Banking & Financial Awareness Mixed Quiz: Set 25

The correct answer is B, section 45-IA. The section was inserted by the Reserve Bank of India (Amendment) Act of 1997 and requires an NBFC to hold a certificate of registration from the Reserve Bank and to maintain the prescribed minimum net owned fund before it can carry on business. Option A, section 42, deals with the cash reserve ratio that a scheduled bank must keep with the Reserve Bank, so it belongs to banks and not to NBFCs. Option C, section 22, is the licensing provision for banking companies, but it sits in the Banking Regulation Act of 1949 rather than in the Reserve Bank of India Act. Option D, section 35A, is the Reserve Bank's general power to issue directions to banking companies. The companion provision worth remembering is section 45-IB, which requires a deposit-taking NBFC to keep liquid assets.

The correct answer is B, SBI. Ecowrap is the research report of the State Bank of India, brought out by its economic research department.

Ecowrap is written by the team of the group chief economic adviser at SBI and comments on growth, inflation, bank credit, government finances and the state of households. It is widely quoted in the press because it often carries an early estimate of GDP growth or of the fiscal position before the official figures appear. The edition of May 2020 studied the damage the Covid-19 lockdown was doing to incomes and to economic activity. SBI is the country's largest commercial bank, with its headquarters in Mumbai.

A is wrong: the Reserve Bank publishes its own Monetary Policy Report, Financial Stability Report and Annual Report, not Ecowrap. C is wrong: HDFC Bank brings out no report of this name. D is wrong: nor does ICICI Bank.

Exam tip: Ecowrap belongs to SBI Research, while the best known Reserve Bank reports are the Financial Stability Report and the Monetary Policy Report.

The correct answer is B, IRDAI. The Insurance Regulatory and Development Authority of India is the statutory regulator of insurance, created under the IRDA Act 1999 after the Malhotra Committee recommended opening the sector to private and foreign capital; it licenses life, general, health and reinsurance companies and registers agents, brokers and surveyors, and its headquarters is at Hyderabad. Option A is wrong; the Securities and Exchange Board of India regulates the securities market, which means stock exchanges, depositories, brokers, merchant bankers, mutual funds and the disclosures of listed companies. Option C is wrong; the Pension Fund Regulatory and Development Authority regulates the National Pension System and the Atal Pension Yojana, and although an annuity is bought from an insurer at the end of a pension account, the insurer itself answers to IRDAI. Option D is wrong; the Reserve Bank regulates banks, non-banking financial companies and payment systems, not insurers, even where a bank sells insurance as a corporate agent.

The correct answer is A, reform of the banking and financial system. The Committee on the Financial System of 1991, chaired by M. Narasimham, came at the start of liberalisation and recommended lower statutory liquidity and cash reserve ratios, prudential norms for income recognition and provisioning, the classification of assets as standard, sub-standard, doubtful and loss, a capital adequacy requirement and a four-tier banking structure; the second Narasimham report of 1998 added mergers of strong banks, narrow banking for weak ones and asset reconstruction companies. Option B, reform of the insurance sector, belongs to the Malhotra Committee of 1993. Option C, capital account convertibility, belongs to the Tarapore Committee of 1997 and 2006. Option D, digital payments, belongs to the Nandan Nilekani Committee of 2019, which is a far more recent report.

The correct answer is B, accept demand deposits. An NBFC cannot accept demand deposits, cannot issue cheques drawn on itself, is not part of the payment and settlement system, and its depositors do not have the cover of the Deposit Insurance and Credit Guarantee Corporation. Those four points together are the difference between an NBFC and a bank. Option A is wrong as a choice because lending is the core activity of an NBFC and is written into its very definition. Option C is wrong for the same reason, since the acquisition of shares, debentures and other securities is one of the activities that defines the business. Option D is wrong because hire purchase is specifically named among the permitted activities, along with leasing, insurance business and chit business. A deposit-taking NBFC may accept term deposits, which is what makes this question worth reading twice.

The correct answer is C, 1,50,000 rupees. The Public Provident Fund Scheme allows a minimum of five hundred rupees and a maximum of one and a half lakh rupees in a financial year, the same ceiling that applies to the Sukanya Samriddhi Account and matching the limit of the deduction under section 80C. Option A, fifty thousand rupees, is wrong and far below the ceiling. Option B, one lakh rupees, is wrong but tempting because it was the limit in an earlier period before the ceiling was raised. Option D, two lakh rupees, is wrong; a two lakh ceiling belongs to the Mahila Samman Savings Certificate announced in the Union Budget for 2023-24, not to the PPF. If the deposit in a year exceeds the ceiling, the excess earns no interest and is simply returned.

The correct answer is B, the Hilton Young Commission. Formally the Royal Commission on Indian Currency and Finance, it reported in 1926 and recommended a central bank separate from the Imperial Bank of India; the recommendation led to the Reserve Bank of India Act 1934, and the Bank began work on 1 April 1935 with its central office at Calcutta, which moved permanently to Bombay in 1937. Option A is wrong; the Narasimham Committee reported on banking sector reform in 1991 and again in 1998, long after the Bank existed, and gave India the capital adequacy and prudential norms of the reform years. Option C is wrong; the Chakravarty Committee of 1985 reviewed the working of the monetary system and shaped monetary targeting. Option D is wrong; the Sivaraman Committee, the Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development, led to the founding of NABARD in 1982, which is the distractor most often chosen.

The correct answer is B, Manila, Philippines. The Asian Development Bank was established in 1966 and has worked from Manila since then, with field offices in its member countries including India. Option A is wrong because, although Japan holds one of the two largest shares in the bank and its president has by convention been Japanese, Tokyo is not its seat. Option C is wrong because Singapore hosts many regional offices of banks and firms but not the ADB headquarters. Option D is wrong because Jakarta is the seat of the ASEAN Secretariat, which is a different kind of body altogether. For revision, fix Manila with the ADB, Beijing with the AIIB, Shanghai with the New Development Bank and Washington DC with the IMF and the World Bank.

The correct answer is A. The Reserve Bank uses what the industry calls the fifty-fifty test: both conditions must hold, so financial assets must be more than half of total assets and the income from those assets must be more than half of gross income. A company that meets only one of the two is not an NBFC. Option B is wrong because twenty-five per cent is not the threshold in either limb of the test. Option C is wrong on two counts: the figure is fifty and not seventy-five, and the income limb alone is never enough. Option D is wrong because incorporation under the Companies Act is a precondition for every company and says nothing about principal business; a manufacturer that parks money in securities is not an NBFC. The reason for the test is to separate a finance company from a trading, manufacturing or service company that also holds investments.

The correct answer is C, Section 6. Section 6 governs capital account transactions, which are those that alter the assets or liabilities of a person outside India or in India, such as foreign direct investment, investment in overseas securities, borrowing abroad or buying immovable property abroad. They are permissible only to the extent allowed, and the Reserve Bank frames the regulations while the Central Government makes rules for debt instruments. Option A is wrong because Section 3 is the prohibition on dealing in foreign exchange except through an authorised person. Option B is wrong because Section 5 covers current account transactions, which are ordinarily free subject to reasonable restrictions by the Government. Option D is wrong because Section 10 deals with authorised persons, that is authorised dealers, money changers and offshore banking units.

The correct answer is C, Hyderabad. IRDAI began in New Delhi but its office was shifted to Hyderabad in 2001, and this move is exactly why the question is asked: the candidate who assumes that every financial regulator sits in Mumbai or Delhi gets it wrong. Option A is wrong for IRDAI but is the right answer for several neighbours: the Reserve Bank of India, the Securities and Exchange Board of India, NABARD and the Securities Appellate Tribunal are all at Mumbai. Option B is wrong here, though New Delhi is the headquarters of the Pension Fund Regulatory and Development Authority, the Insolvency and Bankruptcy Board of India, the National Housing Bank and the National Financial Reporting Authority. Option D is wrong; Chennai hosts no national financial regulator, although it has a bench of the National Company Law Tribunal. For completeness, remember Lucknow for SIDBI, which is the other city that appears in these options.

The correct answer is B, six. On 15 April 1980 the Government nationalised six more private banks, this time using a deposit cut-off of ₹200 crore. One of the six, New Bank of India, was later merged into Punjab National Bank in 1993, which is why the count of nationalised banks afterwards is often given as nineteen.

Option A, four, and option C, eight, match no round of nationalisation and are there to test whether the cut-off and the count have been learnt together. Option D, fourteen, is the number taken over in the first round on 19 July 1969, when the cut-off was deposits of ₹50 crore or more. The pattern to remember is simple: 1969, fourteen banks, ₹50 crore; 1980, six banks, ₹200 crore; and the State Bank of India was already in public hands from 1955, so it appears in neither list.

The correct answer is C, four. The layers are the Base Layer, the Middle Layer, the Upper Layer and the Top Layer, and the regulation becomes stricter as a company moves up, so that supervision matches the risk a company poses to the system. Option A, two, reflects the older division into deposit-taking and non-deposit-taking companies, which still exists but is not the layered framework. Option B, three, is the usual wrong answer, because candidates remember the base, middle and upper layers and forget the fourth. Option D, five, is simply wrong. The detail that completes the answer is that the Top Layer is kept empty by design and will be populated only if the Reserve Bank judges that a company in the Upper Layer has come to pose a substantial increase in systemic risk.

The correct answer is C, the Primary Agricultural Credit Society. Short-term rural cooperative credit is built in three tiers: the State Cooperative Bank at the apex of the state, the District Central Cooperative Bank at the district level and the Primary Agricultural Credit Society in the village, where the farmer actually borrows. Funds flow down the tiers and the society deals directly with its members.

Option A is the top tier and is the state's own cooperative apex bank, linked to the Reserve Bank and to NABARD. Option B is the middle tier and lends to the village societies rather than to farmers. Option D, a Regional Rural Bank, is not part of the cooperative structure at all; it is a commercial bank created under the Regional Rural Banks Act, 1976 with the Centre, a sponsor bank and the State as shareholders. Do not mix the two rural channels, cooperative and RRB.

The correct answer is B, 1992. The Securities and Exchange Board of India was first constituted in April 1988 as a non-statutory body with advisory functions, and it received statutory powers through the Securities and Exchange Board of India Act 1992, passed in the year the securities scam made a strong market regulator unavoidable. Option A, 1988, is the year of its creation rather than of its statutory powers, and is the most tempting wrong choice; a question that asks when SEBI was set up has 1988 as the answer, so read the stem carefully. Option C, 1995, is wrong, although an amendment of that year widened the Board powers; it is also close to the founding of the National Stock Exchange, which began trading in 1994. Option D, 2002, is wrong and belongs to a different statute, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of that year, which is a Reserve Bank subject.

The correct answer is D, Reserve Bank of India. Policy rates are announced by the Reserve Bank, and since 2016 the decision is taken by its Monetary Policy Committee of six members under the chairmanship of the Governor. The repo rate is the rate at which banks borrow short term funds from the Bank against government securities, and the reverse repo is the rate at which the Bank absorbs their surplus funds, so both are instruments of the central bank and not of any other body.

Option A, the Ministry of Finance, sets the inflation target in consultation with the Bank and appoints three members of the Committee, but it does not fix the rates. Option B, the State Bank of India, is a commercial bank that borrows at these rates. Option C, the Comptroller and Auditor General, audits government accounts and has no role in monetary policy at all.

The correct answer is C, five hundred crore rupees and above. A non-deposit-taking NBFC of that size is classified as systemically important, written as NBFC-ND-SI, and becomes subject to prudential norms on capital adequacy, exposure and disclosure that smaller companies escape. Option A, one hundred crore, was never the threshold. Option B, two hundred and fifty crore, is an invented figure placed between the real ones. Option D, one thousand crore, is the strongest distractor because it is a real threshold in this topic, but a different one: under Scale Based Regulation a non-deposit-taking NBFC below one thousand crore rupees in assets generally sits in the Base Layer. Keep the two numbers apart as five hundred crore for systemic importance and one thousand crore for the boundary of the Base Layer.

The correct answer is C, 2013. PFRDA was first created in 2003 by a resolution of the Government as an interim authority to oversee the new defined contribution pension arrangement, and it ran the National Pension System for a decade without a statute; the Pension Fund Regulatory and Development Authority Act 2013 gave it statutory standing. Option A, 2003, is therefore the year of its creation as an interim body and is the obvious trap in this question. Option B, 2008, is wrong; that year the National Pension System was opened to the public and the central recordkeeping agency and pension funds were appointed, but no Act was passed. Option D, 2016, is wrong and belongs to the Insolvency and Bankruptcy Code, under which the Insolvency and Bankruptcy Board of India began on 1 October 2016. A clean way to remember the sequence of statutes is 1934, 1992, 1999, 2013 and 2016 for RBI, SEBI, IRDAI, PFRDA and IBBI.

The correct answer is B, the Malegam Committee. After the microfinance crisis in Andhra Pradesh in 2010, the Reserve Bank appointed a sub-committee of its central board under Y. H. Malegam to study the lending practices of microfinance institutions, and its report of January 2011 led to the NBFC-MFI being carved out as a distinct category with its own rules on margins, interest and recovery. Option A, the Narasimham Committee, reported on banking sector reform in 1991 and 1998 and has nothing to do with microfinance. Option C, the Nachiket Mor Committee of 2013, proposed comprehensive financial services for small businesses and low-income households and led towards small finance banks and payments banks, so it is a genuine distractor. Option D, the Raghuram Rajan Committee of 2008, reported on financial sector reforms more broadly.

The correct answer is B, the Securities Appellate Tribunal. The Tribunal was set up under the SEBI Act and sits at Mumbai; since the Finance Act 2017 it also hears appeals against orders of IRDAI and of PFRDA, so one tribunal now serves three regulators. An appeal from the Tribunal goes to the Supreme Court on a question of law. Option A is wrong; the National Company Law Tribunal hears company law matters and corporate insolvency under the Insolvency and Bankruptcy Code, with appeals to the National Company Law Appellate Tribunal. Option C is wrong; the Debt Recovery Tribunal recovers the dues of banks and financial institutions and deals with the insolvency of individuals and partnership firms under the Code, with appeals to the Debt Recovery Appellate Tribunal. Option D is wrong; a High Court may be approached in writ jurisdiction in exceptional cases, but the statutory appeal is to the Securities Appellate Tribunal.