Test: Reserve Bank of India - Bank Exams MCQ

In 2003, foreign banks were permitted for the first time to operate currency chests. Standard Chartered Bank, the largest and oldest foreign bank in the country, was the first foreign bank to handle currency chests in India.

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Thus, the money supply will decrease with the bank which will mean that the rate of interest on loans offered by the bank will increase.

Option (E) is correct. Prime lending rate is the interest rate used by a bank which is decided by the concerned bank. It is usually the interest rate at which banks lend to favoured customers - i.e., those with good credit. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate that banks use to lend to one another. The prime rate is also important for individual borrowers, as the prime rate directly affects the lending rates available for a mortgage, small business loan or personal loan.

It advises banks to lend against certain commodities. Selective credit control is used to restrict bank finance against sensitive commodities (food grains, sugar, gur, cotton textiles, raw cotton, kapas).

"Basel II", the revised framework comprised three pillars:
1. minimum capital requirements, which sought to develop and expand the standardised rules set out in the 1988 Accord
2. supervisory review of an institution's capital adequacy and internal assessment process
3. effective use of disclosure as a lever to strengthen market discipline and encourage sound banking practices
None of the statements deals with Pillar 2.

REPO operations refer to RBI injection of liquidity into the system. Repo is a money market instrument, which enables collateralised short term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate. Monetary authorities use Repo rate to inject liquidity in order to control the inflation.

Increase in CRR leads to less amount of availability of money to circulate in the economy which leads to less liquidity. Since, the banks cannot lend as much as earlier, they increase the rate of interest and thus the lending rates become very high.

Capital market, real estate and commodities have been categorised as sensitive sectors by the Reserve Bank as the prices of these assets are prone to fluctuations that may pose a risk to financial stability.

'Know Your Customer' norms were issued in the context of the recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT) by RBI.