BankExamsToday Editorial Summary: April 2017

Ques 1. 

What was the driving force behind the introduction of the bill aimed at amending the SARFESI and DRT Act?
The problem of rising Non-Performing Asset (NPA) is well known. Defects in the existing debt recovery process have further added to the problem of NPAs. For example, more than 70,000 cases are pending before Debt Recovery Tribunal (DRTs). SARFAESI and DRT were imagined to guarantee quick disposal of cases. However, they have not met the expectations.
The Bill seeks to address this issue.
It will modify following four Acts:
  • SARFAESI Act, 2002
  • The Recovery of Debts due to Banks and Financial Institutions Act, 1993
  • The Indian Stamp Act, 1899
  • The Depositories Act, 1996.

Ques 2. 

What are the salient features of the newly proposed amendment bill via the SARFAEI Act?
It allows banks to take possession of collateral security within 30days, as well as expansion of regulatory powers of RBI over Asset Reconstruction Companies (ARC). RBI will get more controls to audit & review any ARC as well as the freedom to remove the chairman or any director & appoint central bank official to its board. RBI will be allowed to levy penalties for non-compliance with its directives & control the fees charged by these companies to banks at the time of acquiring such assets. The bill recommends broadening the scope of the registry that will house the central database of all loans against properties given by all lenders. Bill provides that secured creditors will not be able to take control over the collateral unless it is registered with the central registry. Further, these creditors, after registration of security interest, will have importance over others in repayment of dues. Enable secured creditors to take over a company and restore its business on acquisition of controlling interest in the borrower company.

Ques 3. 

Explain the salient features of the new bill via DRT Act?
It proposes to move towards online DRTs- electronic filing of recovery applications, documents and written statements. Establishment of a time bound process; taking account of interest of creditors- 50% of the debt has to be deposited with DRT for filing an appeal. The bill also suggests amending the Indian Stamp Act so that stamp duty will not be charged on the transfer of financial assets in favour of ARCs. The bill will pave the way for the sponsor of an ARC to hold up to 100% stake. It will also permit non-institutional investors to invest in security receipts issued by ARCs and mandate a timeline for possession of secured assets by fast-tracking the recovery procedure for banks and other financial institutions. It also proposes to widen the space of the central registry that will house the central database of all loans against properties given by all lenders.


Ques 4. 

Explain the objectives of monetary policy?
To maintain price stability (OR control inflation) while keeping in mind the objective of Economic growth
  • Price stability is a necessary precondition for a sustainable growth.
  • Rapid Economic Growth
  • Exchange Rate Stability
Balance of Payment Equilibrium
  • Neutrality of Money
  • Full Employment
  • Equal Income Distribution

Ques 5 

Explain the purpose and procedure of Inflation Targeting in India?
In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework. The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government has notified in the Official Gazette 4 percent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent. The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB of RBI ACT determines the policy interest rates required to achieve the inflation target.


Ques 6. 

As per RBI’s First bi-monthly Monetary Policy Statement for 2017-18 announced on 6th April 2017, what is the new CRR ratio?
4.00 %

Ques 7

What is the new SLR as per the new RBI bi-monthly policy review?
20.50 %

Ques 8. 

What is the new Bank Rate as announced by the RBI in its new bi-monthly policy review?
6.50 %

Ques 9

What is the new REPO and Reverse REPO rate as per the new policy guidelines?
6.25 And 6.00 % respectively

Ques 10 

What is the new MSF rate as per the RRBI guidelines?
6.50 %. Earlier it was 7.00 %

Ques 11. 

Explain the role and relevance of CRR?
Under Section 42(1) of RBI Act 1934, All Scheduled Commercial Banks/Cooperative Banks (Public Sector/Nationalised/Private Sector/ Foreign Banks/ RRBS and Coop. Banks) in India are required to deposit a certain proportion of their deposits in the form of cash with RBI. Banks don't hold these as cash with themselves. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio.

Ques 12. 

Give an example of the working mechanism of CRR?
When a bank's deposits increase by Rs.100, and if the CRR is 4%, the banks will have to deposit Rs.4 with RBI and the bank will be able to use only Rs 96 for investments and lending, credit purpose. Therefore, higher the ratio, the lower is the amount that banks will be able to use for lending and investment. This power of Reserve bank of India to reduce the lendable amount by increasing the CRR makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system. This cash in the form of CRR deposited with RBI is considered as equivalent to holding of cash with themselves and do not carry any Rate of Interest.

Ques 13

What are the measures that are being followed for the maintenance of CRR?
With a view to providing flexibility to banks in choosing an optimum strategy of holding reserves depending upon their intra fortnight cash flows, all SCBs are required to maintain minimum CRR balances up to 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight. Interest is charged as under in cases of default in maintenance of CRR by SCBs: In the case of default in maintenance of CRR requirement on a daily basis which is currently 95 percent of the total CRR requirement, penal interest will be recovered for that day at the rate of 3% p.a. above the Bank Rate on the amount by which the amount actually maintained falls short and if the shortfall continues on the next succeeding day/s, penal interest will be recovered at the rate of 5% p.a. above the Bank Rate.

Ques 14. 

Explain the role and relevance of SLR?
Under Section 24 of Banking Regulations Act 1949, every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of: cash, gold and approved securities. RBI is empowered to increase this ratio up to 40%. An increase in CRR/ SLR restricts the bank's position to lend more. These amounts are not to be deposited with RBI, but to be maintained with the Bank itself.

Ques 15. 

Explain the role and relevance of Bank rate?
Bank Rate refers to the official interest rate at which RBI will provide loans to the banking system which includes commercial/cooperative banks, development banks etc. Such loans are given out either by direct lending or by rediscounting (buying back) the bills of commercial banks and treasury bills. Thus, bank rate is also known as a discount rate. Bank Rate is used by Central Bank of the Country to control and manage the supply of currency for the betterment of the national economy.

Ques 16. 

Explain the working mechanism of Bank Rate?
When unemployment goes up – the Central Bank reduces the Bank Rate so that the cheap funds are available to the Commercial Bank and the Commercial Banks are able to offer Loans to the unemployed Youth at Lower Rate of Interest. While extending loans to the Banks at Bank Rate by RBI, no collateral security is required. Banks borrow money from RBI due to anticipated shortage of money.

Ques 17. 

Explain the probable impact of Bank rate?
When RBI increases the bank rate, the cost of borrowing for banks rises and this credit volume gets reduced leading to decline in the supply of money. Thus, increase in Bank rate reflects a tightening of RBI monetary policy.

Ques 18. 

Explain the role and relevance of REPO and Reverse REPO rate?
Repo rate, or repurchase rate, is the rate at which RBI lends funds to banks for short periods, generally against Govt. Securities. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate.
Govt. Securities includes,
  • Treasury Notes (Long Term) issued by GOI ranging between 2 to 30 years,
  • Treasury Bills (Short Term): 91 days, 182 days, 364 days. 
The objective of Repo is to inject liquidity into the system. If RBI wants to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. Reduction in Repo Rate helps the commercial Banks to get money a Cheaper Rates and vice versa.

Ques 19. 

Point out the differences between REPO rate and Bank rate?
Bank Rate and Repo Rate seem to be similar terms because in both of them RBI lends to the banks. Repo Rate is a short-term measure and it refers to short-term loans and used for controlling the amount of money in the market. Bank Rate is a long-term measure RBI uses this tool to control the money supply. Bank Rate borrowing – No Collateral Security, Repo Rate borrowing – Against securities, Bank Rate is always higher than Repo Rate.

Ques 20. 

Explain the Reverse Repo rate?
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term. This is done by RBI selling government bonds/securities to banks with the commitment to buy them back at a future date. The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it. RBI can reduce liquidity in the banking system by hiking reverse repo rate. RBI uses this tool when it feels that there is too much money floating in the Banking System. An increase in Reverse Repo Rate means – Banks will get a higher Rate of Interest from RBI. Banks will prefer to lend money to RBI which is always safe.

Ques 21. 

Explain the key difference between REPO and Reverse REPO Rate?
Repo Rate: Borrowing by Banks from RBI. Means RBI injects money/liquidity in the Banking System.
Reverse Repo Rate: Borrowing by RBI from Banks – Means absorption of liquidity from the Banking System


Ques 22. 

Explain the role and relevance of Reverse REPO rate?
RBI Generally Is Never In A Situation To Borrow Funds From The Banking System. But This Tool Is Used Whenever RBI Feels That There Is enough Surplus Money Floating In The Banking System, Or Whenever There Is Any Borrowing Requirement By The Central Govt. This Tool Is Used.

Ques 23. 

Explain the role and relevance of Marginal Standing Facility?
Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) window created by Reserve Bank of India in its credit policy of May 2011. MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities. This window has been created for commercial banks to borrow from RBI in certain emergency conditions when inter-bank liquidity dries up completely and there is volatility in the overnight interest rates. To curb this volatility, RBI allowed them to pledge G-secs and get more funds from RBI at a rate higher than the repo rate. Thus, overall idea behind the MSF is to contain volatility in the overnight inter-bank rates. The rate of interest on MSF is above 100 bps above the Repo Rate. Max. Borrowing Limit: The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility. Minimum Amount: Min. Rs. 1 crore and multiples thereof.

Ques 24. 

Explain the role and relevance of Open Market Operations?
Open Market Operations refer to the purchase and sale of the Government securities (G-Secs) by RBI from/to market. The objective of Open Market Operations is to adjust the rupee liquidity conditions in the economy. When RBI sells government security in the markets, the banks purchase them. When the banks purchase Government securities, they have a reduced ability to lend to the industrial houses or other commercial sectors. This reduced surplus cash, contracts the rupee liquidity and consequently credit creation/credit supply. When RBI purchases the securities, the commercial banks find them with more surplus cash and this would create more credit in the system. Thus, in the case of excess liquidity, RBI resorts to sale of G-secs to suck out rupee from the system. Similarly, when there is a liquidity crunch in the economy, RBI buys securities from the market, thereby releasing liquidity. It’s worth note here that the market for government securities is not well developed in India but still OMO plays very important role.

Ques 25. 

What are the different qualitative measures of credit control that is being pursued by the RBI?
  • Margin Requirement
  • Credit Rationing
  • Direct Action
  • Moral Persuasion

Ques 26. 

How does the margin requirement criteria do work as a qualitative measure of credit control?
The marginal requirement of loan: current value of security offered for loan-value of loans granted. The marginal requirement is increased for those business activities, the flow of whose credit is to be restricted in the economy. A person mortgages his property worth Rs. 100,000 against the loan. The bank will give a loan of Rs. 80,000 only. The marginal requirement here is 20%. In case the flow of credit has to be increased, the marginal requirement will be lowered. Reserve Bank of India has been using this method since 1956.

Ques 27. 

Explain the role and relevance of credit rationing method?
Under this method, there is a maximum limit to loans and advances that can be made, which the commercial banks cannot exceed. RBI fixes a ceiling for specific categories. Such rationing is used for situations when credit flow is to be checked, particularly for speculative activities. Minimum of "capital: total assets" (ratio between capital and total asset) can also be prescribed by Reserve Bank of India. Under the Banking Regulation Act, the central bank has the authority to take strict action against any of the commercial banks that refuses to obey the directions given by Reserve Bank of India. There can be a restriction on advancing of loans imposed by Reserve Bank of India on such banks.

Ques 28. 

Explain Moral Persuasion?
This method is also known as "moral persuasion" as the method that the Reserve Bank of India, being the apex bank uses here, is that of persuading the commercial banks to follow its directions/orders on the flow of credit. RBI puts a pressure on the commercial banks to put a ceiling on credit flow during inflation and be liberal in lending during deflation.

Ques 29. 

Explain the factors that act a causative factor for the failure to achieve inflation targeting in India?
The Central Government notified the following as factors that constitute the failure to achieve the inflation target:
  • The average inflation is more than the upper tolerance level of the inflation target for any three consecutive quarters; or 
  • The average inflation is less than the lower tolerance level for any three consecutive quarters.
  • Prior to the amendment in the RBI Act in May 2016, the flexible inflation targeting framework was governed by an Agreement on Monetary Policy Framework between the Government and the Reserve Bank of India of February 20, 2015.

Ques 30

Comment on the timeline of Old Banking System in India?
  • Phase-I : Early Phase - 1770 to 1969 
  • Phase-II : Nationalisation - 1969 to 1991 
  • Phase-III: Banking Sector Reforms - 1991

Ques 31 

What were the key functions performed by the old Banking system in India?
Accepting Deposits, Issue of DDs/Remittences/TTs, Loans and Advances, Safe custody of valuables/Lockers, Working manually through Ledgers/Books only, Loans at very high rate of Interest, Token system for withdrawal of money from a/c.

Ques 32. 

Explain the key disadvantages of of Old Banking System in India ?
Human errors, Time consuming – account opening, passing of cheques, payments etc, Limited use of technology, Fraud prone.

Ques 33. 

Comment on the striking features of New Age Banking in India ?
Core Banking Solutions, Customer Relationship Management, Better customer service – Anywhere Anytime Banking, Better cross selling, RTGS/NEFT replaced DDs/TTs, ATMs/Debit Card/Credit Card/ Internet Banking

Ques 33

Comment on the timeline based history of Banking in India ?
India has a long history of banking and it was originated in the last decade of 18th century. Actually the growth of Banking Industry in India may be studied in terms of two broader phases :
  • Pre-Independence 1770-1947 
  • Post Independence 1947 to till date 
Post Independence phase may be further divided into 3 phases:
  • Pre-Nationalisation 1947-1969 
  • Post Nationalisation 1969-1991 
  • Post Liberalisation 1991

Ques 34

Name two banks of the yesteryears that Liquidated/Failed ?
  1. Bank of Hindostan1829-32 
  2. The General Bank of India 1786-1891

Ques 35

Comment on the establishment of State Bank of India and its contemporaries during and after the independence era ?
During British Rule, the East India Co. Established 3 Banks, known as “Presidency Banks”
  • 1809 Bank Of Bengal Presidency 
  • 1840 Bank of Bombay Banks 
  • 1843 Bank of Madras 
In 1921 all the Presidency Banks were amalgamated into ‘Imperial Bank of India’. In 1955 Imperial Bank of India was nationalised and given the name of ‘State Bank of India’ established under the State Bank of India Act 1955.
The other banks established during this period were :
  • 1865 Allahabad Bank 
  • 1894 Punjab National Bank 
  • 1906-1913 BOI, CBI, BOB, Canara Bank, Indian Bank, Bank of Mysore.
After independence GOI came up with Banking Companies Act 1949 which was later changed to Banking Regulations Act 1949 to regulate activities of all the banks.

Ques 36

There were seven subsidiaries of SBI, which were nationalised in 1959. Name them?
  • State Bank of Patiala(merged in 2017)
  • State Bank of Hydrabad(merged in 2017) 
  • State Bank of Bikaner & Jaipur (merged in 2017) 
  • State Bank of Mysore( merged in 2017)
  • State Bank of Travancore(merged in 2017)
  • State Bank of Saurashtra { Merged in 2008} 
  • State Bank of Indore {Merged in 2010}

Ques 37. 

On 19th July 1969, 14 major Banks were nationalised. Name them?
  • Central Bank of India 8. IOB 
  • Bank of Maharashtra 9. BOB 
  • Dena Bank 10.Union Bank 
  • Punjab National Bank 11. Allahabad Bank 
  • Syndicate Bank 12. UCO Bank 
  • United Bank of India 13. Canara Bank 
  • Indian Bank. 14. Bank of India

Ques 38. 

How many and which all banks were nationalised in 1980?

In 1980, another 6 major Banks were nationalised, with deposits over Rs.200 crore raising the number to 20.
  • Andhra Bank
  • Oriental Bank of Comm.
  • New Bank of India 
  • Corporation Bank 
  • Punjab & Sind Bank 
  • Vijaya Bank (now merged with PNB in Sept.1993)

Ques 39

When was DICGC established ?
In 1971 Deposit Insurance and Credit Guarantee Corporation was established.

Ques 40

When was the idea of RRB's was mooted and established ?
RRBs – 1975 Regional Rural Banks were formed for financial inclusion and development of rural economy.

Ques 41

When was the erstwhile NABARD established ?
In 1982 National Bank for Agriculture and Rural Development was established for credit to agriculture and cooperative sector.

Ques 42

When was the banking sector reforms were taken up, liberalising the whole sector ? Trace out the steps and initiatives undertaken as part of the banking sector reforms ?
  • 1991 - Banking Sector Reforms : Narsimham Committee submitted its report. 
  • 1993 – Banking Regulation Act was amended and gates for new Private Sector Banks were opened. New generation banks that were opened along with it includes, HDFC, Axis Bank, ICICI, Yes Bank, KMB. 
  • 1997 – Narsimham Committee-II (Reforms) 
  • NPA / Income Recognition 
  • Transparency in Balance Sheet 
  • 2002 – SARFAESI Act (Securitisaion and Reconstruction of Assets and Enforcement of Security Interest 2002 Act)

Ques 43 

Comment on the basic structure of commercial banking in India ?
The banking sector is being governed by the RBI, which wholly can be classified as commercial banks, co-operative banks and Development banks. Commercial banks can again be classified into Private sector banks and Nationalised Banks. On the other side the co-operative segment comprises of short term and long term credit provisioning institutions. Short term Credit providing institutions can again be classified as those providing agricultural credit and those providing Urban credit. The banking sector also comprises of Development Institutions which includes EXIM bank, Industrial purpose driven banks as well as Agricultural Banks.

Ques 44

Who all are the stakeholders in the Indian banking segment?
SBI & Associates (now merged), other Nationalised Banks which makes up around 19 in number and other Public sector banks.

Ques 45

What are Scheduled Banks?
Those banks which are included in 2nd Schedule of RBI Act 1934. These banks should fulfill two conditions:
  • Paid up capital and collected funds should not be less than Rs.5 lacs. 
  • Any activity of the Bank should not be detrimental or adversely affect the interests of the customers.

Ques 46

What are the two principle facilities that is being enjoyed by the Scheduled banks?
Every Scheduled Bank enjoys two principal facilities
  • It becomes eligible for a Loan from RBI at Bank Rate. 
  • It automatically acquires the membership of Clearing House.

Ques 47

Which all type of banks are being considered as scheduled banks ?
Scheduled Banks comprises of: Commercial Banks and Cooperative Banks.


Ques 48

What are Commercial banks?
Commercial Banks are both Scheduled and Non-scheduled commercial banks regulated Banking Regulaions Act 1949. Commercial Banks works on a ‘Profit Basis’ and are engaged in the business of accepting deposits for the purpose of advances/loans.


Ques 49

What are the four types of Commercial banks?
4 Types of Scheduled Commercial Banks (SCBs)
  • I. Public Sector Banks 
  • II. Private Sector Banks 
  • III. Foreign Banks 
  • IV. Regional Rural Banks 

Ques 50

What are public sector banks?
  • Public sector banks are those banks where Govt. is the owner or having more than 51% stake in capital. 
  • SBI and all Nationalised Banks are Public Sector Banks.

Ques 51

What are Private sector banks?
Private Banks are owned by private individuals/institutions. These are registered under the Companies Act 1956 as Limited Companies.


Ques 52. 

Name a few New Generation Private Banks in India?
  • HDFC Bank 
  • ICICI Bank 
  • AXIS Bank 
  • Yes Bank 

Ques 53. 

Name a few Old Private Sector Banks in India?
  • Karur Vysaya Bank
  • South Indian Bank etc.

Ques 54

What are foreign banks?
Those banks which are incorporated outside India and are operating branches in India also. 
For example: UK based Banks: HSBC, Barclays Banks Standard Chartered Bank Royal Bank of Scotland.US-based Banks: Bank of America Citi Bank American Express
Some foreign banks are also having their representative offices in India.

Ques 55

What are Regional Rural Banks?
RRBs were established in 1975 under RRB Act 1976. Main focus of RRB's areRural Area Development and elimination of money lenders.RRBs are jointly owned by Govt. Of India having 50% stake , State Govt. 15% ownership,Sponsored Bank 35%. It has been institutionalised as per the recommendations of Narsimham Committee. The First RRB that was institutionalised I in India was Pratham Bank by Syndicate Bank in Moradabad (UP).RRB's are Regulated By NABARD and their Minimum Capital requirement is Rs. 5 crore.

Ques 56. 

Comment on the Priority sector lending targets of RRB's ?
Priority Sector Lending Target of RRBs are as follows
75% of total outstanding advances should be to Priority Sector such as Agriculture incl. Small & Marginal - 18%, Weaker Sector - 15%, MSME - 7.5%, education, Housing, Social Infrastructure, Renewable Energy and Others.

Ques 57

What are Co-operative Banks?
Cooperative Banks are small sized banks operating in rural and urban areas. They also perform fundamental banking activities but they are different from commercial banks. Coop. Banks are registered under Coop. Societies Act 1965 with RCS of the State.They are regulated by RBI under Banking Regulations Act 1949.Coop. Banks have limited products like – No ATM, Internet / Mobile Apps. Banking, RTGS/NEFT , Lesser Network of Branches etc.

Ques 58

Comment on the banking structure of Co-operative banks?
  • Coop. Banking Structure is divided into 5 categories:
  • Primary Coop. Credit Society – Association of borrowers and non-borrowers. Funds of society are derived from members.
  • District Central Coop. Bank – Functions at District level only
  • State Coop. Bank – Apex Body the State Govt.
  • Land Development Bank – Long term loans to farmers. No deposits from public.
  • Urban Coop. Bank – general banking activities at State level.

Ques 59

What are the main Development Banks in India ?
  • IFCI : To cater to the long term financial needs of the Industrial Sector/Big projects. 
  • IDBI : for Industrial Sector now merged with IDBI Bank. 
  • SIDBI : Loan assistance to MFIs (Micro Finance Institutions) for onward lending to individuals/ SHG, subject to Min.Rs.50 lacs. Finance by MFI per borrower should not be more than Rs.60000/- and per SHG Rs.100000.

Ques 60

Comment on the role and functioning of NABARD?
Promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other allied economic activities.

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