9.Commercial bank and Related

Question 1

What is base rate in the context of banking?

Answer 1

Base rate is the minimum rate of interest below which banks are not allowed to lend to their customers, except in certain permitted cases.

Question 2

Why is base rate implemented?

Answer 2

Base rate is implemented to enhance transparency in the credit market and ensure that banks pass on the lower cost of funds to their customers.

Question 3

How is loan pricing determined with base rate?

Answer 3

Loan pricing is determined by adding a base rate and a suitable spread depending on the credit risk premium.

Question 4

How do banks determine their lending rates with respect to the base rate?

Answer 4

Banks are allowed to determine their actual lending rates on loans and advances with reference to the base rate.

Question 5

Is base rate higher or lower than the repo rate?

Answer 5

Base rate is always greater than the repo rate.

Question 6

What change was implemented from 1st April 2016 regarding lending rates?

Answer 6

From 1st April 2016, lenders need to calculate their lending rates based on the marginal cost of funds.

Question 7

How is the marginal cost of funds calculated for lending rates?

Answer 7

Banks calculate their marginal cost of funds across different tenures and add other components including operating costs and tenure premiums.

Question 8

What is the purpose of tenure premium in lending rates?

Answer 8

Tenure premium is a compensation for the risk associated with lending for a longer time.

Question 9

What does SARFAESI stand for?

Answer 9

SARFAESI stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

Question 10

What power does SARFAESI give to banks?

Answer 10

SARFAESI empowers banks to recover their bad debts or bad loans by selling the assets of defaulters without prior permission of the court.

Question 11

Why is SARFAESI considered a landmark legislation for the banking sector?

Answer 11

SARFAESI enables banks to reduce their non-performing assets by adopting measures of reconstruction.

Question 12

What section of the act provides banks with the power to take action against defaulters?

Answer 12

The power to take action against defaulters is provided under Section 13 of the SARFAESI Act.

Question 13

Are there any exceptions to the application of SARFAESI?

Answer 13

Yes, SARFAESI does not apply to unsecured loans, loans below 1 lakh rupees, or the remaining debt below 20% of the original principle.

Question 14

What is the role of asset reconstruction companies (ARCs) under SARFAESI?

Answer 14

SARFAESI allows the creation of asset reconstruction companies and permits banks to sell non-performing assets to these ARCs.

Question 15

What is the role of a credit information bureau?

Answer 15

A credit information bureau collects and maintains records of an individual’s payments related to loans and credit cards.

Question 16

How does a credit information bureau obtain these records?

Answer 16

Member banks and credit institutions submit the payment records to the credit information bureau on a monthly basis.

Question 17

What is the purpose of creating credit information reports and credit scores?

Answer 17

Credit information reports and credit scores are created using the collected information. These reports and scores help credit institutions evaluate and approve loan applications.

Question 18

Why are credit information bureaus important in the financial system?

Answer 18

Credit information bureaus play a crucial role in the financial system as they provide valuable information to credit institutions, helping them make informed decisions about lending and managing credit risk.

Question 19

What are the monetary aggregates used by the RBI to measure money supply in India?

Answer 19

The monetary aggregates used by the RBI are M1, M2, and M3.

Question 20

What is M1 and M3 in terms of money supply?

Answer 20

M1 represents the narrow money supply, which includes currency and coins with the public, demand deposits held by banks, and ‘other’ deposits with the RBI. M3 represents the broad money supply, which includes M1 plus time liabilities portion of demand deposits, certificates of deposit, and term deposits with a contractual maturity of up to and including one year.

Question 21

What is the revised monetary aggregate based on the Y.V. Reddy committee’s recommendation?

Answer 21

The revised monetary aggregate is based on the recommendation of the Y.V. Reddy committee in 1998.

Question 22

What is the equation for M2 and M3?

Answer 22

M2 = M1 + Time Liabilities Portion of demand Deposits with the Banking System + Certificates of Deposit (CD) issued by Banks + Term Deposits of residents with a contractual maturity of up to and including one year with the Banking System (excluding CDs). M3 = M2 + Term Deposits of residents with a contractual maturity of over one year with the Banking System + Term loans between the banking system.

Question 23

What is M0 and M4 in terms of money supply?

Answer 23

M0 represents high-powered money or reserve money, which includes currency in circulation, bankers’ deposits with the RBI, and ‘other’ deposits with the RBI. M4 represents M3 plus total deposits with Post Office savings organizations (excluding National Savings Certificates).

Question 24

What is the difference between M1, M2, and M3?

Answer 24

M1 is the narrowest measure of money supply, M2 is broader than M1 as it includes additional components, and M3 is the broadest measure of money supply.

Question 25

What are time liabilities and certificates of deposit?

Answer 25

Time liabilities refer to the minimum balance that needs to be maintained with banks for demand deposits. Certificates of deposit (CD) are financial instruments similar to T-bills, bills of exchange, and commercial paper with a maturity of up to one year.

Question 26

What is the purpose of measuring monetary aggregates?

Answer 26

Measuring monetary aggregates helps the RBI monitor money supply, evaluate the effectiveness of monetary policy, and assess the overall state of the economy.