In 2014, Bandhan Financial Services, a microlender with headquarters at ______, was granted in-principle approval by RBI to start a universal bank.

The correct answer is C, Promissory Note. Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as an instrument in writing, signed by the maker, containing an unconditional undertaking to pay a certain sum of money to or to the order of a certain person. The word that decides the question is undertaking, that is a promise: only two parties are involved, the maker who promises and the payee who receives. A currency note is left out of the definition even though the Reserve Bank promises to pay on it. Option B is wrong because a bill of exchange, under Section 5, carries an unconditional order to pay, not a promise, and has three parties: drawer, drawee and payee. Option A is wrong because a cheque, under Section 6, is only a bill of exchange drawn on a specified banker and payable on demand, so it too is an order. Option D is wrong because a hundi is a traditional instrument in a regional language, not defined by the Act. Exam tip: promise means promissory note, order means bill or cheque.

The correct answer is A, Bank Rate. Section 49 of the Reserve Bank Of India Act defines the bank rate as the standard rate at which the Bank is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase. It is long term lending by the RBI without any collateral being pledged, so it is higher than the repo rate; today it is aligned with the marginal standing facility rate and is used mainly for penal interest when a bank falls short of its reserve requirements. Option B is wrong because the cash reserve ratio is the share of net demand and time liabilities a bank must keep as cash with the RBI, not a rate of lending. Option C is wrong because the reverse repo rate is what the RBI pays banks when it absorbs their surplus funds. Option D is wrong because the repo rate is short term lending by the RBI against government securities. Exam tip: bank rate means no collateral and a long term, repo means securities pledged for a short term.

The correct answer is C, grant loans and issue credit cards. A payments bank is a differentiated bank licensed on the lines suggested by the Nachiket Mor Committee to carry payments and small savings to people the branch network had not reached. It is deliberately kept out of lending, so it takes no credit risk and must invest its deposits in safe government securities and bank deposits.

Option A is allowed, subject to a ceiling on the balance per customer that the Reserve Bank fixes. Option B is allowed, and a payments bank may issue debit or ATM cards although not credit cards. Option D is its core business, since remittances and payments are the purpose for which the class was created. India Post Payments Bank, which began on 1 September 2018, is the best known example. A small finance bank, by contrast, is allowed to lend and must direct most of its lending to small borrowers.

The correct answer is C, Bank of Baroda. It was founded in 1908 by Maharaja Sayajirao Gaekwad III, nationalised in the first round of July 1969, and the Government of India still holds the majority of its shares, which is what makes a bank a public sector bank. In 2019 it absorbed Vijaya Bank and Dena Bank.

Option A, Axis Bank, began life in 1994 as UTI Bank, the first of the new private banks licensed after the RBI guidelines of 1993. Option B, ICICI Bank, grew out of a development finance institution and is a private sector bank. Option D, Yes Bank, is also private and started business in 2004. A quick test in the examination hall: if the bank was nationalised in 1969 or 1980, or is the State Bank of India, it is a public sector bank; if it was licensed in the 1990s or later, it is private.

The correct answer is B, the Second Schedule of the Reserve Bank of India Act, 1934. A bank is placed in that Schedule once it has the prescribed paid-up capital and reserves and satisfies the Reserve Bank that its affairs are not conducted in a manner harmful to depositors. Inclusion brings the right to borrow from the RBI at the bank rate, membership of the clearing house and access to the money market.

Options A and C name the Banking Regulation Act, 1949, which is the law on licensing, inspection and winding up of banks but does not carry the list of scheduled banks, so both are wrong. Option D, the Seventh Schedule of the Constitution, contains the Union, State and Concurrent Lists and has nothing to do with banks, although banking itself is an entry in the Union List. Remember the pair: RBI Act 1934 for the Second Schedule, Banking Regulation Act 1949 for regulation.