Test: Indian Financial System - UGC NET MCQ

- The Assertion is true because banking institutions, such as banks and credit unions, do primarily collect deposits and offer loans.

- The Reason is false because non-banking institutions do not accept deposits or provide loans in the same manner as banking institutions.

- Since the Reason does not explain the Assertion correctly, Option A is the correct choice.

The Indian Financial System plays a crucial role in promoting both savings and investment. By providing various financial services through institutions such as banks, insurance companies, and pension funds, it mobilizes resources and allocates them efficiently, which is vital for a country’s economic development. An interesting fact is that a robust financial system can significantly influence a country's growth trajectory by encouraging individuals and businesses to invest in productive ventures.

The Indian Financial System contributes to capital formation primarily by fostering the growth of financial institutions and markets. This growth enables better mobilization of savings from the public, which can then be channeled into various investment opportunities, leading to enhanced capital formation. A noteworthy point is that effective capital formation is essential for infrastructure development, which is a key driver of economic growth.

• The assertion is correct; Treasury Bills (T-Bills) are indeed considered safe investments.
• The reason is also correct; T-Bills are backed by the government, which minimizes the risk of default.
• Since the reason explains why T-Bills are seen as safe, it is the correct explanation of the assertion.

Statement 1 is correct because it accurately describes the range of services offered by banks, which include loans, deposits, debit/credit card issuance, and account management. Statement 2 is incorrect as investment services are focused on asset management rather than insurance policies or foreign exchange transactions. Therefore, the correct answer is Option A: 1 Only.

- Statement 1 is incorrect because the Capital Market focuses on long-term investments, typically involving transactions that last over a year.

- Statement 2 is correct as the Foreign Exchange Market deals with transactions in multiple currencies and is influenced by foreign currency rates.

Thus, only Statement 2 is correct, making Option B the right choice.

Financial Institutions primarily serve as intermediaries between investors and borrowers, facilitating the mobilization of savings and investments. They play a critical role by converting short-term liabilities into long-term investments and transforming risky investments into more stable options. This intermediary function is essential for the smooth operation of financial markets and supports economic growth by ensuring that funds are efficiently allocated.

The primary function of a country's financial system is to manage and regulate the production, distribution, exchange, and holding of financial assets or instruments. This encompasses a range of activities, including ensuring that there is a stable and efficient framework for the flow of funds between savers and investors. An interesting fact is that a well-functioning financial system is crucial for economic stability and growth, as it facilitates investments that drive innovation and job creation.

- The Assertion is true because non-depository institutions, such as mutual funds and brokerage firms, indeed play a significant role in offering financial products and investments.

- The Reason is false because depository institutions are not the only contributors to the financial market; non-depository institutions also significantly influence it.

- Therefore, while the Assertion is true, the Reason is false, making Option C the correct answer.

- The Assertion is true because regulatory institutions such as RBI, IRDA, and SEBI indeed help maintain the stability of financial markets through regulations and oversight.

- The Reason is false because these institutions do not provide loans and financial assistance directly to credit seekers; that role is typically filled by intermediates like commercial banks.

- Therefore, while both statements are true, the Reason does not accurately explain the Assertion, making Option B the correct choice.