Important Questions Banking

1.) What is capital formation and process of capital formation

Capital formation means increasing the stock of real capital in a country.

In other words, capital formation involves making of more capital goods such as machines, tools,
factories, transport equipment, materials, electricity, etc., which are all used for future production
of goods.

Process of capital formation:

a) Creation of savings:

An increase in the volume of real savings so that resources, that would have been devoted to the
production of consumption goods, should be released for purposes of capital formation.

Creation of savings:

Savings are done by individuals or households. They save by not spending all their incomes on
consumer goods. When individuals or households save, they release resources from the
production of consumer goods. Workers, natural resources, materials, etc., thus released are
made available for the production of capital goods.

b) Mobilization of savings:

A finance and credit mechanism, so that the available resources are obtained by private investors
or government for capital formation.

The next step in the process of capital formation is that the savings of the households must be
mobilized and transferred to businessmen or entrepreneurs who require them for investment. In
the capital market, funds are supplied by the individual investors (who may buy securities or
shares issued by companies), banks, investment trusts, insurance companies, finance
corporations, governments, etc.

c) Investment of savings:

The act of investment itself so that resources are actually used for the production of capital
goods.

For savings to result in capital formation, they must be invested. In order that the investment of
savings should take place, there must be a good number of honest and dynamic entrepreneurs in
the country who are able to take risks and bear uncertainty of production.
 2.) What is the role of banking and financial institution in economic development?

The banking system plays an important role in the modern economic world. Banks collect the
savings of the individuals and lend them out to business- people and manufactureRs. Bank loans
facilitate commerce.

Manufacturers borrow from banks the money needed for the purchase of raw materials and to
meet other requirements such as working capital. It is safe to keep money in banks. Interest is
also earned thereby. Thus, the desire to save is stimu-lated and the volume of savings increases.
The savings can be utilized to produce new capital assets.

The banking system facilitates internal and international trade. A large part of trade is done on
credit. Banks provide references and guarantees, on behalf of their customers, on the basis of
which sellers can supply goods on credit. This is particularly important in international trade
when the parties reside in different countries and are very often unknown to one another.

Role of banks in economic development of country.

1. Banks promote capital formation.

2. Investment in new enterprises.

3. Promotion of trade and industry.

4. Development of agriculture.

5. Balanced development of different regions.

6. Influencing economy activity.

7. Implementation of monetary policy.

8. Monetization of the economy.

9. Export promotion cells.

Role of financial institutions in India

1. One of the more recent microeconomic approaches to economic growth is the promotion
of entrepreneurial activities.

2. Entrepreneurial efforts have been found to generate a wide range of economic benefits,
including new businesses, new jobs, innovative products and services.

3. Financing the small scale sector: credit is the prime input for sustained growth of small
scale sector and its availability is thus a matter of great importance.
 4. Micro finance credit: providing loans to unemployed or low-income individuals or
groups who would otherwise have no other means of gaining financial services.

5. State level institutions: several financial institutions have been set up at the state level
which supplements the financial assistance provided by the all India institutions.

6. Insurance and financial services: the institutions are supporting a broad range of financial
services to help expand local capital markets and develop local financial infrastructure.

3.) Write short note on

a) Retail and wholesale banking

S.no Retail banking Whole sale banking

1 Retail banking refers to that banking which Wholesale banking refers to that banking which
targets individuals and the main focus of targets corporate or big customers and their main
such banks is retail customer focus is providing services to corporate clients.

2 Ticket size of loans given in retail banking is Where ticket size of loan is very high and due to
low and due to it impact of NPA will be less it impact of NPA is more pronounced.
pronounced due to diversification

3 Loans such as car, housing, educational, Loans such as loan for setting industry,
personal loans are some of the examples of machinery advance, and export credit are some
loans given in retail banking of the examples of loans given in wholesale
banking.

4 Monitoring and recovery if the loan turn out Due to low customer base it is easy to monitor as
to be NPA in retail banking is more difficult well recover the loan given to customeRs.
because customer base is wide

5 Cost of deposit is low in retail banking Small number of branches is sufficient to cater to
because retail customers do not have the corporate clients.
bargaining power due to less deposit with
them

b) Near banks
Near money is a financial economics term describing non-cash assets that are highly liquid and
easily converted to cash. Near money can also be referred to as quasi-money or cash equivalents.
The nearness of near moneys is important for determining liquidity levels. Examples of near
money assets include savings accounts, certificates of deposit (cds), foreign currencies, money
market accounts, marketable securities, and treasury bills.
 Key takeaways

 Near money refers to non-cash assets.

 Near money can easily be converted to cash.
 Near money and the nearness of near moneys are important considerations in a variety of
different types of liquidity analysis.

c) Rural banking.

 Rural banking in india started since the establishment of banking sector in india.
 As the name suggests, includes banking organizations operating in rural or sub-urban
background.
 The area of operation is limited to few districts or a region of a state. •started with the
main focus on agricultural sector.
 Gradually raise its participation in trade, commerce, industry and other productive
activities in the rural areas.

d) Corporate banking
 Corporate banking is a specialized division of a commercial bank that offers various
banking solutions, such as credit management, asset management, cash management, and
underwriting to large corporations as well as to small and medium-sized enterprises
(smes).

 Under corporate banking the corporate customers are identified as large and mid
corporates.companies having annual sales turnover of over Rs. 500 crore are classified as
large corporate and those having annual sales turnover between rs 100 crore to 500 crore
are classified as mid corporate.

e) Universal banking
 Universal banking is a combination of commercial banking, investment banking,
development banking, insurance and many other financial activities. It is a place where
all financial products are available under one roof.

 So, a universal bank is a bank which offers commercial bank functions plus other
functions such as merchant banking, mutual funds, factoring, credit cards, housing
finance, auto loans, retail loans, insurance, etc.

 Universal banking is done by very large banks. These banks provide a lot of finance to
many companies. So, they take part in the corporate governance (management) of these
companies. These banks have a large network of branches all over the country and all
over the world. They provide many different financial services to their clients.

4.) Explain briefly the principles of lending?

1. Liquidity
 Liquidity is an important principle of bank lending. Bank lend for short period only
because they lend public money which can be withdrawn at any time by depositoRs.

 They therefore advance loans on security of such assets which are easily marketable and
convertible into the cash at short notice.

 A bank chooses such securities in its investment portfolio which possess sufficient
liquidity. It is essential because if the bank needs cash to meet the urgent requirement of
its customers, it should be in position to sell some of the securities at a very short notice
without disturbing their market prices much.

 There are certain securities such as central, states and local govt. Bonds which are easily
saleable without affecting the price of market

2. Safety
 The safety offunds lent is another principle of lending.

 Safety means that the borrower should be able to repay the loan and interest in time at
regular intervals without default.

 The repayment of the loan depend upon the nature of the security, character of the
borrower, his capacity to repay and his financial standing.

 Like other investment bank investments involves risk but the degree of risk varies with
the type of the securities of the central govt. Are safer than those of the state govt. And
local bodies.

3. Diversity
 In choosing its investment portfolio a commercial bank should follow the principle of
diversity.

 It should not invest its surplus funds in a particular type of securities. It should choose the
shares and debentures of different types of industries situated in different regions of the
country. The same principle should be followed in the case of state govt. And local
bodies.

 Its aim at minimizing risk of the investment portfolio of a bank. It also applies to the
advancing of loans to varied types of firms, industry, business and trades.do not keep all
eggs in one basket ".
4. Stability
 Another important principle of bank's investment policy should be to invest in those
stocks and securities which possess a high degree of stability in their price.

 The bank cannot afford any loss on the value of its securities. It should therefore invest it
funds in the shares of reputed companies where the possibility of decline in their prices is
remote. Govt. Bonds and debentures of companies carry fixed rates of interest.

 Their value change with change in the market rate of interest. But the bank is forced to
liquidate a portion of them to meet its requirement of cash in cash of financial crisis.

 Otherwise they run to their full term of 10 years or more and change in the market rate of
interest do not affect them much. Thus banks investments in debentures and bonds are
more stable than in the shares of the companies.

5.) What is study of borrower & project evaluation criteria.

1) Credit worthiness-a history of trustworthiness, a moral character, and

expectations of continued performance demonstrate a debtor's ability to pay.
Creditors give more favorable terms to those with high credit ratings via lower
point structures and interest costs.
2) Size of debt burden-creditors seek borrowers whose earning power exceeds the
demands of the payment schedule. The size of the debt is necessarily limited by
the available resources. Creditors prefer to maintain a safe ratio of debt to capital.
3) Loan size-creditors prefer large loans because the administrative costs decrease
proportionately to the size of the loan. However, legal and practical limitations
recognize the need to spread the risk either by making a larger number of loans, or
by having other lenders participate.
4) Frequency of borrowing-customers who are frequent borrowers establish a
reputation which directly impacts on their ability to secure debt at advantageous
terms.
5) Length of commitment-lenders accept additional risk as the time horizon
increases. To cover some of the risk, lenders charge higher interest rates for
longer term loans.
6) Social and community considerations-lenders may accept an unusual level of
risk because of the social good resulting from the use of the loan. Examples might
include banks participating in low-income housing projects or business incubator
programs.
7) Evaluating credit worthiness
In general, the granting of credit depends on the confidence the lender has in the
borrower's credit worthiness. When both lender and borrower are businesses,
 much of the evaluation relies on analyzing the borrower's balance sheet, cash flow
statements, inventory turnover rates, debt structure, management performance,
and market conditions.
6.) What are the provisions of banking regulation act 1949?

1. Use of words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ (sec.7): according

to sec. 7 of the banking regulation act, no company other than a banking company shall
use the words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ and no company shall
carry on the business of banking in India, unless it uses the above mentioned words in its
name.

2. Prohibition of trading (sec. 8): according to sec. 8 of the banking regulation act, a
banking company cannot directly or indirectly deal in buying or selling or bartering of
goods. But it may, however, buy, sell or barter the transactions relating to bills of
exchange received for collection or negotiation.

3. Disposal of banking assets (sec. 9): according to sec. 9 “a banking company cannot
hold any immovable property, howsoever acquired, except for its own use, for any period
exceeding seven years from the date of acquisition thereof. The company is permitted,
within the period of seven years, to deal or trade in any such property for facilitating its
disposal”.

4. Management (sec. 10): sec. 10 (a) states that not less than 51% of the total number of
members of the board of directors of a banking company shall consist of persons who
have special knowledge or practical experience in one or more of the following fields:

A) Accountancy
B) Agriculture and rural economy
C) Banking
D) cooperative
E) Economics
F) Finance
G) Law
H) Small scale industry.

5. Requirements as to minimum paid-up capital and reserves (sec. 11): sec. 11 (2) of
the banking regulation act, 1949, provides that no banking company shall commence or
carry on business in India, unless it has minimum paid-up capital and reserve of such
aggregate value as is noted below:

(a) Foreign banking companies: in case of banking company incorporated outside

India, aggregate value of its paid-up capital and reserve shall not be less than Rs. 15 lakhs
and, if it has a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs. It must
deposit and keep with the r.b.i, either in cash or in unencumbered approved securities:
(i) The amount as required above, and
(ii) After the expiry of each calendar year, an amount equal to 20% of its profits for the
year in respect of its Indian business.

(b) Indian banking companies: in case of an Indian banking company, the sum of its
paid-up capital and reserves shall not be less than the amount stated below:
(i) if it has places of business in more than one state, Rs. 5 lakhs, and if any such place of
business is in Mumbai or Kolkata or in both, Rs. 10 lakhs.

(ii) if it has all its places of business in one state, none of which is in Mumbai or Kolkata,
Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in respect of each
of its other places of business in the same district in which it has its principal place of
business, plus Rs. 25,000 in respect of each place of business elsewhere in the state.

(iii) if it has all its places of business in one state, one or more of which are in Mumbai or
Kolkata, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai
or Kolkata? No such banking company shall be required to have paid-up capital and
reserve excluding Rs. 10 lakhs.

6. Regulation of capital and voting rights of shareholders (sec. 12): according to sec.
12, no banking company can carry on business in India, unless it satisfies the following
conditions:
(a) Its subscribed capital is not less than half of its authorized capital, and its paid-up
capital is not less than half of its subscribed capital.

(b) Its capital consists of ordinary shares only or ordinary or equity shares and such
preference shares as may have been issued prior to 1st April 1944.

(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all
the shareholders of the company.

7. Restriction on commission, brokerage, discount etc. On sale of shares (sec.

13): according to sec. 13, a banking company is not permitted to pay directly or indirectly
by way of commission, brokerage, discount or remuneration on issues of its shares in
excess of 2½% of the paid-up value of such shares.

8. Prohibition of charges on unpaid capital (sec. 14): a banking company cannot create
any charge upon its unpaid capital and such charges shall be void.

9. Restriction on payment of dividend (sec. 15): according to sec. 15, no banking

company shall pay any dividend on its shares until all its capital expenses (including
preliminary expenses, organization expenses, share selling commission, brokerage,
amount of losses incurred and other items of expenditure not represented by tangible
assets) have been completely written-off.

10. Reserve fund/statutory reserve (sec. 17): according to sec. 17, every banking
company incorporated in India shall, before declaring a dividend, transfer a sum equal to
25% of the net profits of each year (as disclosed by its profit and loss account) to a
reserve fund. The central government may, however, on the recommendation of rbi,
exempt it from this requirement for a specified period.

11. Cash reserve (sec. 18): under sec. 18, every banking company (not being a scheduled
bank) shall, if Indian, maintain in India, by way of a cash reserve in cash, with itself or in
current account with the reserve bank or the state bank of India or any other bank notified
by the central government in this behalf, a sum equal to at least 3% of its time and
demand liabilities in India.
The reserve bank has the power to regulate the percentage also between 3% and 15% (in
case of scheduled banks). Besides the above, they are to maintain a minimum of 25% of
its total time and demand liabilities in cash, gold or unencumbered approved securities.

12. Liquidity norms or statutory liquidity ratio (SLR) (sec. 24): according to sec. 24
of the act, in addition to maintaining CRR, banking companies must maintain sufficient
liquid assets in the normal course of business. The section states that every banking
company has to maintain in cash, gold or unencumbered approved securities, an amount
not less than 25% of its demand and time liabilities in India.
This percentage may be changed by the rbi from time to time according to economic
circumstances of the country. This is in addition to the average daily balance maintained
by a bank.

13. Restrictions on loans and advances (sec. 20): after the amendment of the act in
1968, a bank cannot:
(i) Grant loans or advances on the security of its own shares, and
(ii) Grant or agree to grant a loan or advance to or on behalf of:

A) Any of its directors;

B) Any firm in which any of its directors is interested as partner, manager or guarantor;
C) Any company of which any of its directors is a director, manager, employee or
guarantor, or in which he holds substantial interest; or
D) Any individual in respect of whom any of its directors is a partner or guarantor.

14. Accounts and audit (sees. 29 to 34a): the above sections of the banking regulation
act deal with the accounts and audit. Every banking company, incorporated in India, at
the end of a financial year expiring after a period of 12 months as the central government
may by notification in the official gazette specify, must prepare a balance sheet and a
profit and loss account as on the last working day of that year, or, according to the third
schedule, or, as circumstances permit.

According to sec. 30 of the banking regulation act, the balance sheet and profit and loss
account should be prepared according to sec. 29, and the same must be audited by a
qualified person known as auditor. Moreover, every banking company must furnish their
copies of accounts and balance sheet prepared according to sec. 29 along with the
auditor’s report to the rbi and also the registers of companies within three months from
the end of the accounting period.

7.) Explain briefly

i. Exchange risk

ii. Liquidity risk

iii. Maturity risk

I. Exchange risk- foreign exchange risk refers to the losses that an international financial
transaction may incur due to currency fluctuations. Also known as currency risk, fx risk
and exchange-rate risk, it describes the possibility that an investment’s value may
decrease due to changes in the relative value of the involved currencies. Investors may
experience jurisdiction risk in the form of foreign exchange risk.

II. Liquidity risk- liquidity risk is the risk that a company or bank may be unable to meet
short term financial demands. This usually occurs due to the inability to convert a
security or hard asset to cash without a loss of capital and/or income in the process.

III. Maturity risk- a maturity risk premium is the amount of extra return you'll see on your
investment by purchasing a bond with a longer maturity date. Maturity risk premiums are
designed to compensate investors for taking on the risk of holding bonds over a lengthy
period of time.

8.) Explain the concept of narrow banking?

1. The narrow banking is very much an antonym to the universal banking. In narrow
banking, the bank places its funds under the risk free assets and the maturity of the
liabilities match the assets and there is no possibility of the asset liability mismatch.

2. Banks in India partially implement the narrow banking.

3. Narrow banking, in narrow sense helps the banks to reduce the non performing assets
(NPA) as the engagement brings them some returns also.
 9.) What is general insurance? How can it differ from life insurance?

It means insurance other than life insurance.

Section 2(6b) of the insurance act defines ‘general insurance business’ as fire, marine or miscellaneous
insurance business whether carried on singly or in combination with one or more of them.
 10.) Plastic money is replacing currency in a big way in the developed world. Explain
what plastic money is? Why it is not so popular in the underdeveloped countries?
What measures are being taken to popularize?

The plastic money generally a credit or debit card with a magnetic strip many people carry in
their wallets or purses is the result of complex banking process. Holders of a valid card have the
authorization to purchase goods and services up to a predetermined amount, called a credit limit.
In particular these are required to appear on a credit card are name of the customer, 16 digit card
number, validity date, the name of the issuing bank, signature panel, magnetic strip and personal
identification number.

Why it is not so popular in the underdeveloped countries

1. Usage of plastic money needs either debit card or credit card. Currently, where large
portion of Indians are not having bank account, having a credit history to get a credit card
is a distant future

2. Many (mostly old generation) do not get visibility in plastic money. They can't see what
is happening to their balance and how much is spent/left with them. This gives kind of
discomfort at the time of spending. I could see so many people first withdraw from ATM
and then use same amount to pay by cash.

3. Swiping at pos (merchant card swipe machine) will charge some % to merchant. This
means, of every RS. 100 swiped at machine, he will get around 2-4% less. This could be
compensated, but it requires higher daily volume.

4. Swiping card means, getting money in the account. Hire most of the traders do not keep
invoice book; so getting white money could mean paying more taxes.

5. It is believed that black money economy is more than 2-3 times the white money
economy. This means more than 2-3 trillion USD worth of money is floating without
actually being accounted. When you spend money using card, that will be accounted and
you will have to give reasons for that. So black money people tend to pay always in cash.

In a bid to curb the flow of black money and to push the ambitious 'digital India' scheme, the
narendra modi government might announce some incentives to promote the use of plastic cards
for business transactions.
 11.) Briefly explain the different General insurance products and explain their relevance to the
contemporary world.

1) Fire Insurance

A fire insurance contract may be defined as an agreement whereby one party, for a consideration,
undertakes to indemnify the other party upto an agreed amount against financial loss of goods or
property which the latter may suffer because of fire. Fire insurance thus covers the risk of loss of
property by accidental and non-intentional fire.

2) Marine Insurance

Marine insurance is perhaps the oldest type of insurance. Under a contract of marine insurance,
the insurance company or the underwriter agrees to indemnify the owner of a ship or cargo
against risks which are incidental to marine adventure such as sinking or burning of the ship and
its contents, stranding of the ship, collision of ship.

3) Miscellaneous Insurance Policies

Include motor vehicle insurance, credit insurance etc.

12.) Explain the different techniques of monetary control employed by Central Bank of a
country?

A. Quantitative or General Methods:

1. Bank Rate or Discount Rate:

Bank rate refers to that rate at which a central bank is ready to lend money to commercial banks
or to discount bills of specified types.

Thus by changing the bank rate, the credit and further money supply can be affected. In other
words, rise in bank rate increases rate of interest and fall in bank rate lowers rate of interest.

2. Open Market Operations:

By open market operations, we mean the sale or purchase of securities. As is known that the
credit creating capacity of the commercial banks depend on the cash reserves of the banks. In
this way, the monetary authority (Central Bank) controls the credit by affecting the base of the
credit-creation by the commercial banks. If the credit is to be decreased in the country, the
central bank begins to sell securities in the open market.
3. Variable Reserve Ratio:

The commercial banks have to keep given percentage as cash-reserve with the central bank. In
lieu of that cash ratio, it allows commercial banks to contract or expand its credit facility. If the
central bank wants to contract credit (during inflation period) it raises the cash reserve ratio.

4. Change of Liquidity:

According to this method, every bank is required to keep a certain proportion of its deposits as
cash with it. When the central bank wants to contract credit, it raises its liquidity ratio and vice
versa.

B. Qualitative or Selective Methods:

1. Change in Marginal Requirements:

Under this method, the central bank effects a change in the marginal requirement to control and
release funds. When the central bank feels that prices are rising on account of stock-piling of
some commodities by the traders, then the central bank controls credit by raising the marginal
requirements. (Marginal requirement is the difference between the market value of the assets and
its maximum loan value).

2. Regulation of consumer credit:

During inflation, this method is followed to control excess spending of the consumers. Generally
the hire purchase facilities or installment methods are used to reduce to the minimum to curb the
expenditure on consumption.

3. Direct Action:

This method is adopted when some commercial banks do not co-operate with the central bank in
controlling the credit. Thus, central bank takes direct action against the defaulter. The central
bank may take direct action in a number of ways as under.

(i) It may refuse rediscount facilities to those banks that are not following its directions.

(ii) It may follow similar policy with the bank seeking accommodation in excess of its capital
and reserves.

(iii) It may change rates over and above the bank rate.

(iv) Any other strict restrictions on the defaulter institution.

4. Rationing of the credit:

Under this method, the central bank fixes a limit for the credit facilities to commercial banks.
Being the lender of the last resort, central bank rations the available credit among the applicants.

Generally, rationing of credit is done by the following four ways.

(i) Central bank can refuse loan to any bank.

(ii) Central bank can reduce the amount of loans given to the banks.

(iii) Central bank can fix quota of the credit.

(iv) Central bank can determine the limit of the credit granted to a particular industry or trade.

5. Moral Persuasion or Advice:

In the recent years, the central bank has used moral suasion also as a tool of credit control. Moral
suasion is a general term describing a variety of informal methods used by the central bank to
persuade commercial banks to behave in a particular manner.

6. Publicity:

Publicity is also another qualitative technique. It means to force them to follow only that credit
policy which is in the interest of the economy. The publicity generally takes the form of
periodicals and journals.

13.) Differentiate between schedule and non-scheduled bank?

 14.) Explain the principles of risk in insurance.

Principles of Insurance

There are several principles governing insurance business, the important of which

are discussed below.

(a) Principle of indemnity: Insurance is a contract of indemnity. The insurer is called

indemnifier and the insured is the indemnified. In a contract of indemnity, only those who suffer
loss are compensated to the extent of actual loss suffered by them. One cannot make profit by
insuring his risks.

(b) Insurable interest: Everyone cannot enter into contracts of insurance. For example, A
cannot insure the life of B who is a total stranger. But if B happens to be his wife or his debtor or
business manager, A has insurable interest, i.e., vested interest and, therefore, he can insure the
life of B. For every type of policy insurable interest is insisted upon. In the absence of such
interest the contract will amount to a wagering contract.

(c) Principle of uberrimae fidei: Under ordinary law of contract there is no positive duty to tell
the whole truth in relation to the subject-matter of the contract. There is only the negative
obligation to tell nothing but the truth.

15.) Explain the various guarantees governed by ECGC.

ECGC offers following types of guarantees to the exporters:

i. Export finance guarantee

ii. Packing credit guarantee

iii. Post-shipment export credit guarantee

iv. Export production finance guarantee

v. Transfer guarantee

vi. Export performance guarantee

(a) Packing Credit Guarantee: Any loan given by exporter at the banks to an expo pre-
shipment stage against a confirmed export order or letter of credit qualifies for Packing Credit
Guarantee. Pre-shipment advances extended for export of services or for Construction works
abroad are also eligible for cover under this guarantee. The bank will be entitled to claim
66 2/3 % of its loss from the corporation in the event of an exporter failing to discharge his
liabilities to the bank.

(b) Post shipment Export Credit Guarantee: Banks extend post-shipment finance to exporters
through purchase, negotiation or discount of export bills or advances against such bills. The post
shipment credit guarantee provides protection to banks against non-realization of export
proceeds and the resultant failure of the exporter to repay the advances availed. The percentage
of loss covered under this guarantee is 75%.

(c) Export Production Finance Guarantee: Export Production Finance Guarantee enables
banks to sanction advances at pre-shipment stage to the full extent of the domestic cost of
production. Here again, the bank would be entitled to 66 2/3% of its loss from the corporation.

(d) Export Finance Guarantee: Export Finance Guarantee covers post-shipment advances
granted by banks to exporters against export incentives receivable in the form of duty drawback.
The percentage of loss covered under this guarantee is 75%.

(a) Export Performance Guarantee: Exporters are often called upon to furnish a bank
guarantee to the foreign parties to ensure due performance or against advance payment or in lieu
of retention money. Export Performance Guarantee protects banks to the extent of 75% of the
loss suffered by bank on account of such guarantees.

(b) Export Finance (Overseas Lending) Guarantee: If a bank financing an overseas project
provides a foreign currency loan to a contractor, it can protect itself from the risk of non-
payment by obtaining Export Finance (Overseas Lending) Guarantee. The percentage of loss
covered under this guarantee is 75%.

16.) What are the Elements of Insurance Risk?

17.) What are the Principles of micro finance?

1. The poor need a variety of financial services, not just loans. Just like everyone else,
poor people need a wide range of financial services that are convenient, flexible, and
reasonably priced. Depending on their circumstances, poor people need not only credit,
but also savings, cash transfers, and insurance.

2. Microfinance is a powerful instrument against poverty. Access to sustainable

financial services enables the poor to increase incomes, build assets, and reduce their
 vulnerability to external shocks. Microfinance allows poor households to move from
everyday survival to planning for the future, investing in better nutrition, improved living
conditions, and children’s health and education.

3. Microfinance means building financial systems that serve the poor. Poor people
constitute the vast majority of the population in most developing countries. Yet, an
overwhelming number of the poor continue to lack access to basic financial services.

4. Microfinance is about building permanent local financial institutions. Building

financial systems for the poor means building sound domestic financial intermediaries
that can provide financial services to poor people on a permanent basis.

18.) Describe the Types of Insurance.

19.) What are the reasons for the growth of Internet banking?

1. Manage your cash flow more effectively.

Our Internet Banking Solutions make it easier to control your payables and receivables. For
instance, you can arrange to receive alerts when payments are due or pending your approval.
2. Simplify your government remittances

Filing tax returns and remitting tax payments can be very time consuming. With our Internet
Banking Solutions, you can complete the forms online and schedule the payments to be made on
the due date and thereby avoid costly late payment charges. Once you’ve paid your government
remittances online, you won’t want to go back to the manual method.

3. Take full advantage of discounted payment terms

If you have 30 or 60 days to pay your bills, you can hold on to your money longer—up until the
payment due date—know that your payment will be processed on time.

4. Allow your employees to prepare the transactions

Your business will have total control over the access privileges granted to employees who use
the service.

5. Access all your accounts at any time, even outside office hours

Check on your accounts and carry out transactions whenever it suits you, including evenings and
weekends. That way, you can focus on what matters most during the day.

6. Simplify your payroll and business-to-business (B2B) payables

It’s easy to pay your employees via the Internet. You can also send funds directly to other
businesses: transactions are settled on the spot. This web-based business-to-business payment
feature is unique to National Bank.

7. Take advantage of all the services you need, no matter how big or small your business

Whether small, medium or large, all businesses access the same platform and can use the
functions that correspond to their needs.

8. Reduce administrative overhead

By offering fast and efficient Internet services, National Bank allows you to reduce the time and
resources dedicated to managing several transactions. There’s less paperwork and company
personnel can be utilized more efficiently.

9. Carry out your foreign currency transactions

Our Internet Banking Solutions for businesses facilitate account management and foreign
currency transactions.

10. Simplify your account reconciliation and make investments

The Internet platform makes it easier for you to keep an eye on all your company accounts and
banking activity. You can also submit investment orders.

20.) "Reinsurance means by which Insurance Companies obtain the necessary

protection." Comment.

21.) "Networked individuals and firms are more efficient than net worthed individuals."
Comment.

22.) Distinguish between NBFC and Bank.

Basis For Comparison NBFC Bank

Meanings A NBFC’s is a company that Bank is a government
provides banking services to authorized financial
people without holding a Bank intermediary that aims at
license. providing banking services to
general public.
Incorporated Under Companies Act 1956. Banking Regulation Act,
1946.
Demand Deposit Not Accepted. Accepted.
Foreign Investment Allowed up to 100%. Allowed up to 74% for private
sector banks.
Payment and Settlement Not a part of System Integral part of System.
System

23.) "Banking license should be provided to corporate sector" — give your opinion.

24.) Explain the role of ECGC and EX1M bank in boosting of export sector.
25.) Explain NPA and its provision?