Consider the following statements about the Special Drawing Facility (SDF) : 1. It makes provision of short-term loans by the RBI to the State Governments/UT Governments against Government Securities. 2. Interest rate charged by the RBI on it is the same as Repo Rate. 3. It can be availed by the State Governments/UT Governments only after exhausting the normal Ways and Means Advances limit. Which of the statements given above is/are correct?

The correct answer is C, 2 and 3. Ways and Means Advances are short-term loans from the RBI, and the scheme began in 1997.

Governments often spend before their receipts arrive. To bridge such temporary mismatches, the RBI lends to the Centre and to State and UT governments through Ways and Means Advances. The facility was introduced on 1 April 1997, when it replaced the old system of ad hoc Treasury Bills that had automatically monetised the Centre's deficit. A government that crosses its WMA limit goes into overdraft, which is costlier and time-bound. The interest on WMA is linked to the repo rate, not the bank rate.

Option A is wrong because statement 1 calls WMA long-term lending, while it is meant only for short gaps in cash flow. Option B is wrong for the same reason. Option D is wrong because it adds statements 1 and 4, and the WMA rate follows the repo rate.

Exam tip: WMA = short-term, since 1997, at the repo rate; beyond the limit comes overdraft.

The correct answer is A, bancassurance. The word joins bank and assurance and describes the arrangement by which an insurer uses a bank branch network and customer base to sell policies while the bank earns fee income as a corporate agent or broker; it is a permitted para banking activity in India. Option B, reinsurance, is insurance taken by an insurance company itself so that part of a large risk is passed on to another insurer, and it has nothing to do with bank branches. Option C, underwriting, is the undertaking given by a merchant banker to buy the unsubscribed portion of a public issue, and in insurance it means the assessment and pricing of a risk, but not its distribution. Option D, securitisation, is the pooling of loans and their conversion into tradable securities. Bancassurance is attractive to banks because it earns income without using capital.

The correct answer is B. Para banking covers the financial services a bank may offer besides pure banking once the Reserve Bank of India allows it, such as distributing insurance policies and mutual fund units, equipment leasing, hire purchase, factoring, portfolio management and acting as a pension fund adviser, done departmentally or through a subsidiary. Option A describes shadow banking, credit intermediation by entities outside the regulated banking system, which is a very different idea and is not permitted business of a bank. Option C describes the business correspondent model of branchless delivery used for financial inclusion. Option D describes Islamic or interest-free banking, which works on profit and loss sharing and is not practised as banking business in India. The prefix para means alongside, so para banking is the business that runs alongside the core business of accepting deposits and lending.

The correct answer is B, ₹5 lakh. Under the Reserve Bank of India directions on certificates of deposit, a certificate is issued for a minimum of ₹5 lakh to a single investor and thereafter in multiples of ₹5 lakh, which keeps the instrument in the hands of companies, trusts and institutions rather than small savers; it is a negotiable, usance promissory note in dematerialised form and is issued at a discount to face value. Option A, ₹1 lakh, is too small and is the kind of figure used for retail term deposits. Option C, ₹10 lakh, and option D, ₹1 crore, are larger than the floor; a certificate may of course be issued for such amounts because they are multiples of ₹5 lakh, but the question asks for the minimum. Remember also that a bank cannot grant a loan against a certificate of deposit.

The correct answer is C, a gold loan to a household. A gold loan is a small, standardised, secured advance given to an individual against jewellery and belongs squarely to retail banking. Option A, a letter of credit, is a trade finance instrument by which a bank undertakes to pay an exporter on behalf of its importer customer, and it is sold to business clients. Option B, cash management services, means collecting receivables and making bulk payments for a corporate customer and is a classic fee-based wholesale offering. Option D, project finance for a power plant, is a large long-term loan appraised on the cash flows of the project and is wholesale business of the highest ticket size. The test to apply in such questions is the customer: if the borrower is a household or a tiny firm the product is retail, if it is a company, a government or an institution it is wholesale.