Test: Indian Economy and Indian Financial System - 5 - Bank Exams MCQ

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to improve fiscal discipline, reduce India's fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget.

Objectives of FRBM Act

• Efficient management of expenditure, revenue and debt.
• Macroeconomic stability
• Better coordination between fiscal and monetary policy
• Achieving a balanced budget

Major highlights of FRBM act

• To reduce fiscal deficit by 0.3% per annum and reach the levels of 3% fiscal deficit by 2008-09.
• To reduce revenue deficit by 0.5% per annum and to eliminate revenue deficit by 2008-09.
• Fiscal deficit and revenue deficit may exceed the targets only on the ground such as national security, calamity or any other exceptional grounds.
• Government not to borrow from RBI except by Ways and Means Advances (WMAs) to meet temporary excess of cash disbursement over cash receipts

• An asset is said to be liquid if it is easy to sell or convert into cash without any loss in its value. By definition, bank notes and checking accounts are the most liquid assets.
• A liquid asset allows any individual or a company to access cash at any time they want. At the time of investing, the investor must keep some of the liquid assets in his portfolio so that he can have an easy hand on his money during an emergency.
• Cash is a highly liquid asset followed by the banking accounts, checkable account, short-term promissory notes, treasury bills and other government bonds.

Equipment Leasing Services as Departmental Activities Banks can also undertake equipment leasing services departmentally. The banks should comply with the following prudential guidelines when they undertake these activities departmentally:

(i) As activities like equipment leasing require skilled personnel and adequate infrastructural facilities, they should be undertaken only by certain select branches of banks.

(ii) These activities should be treated on par with loans and advances and should accordingly be given a risk weight of 100%, for calculation of capital to risk asset ratio. Further, the extant guidelines on income recognition, asset classification, and provisioning would also be applicable to them.

(iii) The facilities extended by way of equipment leasing services would be covered within the exposure ceilings with regard to single borrowers (15% of the bank's capital funds; 20% provided the additional credit exposure is on account of extension of credit to infrastructure projects) and borrower group (40% of the bank's capital funds; 50% provided the additional credit exposure is on account of extension of credit to infrastructure projects).

(iv) Banks should maintain a balanced portfolio of equipment leasing services vis-à-vis the aggregate credit. Their exposure to each of these activities should not exceed 10% of total advances.

(v) Banks are required to frame an appropriate policy on leasing business with the approval of their Boards and evolve safeguards to avoid possible asset-liability mismatch. While banks are free to fix the period of lease finance in accordance with such policy framed by them, full depreciation should be provided for during the primary lease period of the asset.

The World Bank consists of two main institutions: the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC). While IBRD focuses on providing loans and financial assistance for development projects, IFC promotes private sector investment in developing countries to foster economic growth and reduce poverty.

• Factoring is a service concerned with the financing and collection of account receivables, in domestic and international trade. It is a continuous arrangement in, which goods or services are sold to an agency, known as a "factor". This arrangement is called "factoring".
• An intermediary agent who funds receivables is a factor. A factor is simply a source of financing that offers to pay the company the amount of an invoice minus a commission and fee discount. The factor immediately advances much of the sum invoiced to the client and the rest to the invoiced party upon receipt of funds.

By investing a certain amount regularly towards a pension product, the individual will build up a considerable sum, in a phased manner. They generally have two stages of operation of pension products: Accumulation stage: When one pays a specific amount regularly until the person's retirement. Vesting stage: Once the individual retires, he gets a steady flow of income for the rest of his life. Any pension product must perform the following five core functions with a reasonable degree of competence and efficiency. (a) reliable collection of contributions, taxes, and other receipts (including any loan payments in the security systems); (b) payment of benefits for each of the schemes, in a timely and correct way; (c) securing financial management and productive investment of pension fund assets

Priority Sector Lending Certificates:
PSLC are tradable certificates issued with Priority Sector loans as underlying. The PSLCs have a standard lot size of ₹ 25 Lakhs and multiples thereof.

Statement I: Incorrect
PSLC are tradable certificates issued with Priority Sector loans as underlying.

Statement II: Correct
All PSLCs expire by March 31st irrespective of the date it was first sold.

Statement III: Correct
Eligible Participants are Scheduled Cooperative Banks, Urban Cooperative Banks, and Local Area Banks.
Hence, the correct answer is Option (c).

• In financial terms, social capital basically comprises the value of social relationships and networks that complement the economic capital for economic growth of an organization.
• Social capital is an important constituent of the prosperity of a company. Social networks in an organization include the trust among the employees, their satisfaction level with the job and also the quality of communications that take place with the peers, seniors and subordinates.
• Strong social networking, coupled with efficient performance by the workforce, signifies a healthy state of affairs for the company. Social capital stresses on the importance of these social networks and relationships and aims to use it in the best possible way for achieving organizational goals.

The period of lending may be for a period of 1 day which is known as call money and between 2 days and 14 days, which is known as 'notice money'. Term money refers to borrowing/lending of funds for a period exceeding 14 days and up to one year.

Price ceiling is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply. It has been found that higher price ceilings are ineffective. Price ceiling has been found to be of great importance in the house rent market.

Government imposes a price ceiling to control the maximum prices that can be charged by suppliers for the commodity. This is done to make commodities affordable to the general public. However, prolonged application of a price ceiling can lead to black marketing and unrest in the supply side.

For example: Let's consider the house-rent market. Here in the given graph, a price of Rs. 3 has been determined as the equilibrium price with the quantity at 30 homes. Now, the government determines a price ceiling of Rs. 2. At this rate there is a shortage (demand for 40 houses, but supply is for only 20 houses). In the long run, the extra 20 people will try to get a house on rent, which will eventually give rise to black market and higher rents.

A consumer's income is ₹100, and he wants to spend the money on two commodities, say X and Y and both of these goods are priced at ₹50 each. Now the consumer has three options for spending his income. The first option is to buy two units of commodity X. Second option is to buy two units of commodity Y. or the third option is to buy one unit of commodity X and one unit of commodity Y. This means that the possible bundles, in this case, can be (2, 0); (0, 2); and (1, 1). Now, when all of these three bundles are represented on a graph, a downward-sloping straight line is formed which is known as a budget line.

• The assertion is true. The primary sector involves activities such as agriculture, mining, fishing, and forestry, which are focused on the extraction and production of natural resources.
• The reason is also true and provides the correct explanation for the assertion. The primary sector indeed plays a vital role in providing raw materials that serve as inputs for various industries in the secondary and tertiary sectors. For example, agriculture provides raw materials for food processing industries, while mining provides minerals used in manufacturing.

• An accommodation bill is a bill in which a person lends or gives his name to oblige a friend or some person whom he knows or otherwise.
• In other words, a bill that is drawn, accepted, or endorsed without consideration is called an accommodation bill.
• The party lending his name to oblige the other party is known as the accommodating or accommodation party, and the party so obliged is called the party accommodated.
• Hence, the correct answer is Option (d).

• Article 267 of the Constitution authorises the existence of a Contingency Fund of India, which is an imprest (corpus) placed at the disposal of the President of India to facilitate meeting of urgent unforeseen expenditure by the government, pending an authorisation from Parliament.
• The corpus of the Contingency Fund, as authorised by Parliament, stands at Rs 500 crore at present.
• Parliamentary approval for such unforeseen expenditure is obtained, ex- post-facto, and an equivalent amount is drawn from the Consolidated Fund of India to recoup the Contingency Fund after such ex-post-facto approval.

• The trustee, who inspects the performance of an InvIT is certified by Sebi and he cannot be an associate of the sponsor or manager.
• 'Sponsors' are people who promote and refer to any organisation or a corporate entity with a capital of Rs 100 crore, which establishes the InvIT and is designated as such at the time of the application made to Sebi, and in case of PPP projects, base developer.
• Promoters/sponsor(s), jointly, have to hold a minimum of 25 per cent for three years (at least) in the InvIT, excluding the situations where an administrative requirement or concession agreement needs the sponsor to hold some minimum percent in the special purpose vehicle. In these cases, the total value of the sponsor holding in the primary special purpose vehicle and in the InvIT should not be less than 25 per cent of the value of units of InvIT on post-issue basis.
• Investment manager is an entity or limited liability partnership (LLP) or organisation that supervises assets and investments of the InvIT and guarantees activities of the InvIT.
• Project manager refers to the person who acts as the project manager and whose duty is to attain the execution of the project and in case of PPP projects. It indicates that the entity is responsible for such execution and accomplishment of project landmark with respect to the agreement or other relevant project document.

The chronological order of these milestones is as follows:

• United Nations Earth Summit (1992): The United Nations Conference on Environment and Development (UNCED), also known as the Earth Summit, took place in 1992. It laid the foundation for global sustainable development discussions and initiatives.
• Millennium Development Goals (MDGs) (2000): The MDGs were adopted in 2000 as a set of eight time-bound goals focused on eradicating poverty and improving various aspects of human development by 2015.
• Establishment of the UN Sustainable Development Commission (2013): The United Nations established the Sustainable Development Commission in 2013 to promote sustainable development and provide expert advice on related issues.
• Adoption of the SDGs (2015): The Sustainable Development Goals (SDGs) were adopted by the United Nations in 2015 as a comprehensive framework of 17 interconnected goals aimed at addressing various global challenges, including poverty, inequality, climate change, and more.

The unique feature of an e-Insurance Account (e-IA) is that each account holder is granted a unique Login ID and Password. This allows secure access to their e-policies online. While it doesn't directly provide access to claims and settlements, its primary purpose is to maintain electronic policy documents. Additionally, an e-IA holder can appoint an authorized representative in case of incapability or demise. Notably, an e-IA is provided "free of cost" to applicants, and it facilitates easy access to the insurance portfolio via the Internet.

SEBI- is a statutory regulatory body established on the 12th of April, 1992. The security exchange board of India plays an important role in regulating all the players operating in the Indian capital market. It attempts to protect the interest of investors and aims at developing the capital markets by enforcing various rules and regulations.

The SEBI has three main powers:

• Quasi-Executive: SEBI is empowered to implement the regulations and judgment made and to take legal action against the violators. It is also authorized to inspect books of accounts and other documents if it comes across any violation of the regulation
• Quasi-Legislative: SEBI reserves the right to frame rules and regulations to protect the interest of the investors
• Quasi-Judicial: SEBI has the authority to deliver judgment related to fraud and other unethical practices in terms of the securities market. This help to ensure fairness, transparency, and accountability in the securities market.

Thus, Statements I, II & III all are matched incorrectly.
Hence, the correct answer is Option(c).

Qualitative or selective method of credit control:
Rationing of Credit:

• This is the oldest method of credit control. Rationing of credit as an instrument of credit control was first used by the Bank of England by the end of the 18th Century. It aims to control and regulate the purposes for which credit is granted by commercial banks.

It is generally of two types.

• The variable portfolio ceiling: It refers to the system by which the central bank fixes the ceiling or maximum amount of loans and advances for every commercial bank.
• The variable capital asset ratio: It refers to the system by which the central bank fixes the ratio which the capital of the commercial bank should have to the total assets of the bank.

Hence, option (c) is the correct answer.

Arbitrageurs behavior is guided by the desire to take advantage of a discrepancy between prices of more or less the same assets or competing assets in different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

Inter Corporate Deposits is an unsecured borrowing by corporates and FIs from other corporate entities, registered under the Companies Act. The corporations having surplus funds would lend to another corporate, in need of funds at a higher rate of interest under uncollateralised security. The borrowing under ICD is restricted to up to 150% of the Net Owned Funds and the minimum tenor of borrowing is for 7 days.

• Statement I: This statement is not accurate. QIP does not involve issuing securities to retail investors. It specifically targets institutional investors (QIBs), as mentioned earlier. Retail investors are typically not eligible to participate in QIPs.
• Statement II: This statement is not accurate. QIP is not a method used by retail investors to buy shares in the secondary market. Instead, it is a primary market mechanism used by companies to raise fresh capital by issuing securities to institutional investors.
• Statement III: This statement accurately describes the role of QIP. Qualified Institutional Placement (QIP) is a method used by companies to raise funds in the primary market by issuing securities such as equity shares, convertible debentures, or other instruments to qualified institutional buyers (QIBs). QIBs include institutional investors like mutual funds, foreign institutional investors (FIIs), insurance companies, and banks. QIP is designed to attract large and sophisticated investors who can provide substantial capital to the issuing company.
• Statement IV: This statement is not accurate. QIP is not a regulatory authority overseeing primary market activities. It is a fundraising method. Regulatory authorities overseeing primary market activities include organizations like the Securities and Exchange Board of India (SEBI), which sets rules and regulations governing various aspects of primary market activities.

When an asset is acquired on a lease basis, lease rentals are shown as an expense in the firm's profit and loss account. Neither the leased asset nor the liability under the lease agreement are shown in the Balance Sheet. Hence, the debt-equity ratio remains unaffected, as compared to a firm that buys the asset with borrowed funds. Hence Firm with the lease is in a better position to borrow further.

• The Rs 5 note was the first paper currency issued by RBI in January 1938 and within the same year, currency notes of Rs 10, Rs 100, Rs l,000 and Rs 10,000 were issued.
• In 1946, Rs 1,000 and Rs 10,000 notes were demonetized to curb unaccounted money. These were then reintroduced in 1954 only to be withdrawn in 1978 again.
• Currency notes of Rs 500 and Rs 1,000 were again demonetized on 6th November 2016.
• Minting coins is the responsibility of the Government, and not of the RBI. For this reason, the Re 1 note had the signature of the Finance Secretary of the Government and not the Governor of RBI.
• Thus, Option (c) is the correct answer.

Growth Oriented definition

• This definition was introduced by Paul. A. Samuelson.
• According to the definition "Economics is the study of how man and society choose with or without the use of money to employ the scarce productive resources, which have alternative uses, to produce various commodities over time and distributing them for consumption, how or in the future among various person or groups in society."
• It analyses costs and benefits of improving patters of resource allocation.

A contagion is the spread of an economic crisis from one market or region to another and can occur at both domestic and international level. Financial contagion can also be referred as the spread of market disturbances - mostly on the downside - from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows.

• Inventory turnover is the number of times a company sells and replaces its stock of goods during a period. Inventory turnover provides insight as to how the company manages costs and how effective their sales efforts have been.
• The higher the inventory turnover, the better since a high inventory turnover typically means a company is selling goods very quickly and that demand for their product exists.

The chronological order of these initiatives is as follows:

• Introduction of mandatory CSR spending in India (2014): The Indian government introduced the mandatory Corporate Social Responsibility (CSR) spending requirement for certain companies under the Companies Act 2013. Companies meeting specific criteria were required to allocate a portion of their profits toward CSR activities.
• Enactment of Companies Act 2013 with CSR provisions (2014): The Companies Act 2013 was enacted in India, which included provisions related to corporate social responsibility (CSR). This marked a significant step in formalizing CSR obligations for eligible companies.
• Launch of the National Skill Development Mission (2015): The National Skill Development Mission was launched in 2015 to enhance the employability and skills of India's workforce, aligning with the goal of sustainable development.
• Launch of the Swachh Bharat Abhiyan (Clean India Campaign) (2014): The Swachh Bharat Abhiyan was launched in 2014 with the aim of achieving a clean and open-defecation-free India. While not directly tied to CSR, it reflects a broader societal initiative aligned with sustainable development.