Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in news ?
- A.The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.
- B.The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.
- C.The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
- D.The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.
Correct answer
Explanation
The correct answer is C. The Merchant Discount Rate (MDR) is the fee a bank charges a merchant for processing payments the merchant receives from customers by card.
When a customer pays with a debit or credit card, the merchant does not receive the full bill amount: a small percentage is deducted as MDR. It is usually shared among the merchant's bank (the acquirer), the card-issuing bank and the card network that routes the transaction. It is expressed as a percentage of the transaction value. The RBI regulates MDR on debit cards, and the government has at times waived or absorbed it, for example for RuPay debit cards and UPI, to push digital payments.
A is wrong: MDR is a charge paid by the merchant, not an incentive paid to the merchant.
B is wrong: money returned to customers for card use is cashback or a reward, not MDR.
D is wrong: a government incentive to merchants is a subsidy, while MDR is a bank fee.
Exam tip: MDR = paid by the merchant to the acquiring bank per card transaction, as a percentage of the bill.
Practice Questions
View allConsider 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?
- A.1, 2 and 3
- B.1 only
- C.1 and 3 only
- D.2 and 3 only
Show answer
Explanation
The correct answer is B, 1 only. The Special Drawing Facility is short-term, secured lending to States, but it is cheaper than the repo rate and comes before ordinary WMA, not after it.
The RBI, as banker to the State governments, lets a State draw money for temporary cash gaps in a fixed order. First comes the Special Drawing Facility, secured by the State's holdings of government securities, including its investments in the Consolidated Sinking Fund and the Guarantee Redemption Fund. Once that is used up, the State takes normal Ways and Means Advances, and beyond that limit it runs an overdraft. The SDF is charged at one percentage point below the repo rate, normal WMA at the repo rate, and overdraft at more than the repo rate.
Option A is wrong because statements 2 and 3 are false. Option C is wrong because statement 3 reverses the order: SDF is drawn before WMA. Option D is wrong because it rejects the one true statement and keeps the two false ones.
Exam tip: order SDF → WMA → overdraft; rates repo − 1%, repo, above repo.
Consider the following statements about Ways and Means Advances (WMA) : 1. WMA is a provision in which the Reserve Bank of India provides long-term loans to the State Governments/UT Governments and Central Government. 2. WMA is a provision in which the Reserve Bank of India provides short-term loans to the State Governments/UT Governments and Central Government. 3. WMA was introduced in 1997. 4. Interest rate charged by the RBI on WMA is the same as the bank rate. Which of the statements given above is/are correct?
- A.1 only
- B.1 and 3 only
- C.2 and 3
- D.1, 3 and 4
Show answer
Explanation
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 sale of insurance policies to customers through the branches of a bank is known as
- A.Bancassurance
- B.Reinsurance
- C.Underwriting
- D.Securitisation
Show answer
Explanation
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.
Para banking, as the term is used by the Reserve Bank of India, refers to
- A.credit given outside the regulated banking system
- B.non-banking activities undertaken by a bank with RBI permission
- C.banking done only through business correspondents
- D.interest-free banking on profit and loss sharing
Show answer
Explanation
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.
A certificate of deposit, the typical wholesale deposit instrument, is issued for a minimum amount of
- A.₹1 lakh
- B.₹5 lakh
- C.₹10 lakh
- D.₹1 crore
Show answer
Explanation
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.