MONEY AND BANKING (Part – I)

Total Questions: 150

141. What is the purpose of setting up of Small Finance Banks (SFBs) in India? [U.P.S.C. (Pre) 2017]

To supply credit to small business units.
To supply credit to small marginal farmers.
To encourage young entrepreneurs to set up business particularly in rural areas.

Select the correct answer using the code given below :

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Correct Answer: (a) 1 and 2 only

Solution:As per RBI guidelines for licensing of Small Finance Banks (released in November, 2014), the objectives of setting up of Small Finance Banks (SFBs) will be to further financial inclusion by (a) provision of saving vehicles, and (b) supply of credit to small business units; small and marginal farmers; micro and small industries; and others unorganized sector entities, through high technology-low cost operations. However, there is no explicit provision for SEBs to encourage young entrepreneurs to set up business particularly in rural areas. Hence, option (a) is the correct answer.

142. The establishment of 'Payment Banks' is being allowed in India to promote financial inclusion. Which of the following statements is/are correct in this contex? [U.P.S.C. (Pre) 2016]

Mobile telephone companies and supermarket chains that are owned and controlled, by residents are eligible to be promoters of Payment Banks.
Payment Banks can issue both credit cards and debit cards.
Payment Banks cannot undertake lending activities.

Select the correct answer using the code given below :

(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3

Correct Answer: (b) 1 and 3 only

Solution:As per RBI's guidelines for licensing of Payment Banks, the payments bank will be registered as a public limited company under the Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities mainly to acceptance of demand deposits and provision of payments and remittance services.

The primary objective of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users, by enabling high volume-low value transactions in deposits and payments/remittance services in a secured technology- driven environment.

The existing non-bank Pre-paid Payment Instrument (PPI) issuers authorized under the Payment and Settlement Systems Act, 2007 (PSS Act); and other entities such as individuals/ professionals; Non-Banking Finance Companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks.

Payments Bank can issue. ATM/Debit card. They, however, cannot issue credit cards. They cannot undertake lending activities. Hence, option (b) is the correct answer.

143. RBI has cleared the resolution to start Payment Banks in India for improving Financial Inclusion. Following committee had recommended the creation of Payment Banks : [U.P.P.C.S. (Mains) 2014]

(a) Arvind Mayaram
(b) Y.V. Reddy
(c) Bimal Jalan
(d) Nachiket Mor

Correct Answer: (d) Nachiket Mor

Solution:Nachiket Mor Committee on 'Comprehensive Financial Services for Small Businesses and Low Income Households' had recommended the formation of a new category of banks called Payment Banks. The Committee was formed on 23rd September, 2013. It submitted its report to the RBI on 7th January, 2014.

An expert committee led by Bimal Jalan, former RBI Governor, was set up in November 2018, to review the ECL framework of the RBI. In 2019, the RBI had adopted the recommendations of the expert committee on ECF. The committee had suggested that the RBI's contingency risk buffer (CRB) should be maintained in a range of 5.5 per cent to 6.5 per cent of the central bank's balance sheet.
The Y.V. Reddy Committee, formally known as the "Working Group to Review the Monetary and Financial Statistics," was established in 1998 to examine the analytical aspects of monetary survey. The committee, chaired by Y.V. Reddy, submitted its report in June 1998, recommending the compilation of four monetary aggregates based on the banking sector's balance sheet and progressive liquidity.
The Arvind Mayaram committee suggested that any investment by way of equity shares, compulsorily convertible preference shares, or debentures that is less than 10 percent of the post-issue paid-up equity capital of a company should be treated as FPI.

144. What is 'Shadow Banking'? [U.P.R.O./A.R.O. (Pre) 2014]

(a) Outsourcing of banking work by a bank
(b) Financial transactions and other activities of non-banking financial intermediary
(c) Domestic banks foreign operations
(d) Foreign bank operating in another country for banking and other activities

Correct Answer: (b) Financial transactions and other activities of non-banking financial intermediary

Solution:'Shadow banking' in fact, symbolizes one of the many failings of the financial system leading up to the global financial crisis. The term 'Shadow Bank' was coined by the American economist Paul McCulley in 2007. 'Shadow banking' refers to the practice of banking-like activities (mainly lending) performed by non-banking financial intermediaries, which are not subject to strict regulation. These institutions function as intermediaries between the investors and borrowers, providing credit and generating liquidity in the system. Although these entities do not accept traditional demand deposits offered by banks, they do provides services similar to what commercial banks offer.

145. The difference between a bank and a Non-Banking Financial Institution (NBFI) is that : [U.P.S.C. (Pre) 1994]

(a) a bank interacts directly with customers while an NBFI interacts with banks and governments
(b) a bank indulges in a number of activities relating to finance with a range of customers, while an NBFI is mainly concerned with the term loan needs of large enterprised
(c) a bank deals with both internal and international customers while an NBFI is mainly concerned with the finance of foreign companies
(d) a bank's main interest is to help in business transactions and saving/investment activities while and NBFI's main interest is in the stabilization of the currenct

Correct Answer: (b) a bank indulges in a number of activities relating to finance with a range of customers, while an NBFI is mainly concerned with the term loan needs of large enterprised

Solution:Banks are the financial institutions which are empowered by the government to financial activities like to accept a depos. its or grant credit, to manage withdrawals, to pay interest, to clear cheques and to provide general services to the clients, Banks also play an important role in socio-economic development of a country. While a Non-Banking Financial Institution (NBFI) is a financial institution that does not have a full banking license and is not directly under the control of the government. NBFI's are primarily concerned with the term loan requirement of large companies.

146. With reference to the Non-Financial Companies (NBFCs) in India, consider the following statements : [U.P.S.C. (Pre) 2010]

1. They cannot engage in the acquisition of securities issued by the government.
2. They cannot accept demand deposits like Saving Account.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Correct Answer: (b) 2 only

Solution:A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/ stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving depos- its under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). Hence, Statement 1 is incorrect. NBFC cannot accept demand deposits, do not form part of the payment and settlement system and cannot issue cheques drawn on itself. Deposits insurance facility of Deposits Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. Thus, Statement 2 is correct. Hence, option (b) is the correct answer.

147. On which date, the Ombudsman Scheme for the Non-Banking Financial Companies (NBFC), 2018 was effectively introduced by Reserve Bank of India? [M.P.P.C.S. (Pre) 2020]

(a) 26 January, 2018
(b) 23 January, 2018
(c) February, 2018
(d) 23 February, 2018

Correct Answer: (d) 23 February, 2018

Solution:The Ombudsman Scheme for Non-Banking Financial Companies (NBFC), 2018, is an expeditious and cost free apex level mechanism for resolution of complaints of the customers of NBFCs, relating to certain services rendered by NBFCs. The Scheme is being introduced under Section 45 L of the Reserve Bank of India Act, 1934, with effect from February 23, 2018. The NBFC Ombudsman is a senior official appointed by the Reserve Bank of India.

148. Microfinance is the provision of financial service to people of low-income groups. This includes both the consumers and the self-employed. The service/services rendered under microfinance is/are : [U.P.S.C. (Pre) 2011]

1. Credit facilities

2. Saving facilities

3. Insurance facilities

4. Fund Transfer facilities

Select the correct answer using the codes given below :

(a) 1 only
(b) 1 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4

Correct Answer: (d) 1, 2, 3 and 4

Solution:Microfinance is the supply of basic financial services to poor and low-income households and their micro-enterprises. Microfinance comprises several financial tools such as savings, credit, leasing, insurance and cash transfers. These services are provided by a variety of institutions, which can be broadly divided into banks, NGOs, credit and savings cooperatives and associations, and non-financial and informal sources.

149. RBI had set up a committee to study and give suggestions on the microfinance sector. Its Chairman was : [U.P.P.C.S. (Mains) 2010]

(a) Y.H. Malegam
(b) Abid Hussain
(c) Bimal Jalan
(d) Rakesh Mohan

Correct Answer: (a) Y.H. Malegam

Solution:The Board of Directors of the RBI constituted a Sub-Committee of the Board to study the issues and concerns on the microfinance sector. The Sub-Committee of the Board was formed on October 15, 2010, under the chairmanship of Mr. Y.H. Malegam. The Committee submitted its report in December, 2011. The Committee recommended that a separate category be created for NBFCs operating in the microfinance sector, such NBFCs being designated as NBFC-MFI.

150. On which of the following recommendations, the Microfinance Institutions were set up in 2011? [U.P.R.O./A.R.O. (Pre) 2014]

(a) Malegam Committee
(b) Gaiporia Committee
(c) Rangrajan Committee
(d) Banking Reforms Committee

Correct Answer: (a) Malegam Committee

Solution:On the recommendations of Malegam Committee, a new category of NBFCs, viz., Non Banking Financial Company- Microfinance Institution (NBFC-MFI) was created.

The Goiporia Committee was set up in 1990 by the Reserve Bank of India (RBI). The Goiporia committee was given the mandate of exploring and giving recommendations for improving customer service in the banks.
The Rangarajan Committee is primarily associated with poverty estimation in India. Specifically, it was formed in 2012 to review the methodology for estimating poverty levels in the country.
The Narasimham Committee is a key reference point for banking reforms in India. Two committees, chaired by M. Narasimham, were established to recommend improvements to the financial system, particularly the banking sector. The first committee, formed in 1991, focused on enhancing efficiency and productivity, while the second, in 1998, addressed structural measures for strengthening the system.

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