Banking theory and regulatory mechanism

Section _A
1. State any two functions of banking?
The two functions of banking are Accepting deposits and lending loans.
  2 .state the meaning of repo rate?
 Repo rate is the rate at which the central bank of a country (Reserve Bank of
India in case of India) lends money to commercial banks in the event of any
shortfall of funds. Repo rate is used by monetary authorities to control
inflation.
 3. What is basel1 account?
Basel I is a set of international banking regulations put forth by the Basel
Committee on Bank Supervision (BCBS) that sets out the minimum capital
requirements of financial institutions.
4. What are the conditions to be fulfilled by scheduled banks?
·         Scheduled Banks are those banks whose minimum paid up capital and
reserve and amount to 25 lakh.
·         These bank have to submit details of their activities to the Reserve Bank of
India every week.
5. What is standard asset?
Standard Asset is one which does not disclose any problems and which does
not carry more than normal risk attached to the business. Such an asset
should not be an NPA.
6. Give two Examples for nbfc?
·         HDFC  LTD
·         ADITYA BIRLA FINANCE LTD
7. Give the meaning of open market operations?
An open market operation (OMO) is an activity by a central bank to give (or
take) liquidity in its currency to (or from) a bank or a group of banks.
8. What is benchmark prime lending rate?
Benchmark Prime Lending Rate (BPLR) Base rate is the minimum rate at
which bank can lend.
 9. What are included in the money concept of m1?
M1 includes:  
Currency with public
Demand deposit in all banks (e.g. current account, savings account)
Other deposits with RBI
10. What is hire purchase and leasing company?
·         A hire purchase is a method of buying goods through making instalment
payments over time.
·         Financial leasing companies engage in financing the purchase of concrete
assets.
11. State any two organization to which banking regulation act 1949 does not
apply?
Cooperative and Agriculture
12. Net owned fund- explain
Net owned Fund will consist of paid up equity capital, free reserves, balance in
share premium account and capital reserves representing surplus

Section –B
13. What are the powers of RBI under RBI act 1934?
a) Traditional functions
b) Development functions
c) Supervisory functions

14. Trace the origin and enhancement of banking regulation act 1949?
Bank regulation is a form of government regulation which subjects banks to
certain requirements, restrictions and guidelines, designed to create market
transparency between banking institutions and the individuals and
corporations with whom they conduct business, among other things.
15. What are the restriction on capital adequacy of commercial banks by rbi?
1. The bank capital shall be the means to ensure the implementation,
reliability and sustainability of the banking activities.
2. Capital adequacy shall be the essential element to assess a bank’s financial
condition, solvency, sustainability and reliability, which should comply with
the essence and goals of the bank’s capital.
3. Capital adequacy of a bank shall be assessed based on various capital ratios
and the minimum regulatory capital of the bank.
16. What are the services rendered by NBFC?
 1. Mobilisation of savings:
2. Developing saving habits:
3. Providing housing finance:
4. Increasing the standard of living:
5. Promoting economic development:
17. Enumerate the reasons for failure of Nbfc?
A) SOME NBFCS, IN THE HASTE OF MAKING PROFITS DIVERTED
THEIR FUNDS INTO INVESTMENTS IN SHARES ETC. RATHER THAN
STICKING TO SAFER ACTIVITIES LIKE LENDING. SUCH FUNDS
WERE OFTEN LOST DUE TO VAGARIES OF STOCK MARKET.
B) IN SOME NBFCS CASES, FUNDS WERE DIVERTED TO OTHER
GROUP COMPANIES OF THE NBFC AND EVENTUALLY LOST.
C) SOME NBFCS LACKED EXPERIENCE IN LENDING AND
RECOVERIES.
18. Explain the concept of money supply?
Different measures of money supply. Not all of them are widely used and the
exact classifications depend on the country. M0 and M1, also called narrow
money, normally include coins and notes in circulation and other money
equivalents that are easily convertible into cash. M2 includes M1 plus short-
term time deposits in banks and 24-hour money market funds. M3 includes
M2 plus longer-term time deposits and money market funds with more than
24-hour maturity. The exact definitions of the three measures depend on the
country. M4 includes M3 plus other deposits. The term broad money is used
to describe M2, M3 or M4, depending on the local practice.
19. Give the meaning of money supply concepts of M1, M2, M3 and M4 as
adopted by RBI?
M1 includes:  
Currency with public
Demand deposit in all banks (e.g. current account, savings account)
Other deposits with RBI
M2:
M2= M1 + Post office bank savings*
*Similar to regular banks, Post office also offers their time savings account,
recurring deposit account, time deposit account. Here we count the Post office
savings (=”DEMAND deposit” type) only.
M3 (Broad Money):
Also called Money aggregate
M3 = M1 + Time deposits with commercial banks (Fixed deposits, Recurring
deposits).
MIND IT: M3= M1+time and NOT M3=M2+time.      
M4
M4= M3 + total post office deposits.*

Section-c
20. Discuss the nature and scope of banking regulation act 1949?
According to section6 (1), the scope of banking regulation act defines the
following
(a)- The borrowing, raising, or taking up of money;
- The lending or advancing money either upon or without security;
- the drawing, making, accepting; discounting, buying, selling collecting and
dealing in bills of exchange, hoodies, promissory notes.
b) – acting as agents for Government or local authority or any other person
(c) Contracting for public and private loans and negotiating and issuing the
same;
(d) Carrying on and transacting every kind of guarantee and indemnity
business.
21. What are the recommendation of narasimham committee?
Two such expert Committees were set up under the chairmanship of They
submitted their recommendations in the 1990s in reports widely known as the
Narasimham Committee-I (1991) report and the Narasimham Committee-II
(1998) Report. These recommendations not only helped unleash the potential
of banking in India, they are also recognized as a factor towards
minimizing the impact of 
22. Argue favouring rationalization of interest rates?
1. High Interest to impact economy
2. Inflation to be under control.
3. Higher liquidity in markets.
4. Cost of living to rise further
5. Real Estate growth to continue
23. Explain the effectiveness of open market operation and CRR?
Open market operation: A central bank can therefore manage the money
supply–that is, conduct monetary policy, in three ways namely by changing
the monetary base through open market operations, by changing the
monetary base through discount lending and by changing the money
multiplier by changing the required reserve ratio.
Cash reserve ratio: Under CRR a certain percentage of the total bank
deposits has to be kept in the current account with RBI which means banks do
not have access to that much amount for any economic activity or commercial
activity.