MONEY AND BANKING 3

Question 1

e-RUPI means

Answer 1

e-RUPI is like a digital voucher and is not a digital/virtual currency
E-RUPI is powered by NPCI’s UPI platform.
It is cashless and contactless payment system
It is person specific and purpose specific
It is aimed at plugging holes in the existing welfare payment disbursement system. It will help
in tracking how much of the allocated funds have been disbursed to citizens.

Question 2

Indian Financial System Structure

Answer 2

1.Banks
A.Commercial-Scheduled and Unscheduled
B.Cooperative-Urban and Rural

2.Non Banking Financial Institutions
A.DFI (Development Financial Institutions)
B.Non-Banking Financial Companies (NBFCs)
C.Primary dealers (PDs)
D.Credit Information Companies (CIC)

Question 3

Commercial banks categories

Answer 3

Scheduled Banks-A bank listed in the second schedule of the RBI Act, 1934.
1.Must be a corporation.
2.Minimum paid-up share capital of Rs. 500 crores.
Difference Between Scheduled and Non-Scheduled Banks:
Banking Activities: Scheduled banks can conduct full banking operations, including foreign exchange dealings. Non-scheduled banks have limitations.
Reserve Requirements: Scheduled banks must maintain reserves with RBI as per RBI Act, 1934. Non-scheduled banks follow reserve requirements under Banking Regulation Act, 1949, but reserves may not be held with RBI.

Question 4

Co-operative Banks categories

Answer 4

two categories viz. Urban Co-operative banks (UCB) and Rural Co-operative banks.
1.The Urban Co-operative banks (UCB) (also called Primary Co-operative Banks) are
located in urban and semi urban areas and were traditionally centred around communities, localities workplace groups.
2.UCBs are again classified into Scheduled and Non-scheduled categories, which are then further classified into single state and multi state. Single State UCBs are registered as cooperative societies under the provisions of the State Government Cooperative Societies Act and are regulated by the Registrar of Cooperative Societies (RCS) of State concerned. Multi-State UCBs are registered as cooperative societies under the provisions of Multi-State Cooperative Societies Act, 2002 and are regulated by the Central Registrar of Cooperative Societies (CRCS).

1.Rural Co-operative banks
It comprises short-term and long-term co-operative credit structures.
The short-term co-operative credit structure operates with a three- tier system – State Cooperative Banks (StCBs) at the State level, (District) Central Cooperative Banks (DCCBs) at the district level and Primary Agricultural Credit Societies (PACS) at the village level. long eterm includes SCARDB (State Cooperative Agri and Rural development bank) and PCARDB (Primary Cooperative Agri and Rural development bank )

Question 5

Describe under whom these come- State Cooperative Banks (StCBs) at the State level, (District) Central Cooperative Banks (DCCBs) at the district level and Primary Agricultural Credit Societies (PACS) at the village level SCARDB PCARDB

Answer 5

StCBs/DCCBs are registered under the provisions of State Cooperative Societies Act of the State concerned and comes under the dual regulation of State governments and RBI. PACS, SCARDB, PCARDB are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by RBI

Question 6

Who supervises all Rural Cooperative Banks?

Answer 6

All Rural Cooperative Banks are supervised by NABARD (RBI delegated its supervisory power) and Registrar of Cooperative Societies of State.

Question 7

Control of cooperative banks?

Answer 7

Banking Regulation Act, 1949. Since then, there is ‘duality of control’ over cooperative banks (urban and rural both) between the State Registrar of Cooperative Societies/Central Registrar of Cooperative Societies and the RBI. RBI regulates and supervises the banking functions and amalgamation and liquidation of UCBs/StCB/DCCB through the Banking regulation Act, 1949 and the non-banking aspects like registration, management, administration and recruitment are regulated and supervised by the State/ Central Governments. RBI approval is not required for appointment of Chairman/Whole-time Director/Managing Director/CEO in case of Cooperative Banks (i.e. UCBs/StCB/DCCB). But in public interest and to protect the interest of the depositors, if required, RBI can supersede the Board of Cooperative Banks.

Question 8

Banks and Non-Banking Financial Institutions (NBFI) differences

Answer 8

The basic difference between a Bank and a NBFI is Banks accept demand deposits and NBFIs do not accept demand deposits. Banks issue cheques but NBFIs cannot issue cheques drawn on itself. (while some NBFIs may have limited deposit-taking capabilities under certain conditions, they do not typically offer time deposits as a core part of their business model)

Question 9

commercial vs cooperative banks

Answer 9

Commercial banks operate on the commercial (profit) principles while the basis of operation for cooperative banks is on cooperative lines i.e., service to its members and the society. Cooperative banks provide a higher rate of interest on deposits as compared to commercial banks.

Question 10

affect of high crr on aggregate demand, household savings

Answer 10

The rise in interest rates decreases the liquidity in the market which further seeks to reduce the
aggregate demand and thereby inflation in the economy.
* A high-interest rate by the banks is likely to attract households to save more money with banks. Thus
an increase in CRR is likely to increase household savings with the banks.

Question 11

dirty floating

Answer 11

It is a mixture of fixed and free exchange rate

Question 12

qualitative and quantitative tools of rbi

Answer 12

1. Quantitative Tools Focus on the overall level of credit in the economy.
   Repo Rate
   Reverse Repo Rate
   Cash Reserve Ratio (CRR)
   Statutory Liquidity Ratio (SLR)
   Open Market Operations (OMOs)
   Bank Rate
2. Qualitative Tools Target the direction of credit towards specific sectors of the economy.
   Selective Credit Control (SCC)
   Moral Suasion
   Margin Requirements

Question 13

why is MSF above the repo rate?

Answer 13

MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for
banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging
government securities, where the rates are lower in comparison with the MSF.

Question 14

Capital Markets vis-a-vis Commercial Banks in terms of funding

Answer 14

The key distinction is that capital markets provide direct funding from saver to user via the issuance
of securities, while bank intermediation involves indirect funding with banks as the go-between
connecting the saver and user.

Question 15

The MPC replaced the system where the RBI governor, with the aid and advice of his internal team and a
technical advisory committee, had complete control over monetary policy decisions. true or false

Answer 15

true

Question 16

Within Banks (scheduled) what all included

Answer 16

1.Public SECTOR banks
2.Private SECTOR banks
3.Foreign banks
4.Regional Rural Banks
5.Payment Banks
6.Small FInance Banks

Question 17

Public Sector Banks

Answer 17

Banks owned by the Central or State governments having more than 51% ownership with the government. For example, SBI and its associates, Punjab National Bank, Bank of India etc.
Note difference from public/pvt company

Question 17

Within Banks (unscheduled) what all included

Answer 17

Local Area Banks

Question 18

Private Sector Banks:

Answer 18

Banks owned by private individuals for example ICICI bank, Axis Bank etc. Note difference from public/pvt company

Question 19

Foreign Banks

Answer 19

Banks established in India but owned by foreign entity/ies for example Citi Bank. These are basically private banks only owned by foreign entities.

Question 20

Regional Rural Banks (RRB)

Answer 20

1.were established in 1975 under the provisions of the Regional Rural Banks Act, 1976
2.with a view to developing the rural economy by providing particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.
3.RRBs are owned by the Central government, concerned State government and the sponsor bank in proportion of 50:15:35 (each RRB is sponsored by a particular bank).
4.RRBs need to provide 75% of the lending to priority sectors.
5.RRBs are under the supervision of NABARD.

Question 21

Payment Banks:

Answer 21

1.In August 2015, RBI granted license to 11 applicants for Payment Banks.
2.RBI has put a cap of Rs. 2 lakhs on deposits. (payment banks will not be allowed to lend and issue credit cards. ONLY DEMAND DEPOSIT)
3.Hence, the main target for payment banks will be migrant labourers, self-employed, low-income households etc.

Question 22

Small Finance Banks:

Answer 22

1.In Sept. 2015, RBI granted license to 10 applicants for Small Finance Banks which
is a step in the direction of furthering financial inclusion.
2.The small finance banks shall primarily undertake basic banking activities of
MSMEs, small and marginal farmers, and unorganized sector entities.
3. The small finance banks will be required to extend 75% of its total credit to the
sectors eligible for classification as priority sector lending (PSL) by the RBI.
At least 50% of its loan portfolio should constitute loans of up to Rs25 lakhs

Question 23

niche or differentiated banks

Answer 23

Both payment banks and small finance banks are niche or differentiated banks
i.e., specialized in certain banking functions and not universal.

Question 24

Local Area Banks (LAB)

Answer 24

1.were set up as per a Government of India Scheme announced in 1996.
2.The intention of the government was to set up new private local banks with jurisdiction over two or three contiguous districts. The objective of establishing the local area banks was to enable mobilization of the rural savings by local institutions and make them available for investments in local areas.
3.There are only four Local Area Banks in India which exist in the form of Non-Scheduled banks, one such example is Coastal Local Area Bank in Vijayawada, Andhra Pradesh.

Question 25

All India Financial Institutions (AIFIs)/ Development Financial Institutions (DFIs)

Answer 25

1)long-term financial support for economic development. 2) offer funding solutions where traditional banking channels may be inadequate or unavailable.

1.NABARD
2. National Housing Bank (NHB)
3. EXIM Bank
4. Small Industries Development Bank of India (SIDBI)
5.MUDRA Ban
6.NaBFID

Question 26

NABARD: National Bank for Agriculture and Rural Development

Answer 26

NABARD was established in 1982 under the provisions of National Bank for
Agriculture and Rural Development Act 1981. Agriculture and Rural Development
via-
1.refinance and provides direct finance to institutions as may be approved by the Central government.
2. as coordinator/supervisor in the operations of rural credit institutions like RRBs and Rural Cooperative Banks (RBI has delegated its supervisory powers in case of rural sector to NABARD while retaining its regulatory powers)
3. assists in policy formulation, Offers training and research facilities for banks,

Question 27

National Housing Bank (NHB):

Answer 27

promote housing finance institutions by way of refinance (i.e., NHB finances those institutions which provide finance to individual borrowers, builders etc.)

Question 28

EXIM Bank

Answer 28

1.provide financial assistance to exporters and importers, and coordinating the working of institutions engaged in financing export and import of goods and services to promoting the country’s international trade.
2.EXIM bank also extends loans to overseas financial institutions, regional development banks, sovereign governments and other entities overseas, to enable buyers in those countries to import goods and services from India.
3.It provides both direct financial assistance to exporters/importers and indirect financial assistance by way of refinance

Question 29

Small Industries Development Bank of India (SIDBI):

Answer 29

SIDBI promotes, finances, and develops the MSME sector, mainly through refinancing institutions that lend to MSMEs.

Question 30

MUDRA Bank:

Answer 30

1.MUDRA (Micro Units Development and Refinance Agency Ltd.) Pending enactment of an act for MUDRA Bank, a Non-Banking Finance Company as MUDRA Ltd has been set up as a subsidiary of SIDBI.
2.The purpose of MUDRA is to provide funding to the NON CORPORATE (informal sector) of up to Rs 10 lakhs.
3.MUDRA would be responsible for REFINANCING
4.MUDRA loans are available in three categories. For small business, loans up to Rs. 50,000/- is available under the ‘Shishu’ category, beyond Rs. 50,000 and up to Rs. 5 lakhs under the ‘Kishor’ category and between Rs. 5 lakhs to Rs. 10 lakhs under the ‘Tarun’ category.

Question 31

National Bank for Financing Infrastructure and Development (NaBFID)

Answer 31

Presently Govt. holds 100% equity but later on it will reduce its stake/ownership to 26%.

Question 32

Non-Banking Financial Companies (NBFCs):

Answer 32

1.An NBFC is a company registered under the Companies Act, 1956/2013, engaged in loans, advances, acquisition of marketable securities, leasing, hire-purchase, insurance, and chit business, excluding agriculture, industrial activity, sale/purchase of goods/services, and real estate.
2.NBFCs are mainly private sector institutions.
3.As per the RBI Act 1934, NBFCs need an RBI registration certificate to operate, except for certain categories regulated by other regulators like SEBI, IRDA, Ministry of Corporate Affairs, and state governments.
4.NBFC-MFIs are a type of NBFC with limits on the credit they can provide to households.
5.P2P intermediaries are a new class of NBFCs that connect borrowers with individual lenders.

Question 33

Microfinance

Answer 33

is provision of financial services to poor and low-income households. These financial services include small loans/credit, savings, insurance, funds transfer/remittance facilities etc. Microfinance is an economic tool designed to promote financial inclusion which enables the poor and low-income households to come out of poverty, increase their income levels and improve overall living standard

Question 34

A microfinance loan

Answer 34

Micro-credit) is defined as a collateral-free loan given to a household having annual household income up to ₹3,00,000. For this purpose, the household shall mean an individual family unit, i.e., husband, wife and their unmarried children. The Banks/NBFCs should clearly mention a ceiling on the interest rate and all other charges applicable to the microfinance loans.

Question 35

Microfinance loan/credit is delivered through

Answer 35

a variety of institutional channels viz. commercial & cooperative banks, NBFCs, NBFC-MFIs etc.

Question 36

P2P intermediaries

Answer 36

a new type of NBFC, connect borrowers with individual lenders through online platforms. P2P platforms also handle repayments, forwarding them to lenders. This form of lending is also known as social or crowd lending.

Question 37

RBI guidelines regarding P2P lending (2017)

Answer 37

1.Fund transfer through escrow account (a temporary pass-through account held by a third party during the process of a transaction between two parties) operated by the NBFC-P2P.
2. All fund transfers shall be through and from bank accounts and cash transaction is strictly prohibited.
3. There are limits on how much a lender can lend (in aggregate Rs. 50 lakhs) and how much a borrower can borrow and there is also a limit on time period.
4.NBFC WILL NOT LEND BUT will undertake due diligence on the participants, undertake credit assessment and risk profiling of the borrowers and disclose the same, require prior and explicit consent of the participant to access its credit Information, undertake documentation of loan agreements and other related documents, provide assistance in disbursement and repayments of loan amount, render services for recovery of loans originated on the platform..i.e. FACILITATION
5.The NBFC – P2P shall disclose to the borrower and lender each other’s identity a financial details

Question 37

Primary dealers (PDs):

Answer 37

Primary dealers are registered entities with the RBI who have the license to purchase and sell government securities. Hence, they play a crucial role in fostering both the primary and secondary government securities markets. Cab be standalone PDs or banks authorized to undertake PD business.

Question 37

Credit Information Companies (CIC)

Answer 37

A CIC is an independent organization that signs up banks, NBFCs and financial institutions as its members and aggregates data and identity information for individual consumers and businesses from its members. CICs inform banks whether a prospective borrower is creditworthy or not based on his past payment track record. The CICs are regulated and licensed by RBI as per the Credit Information Companies (Regulation) Act.

Question 37

Financial Inclusion means

Answer 37

Financial inclusion is the delivery of financial services at affordable costs to vast sections of disadvantaged and low-income groups.Financial inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over. Eg DFIs, Nationalization of insurance etc.