financial institutions, providing finances productivity initiatives through Lead
Crop Initiative or disseminating flow
for export and import of goods and
of information to agrarian communities
services.
through Farmer Clubs.
• EXIM is known to manage finances to
third world countries for export and National Housing Bank (NHB)
is a wholly owned subsidiary of the • National Housing Bank (NHB), a wholly
Government of India. owned subsidiary of Reserve Bank of
India (RBI), was set up on 9 July 1988
NABARD
under the National Housing Bank Act,
• NABARD was established based on 1987.
the recommendation of the Shivaram • NHB is a premier institution for housing.
Committee on July 12, 1982.
• There was a dire need for the
• NABARD is one of the premier agencies incorporation of the NHB because of the
providing economic impetus and non – availability of long – term finance
development in the rural areas. to individual households which was a
• NABARD is India’s specialised bank for major impediment to the development
Agriculture and Rural Development in of the housing sector. Thus, the NHB
India and started with an initial corpus of essentially became an Act of the
100 crore. Parliament.
Indian Financial System 111
• Some of the objectives of the NHB • The Indian Capital market does often
include integrating housing finance provide loans to the SIDBI.
system with the overall finance system, • SIDBI is also permitted to obtain loans
ensuring widespread access of housing from foreign sources through the ‘Single
facilities, promoting affordable housing Window Service.’
credit, upgrading the housing stock in
• SIDBI has contributed to the corpus
the country, encouraging public agencies of 88 venture capital funds which has
to emanate as providers of serviced catalyzed investment of more than 5600
lands, for housing and gauging optimal crore across 472 MSMEs.
utilization of resources.
• A major activity of the NHB includes Micro Finance
extending financial assistance to eligible • Microfinance is a corpus of financial
institutions in the housing sector by way services for entrepreneurs and small
of refinance and direct finance. The NHB businesses lacking access to banking and
is the regulator and supervisor of the allied services.
Housing Finance Companies (HFCs) in • Mohammed Yunus, a Nobel Prize
the country. winner, introduced the concept of
microfinance in Bangladesh in the form
Small Industries Development of the ‘Grameen Bank.’ The concept was
Bank of India (SIDBI) bought by NABARD, under the flagship
• Small Industries Development Bank microfinance initiative.
of India (SIDBI) was established as a • Microfinance accounts for a common
wholly owned subsidiary of IDBI under link between SHGs, NGOs and banks.
the Small Industries Development Bank
of India Act, 1989.
• The main attributes of microfinance
includes loans devoid of security,
• SIDBI is the apex financial institution loans to people below the poverty line,
for promoting, financing and developing regulating loan limits, assisting NGOs
industries in the small scale sector. in deciding terms and conditions for
• The operations were incorporated from granting loans to the poor and exploiting
April 2, 1990. untapped business potential of the rural
• Headquartered in Lucknow, SIDBI areas.
regulates the activities of agencies which • Launched in 1992 as a pilot project,
provide funds to small enterprises. it has since provided its efficacy as a
• The entire portfolio of operations which mainstream programme for banking
were previously handled by the IDBI has by the poor, who mainly comprise the
been shifted to SIDBI. marginal farmers, landless labourers,
• SIDBI provides assistance to the small artisans and craftsmen and people
scale industrial sector through additional involved in hawking and vending
institutions like State Financial business.
Corporation (SFC), Commercial Banks • Microfinance is advantageous as it
and State Industrial Development ensures timely repayment of loans to
Corporation. banks, reduction in transactional costs,
• Besides share capital, SIDBI can both to the poor and the banks and
increase resources by taking loans from maintaining transparency and coherence
the Government of India and RBI. in financial proceedings.
112 Indian Financial System
• There are currently a few social Pvt. Ltd., Janalakshmi Financial Services
interventions that have been combined Pvt. Ltd., S.M.I.L.E Microfinance Ltd.
with micro financing to increase and Utkarsh Microfinance Ltd.
awareness of HIV/AIDS. Such initiatives FOREIGN BANKS
like the “Intervention with Microfinance
for AIDS and Gender Equity” (IMAGE) • The Mandate of the Department of
Financial Services covers the functioning
which incorporates microfinance with
of Banks, Financial Institutions,
“The Sisters-for-Life” program; a
Insurance Companies, Foreign Banks
participatory program that educates on and the National Pension System.
different gender roles, gender-based
violence, and HIV/AIDS infections to
• The Department is headed by the
Secretary, who is assisted by an
strengthen the communication skills and
Additional Secretary, four Joint
leadership of women. Secretaries and two Economic Advisers.
• Few of the most reputed players are SKS • The following tabular column represents
Microfinance Ltd., BSS Microfinance some of the most reputed foreign banks,
Pvt. Ltd., Grameen Financial Services operating in India:
• Not only do these foreign banks of them have been able to make a mark
provide innovative financial services to in this segment of the banking industry.
customers, but also create an all new In an era when retail sector accounts for
banking experience, using the power of 20% of all the credits, the disappearance
technology. of foreign sector banks could greatly
• Foreign banks also play a significant role undermine the competitiveness and
in shaping up a country’s economy and efficiency of the Indian Retail Banking
is a relationship – building tool among Industry.
nations, considering the concepts of
macroeconomics.
• The RBI is primarily responsible for
monitoring the regulatory framework
• Though foreign banks bring with them all
with respect to the foreign banks.
the technologies and expertise, yet none
Indian Financial System 113
1. What are the three important components Which of the above statements are
of the Indian Money Market? TRUE?
(a) Liquid Money, White Money and (a) (i) and (ii)
Black Money (b) (ii) and (iii)
(b) Short – term money and Long – (c) (i) and (iii)
term money (d) (i), (ii) and (iii)
(c) Call Money, Notice Money and 6. For which of the following amounts,
Term Money can T – Bills be issued?
(d) Liquid Money, Notice Money
(a) ` 75, 000
and Term Money
(b) ` 70, 000
2. Consider the following statements with
(c) ` 60, 000
respect to the Indian Money Markets
(i) In India, the privatization accounts (d) ` 45, 000
for catering to the majority of the 7. Which is the most significant utility of
financial demands the commercial bill market?
(ii) Inter – Bank Market involves (a) Timely collection of interests
transactions between banks for (b) Short – term funds for business
creating financial equilibrium empowerment
(iii) Most of these exchanges take (c) Create a stable seller – buyer
place considering floating interest relationship
rates. (d) Identify payment trespassers.
Which of the above statements are 8. What is the biggest challenge for the
TRUE?
commercial bill?
(a) (i) & (ii) (b) (ii) & (iii)
(c) (i) & (iii) (d) (i), (ii) & (iii) (a) Big business conglomerates
3. What is T – Bills? (b) Private banks
(a) Telephone Bills (c) Consumers
(b) Telemarketing Bills (d) Sellers.
(c) Tenure Bills 9. Consider the statements related to the
(d) Treasury Bills Collateral Loan Market
4. Which country’s government used T – (i) There is a huge risk involved in
Bills for the first time? the high value loans
(a) USA (ii) Collateral Loan Market facilitates
(b) USSR loan sanction real fast
(c) UK (iii) Maturities on such loans are no
(d) India longer than one year.
5. Which of the following aspects are
Which of the above statements are
unique to the USP of the T – Bills?
TRUE?
(i) An auction process
(a) (i) and (ii)
(ii) Competitive returns as per
customers’ specifications (b) (ii) and (iii)
(iii) Government bears the (c) (i) and (iii)
responsibility of the final payment. (d) (i), (ii) and (iii)
114 Indian Financial System
10. Who are the lenders in the case of (c) when the exchange rate of a
collateral loans? currency falls
(a) Asset Management Companies (d) when fiscal deficit exceeds
(b) Banks balance of payment deficit
(c) Insurance Companies 16. According to the Chakravarthy
(d) Credit Rating Agencies Committee, one of the principal causes
11. Which financial enterprise assists in affecting price stability in India is:
covering short – term obligations like (a) existence of black money
payroll? (b) violent fluctuation in agricultural
(a) Commercial Bill Market production
(b) Collateral Loan Market (c) India’s precarious balance of
(c) Treasury Bill Market payment position
(d) Commercial Paper Market (d) fiscal deficit
12. Consider the following attributes of 17. Which of the following statements
correctly expresses the difference
gilt – edged securities.
between preference shares and equity
(i) Safe investment
shares?
(ii) Complete liquidity
(a) equity shareholders have no
(iii) Bulk investment
voting right but preference
Which of the above is TRUE?
shareholders have voting rights
(a) (i) and (ii)
(b) preference shareholders have
(b) (i) and (iii) no have voting rights but equity
(c) (ii) and (iii) shareholders have voting rights
(d) (i), (ii) and (iii) (c) preference shareholders have
13. The first public sector bank in India no right to profit whereas equity
which obtained license for Internet shareholders have a right to profit
Banking from RBI is- (d) preference shareholders get
(a) Punjab National Bank exemption from taxes while
(b) Oriental Bank of Commerce equity shareholders do not get
(c) Corporation Bank any exemption
(d) State Bank of India 18. Which one of the following
14. Which of the following is not a function governmental steps has proved
of the Securities and Exchange Board relatively effective in controlling the
of India (SEBI)? double digit rate of inflation in the
(a) Supervising the working of the Indian economy during recent years?
Stock Exchanges (a) enhanced rate of production of all
(b) Underwriting new capital issues consumer goods
(c) Regulating merchant banks and (b) streamlined public distribution
mutual funds system
(d) promoting the development of a (c) pursuing an export oriented
healthy capital market strategy
15. Inflation, in theory, occurs: (d) containing budgetary deficit and
(a) when the price of essential unproductive expenditure
commodities outstrips income 19. Which one of the following is not a
(b) when money supply grows at feature of “Value Added Tax” ?
a higher rate than GDP in real (a) It is multi-point destination-
terms based system of taxation.
Indian Financial System 115
26. The concept of ‘Universal Banking’ 31. Which among the following would
was implemented in India on the most likely follow if the Reserve
recommendations of: Bank of India effects selling of the
(a) Abid Hussain Committee securities?
(b) R H Khan Committee (a) The cash resources at the disposal
(c) S Padmanabhan Committee of the commercial banks increase.
(d) Y H Malegam Committee (b) The cash resources at the disposal
27. When there is an inflationary trend in of the commercial banks get
the economy, what would be trend in diminished.
the pricing of the Bank Products? (c) The cash resources of the
(a) Increasing Trend commercial banks remain
(b) Decreasing Trend
unchanged.
(c) Constant Trend
(d) None of the above.
(d) There is no relevance of the
32. An excise duty is a charge on which of
inflation in pricing of the Banking
the following?
Products
(a) Export of goods
28. As per Section 24 (2A) of Banking
Regulation Act 1949, every banking (b) Production of goods
company in India has to maintain (c) Production or sale of goods
equivalent to an amount which shall (d) Consumption of good
not at the close of the business on 33. The most active segment of the Money
__________ be less than 25% of Market in India is which one of the
the total of its net demand and time following?
liabilities, which is known as SLR. (a) Call Money / Notice Money
Which among the following is the Market
correct option? (b) Repo / Reverse Repo
(a) Any Day (c) Commercial Paper (CP)
(b) Any Week (d) Certificate of Deposit (CD)
(c) Any Fortnight 34. What does venture capital mean?
(d) Any Month (a) A short-term capital provided to
29. For which of the following, the industries
Reserve Bank of India has stipulated (b) A long-term start-up capital
a maximum Capital Adequacy provided to new entrepreneurs
Requirements in India? (c) Funds provided to industries at
(a) Private Sector Banks times of incurring losses
(b) Banks that Undertake Insurance (d) Funds provided for replacement
Business. and renovation of industries
(c) Local Area Banks
35. Consider the following statements :
(d) Scheduled Commercial Banks
The function of the Reserve Bank of
30. Which one of the following Public
India does not include:
Sector Bank’s emblem figures a dog
1. Open market operations
and the words ‘faithful friendly, in it?
(a) Punjab National Bank 2. Monitoring revenue collection
(b) Syndicate Bank 3. Supervising non-banking finance
(c) Oriental Bank of Commerce companies
(d) State Bank of India 4. Review of public expenditure
Indian Financial System 117
Which of the statement/s given above 39. Which of the following measures
is/are correct? would result in an increase in the
(a) 1 only (b) 2 and 4 money supply in the economy?
(c) 1, 3 and 4 (d) 1, 2, 3 and 4 1. Purchase of government securities
36. Consider the following statements. from the public by the Central
1. The National Housing Bank, Bank
the apex institution of housing 2. Deposit of currency in
finance in India, was set up as a commercial banks by the public
wholly-owned subsidiary of the 3. Borrowing by the government
Reserve Bank of India. from the Central Bank
2. The Small Industries 4. Sale of government securities to
Development Bank of India was the public by the Central Bank
established as a wholly-owned Select the correct answer using the
subsidiary of the Industrial codes given below :
Development Bank of India. (a) 1 only (b) 2 and 4
Which of the statement given above is/ (c) 1 and 3 (d) 2, 3 and 4
are correct? 40. Consider the following statements:
(a) 1 only (b) 2 only 1. High growth will lead to inflation.
(c) Both 1 and 2 (d) Neither 1 nor 2 2. High growth will lead to
37. Why is the offering of “teaser loans’’ deflation.
by commercial banks a cause of Which of the statements given above
economic concern ? is/are correct?
(a) Only 1 (b) Only 2
1. The teaser loans are considered to
(c) Both 1 and 2 (d) Neither 1 nor 2
be an aspect of sub-prime lending
41. Which one among the following is an
and banks may be exposed to the
appropriate description of deflation?
risk of defaulters in future.
(a) it is a sudden fall in the value of a
2. In India, the teaser loans are
currency against other currencies
mostly given to inexperienced
(b) It is a persistent recession in the
entrepreneurs to set up
economy
manufacturing or export units.
(c) It is a persistent fall in the general
Which of the statements given above
price level of goods and services
is/are correct?
(d) It is fall in the rate of inflation
(a) 1 only over a period of time
(b) 2 only 42. Consider the following statements
(c) Both 1 and 2 regarding Non-Banking Finance
(d) Neither 1 nor 2 Companies (NBFCs):
38. Name the 3 commodities in the 1. NBFCs can also engage in Micro-
Wholesale Price Index. Finance Activities.
1. Primary articles 2. Housing-finance companies
2. Fuel, power, light and lubricants form a distinct sub-group of the
3. Manufactured products NBFCs.
4. Food articles and industrial raw 3. The deposit insurance facility of
materials the Deposit Insurance and Credit
(a) 1, 2 and 3 (b) 2, 3 and 4 Guarantee Corporation is not
(c) 1, 3 and 4 (d) 1 and 3 available for NBFC depositors.
118 Indian Financial System
Which among the above statement(s) 47. With reference to inflation in India,
is/are not correct? which of the following statements is
(a) Only 1 (b) 1 and 3 correct?
(c) All of there (d) None of these (a) Controlling the inflation in
43. Which among the following are the India is the responsibility of the
‘Credit-Rating Agencies’ of India? Government of India only
1. CRISIL 2. CARE (b) The Reserve Bank of India has no
3. ICRA 4. ONICRA role in controlling the inflation
(a) 1 and 3 (b) 1, 2 and 3 (c) Decreased money circulation
(c) 1, 3 and 4 (d) All of them helps in controlling the inflation
44. Which among the following are the (d) Increased money circulation
wholly/partly owned subsidiaries of helps in controlling the inflation
the Reserve Bank of India (RBI)? 48. The Reserve Bank of India regulates
1. Deposit Insurance and Credit the commercial banks in matters of:
Guarantee Corporation (DICGC) 1. liquidity of assets
2. National Housing Bank (NHB) 2. branch expansion
3. National Bank for Agriculture and 3. merger of banks
Rural Development (NABARD) 4. winding-up of banks
4. Bharatiya Reserve Bank Select the correct answer using the
Note Mudran Private Limited codes given below.
(BRBNMPL)
(a) 1 and 4 only
(a) 1 and 4 (b) 1, 2 and 4
(b) 2, 3 and 4 only
(c) 2, 3 and 4 (d) All of them
(c) 1, 2 and 3 only
45. Consider the following steps:
(d) 1, 2, 3 and 4
1. Banking Department gets
49. Which of the following grants /
currency from the Issue
grant direct credit assistance to rural
Department
households?
2. Government puts the currency in
1. Regional Rural Banks
circulation
2. National Bank for Agriculture
3. Central Government incurs a
and Rural Development
deficit in its Budget
4. Government Sells Treasury Bills 3. Land Development Banks
to Banking Department of RBI Select the correct answer using the
Which among the following is the codes given below.
correct order of the above steps? (a) 1 and 2 only (b) 2 only
(a) 1 2 3 4 (b) 2 3 4 1 (c) 1 and 3 only (d) 1, 2 and 3
(c) 3 4 1 2 (d) 4 3 2 1 50. Which among the followings is the
46. Consider the following: type of inflation?
1. Commercial Banks 1. Demand Pull Inflation
2. Central Bank of India 2. Cost Push Inflation
3. Government 3. Stagflation
Which among the above can create 4. Hyperinflation
money? Choose the correct type.
(a) Only 1 (b) Only 1 & 2 (a) 1, 2, 3, 4 (b) 1, 2
(c) Only 3 (d) All 1 2 & 3 (c) 3, 4 (d) 1, 4
Indian Financial System 119
51. What is the difference between Inflation 54. Which among the following are the
and Deflation? Nationalised Banks?
1. Inflation is an increase in price 1. Bank of India
of goods while Deflation is that 2. Punjab National Bank
state in which the value of money 3. Canara Bank
rises and the price of goods and 4. United Commercial Bank
services falls. Choose the code.
2. Deflation is an increase in price (a) 1 and 2 (b) 3 and 4
of goods while Inflation is that (c) 1 and 4 (d) 1, 2, 3, 4
state in which the value of money 55. What are the reforms of Narsimham
rises and the price of goods and Committee on Banking sector?
services falls. 1. Nationalisation of banks should
3. Inflation is that state in which not take place any more.
the value of money rises and the 2. Private and foreign banks should
price of goods and services falls be set up to promote competition.
while deflation is an increase in 3. There should be a phased
price of goods. reduction of CRR and SLR.
Choose the correct difference between Choose the correct option.
Inflation and Deflation. (a) 1 only
(a) 1 only (b) 2 only (b) 2 only
(c) 3 only (d) 1, 2, 3 (c) 3 only
52. Which among the following is the type (d) All of the Above
of organised sector of Indian money 56. Consider the following statement:
market? 1. As per recommendations of
1. Call money market the Narasimham Committee,
2. Treasury Bill Market it has been decided that credit
3. Commercial Bill Market facilities granted by banks will
4. Collateral loan market be classified into performing and
Choose the correct code. non-performing assets (NPA)
(a) 1 and 2 2. NPA is a loan which is in default
(b) 3 and 4 for more than nine months.
(c) 1, 2, 3, 4 Choose the incorrect statement.
(d) None of the Above (a) 1 only
53. Consider the following statement: (b) 2 only
1. Ad hoc treasury bills are sold (c) 1 and 2
to the banks and public and are (d) None of the Above
freely marketable. 57. Choose the type of capital market:
2. Regular treasury bills are not 1. Securities Market
sold to the banks and the general 2. Financial institutions
public, and are not marketable. 3. Gill-edged market
Choose the correct code. 4. Incorporated securities
(a) 1 only Which among the following code is
(b) 2 only correct?
(c) 1 and 2 (a) 1 and 4 (b) 1 and 3
(d) None of the Above (c) 1 and 2 (d) 3 and 4
120 Indian Financial System
58. Consider the following statement: 61. Which of the following markets are
1. GIC was formed in November independently regulated by Forward
1972. Market Commission?
2. The 107 private companies (a) Mutual Funds
operating in the field were (b) Commodity Futures Market
grouped together into four - (c) Stock Market
National Insurance Company, (d) Foreign Exchange Markets
United India Insurance Company, 62. According to the Chakravarthy
Oriental Insurance Company and Committee, one of the principal causes
New India Assurance Company. affecting price stability in India is:
Choose the incorrect statement. (a) existence of black money
(a) 1 only (b) 2 only (b) violent fluctuation in agricultural
(c) 1 and 2 production
(d) None of the Above (c) India’s precarious balance of
59. Name of four institutions that are payment position
regulated by the RBI as all-India FIs: (d) fiscal deficit
1. Export Import Bank of India 63. Which one of the following statements
(EXIM Bank) is an appropriate description of
2. National Bank for Agriculture and deflation?
Rural Development (NABARD) (a) It is a sudden fall in the value of a
3. National Housing Bank (NHB) currency against other currencies
4. Small Industries Development (b) It is a persistent recession in both
Bank of India (SIDBI) the financial and real sectors of
Choose the correct answer. economy
(a) 1 and 2 (c) It is a persistent fall in the general
price level of goods and services
(b) 3 and 4
(d) It is a fall in the rate of inflation
(c) 1, 3, 4
over a period of time
(d) 1, 2, 3, 4 64. The International Development
60. Consider the following statement: Association, a lending agency, is
1. IRDA is a multimember nodal administered by the:
agency (a) International Bank for
2. It is vested with regulatory powers Reconstruction and Development
in respect of the insurance sector (b) International Fund for
similar to those vested in SEBI in Agricultural Development
respect of the capital markets and (c) United Nations Development
of RBI for the banking sector. Programme.
(d) United Nations Industrial
3. The IRDA Act, 1999 cleared the
Development Organization
way for private sector entry into
65. A fall in ‘SENSEX’ means:
the insurance business. (a) a fall in prices of shares of
Choose the correct statement. all companies registered with
(a) 1 only Bombay Stock Exchange
(b) 2 only (b) a fall in prices of shares of
(c) 3 only all companies registered with
(d) All of the Above National Stock Exchange
Indian Financial System 121
(c) an overall fall in prices of shares 70. Consider the following statements:
of group up companies registered 1. Sensex is based on 50 of the
with Bombay Stock Exchange most important stocks available on the
(d) a fall in prices of shares of all Bombay stock Exchange (BSE).
companies belonging to a group 2. For calculating the Sensex, all
of companies registered with the stock are assigned proportional
Bombay Stock Exchange weightage.
66. From time to time, which among 3. New York Stock Exchange is the
the following body publishes the oldest stock exchange in the world.
“Exchange Control Manual” in context Which of the statements given above
with the Foreign Exchange in India? is/are correct?
(a) Foreign Trade Promotion Board (a) 2 only (b) 1 and 3
(b) Department of Commerce (c) 2 and 3 (d) none
(c) Reserve Bank of India 71. Brent index is associated with :
(d) SEBI (1) crude oil prices
67. The Laffer curve is the graphical (2) copper future prices
representation of: (3) gold future prices
(a) The relationship between tax
(4) shipping rate index
rates and absolute revenue these
Which of the following is true?
rates generate for the government.
(a) Only 1 (b) Only 2
(b) The inverse relationship between
(c) Only 3 (d) Only 4
the rate of unemployment and the
72. Which of the following are the
rate of inflation in an economy.
provisions of SARFAESI Act which
(c) The inequality in income
enables banks to reduce their non-
distribution.
(d) The relationship between performing assets (NPAs)?
environmental quality and 1. Enforcement of Security Interest
economic development. by secured creditor (Banks/
68. Which among the following is true Financial Institutions).
about “deficit financing”? 2. Transfer of non- performing
(a) Public expenditure in excess of assets to asset reconstruction
public revenue company which will then dispose
(b) Public revenue in excess of of those assets and realise the
public expenditure proceeds.
(c) New currency replaced by old 3. To provide a legal framework for
currency securitization of assets.
(d) None of above 4. Assisting banks in making
69. What do we call an arrangement the credibility track record
whereby an issuing Bank at the request of customers under Credit
of the Importer (Buyer) undertakes Information Bureau of India
to make payment to the exporter (CIBIL).
(Beneficiary) against stipulated (a) 1 and 2 (b) 1, 2 and 3
documents? (c) 2, 3 and 4 (d) 1, 2, 3 and 4
(a) Bill of Exchange 73. Which among the following are the
(b) Letter of Exchange ‘Credit-Rating Agencies’ of India?
(c) Letter of Credit 1. CRISIL 2. CARE
(d) Bill of Entry 3. ICRA 4. ONICRA
122 Indian Financial System
89. With reference to the National Which of the statements given above
Investment Fund to which the is/are correct ?
disinvestment proceeds are routed, (a) 1 and 2 (b) 2 only
consider the following statements ? (c) 3 and 4 (d) 3 only
1. The assets in the National 90. SEZs were established with the
Investment Fund are managed by objective of ____ .
the Union Ministry of Finance. 1. attracting foreign investment
2. The National Investment Fund directly.
is to be maintained within the 2. protect domestic market from
Consolidated Fund of India. competition from multinationals.
3. Certain Asset Management 3. providing more capital to
companies are appointed as the agricultural and allied activities.
fund managers. (a) 1 only
4. A certain proportion of annual (b) 2 only
income is used for financing (c) 3 only
select social sectors. (d) All of the above
Indian Financial System 125
1. (c) The three important components 10. (b) Banks are the lenders. In case of
of the Indian Money Market payment default, the property is
are call money (one – day seized by the hypothecary bank.
transactions), notice money 11. (d) Commercial paper market
(transaction between 2 – 14 days) provides a means for corporations
and term money (transactions to borrow money to cover short-
exceeding a fortnight). term debt obligations, such as
2. (b) Options ii and iii are correct payroll.
as Inter – bank market implies 12. (d) Gilt–edged securities provide
transaction (borrowing and zero risk, 100% liquidity and
lending) between banks and all massive returns.
these policies deploy floating 13. (a) 14. (b) 15. (b)
rates of interest, as they are
subjected to market risks. 16. (b) 17. (c) 18. (d)
3. (d) T – bills stands as an acronym for 19. (d) VAT is the State Subject.
treasury bills. 20. (c) Deflation is a decrease in the
4. (a) USA had introduced Treasury prices of goods and services. It
Bills for the first time in the occurs when the annual inflation
history of short – term financial rate falls below 0%, which is
markets. negative inflation rate. This is
5. (d) All three options are appropriate different from Disinflation which
as T – Bills are issued by a is a slow-down in the inflation
bidding process; for competitive rate. This is a situation when
T – Bills, the bidder has to specify inflation declines to lower levels
returns and in case of maturity, the but prices continue to rise.
government pays the par value to
21. (a) 22. (c) 23. (c)
the bearer.
24. (c)
6. (a) T – Bills can be issued for a
minimum amount of ` 25, 000 25. (b) Foreign Banks and Regional
and in multiples of the same. Rural Banks also come under
Thus option A suffices. the category of Scheduled
7. (b) A commercial bill provides Commercial Banks. Now, the
short – term boost for business banks are free to determine their
expansion savings bank deposit interest
8. (a) The MNCs and big corporate rate, subject to the following two
do not abide by the principle conditions:
of timely payment and hence 1. Each bank will have to offer
challenges the conventional a uniform interest rate on
protocol of the commercial bill. savings bank deposits up to
9. (a) The third statement is wrong as ` 1 lakh,irrespective of the
maturities on collateral loans are amount in the account within
no longer than nine months. this limit.
126 Indian Financial System