Regulatory Institutions Short Answer Type Questions

Regulatory Institutions Short Answer Type Questions

Question 1.
Discuss briefly the organizational structure of RBI. Dec 2005
The organization of RBI can be divided into three parts:

  • Central Board of Directors.
  • Local Boards
  • Offices of RBI

(1) Central Board of Directors:
The organization and management of RBI is vested on the Central Board of Directors. It is responsible for the management of RBI. Central Board of Directors consist of 20 members.
It is constituted as follows:
(a) One Governor: It is the highest authority of RBI. He is appointed by the Government of India for a term of 5 years. He can be re-appointed for another term.

(b) Four Deputy Governors: Four deputy Governors are nominated by Central Govt, for a term of 5 years

(c) Fifteen Directors: Other fifteen members of the Central Board are appointed by the Central Government. Out of these, four directors, one each from the four local Boards are nominated by the Government separately by the Central Government.

Ten directors nominated by the Central Government are among the experts of commerce, industries, finance, economics and cooperation. The finance secretary of the Government of India is also nominated as Govt, officer in the board. Ten directors are nominated for a period of 4 years.

The Governor acts as the Chief Executive officer and Chairman of the Central Board of Directors. In his absence a deputy Governor nominated by the Governor, acts as the Chairman of the Central Board. The deputy governors and government’s officer nominee are not entitled to vote at the meetings of the Board. The Governor and four deputy Governors are full time officers of the Bank.

(2) Local Boards:
Besides the central board, there are local boards for four regional areas of the country with their head-quarters at Mumbai, Kolkata, Chennai, and New Delhi. Local Boards consist of five members each, appointed by the central Government for a term of 4 years to represent territorial and economic interests and the interests of co-operatives and indigenous banks. The function of the local boards is to advise the central board on general and specific issues referred to them and to perform duties which the central board delegates.

(3) Offices of RBI:
The Head office of the bank is situated in Mumbai and the offices of local boards are situated in Delhi, KoJkata arid Chennai, In order to maintain the smooth working of banking system, RBI has opened local offices or branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI can open its offices with the permission of the Government of India. In places where there are no offices of the bank, it is represented by the state Bank of India and its associate banks as the agents of RBI.

Question 2.
What is monetary policy? Explain its objectives. Or discuss the salient features of the latest monetary policy of RBI.
Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI), is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are:
(a) Price Stability:
Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favorable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.

(b) Controlled Expansion Of Bank Credit:
One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.

(c) Promotion of Fixed Investment:
The aim here is to increase the productivity of investment by restraining non essential fixed investment.

(d) Restriction of Inventories:
Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization

(e) Promotion of Exports and Food Procurement Operations:
Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an independent objective of monetary policy.

(f) Desired Distribution of Credit:
Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers.

(g) Equitable Distribution of Credit:
The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people

(h) To Promote Efficiency:
It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.

(i) Reducing the Rigidity:
RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.

Question 3.
What is credit control? Explain the quantitative credit control techniques of RBI.
Credit Control is an important tool used by Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy.

Quantitative credit control techniques are –
(a) Bank Rate Policy:
The standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under the provisions of the Act of RBI. Thus the RBI, rediscounts the first class bills in the hands of commercial banks to provide them with liquidity in case of need. This rate is subjected to change from time to time in accordance with the economic stability and its credibility of the nation. The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.

(b) Open Market Operation:
It means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities.

(c) Adjusting with CRR and SLR:
By adjusting the CRR(Cash Reserve Ratio) and SLR(Statutory Liquidity Ratio) which are short term tools to be used to shortly regulate the cash and fund flows in the hands of the People, banks and Government, the RBI regularly make necessary adjustments in these rates. These variations in the rates will easily have a greater control over the cash flow of the country.

(i) CRR(Cash Reserve Ratio):
All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 percent. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money

(ii) SLR(Statutory Liquidity Ratio):
Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. What SLR does is again restrict the bank’s leverage in pumping more money into the economy by investing a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.

(d) Lending Rate:
Lending rates are the ratios fixed by RBI to lend the money to the customers on the basis of those rates. The higher the rate means the credit to the customers is costlier. The lower the rate means the credit to the customers is less which will encourage the customers to borrow money from the banks more that will facilitate the more money flow in the hands of the public.

(e) Repo Rate:
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.

(f) Reverse Repo Rate:
The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system

Question 4.
Discuss briefly the organisation structure of SEBI.
The SEBI Act provides for the establishment of a statutory board consisting of 6 members. The chairmen and 2 members are to be appointed by the central government, 1 member to be appointed by the RBI and 2 members to be appointed by the central government. Section II deals with the powers of the Board.

SEBI has divided its activities into 6 operational departments namely:

  • Primary market department
  • Issue management and intermediaries department
  • Secondary market department
  • Institutional department
  • Legal department
  • Investigation department

(a) Primary market department:
Primary market department deals with all-policy matters and regulatory issues to new issue market/primary market.

(b) Issue management and intermediaries department:
This department is concerned with matters like registration, regulation, and monitoring of issue related to intermediaries.

(c) Secondary market department:
It looks after all matters relating to the secondary market; administration of the major stock exchanges registration of brokers etc.

(d) Institutional investment department:
This department is concerned with framing rules and regulations relating to foreign institutional investors, mutual funds and other matters like publications, memberships in international organisations

(e) Legal department:
This department deals with all the legal matters concerned with SEBI

(f) Investigation department:
This department is concerned with various types of market research of investigations carries out by SEBI

Question 5.
What are the power and functions of SEBI?
Powers of SEBI:
SEBI has been vested with the following powers in order to protect the interest of investors:

  • Power to call any information or explanation from recognised stock exchanges or their members at any time.
  • Power to call periodical returns from recognised stock exchanges
  • Power to direct enquires in to functioning of stock exchanges or their members
  • Power to grant or create bye-laws relating recognised stock exchanges.
  • Power to make or amend bye-laws of recognised stock exchanges.
  • Power to control and regulate stock exchanges.

Functions of SEBI:
Section 11 of the SEBI act specifies the functions as follows:
(1) Regulatory functions:

  • Regulations of stock exchange and other self regulatory organisations in the country
  • Registration and regulation of stock brokers, sub-brokers, register to issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with-securities market.
  • Registration and regulation of various investment schemes including mutual funds.
  • Prohibition of fraudulent and unfair trade practices in security market to protect the interest of investors.

(2) Developmental functions:

  • Promote investor’s education to increase participation in capital market.
  • Training of intermediaries such as brokers, sub-brokers etc
  • Conducting research and publishing market information which are useful to all market participants
  • Promoting self regulatory organisations

Question 6.
State the objectives of credit control methods adopted by RBI.

  • To encourage the overall growth of the “priority sector” i.e. those sectors of the economy which is recognized by the government as “prioritized
  • To keep a check over the channelization of credit so that credit is not delivered for undesirable purposes.
  • To achieve the objective of controlling “Inflation” as well as “Deflation”.
  • To boost the economy by facilitating the flow of adequate volume of bank credit to different sectors.

Question 7.
What do you mean by listing of companies? State the objectives of listing.
The listing of companies in the capital market implies the admission of the shares of that company to dealings on a recognised stock exchange. The securities or shares may be of any public limited company, Central or state government, quasi governmental and other financial institutions/corporations, municipalities and so on.

The objectives of listing are to:

  • Provide liquidity to shares
  • Mobilize savings for economic development
  • Protect interest of investors by ensuring full disclosures

Most stock exchanges have a listing department to grant approval for listing of shares of companies in accordance with the various provisions of the law.

Question 8.
Write a note on RBI.
The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi.

Local Boards consist of five members each Central Government appointed tor a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on April 1,1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

  • To regulate the issue of banknotes
  • To maintain reserves with a view to securing monetary stability and
  • To operate the credit and currency system of the country to its advantage.

Question 9.
Explain the objectives of RBI.
Objectives of the Reserve Bank of India:
The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve Bank as: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”

Prior to the establishment of the Reserve Bank, the Indian financial system was totally inadequate on account of the inherent weakness of the dual control of currency by the Central Government and of credit by the Imperial Bank of India.

The Hilton-Young Commission, therefore, recommended that the dichotomy of functions and division of responsibility for control of currency and credit and the divergent policies in this respect must be ended by setting-up of a central bank – called the Reserve Bank of India – which would regulate the financial policy and develop banking facilities throughout the country. Hence, the Bank was established with this primary object in view.

Another objective-of the Reserve Bank has been to remain free from political influence and be in successful operation for maintaining financial stability and credit. The fundamental object of the Reserve Bank of India is to discharge purely central banking functions in the Indian money market, i.e., to act as the note- issuing authority, bankers’ bank and banker to government, and to promote the growth of the. economy within the framework of the general economic policy of the Government, consistent with the need of maintenance of price stability.

A significant object of the Reserve -Bank of India has also been to assist the planned process of development of the Indian economy. Besides the traditional central banking functions, with the launching of the five-year plans in the country, the Reserve Bank of India has been moving ahead in performing a host of developmental and promotional functions, which are normally beyond the purview of a traditional Central Bank.

Question 10.
Explain the functions of RBI.
Functions of the Reserve Bank of India:
The Reserve Bank of India performs all the typical functions of a good Central Bank. In addition, it carries out a variety of developmental and promotional functions attuned to the course of economic planning in the country:
Issuing currency notes, i.e., to act as a currency authority –

  • Serving as banker to the Government.
  • Acting as bankers’ bank and supervisor.
  • Monetary regulation and management.
  • Exchange management and control.
  • Collection of data and their publication.
  • Miscellaneous developmental and promotional functions and activities.
  • Agricultural Finance.
  • Industrial Finance
  • Export Finance.
  • Institutional promotion.

Question 11.
What are the procedure to be followed for listing of securities?
The following procedures to be followed for listing of securities are:
(1) Whether the articles of association contain the following provisions.

  • A common form of share transfer shall be used.
  • Fully paid shares are free from line.
  • Calls paid in advance may carry interest, but shall not confer a right to dividend:
  • Option to call of shares shall be given only after sanction by the general meeting.

(2) Whether at least 49% of each class of securities issued was offered to the public for subscription through newspapers for not less than three years.

(3) Whether the company is of a fair size and has a broad based capital structure and there is sufficient public interest in its securities.

Question 12.
Why RBI is called Bankers Bank and lender of last resort?
The RBI was formally inaugurated in April 1935, which functions within the framework of a mixed economic systems. RBI is acting as the banker’s bank. In accordance with the provisions of the banking companies Act of 1947, every schedule Bank in the country must keep a cash balance with the RBI equivalent to 5% of demand liabilities.

The objective of this requirement is two-told:

  • To safeguard the interest of depositors.
  • Helps to centralize the banking reserves in order to regulate & control the credit policies in the country.

It also enables the scheduled banks to borrow from the Reserve Bank by discounting the bills of exchange. RBI can purchase, sell and rediscount bills of exchange and promissory notes payable in India. However they should be arising out of bonafide commercial transaction. They should possess two or more good signatures and one of them be that of scheduled bank.

RBI provides clearing facility to commercial banks by setting off mutual transactions among them. It facilitates scheduled banks to merit money through draft, mail on telegraphic transfer from one place to the other RBI also inspect and sanction license to banks, performs amalgamation of banks and formulate lending policies of banks. So for all these reasons RBI is considered as banker’s banks.

The lender of the last resort the Reserve Bank comes to the rescue of commercial banks in times of this difficulties by means of buying government securities. The Reserve Bank as a banker’s bank regulates the volume of credit by the scheduled banks. RBI act as lender of the last resort under sec. 17 of RBI of act 1934 to all scheduled banks in the country.

Question 13.
Briefly explain the bank rate policy.
Bank rate is the rate of interest which is charged on loans and advances given by the central bank to commercial banks. According to the Reserve Bank of India, Act 1934 “Bank rate is the standard rate at which it is prepared to buy or discounts bills of exchange or others commercial papers eligible for purchase under this Act.” Bank rate policy is that policy by which the Central Bank controls the credit creations of the banks by following two methods.
(a) Contraction of credit:
Contraction of credit is the main functions of bank rate policy. When a central bank want to contract the credit in the country it increases the bank rate. The main objective of the rising the bank rate is to provide Central Bank loan to commercial banks more expensive. Increases in the bank rate the commercial banks also increase the rate of interest. So, increase in the rate of interest will be that the traders and investors will borrow less amount from the banks.

(b) Expansion of credit:
By lowers the bank rate the Central Bank expand credit in the country low bank rate means Central Banks loans to the commercial banks also become cheap. As a result of lower bank rate the rate of interest will also go down. Traders and investors will now borrow more from the banks.

Question 14.
Explain the objectives of SEBI.
According to preamble of the SEBI act the main objective of the SEBI is to promote healthy and orderly growth of the securities market and secure investor protection. SEBI monitors the activities of stock exchange market and merchant bankers.
The objectives of SEBI are as follows:

  • To protect the interest of investors.
  • To motivate investors for savings on securities.
  • To regulate the securities market and ensure fair practices by the issuers of securities.
  • To promote efficient services by brokers, merchant bankers and other intermediaries.
  • To facilitate for steady flow of savings in to the capital market.

Regulatory Institutions Very Short Answer Type Questions

Regulatory Institutions Very Short Answer Type Questions

Question 1.
Who is the regulatory framework of the Indian financial system?
Indian financial system has two major regulatory arms of Government of India:

  • Reserve Bank of India
  • Securities Exchange Board of India.

Question 2.
Define RBI.
According to Kisch and Elkin, “The essential function of central bank is the maintenance of stability with monetary standard which involves control of the monetary circulation”.

Question 3.
What is need for Central Bank or RBI?
If the country has to secure monetary stability, it has to have one Institution like central bank or RBI that will ensure monetary stability and control the other commercial banks.

Question 4.
Define Investor Regulations.
The Regulations framed to protect the interest of the investors are known as Investors regulations.

Question 5.
What do you mean by Internal regulations?
To ensure discipline in the management of financial institution or other financial service organisations, the RBI has introduced various regulations wherein all the
institutions have to abide by the regulations laid down. These are known as internal regulations.

Question 6.
What do you mean by Self regulations?
The regulations imposed by them selves are called self, regulations. Ex. the , Merchant Bankers association in India have framed a list of impositions or legislations apart from the regulations laid down the SEBl.

Question 7.
State the types of Regulatories.

  • Legislative regulations
  • Self regulations
  • Internal regulations
  • Investor regulations
  • Institutional regulations

Question 8.
What do you mean by Economic Growth?
The growth of the economy financially and economically is known growth. To ensure economic growth there should be proper planning as Qc, activities that provides employment opportunities, increases standard of living and the profitability of the organizations undertaking activities.

Question 9.
What is zero interest bond?
Some bonds, called zero interest bonds, don’t pay out any interest prior to maturity. These bonds are sold at-a deep discount because all of the bond occurs at maturity when the principal is returned to the bond holders along with interest. These bonds are also known as “zeros”.

Question 10.
What are the three objective RBI?

  • To ensure monetary and financial stability
  • To frame policies and lay down regulations
  • To monitor the activities of commercial bank
  • To issue currency notes except one rupee notes and coin

Question 11.
State any four functions of RBI.

  • Maintain financial stability and enable the growth of sound institutions.
  • Maintain monetary stability for the business and economic life towards growth and proper functioning of a mixed economic system in the cowry.
  • Maintain a stable payment and currency ensure regulations monetary and financial stability
  • Policies and lay down efficient execution of financial transaction system and facilitate safe.
  • Regulate the money and credit supply in the economy to help maintain price stability to a reasonable extent.
  • Ensure credit allocation in line with

Question 12.
Expand CRR and SLR?

  • CRR = Cash Reserve Ratio
  • SLR = Statutory Liquidity Ratio

Question 13.
Give the meaning of open market operations.
Open market operations refers to buying and selling by the RBI in the money market to change the volume The basic objective of this measure is to control the national economic priorities.

Question 14.
State two credit controls used by RBI?
Credit control used by RBI are:

  • Quantitative Credit Control Measures
  • Qualitative Credit Control Measures.

Question 15.
What are the objectives of SEBI?
The objectives of the SEBI:

  • Protection of investors interests in securities
  • Promotion market and of the development of the securities market
  • Regulation of the securities market

Question 16.
Give the meaning of central bank.
A central bank or reserve bank is a public institution that manages a state’s currency, money supply and interest rates. They usually oversee the commercial banking system of their respective countries. It possess a monopoly on increasing nation’s monetary base and usually print the national currency, which serves as nations legal tender.

Question 17.
What is monetary policy?
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment

Question 18.
State the key roles of RBI.
The Key roles of the RBI are:

  • Regulator and supervisor of the financial system
  • Manager of exchange control
  • Issuer of currency
  • Banker to the Government
  • Bank to banks: maintains banking accounts of all scheduled banks

Question 19.
What is Credit Control?
Credit Control is an important tool used by the Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy.

Question 20.
What is qualitative methods?
Qualitative methods means the control or management of the uses of bank credit or manner of channelizing of cash and credit in the economy.

Question 21.
What is publicity?
RBI uses media for the publicity of its views on the current market condition and its directions that will be required to be implemented by the commercial banks to control.

Question 22.
What is direct action?
Under the banking regulation Act, the central bank has the authority to take strict action against any of the commercial banks that refuses to obey the directions given by Reserve Bank of India. This phenomenon is termed as direct action.

Question 23.
What is moral suasion?
This method is also known as “Moral Persuasion” as the method that the Reserve Bank of India, being the apex bank uses here, is that of persuading the commercial banks to follow its directions/orders on the flow of credit.

Question 24.
What is bank rate.
Bank Rate also known as the Discount Rate is the official minimum rate at which the Central Bank of the country is ready to rediscount approved bills of exchange or lend on approved securities.

Question 25.
What is open market operations?
Open Market Operations indicate the buying/selling of government securities in the open market to balance the money supply in the economy.

Question 26.
Give the meaning of repo.
Repo is a swap deal involving immediate sale of securities and a simultaneous re. purchase of those securities at a future date at a predetermined price. Commercial banks and financial institution also park their funds with RBI at a certain rate, this rate is called the Reverse Repo Rate.

Question 27.
What is do you mean by cash reserve ratio?
The money supply in the economy is influenced by the cash reserve ratio. It is the ratio of a bank’s time and demand liabilities to be kept in reserve with the RBI. A high CRR reduces the flow of money in the economy and is used to control inflation. A low CRR increases the flow of money and is used to overcome recession.

Question 28.
What is statutory liquidity ratio or SLR?
Under SLR, banks have to invest a certain percentage of its time and demand liabilities in Government approved securities. The reduction in SLR enhances the liquidity of commercial banks. The present statutory ratio of commercial banks in India is 25%.

Question 29.
What do you mean by time deposits?
Time deposits are repayable after a certain fixed period. These deposits are not withdrawn able by cheque, draft or by other means. It includes the following.

Question 30.
What is Bank Rate?
Section 49 of the Reserve Bank of India, defines bank rate as “the standard rate at which the bank is prepared to buy or discount bills of exchange or other commercial papers eligible for purchases under this Act.”

Question 31.
State two credit control used by Reserve Bank of India.
The two credit control used by Reserve Bank of India are:

  • General or Quantitative credit control
  • Selective or Qualitative credit control

Question 32.
Who is a speculators?
Speculators are those who deal in securities in order to make profit. They do not take delivery of the securities purchased or sold by them but only pay or receive the differences between the purchase price and sale price.

Question 33.
Expand SEBI.
SEBI = Securities and Exchange Board of India.

Question 34.
What is CRR?
The word CRR stands for Cash Reserve Ratio. Under Section 42 of RBI Act, 1934, scheduled banks are required to maintain with RBI a specified percentage of their net demand.and time liability in the from of cash reserve. This is known as cash reserve ratio.

Commercial Banks Long Answer Type Questions

Commercial Banks Long Answer Type Questions

Question 1.
What is a commercial bank? Explain the primary functions of commercial banks.
A commercial bank is a profit-seeking business firm, dealing in money and credit. It is a financial institution dealing in money in the sense that it accepts deposits of money from the public to keep them in its custody for safety Primary banking functions of the commercial banks include:

  • Acceptance of deposits
  • Advancing loans
  • Creation of credit
  • Clearing of cheques
  • Financing foreign trade
  • Remittance of funds

(1) Acceptance of Deposits:
Accepting deposits is the primary function of a commercial bank mobilise savings of the household sector. Banks generally accept three types of deposits viz.

  • Current Deposits
  • Savings Deposits
  • Fixed Deposits.

(a) Current Deposits:
These deposits are also known as demand deposits. These deposits can be withdrawn at any time. Generally, no interest is allowed on current deposits, and in case, the customer is required to leave a minimum balance undrawn with the bank

(b) Savings Deposits:
This is meant mainly for professional men and middle class people to help them deposit their small savings. It can be opened without any introduction. Money can be deposited at any time but the maximum cannot go beyond a certain limit. There is a restriction on the amount that can be withdrawn at a particular time or during a week. If the customer wishes to withdraw more than the specied amount at any one time, he has to give prior notice. Interest is allowed on the credit balance of this account.

(c) Fixed Deposits:
These deposits are also known as time deposits. These deposits cannot be withdrawn before the expiry of the period for which they are deposited or without giving a prior notice for withdrawal. If the depositor is in need of money, he has to borrow on the security of this account and pay a slightly higher rate of interest to the bank. They are attracted by the payment of interest which is usually higher for longer period.

(2) Advancing Loans:
The second primary function of a commercial bank is to make loans and advances to all types of persons, particularly to businessmen and entrepreneurs. Loans are made against personal security, gold and silver, stocks of goods and other assets. The most common way of lending is by:

(a) Overdraft Facilities:
In this case, the depositor in a current account is allowed to draw over and above his account up to a previously agreed limit. Suppose a businessman has only Rs. 60,000/- in his current account in a bank but requires Rs. 1,20,000/- to meet his expenses. He may approach his bank and borrow the additional amount of Rs. 60,000/-. The bank allows the customer to overdraw his account through cheques. The bank, however, charges interest only on the amount overdrawn from the account. This type of loan is very popular with the Indian businessmen.

(b) Cash Credit:
Under this account, the bank gives loans to the borrowers against certain security. But the entire loan is not given at one particular time, instead the amount is credited into his account in the bank; but under emergency cash will be given. The borrower is required to pay interest only on the amount of credit availed to him.

(c) Discounting Bills of Exchange:
This is another type of lending which is very popular with the modern banks. The holder of a bill can get it discounted by the bank, when he is in need of money. After deducting its commission, the bank pays the present price of the bill to the holder. Such bills form good investment for a bank. They provide a very liquid asset which can be quickly turned into cash.

(d) Money at Call:
Bank also grant loans for a very short period, generally not exceeding 7 days to the borrowers, usually dealers or brokers in stock exchange markets against collateral securities like stock or equity shares, debentures, etc., offered by them. Such advances are repayable immediately at short notice hence, they are described as money at call or call money.

(e) Term Loans:
Banks give term loans to traders, industrialists and now to agriculturists also against some collateral securities. Term loans are so-called because their maturity period varies between 1 to 10 years. Term loans, as such provide intermediate or working capital funds to the borrowers.

(f) Consumer Credit:
Banks also grant credit to households in a limited amount to buy some durable consumer goods such as television sets, refrigerators, etc., or to meet some personal needs like payment of hospital bills etc. Such consumer credit is made in a lump sum and is repayable in installments in a short time.

(g) Miscellaneous Advances:
Among other forms of bank advances there are packing credits given to exporters for a short duration, export bills purchased/discounted, import finance-advances against import bills, finance to the self employed, credit to the public sector, credit to the cooperative sector and above all, credit to the weaker sections of the community at concessional rates.

(3) Creation of Credit:
A unique function of the bank is to create credit. Banks supply money to traders and manufacturers. They also create or manufacture money. Bank deposits are regarded as money. They are as good as cash. The reason is they can be used for the purchase of goods and services and also in payment of debts. When a bank grants a loan to its customer, it does not pay cash.

It simply credits the account of the borrower. He can withdraw the amount whenever he wants by a cheque. In this case, bank has created a deposit without receiving cash. That is, banks are said to have created credit. Sayers says “banks are not merely purveyors of money, but also in an important sense, manufacturers of money.”

(4) Promote the Use of Cheques:
The commercial banks render an important service by providing to their customers a cheap medium of exchange like cheques. It is found much more convenient to settle debts through cheques rather than through the use of cash.

(5) Financing Internal and Foreign Trade:
The bank finances internal and foreign trade through discounting of exchange bills. Sometimes, the bank gives short-term loans to traders on the security of commercial papers. This discounting business greatly facilitates the movement of internal and external trade.

(6) Remittance of Funds:
Commercial banks, on account of their network of branches throughout the country, also provide facilities to remit funds from one place to another for their customers by issuing bank drafts, mail transfers or telegraphic transfers on nominal commission charges.

Question 2.
Explain the Narasimhan committee report on banking sector reforms 1998.
The finance ministry of government of India appointed Mr. M. Narasimham as .chairman of one more committee, this time it was called as the committee on banking sector reforms. The committee was asked to “review the progress of banking sector reforms to the date and chart a programme on financial sector reforms necessary to strengthen India’s financial system and make it internationally competitive”. The narasimham committee on banking sector reforms submitted this report to the government in April 1998. This report covers the entire issues relating to capital adequacy, bank mergers, the condition of global sized banks, recasting of banks boards etc. some important findings are as follows;

Need For Stronger Banking System:
The Narasimham committee has made out a stronger banking system in country, especially in the context of capital account convertibility (CAC) which would involve large amount of inflow and outflow of capital and consequent complications for exchange rate management and domestic liquidity. To handle this India would need a strong resilient banking and financial system.

Experiment With The Concept of Narrow Banking:
The Narasimham committee is seriously concerned with the rehabilitation of weak public sector banks which have accumulated a high percentage of non-paying assets (NPA), and in some cases, as high as 20% of their total assets. They suggested the concept of narrow banking to rehabilitate such weak banks.

Small Local Banks:
The Narasimham committee has argued that “While two or three banks with an international orientation and 8 to 10 of larger banks should take care of their needs of the large and medium corporate sector ad larger of the small enterprises, there will still be a need for a large number of local banks.” The committee has suggested the setting up of small local banks which should be confined to states or clusters of districts in order to serve local trade, small industry etc.

Capital Adequacy Ratio:
The Narasimham committee has also suggested that the government should consider raising the prescribed capital adequacy ratio to improve the inherent strength of banks and to improve their risk taking ability.

Public Ownership And Real Autonomy:
The Narasimham committee has argued that government ownership and management of banks does not enhance autonomy and flexibility in working of public sector banks. Accordingly, the committee has recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy.

Review And Updating Banking Laws:
The Narasimham committee has suggested the urgent need to review and amended the provisions of RBI Act, Banking Regulation Act, State Bank of act etc so as to bring them on same line of current banking needs.

Question 3.
Explain the secondary functions of commercial banks.
Secondary banking functions of the commercial banks include:

  • Agency Services
  • General Utility Services

These are discussed below.
(i) Agency Services: Banks also perform certain agency functions for and on behalf of their customers. The agency services are of immense value to the people at large.

The various agency services rendered by banks are as follows:
(a) Collection and Payment of Credit Instruments: Banks collect and pay various credit instruments like cheques, bills of exchange, promissory notes etc, on behalf of their customers.

(b) Purchase and Sale of Securities: Banks purchase and sell various securities like shares, stocks, bonds, debentures on behalf of their customers.

(c) Collection of Dividends on Shares: Banks collect dividends and interest on shares and debentures of their customers and credit them to their accounts.

(d) Acts as Correspondent: Sometimes banks act as representative and correspondents of their customers. They get passports, traveller’s tickets and even secure air and sea passages for their customers.

(e) Income-tax Consultancy: Banks may also employ income tax experts to prepare income tax returns for their customers and to help them to get refund of income tax.

(f) Execution of Standing Orders: Banks execute the standing instructions of their customers for making various periodic payments. They pay subscriptions, rents, insurance premier etc., on behalf of their customers.

(g) Acts as Trustee and Executor: Banks preserve the ‘Wills’ of their customers and execute them after their death.

(ii) General Utility Services: In addition to agency services, the modern banks provide many general utility services for the community as given.8 Banking
(a) Locker Facility:
Bank provide locker facility to their customers. The customers can keep their valuables, such as gold and silver ornaments, important documents; shares and debentures in these lockers for safe custody.

(b) Traveller’s Cheques and Credit Cards:
Banks issue traveller’s cheques to help their customers to travel without the fear of theft or loss of money. With this facility, the customers need not take the risk of carrying cash with them during their travels.

(c) Letter of Credit:
Letters of credit are issued by the banks to their customers certifying their credit worthiness. Letters of credit are very useful in foreign trade.

(d) Collection of Statistics:
Banks collect statistics giving important information relating to trade, commerce, industries, money and banking, They also publish valuable journals and bulletins containing articles on economic and financial matters.

(e) Acting Referee:
Banks may act as referees with respect to the financial standing, business reputation and respectability of customers.

(f) Underwriting Securities:
Banks underwrite the shares and debentures issued by the Government, public or private companies.

(g) Gift Cheques:
Some banks issue cheques of various denominations to be used on auspicious occasions.

(h) Accepting Bills of Exchange on Behalf of Customers :
Sometimes, banks accept bills of exchange, internal as well as foreign, on behalf of their customers. It enables customers to import goods.

(i) Merchant Banking:
Some commercial banks have opened merchant banking divisions to provide merchant banking service

Question 4.
Explain the investment policy of a commercial bank.
Financial position of a commercial banks is reflected in its balance sheet. Balance sheet is a statement showing the assets and liabilities of the bank. The principles underlying the investment policy of a commercial bank are as follows:

(a) Liquidity:
In the context of the balance sheet of a bank the term liquidity has two interpretations. First, it refers to the ability of the bank to honour the claims of the depositors. Second, it connotes the ability of the bank to convert its noncash assets into cash easily and without loss. Liquidity also means the ability of the bank to convert its non-cash assets into cash easily and without loss. The bank cannot have all its assets in the form of cash because each is an idle asset which does not fetch any return to the bank. So some of the assets of the bank, money at call and short notice, bills discounted, etc. could be made liquid easily and without loss.

(b) Profitability:
A commercial bank by definition, is a profit hunting institution. The bank has to earn profit to earn income to pay salaries to the staff, interest to the depositors, dividend to the shareholders and to meet the day-to-day expenditure. Since cash is the least profitable asset to the bank, there is no point in keeping all the assets in the form of cash on hand. The bank has got to earn income. Hence, some of the items on the assets side are profit yielding assets. They include money at call and short notice, bills discounted, investments, loans and advances, etc.

(c) Safety or Security:
Apart from liquidity and profitability, the bank should look to the principle of safety of its funds also for its smooth working. While advancing loans, it is necessary that the bank should consider the three ‘C’s of credit character, capacity and the collateral of the borrower. The bank cannot afford to invest its funds recklessly without considering the principle of safety. The loans and investments made by the bank should be adequately secured.

(d) Diversity:
The bank should invest its funds in such a way as to secure for itself an adequate and permanent return. And while investing its funds, the bank should not keep all its eggs in the same basket. It is necessary to avoid the dangerous consequences of investing in one or two channels. If the bank invest its funds in different types of securities or makes loans and advances to different objectives and enterprises, it shall ensure for itself a regular ow of income.

(e) Salability of Securities:
Further, the bank should invest its funds in such types of securities as can be easily marketed at a time of emergency. The bank cannot afford to invest its funds in very long term securities or those securities which are unsaleable. It is necessary for the bank to invest its funds in government or in rst class securities or in debentures of reputed rms. It should also advance loans against stocks which can be easily sold.

(f) Stability in the Value of Investments:
The bank should invest its funds in those stocks and securities the prices of which are more or less stable. The bank cannot afford to invest its funds in securities, the prices of which are subject to frequent fluctuations.

(g) Principles of Tax-Exemption of Investments:
Finally, the.investment policy of a bank should be based on the principle of tax exemption of investments. The bank should invest in those government securities which are exempt from tax.

Question 5.
Explain the agency functions of commercial banks.
Agency functions include the following:
(i) Collection of cheques, dividends, and interests:
As an agent the bank collects cheques, drafts, promissory notes, interest, dividends etc., on behalf of its customers and credit the amounts to their accounts. Customers may furnish their bank details to corporate where investment is made in shares, debentures, etc. As and when dividend, interest, is due, the companies directly send the warrants/cheques to the bank for credit to customer account.

(ii) Payment of rent, insurance premiums:
The bank makes the payments such as rent, insurance premiums, subscriptions, on standing instructions until further notice. Till the order is revoked, the bank will continue to make such payments regularly by debiting the customer’s account.

(iii) Dealing in foreign exchange:
As an agent the commercial banks purchase and sell foreign exchange as well for customers as per RBI Exchange Control Regulations.

(iv) Purchase and sale of securities:
Commercial banks undertake the purchase and sale of different securities such as shares, debentures, bonds etc., on behalf of their customers. They run a separate ‘Portfolio Management Scheme’ for their big customers.

(v) Act as trustee, executor, attorney, etc:
The banks act as executors of Will, trustees and attorneys. It is safe to appoint a bank as a trustee than to appoint an individual. Acting as attorneys of their customers, they receive payments and sign transfer deeds of the properties of their customers.

(vi) Act as correspondent:
The commercial banks act as a correspondent of their customers. Small banks even get travel tickets, book vehicles; receive letters etc. on behalf of the customers.

(vii) Preparations of Income-Tax returns:
They prepare income-tax returns and provide advices on tax matters for their customers. For this purpose, they employ tax experts and make their services, available to their customers.

B. General Utility Services:
The General utility services include the following:
(i) Safety Locker facility:
Safekeeping of important documents, valuables like jewels are one of the oldest services provided by commercial banks. ‘Lockers’ are small receptacles which are fitted in steel racks and kept inside strong rooms known as vaults. These lockers are available on half-yearly or annual rental basis.

The bank merely provides lockers and the key but the valuables are always under the control of its users. Any customer cannot have access to vault. Only customers of safety lockers after entering into a register his name account number and time can enter into the vault. Because the vault is holding important valuables of customers in lockers, it is also known as ‘Strong Room’.

(ii) Payment Mechanism or Money Transfer:
Transfer of funds is one of the important functions performed by commercial banks. Cheques and credit cards are two important payment mechanisms through banks. Despite an increase in financial transactions, banks are managing the transfer of funds process very efficiently. Cheques are also cleared through the banking system. Correspondent banking is another method of transferring funds over long distance, usually from one country to another. Banks, these days employ computers to speed up money transfer and to reduce cost of transferring funds.

Electronic Transfer of funds is also known as ‘Chequeless banking’ where funds are transferred through computers and sophisticated electronic system by using code words. They offer Mail Transfer, Telegraphic Transfer (TT) facility also.

(iii) Travelers’ cheques:
Travelers Cheques are used by domestic travelers as well as by international travelers. However the use of traveler’s cheques is more common by international travelers because of their safety and convenience. These can be also termed as a modified form of traveler’s letter of credit.

(iv) Circular Notes or Circular Letters of Credit:
Under Circular Letters of Credit, the customer/traveller negotiates the drafts with any of the various branches to which they are addressed. Thus the traveller can obtain funds from many of the branches of banks instead only from a particular branch. Circular Letters of Credit are therefore a more useful method for obtaining funds while travelling to many countries.

(v) Issue “Travellers Cheques”:
Banks issue travellers cheques to help carry money safely while travelling within India or abroad. Thus, the customers can travel without fear, theft or loss of money.

(vi) Letters of Credit:
Letter of Credit is a payment document provided by the buyer’s banker in favour of seller. This document guarantees payment to the seller upon production of document mentioned in the Letter of Credit evidencing dispatch of goods to the buyer.

(vii) Acting as Referees:
The banks act as referees and supply information about the business transactions and financial standing of their customers on enquiries made by third parties. This is done on the acceptance of the customers and help to increase the business activity in general.

(viii) Provides Trade Information:
The commercial banks collect information on business and financial conditions etc., and make it available to their customers to help plan their strategy. Trade information service is very useful for those customers going for cross-border business. It will help traders to know the exact business conditions, payment rules and buyers’financial status in other countries.

(ix) ATM facilities:
The banks today have ATM facilities. Under this system the customers can withdraw their money easily and quickly and 24 hours a’day. This is also known as ‘Any Time Money’. Customers under this system can withdraw funds i.e., currency notes with a help of certain magnetic card issued by the bank and similarly deposit cash/cheque for credit to account.

(x) Credit cards:
Banks have introduced credit card system. Credit cards enable a customer to purchase goods and services from certain specified retail and service establishments*up to a limit without making immediate payment. In other words, purchases can be made on credit basis on the strength of the credit card.

(xi) Gift Cheques:
The commercial banks offer Gift cheque facilities to the general public. These cheques received a wider acceptance in India. Under this system by paying equivalent amount one can buy gift cheque for presentation on occasions like Wedding, Birthday.

(xii) Accepting Bilis:
On behalf of their customers, the banks accept bills drawn by third parties on its customers. This resembles the letter of credit. While banks accept bills, they provide a better security for payment to seller of goods or drawer of bills.

(xiii) Merchant Banking:
The commercial banks provide valuable services through their merchant banking divisions or through their subsidiaries,to the traders. This is the function of underwriting of securities. They underwrite a portion of the Public issue of shares, Debentures and Bonds of Joint Stock Companies.

(xiv) Advice on Financial Matters:
The commercial banks also give advice to their customers on financial matters particularly on investment decisions such as expansion, diversification, new ventures, rising of funds etc.

(xv) Factoring Service:
Today the commercial banks provide factoring service to their customers. It is very much helpful in the development of trade and industry as immediate cash flow and administration of debtors’ accounts are taken care of by factors. This service is again provided only by a separate subsidiary as per RBI regulations.

Question 6.
Explain the investment norms of commercial banks.
The Reserve Bank has issued guidelines On categorisation and voluation of banks investment portpolio. These guidelines are in confirmity with international best practices, and are effective from September 30 2000. The salient features of the guide-lines are,

The entire investment portfolio is to be classified under three categories:
(i) Held to Maturity (HTM) – It includes securities acquired with the intention of being held up to maturity.

(ii) Held for Trading (HFT) – It includes securities acquired with the intention of being traded to take advantage of the short-term price/interest rate movements.

(iii) Available for sale (AFS)- It includes securities not included in HTM and HFT. Banks should decide the category of investment at the time of acquisition.
In Balance Sheet, investment will continue to be classified under 6 heads.

  • Govt. Securities
  • Other approved securities
  • Shares
  • Debentures and bonds
  • Subsidiaries & Joint ventures
  • Others

→ Investments classified Under HTM need not be marked to market, and will be carried at acquisition cost.These investments will include, recepitalisation bonds, investments in subsidiaries and joint ventures, Investment in debentures demand as advance.

→ Banks which had already marked to market more than 75 percent of their SLR portfolio, have the option to reclassify their investments under this category upto the permissable level.

→ Profit on sale of investment in the HTM category should be taken to the P & L a/c before being appropriated to the Capital Reserve account. Loss on sale should be recognised in the P & La/c.

→ Banks are free to decide on the extent of holdings under the HFT and AFS categories, based on relevant considerations like tax planning, risk management capabilities and trading strategies individual scrips in the AFS need to be marked to market at the year – end or at more frequent intervals, individual scrips in the HFT category are to be revalued at least at monthly intervals.

→ Market price of the scrip available from the traders quotes on the stock exchange, price of SQL transactions or RBI Price list would serve as the “Market Value” for investment in AFS and HFS.

→ Investment under the HFT category should be sold within 90 days; in the event of inability to sell due to adverse factors like tight liquidity, extreme, volaticity,. or a undirectional movement in market, the unsold securities should be shifted to the AFS category.

→ Profit or loss on sale of investments in both HFT and AFS categories should be taken in the P & L account.

→ Shifting of investments from / to HTM May be done with the approval of the Board once*a year, normally at the beginning of the accounting year. Shifting from investments from AFS to HFT may be done with the approval of the Board/ Investment committee. Shifting from HFT to AFS is generally not allowed.

→ Under all eircumstances the shifting of investments from one category to another should be done at lowest value among acquisition cost, book value or market value. Depreciation if any, should be fully provided for.

→ RBI will no longer announce the yield to Maturity (YTM) rates for unquoted Government securities for the purpose of valuation of investment by banks.

Question 7.
State the factors determining liquidity requirements of commercial banks.
(i) Statutory Requirements:
Banks are allowed freedom regarding the size of cash balances that they maintain but other liquid assets that they maintain are regulated by liquidity requirement prescribed by RBI through cash reserve ratio (CRR) and statutory liquidity Ratio (SLR).

(a) Cash Reserve Ratio:
Under Section 42 of RBI Act. 1934, scheduled banks are required to maintain with RBI a specified percentage of their net demand and time liability (NDTL) in the form of cash reserve.This ratio can vary between 3 and 1 5 percent.

(b) Statutory liquidity Ratio:
Under Section 24 of the Banking Regulation Act. 1949, RBI Requires scheduled commercial banks to hold liquid assets, such as gold and unencumbered approved securities against their NDTL in addition to cash reserve requirements government securities are stable in value and are easily marketable and shiftable to RBI. Therefore, they are regarded as eligible securities for SLR. This measure was designed primarily for ensuring adequate solvency for commercial banks.

(ii) Interest on cash balances maintained with the RBI under CRR Before the announcement of credit poficy on October 21 ,1997, all scheduled commercial banks (excluding Regional Rural Banks) were paid interest on eligible cash balances maintained with the Reserve Bank of India under CRR requirement according to a two-tier formual at the rate of 10.5 percent .per annum.

With a view to rationalising this system and making it fair to all new and old banks, it was decided that with effect from October 25, 1997, all banks are paid interest at the rate of 4 percent per annum on all eligible cash balances maintained. At present, all scheduled commercial banks are paid interest at the Bank rate on eligible cash balances maintained with RBI under CRR requirement, without detailed scrutiny by RBI. On the basis of quarterly interest claim statement submitted by banks.

(iii) General Economic activity:
During a period of business boom banks can manage with relatively smaller liquid assets. On the contrary, during depression bank have maintain larger liquidity cause there is higher probability of people with drawing their deposits.

(iv) Nature of Investments:
Banks which make larger investment in assets and securities which cannot be easily converted in to cash in a short period will have to maintain larger cash balances and liquid assets and vice versa.

(v) Nature of customers:
In case most customers of a bank are involved in seasonal activity then liquidity requirements of the bank will also vary from season to season. During busy season, banks will have to finance larger number of transactions and have to maintain larger cash balances. In slack season, banks can do with lessen cash and liquid assets.

(vi) Nature of deposits:
Banks with mostly time deposits can manage with lesser liquidity as compared with banks having mainly current accounts.

(vii) Banking habits of customers:
Where banking habits are strong i.e., most of the transactions in the economy are done through cheques, banks can manage operations with lower liquidity. Contrawise large liquidity needs to be maintained by banks for carrying out same level of operations.

(viii) Number and Size of deposits:
Banks with large number of small depositors can manage with lower cash balances because overall fluctuations in withdrawals will be minimal. Banks with small number of large depositors will have to maintain larger cash balances as sudden withdrawal by a few depositors will make liquidity position of banks precarious.

(ix) Structure of Banking:
In case of branch banking or where each bank has recourse to central bank, liquidity requirement is generally lower compared with that in case of unit banking.

(x) Alternative Source of liquidity:
Banks, which can make emergency arrangements of cash from RBI or a big business house with which they have relation, have to maintain lower liquidity. Otherwise, liquidity requirements will be higher.

(xi) Existence of efficient Money Market:
Wherever there is efficient money market so that investment can be easily and quickly converted into cash, Liquidity requirement of Banks will be lower and vice versa.

(xii) General practice in the banking practice:
Extent of liquidity maintained by a particular commercial bank is also influenced by general practice adopted by other banks doing some type of banking business.

Question 8.
Explain the asset structure of commercial banks.
The asset structure of a commercial bank is revealed by the balance sheet of the bank. A balance sheet is prepared to know the financial position of the bank at a given period of time. The balance sheet of a bank has two sides viz. Asset and liabilities.

The asset structures of commercial bank is explained with following example
Balance sheet of ABC Bank on 31st March 1999

Capital and liabilities Property and assets
(1) Capital:
Authorised capital
Issued capital
Subscribed capital
Part up capital
(1) Cash in hand & with RBI
(2) Reserve fund and other reserves (2) Balance with other banks
(3) Deposits and other a/cs
Fixed deposits
Savings bank deposit Current a/c
(3) Money at cash and short notice
(4) Loans from other banks (4) Investments
(5) Bills payable (5) Advances
(6) Bills for collection Being bills receivable And bills discounted (6) Loans, cash, credit, overdrafts
(7) Other liabilities (7) Bills receivable being bills for collection
(8) Acceptance, endorsementsand other obligations (8) Constituent liabilities for acceptance an endorsement and other obligations per contract
(9) Profit and loss a/c (9) Premises and fixtures
(10) Contingent liabilities (10) Other assets

Analysis of asset side:
The firm asset refers to those terms on account of which the bank has to receive an income from others. The various assets of a bank are shown ill the order of its liquidity. It enables the bank how the banks have employed their resources. The various assets of a commercial bank are as follows.

Part of the resources of a bank is kept in the from of cash to honour the cheques of its customers. In some case part of the cash balance is kept with other bank and with central bank. The percentage of cash reserve to be kept is partly determined by statute and partly by convention. This cash reserve can be used during the period of emergency.

Money at call and short notice:
It is a type of loan, which is given for short period of time. The bank can recall such loan by giving a short notice.

Bills discounted:
Represent bills which are discounted by the bank. The bank collects such bills when they mature. Incase, the bank needs cash before the maturity of these bills it can get them re-discounted by the central bank of the country.

Bills for creation :
Before collection these bills represent the assets but after collection they become the liabilities of the bank. It appears on both sides of the balance sheet.

Includes total amount of profit yielding assets. The different types of investments are shown separately in the balance sheet. The amount invested in government and non-government securities is also indicated separately.

Bank utilize their funds in providing various types of loans and advances. The loan are granted against physical securities.

Constituent liabilities for acceptance and other obligations:
These items represent the total dues of a banks customers in respect of obligation. It has accepted on their lahlaf like accepting a bill and issue of a lettery of credit.

Premises and fixtures:
Includes total value of the mouable and immovable properties of the bank. It includes the office building furniture, stationery and other assets.

Other assets:
A bank in the settlement of claims acquire. Those assets during the ordinary course of business under the banking regulation Act. Such assets are not to be retained permanently. They are to be disposed if within a period of seven years cross the date of their acquisition.

Commercial Banks Short Answer Type Questions

Commercial Banks Short Answer Type Questions

Question 1.
State the role of a commercial bank in the economic development of a nation.

  • It helps the banks to promote capital formation
  • It helps in investment in new enterprises
  • It helps in the promotion of trade and industry
  • It helps in the development of agriculture
  • It helps in balanced development of different regions
  • It helps in influencing economic activity
  • It helps in implementation of monetary policy
  • It helps in monetization of economy
  • It helps in export promotion cells

Question 2.
State the agency functions of commercial banks.
The agency functions of commercial banks are as follows:

  • To collect and clear cheque, dividends and interest warrant
  • To make payment of rent, insurance premium etc
  • To deal in foreign exchange transactions
  • To purchase and sell securities
  • To act as trusty, attorney, correspondent and executor
  • To accept tax proceeds and tax returns

Question 3.
State the general utility functions of commercial banks.
The general utility functions of a commercial banks are as follows;

  • To provide safety locker facility to customers
  • To provide money transfer facility
  • To issue traveller’s cheque
  • To act as referees
  • To accept various bills for payment e.g. phone bills, gas bills, water bills etc
  • To provide merchant banking facility
  • To provide various cards such as credit cards, debit cards, smart cards etc.

Question 4.
State the advantages of letter of credit.

  • It gives the exporter an absolute assurance that the bill of exchange drawn by him will be honoured.
  • It enables the exporter to realize the amount of the bill immediately by negotiating it with any banker
  • Based on the strength of letter of credit, the exporter can secured advice from a bank for the purpose of procuring or processing toads to be exported
  • It enables the importer to import goods on credit on the strength of credit of issuing bank
  • It gives an assurance to the importer that the required shipping documents are duly enclosed by the exporter

Question 5.
What is credit creation? Explain with examples?
Credit creation is an important function of commercial banks. They create credit for the purpose of lending to all types of customers. When a commercial bank advances a loan to its consumer, liquid cash will not be lent. instead it opens an account in the borrower’s name & credits his account with the amount of the loan such a deposit is indeed credit creations-& this deposit is called secondary or derivative deposit.

On the other hand deposit opened by a customer with liquid cash is called primary deposit. Banks have the ability to create credit many times more than their primary deposits. This credit creation help s to increase the money supply so as to promote economic development in the country. Banks do not create credit out of this air, but it transmit other forms of wealth into moneys. The credit creditors can be explained with following example.
A cash deposit of Rs. 200 0 is made with bank ‘A’
Now bank ‘A’ lends the balance of money after keeping 10% cash reserves. Its balance sheet will then appears as follows.
Balance sheet of Bank A

Deposits 2,000 Cash 200
  Loans 1,800
2,000 2,000

When borrowers gets Rs. 1,800 they make payment to their creditors and they in turn deposit in their bank B. The balance sheet of Bank B will then appear as follows
Balance Sheet of Bank B

Deposits 1,800 Cash 1,800
1,800 2,000

Now bank B lends the balance of money after keeping 10% cash reserves. Its balance sheet will then appear as follows
Balance Sheet of Bank B

Deposits 1,800 Cash 180
  Loans 1,620
2,000 1,800

The borrowers of the loans of Rs. 1,620 may pay their debts and this amount finds its place in the bank ‘C’. The balance sheet of Bank C appear as follows

Deposits 1,620 Cash 162
  Loans 1,458
1,620 1,620

This process continues till last deposit feumes to small to create any more loans.

Commercial Banks Very Short Answer Type Questions

Commercial Banks Very Short Answer Type Questions

Question 1.
Define commercial bank.
Samuelson has defined the functions of the Commercial bank in the following words ’’The Primary economic function of a Commercial bank is to receive demand deposits and honour cheques drawn upon them. A second important function is to lend money to local merchants farmers and industrialists.”

Question 2.
State any two roles of commercial banks.
It helps the banks to promote capital formation.
It helps in promotion of trade and industry.

Question 3.
What is liquidity?
It is one of the factor affecting the investment policy of a commercial bank. The term liquidity refers to ability of a banks in meeting its withdrawals of its depositors and its capability in securing the confidence of depositing public and run the business smoothly.

Question 4.
State the investment principles of commercial banks.

  • Principle of liquidity
  • Principle of safety
  • Principle of profitability

Question 5.
Give the meaning of cash reserve ratio of commercial bank.
Cash reserve refers to cash reserves held by a commercial banks in its hand also with the certain banks and other commercial banks bear (i.e. forms) a certain proportion to its total deposits.

Question 6.
Give the meaning of letter of credit.
Letter of credit is issued by a bank to the importers country at the request of the importer addressed to its branch or correspondent bank in exporters country directing the branch or the correspondent bank to accept or pay the bill of exchange drawn by the exporter up to the amount specified therein.

Question 7.
What is circular notes?
Under the system of circular notes, a person who intends to visits other places in the same country or abroad deposits a certain sum of money with a banker. The banker in return will give him circular notes. The purchaser or holder of circular notes is required to carry with him a letter of identification or indication.

Question 8.
What is a bank draft?
A bank draft is a cheque drawn by one branch of a bank upon another branch of the same bank to pay the money stated therein on demand to the person named therein or to his order.

Question 9.
What is telegraphic transfers?
Telegraphic transfers is one of the device adopted by the commercial banks to remit money from one place to another. It is adopted only when the payee has an account with th drawee branch of a bank.

Question 10.
What do you mean by fixed deposits?
Fixed deposits can be withdrawn only after expiry of certain period say 3 years, 5 years or 10 years. The banker allows a higher rate of interest depending upon the amount and period of time. Previously the rates of interest payable on fixed deposits were determined by Reserve Bank.

Question 11.
What do you mean by cash certificates?
Cash certificates are issued to the public for a longer period of time. It attracts the people because its maturity value is in multiples of the sum invested. It is an attractive and high yielding investment for those who can keep the funds for a long time.

Question 12.
What do you mean by demand deposits?
These are the deposits which may be withdrawn by the depositor at any time without previous notice. It is withdraw able by cheque/draft. It includes the following:

Question 13.
Give the meaning of saving deposits?
The savings deposit promotes thrift among people. The savings deposits can only be held by individuals and non-profit institutions. The rate of interest paid on savings deposits is lower than that of time deposits. The savings account holder gets the advantage of liquidity (as in current a/c) and small income in the form of interests.

Question 14.
What do you mean by current accounts?
Current accounts are maintained by the people who need to have a liquid balance. Current account offers high liquidity. No interest is paid on cur-rent deposits and there are no restrictions on withdrawals from the current account.

Question 15.
Give the meaning of overdraft?
Overdraft facility is provided to holders of current accounts only. This is an ar-rangement with the bankers thereby the customer is allowed to draw money over and above the balance in his/her account. This facility of overdrawing his account is generally pre-arranged with the bank up to a certain limit.

Question 16.
What do you mean by cash credit?
Cash credit is a form of working capital credit given to the business firms. Under this arrangement, the customer opens an account and the sanctioned amount is . credited with that account. The customer can operate that account within the sanctioned limit as and when required.

Question 17.
What is travellers cheque?
A traveler’s cheque is a preprinted, fixed-amount cheque designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege.

Question 18.
Distinguish between overdraft and cash credit.
An overdraft facility is used by the businessmen occasionally and for short duration whereas cash credit is used for long term businessmen in doing regular business.

Question 19.
Mention any two subsidiaries of RBI.
The two subsidiaries of RBI are SBI & NABARD.

Financial Institutions Long Answer Type Questions

Financial Institutions Long Answer Type Questions

Question 1.
What is a bank? Explain the various types of banks.
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is a connection between customers that have capital deficits and customers with capital surpluses.

The various types of banks are as follows:
(a) Commercial banks:
A commercial bank is a prot-seeking business rm, dealing in money and credit. It is a nancial institution dealing in money in the sense that it accepts deposits of money front the public to keep them in its custody for safety. So also, it deals in credit, i.e., it creates credit by making advances out of the funds received as deposits to needy people. It thus, functions as a mobiliser of saving in the economy. A bank is, therefore like a reservoir into which ow the savings, the idle surplus money of households and from which loans are given on interest to businessmen and others who need them for investment or productive uses.

(b) Industrial Banks:
Industries require a huge capital for a long period to buy machinery and equipment. Industrial banks help such industrialists. They provide long term loans to industries. Besides, they buy shares and debentures of companies, and enable them to have xed capital. Sometimes, they even underwrite the debentures and shares of big industrial concerns. The industrial banks play a vital role in accelerating industrial development. In India, after attainment of independence, several industrial banks were started with large paid up capital. They are, The Industrial Finance Corporation (I.F.C.), The State Financial Corporations (S.F.C.), Industrial Credit and Investment Corporation of India (ICICI) and Industrial Development Bank of India (IDBI) etc.

(c) Savings Banks:
These banks were specially established to encourage thrift among small savers and therefore, they were willing to accept small sums as deposits. They encourage savings of the poor and middle class people. In India we do not have such special institutions, but post offices perform such functions. After nationalisation most of the nationalised banks accept the saving deposits.

(d) Agricultural Banks:
Agriculture has its own problems and hence there are separate banks to nance it. These banks are organised on co-operative lines and therefore do not work on the principle of maximum prot for the shareholders. These banks meet the credit requirements of the farmers through term loans, viz., short, medium and long term loans.

(e) Exchange Banks;
These banks nance mostly for the foreign trade of a country. Their main function is to discount, accept and collect foreign bills of exchange. They buy and sell foreign currency and thus help businessmen in their transactions. They also carry on the ordinary banking business.

(f) Miscellaneous Banks:
There are certain kinds of banks which have arisen in due course to meet the specialised needs of the people. In England and America, there are investment banks whose object is to control the distribution of capital into several uses. American Trade Unions have got labour banks, where the savings of the labourers are pooled together. In London, there are the London Discount House whose business is “to go about the city seeking for bills to discount.” There are numerous types of different banks in the world, carrying on one or the other banking busines.

(g) Retail banks:
Sometimes called high street banks, these are the banks that have branches on the street where ordinary customers have their bank accounts. Retail banks make most of their money from the interest payments on loans they lend to individuals and small businesses, and selling things like mortgages and insurance. Building Societies are also a form of retail banking.

(h) Investment banks:
Investment banks take money from investors such as companies or wealthy individuals and buy shares on the stock market. They also analyse the financial markets for their clients, and provide funding and advice for things like corporate takeovers – which is where one company ‘buys’ another. You can’t deposit money in an investment bank like you can in a retail bank, and investment banks make their money by taking a percentage of their clients’ profits on investments, or selling them financial advice.

(i) Central bank:
A central bank is where money is printed and monetary policy is set. Monetary policy deals with things like inflation and interest rates which influence a country’s economy. There is normally only one central bank in a country – such as the Bank of England in the UK – and they are often supposed to regulate the banking sector there. Although an individual or company can’t open an account with them, a central bank is where a government keeps its money, and they can sometimes lend money to other banks who get into financial trouble.

Question 2.
Explain the advantages of investing in mutual funds.
The various advantages of investing in mutual funds are as follows:
(a) Professional Management:
The investor avails of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

(b) Diversification:
Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion.

(c) Convenient Administration:
Investing in a mutual fund reduces paperwork and helps you to avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.

(d) Return Potential:
Over a medium to long-term, mutual funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.

(e) Low Costs:
Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

(f) Liquidity:
In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of. the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.

(g) Transparency:
Regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager’s investment strategy and outlook.

(h) Flexibility:
Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

(i) Choice of schemes:
Mutual Funds offer a family of schemes to suit the varying needs over a lifetime.

(j) Well Regulated:
All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations ‘ of Mutual Funds are regularly monitored by SEBI.

Question 3.
What is non banking financial institutions? Explain the various types of non banking financial institutions.
A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. The Reserve Bank of India, categorizes the NBFCs into various categories on the basis of their nature and activities:
(a) Equipment Leasing Company:
Equipment leasing company means any company, principal business of which is leasing of equipment or the financing of such activity.

(b) Hire Purchase Company:
Hire Purchase companies means any company whose principal business is hire-purchase or financing such transactions. Hire-purchase Company finances the price of the goods to be sold on a future date. The goods are in fact let on hire by the hire purchase company with a condition to pay the installments by the hirer and after all the installments are paid by the hirer will have an option to purchase it later.

(c) Housing Finance company:
Housing Finance company is a company which provides finance for acquisition and/or construction of houses, acquisition of land and development of plot/ land.

(d) Investment Company:
The main business of an Investment Company is to acquire securities and resale it later. They buy new issues from security issuers and make the arrangement of resale to the investing public.

(e) Loan Company:
Loan company is a company which carry on its principal business as the providing of finance whether by making loans or advances or otherwise for any activity other than its own. These activities exclude leasing and hire purchase.

(f) Mutual Benefit Financial Companies:
Mutual Benefit Financial companies are the companies usually the ‘nidhi’ which are notified by the Central Government under section 620A of the Companies Act 1956 (1 of 1956). These companies provide finance to the members of the companies and accept deposits form them.

The important features of these companies are:

  • They mobilize deposits from their members and public with an assurance to provide credit*when required by depositors.
  • They provide credit to those who are usually not financed by banks or out of reach of commercial banking.
  • MBFCs are easily accessible, local in character and follow easy and simple procedures.
    They work on sound principles of banking. Their operations are governed by the directives of the RBI.
  • MBFCs are very old financial institutions existing over 100 years operating mainly in South India.

(g) Miscellaneous Non-Banking Company (MNBC):
MNBC is a company or a financial institution performing all or any of the following activities:
→ Collection of money in one lump sum/installments by way of contributions/ subscriptions, sale of units and other instruments, granting membership admission fee or in any manner.

→ Manage/conduct/supervise transaction/arrangement relating to an agreement with the subscribers, each one of whom subscribes a certain sum in installments over a definite period, and is entitled to a prize amount on the basis of draw of lots or by auction/tender.

→ Carry on the activity in any other form of chit or kuri.

→ Undertake/carry on/ engage in any other business similar to the above.

(h) Residuary Non-Banking Company (RNBC):
RNBC is defined as a company that receives deposits under any scheme/ arrangement in one lump sum / installments by way of contributions / subscriptions or by sale of units/certificate/other instruments or in any other manner. Usually RNBCs mobilize deposits from a large number of small and uniformed deposits through field staff promising that their money would be invested in banks and government securities. They are in general small in size and all non-banking companies other than NBFCs and MNBCs fall into the category of RNBCs.

Question 4.
Explain the importance of non banking finance companies.
Non-Banking Finance Companies play an expanded role to accelerate the pace of growth of the financial market. They also help to bridge the credit gap in several sectors. They play an important role in economic development. They play important role in the following ways:
→ Intermediary: They collect the savings of the people and lent to various parties like household, firm, small enterprises on sustained basis. In this ways they bring the savers and lenders together and this help in mobilizing resources in the economy.

→ Promotion of Business sector: It helps the business sector by financing it through loans, mortgages, purchase of bonds, shares etc. in flexible terms and procedures.

→ Help the Central, state and local government: NBFCs helps the local bodies by purchasing their bonds and by selling and purchasing the securities of the government.

→ Provide liquidity: NBFCs provide liquidity when they convert an asset in to cash easily and quickly without loss of value in terms of money.

→ Employment generation: NBFCs help in both direct and indirect employment generation. They have employed many persons to man their offices. Besides office staff, institutions need the services of experts which help them in finalizing lending proposals.

→ Specialized Credit Requirements: NBFCs provide various types of loans and financial sen/ices which are of special nature and differ from customer to customer. Banks can not meet their requirements as they are having lending policies confirming to the banking legislation.

→ Efficient and competitive sector: Advent of NBFCs has ensured a healthy, efficient and competitive financial sector which reinsured the quality financial services to the customers.

→ Capital formation: NBFCs help in mobilizing savings in very remote and unbanked areas and thereby contribute to the capital formation of the economy.

Question 5.
Define Commercial Bank. Explain the main sources for Commercial Bank.
Paid up capital, Reserves and surpluses and various types of deposits constitute major sources of fund of commercial banks in India.
(i) Paid up capital:
Capital base of commercial banks in India is much smaller compared to that of banks in developed countries. In india the share of paid up capital in total . resources of these banks is only about 1 percent while in developed countries it is around 7-10 percent late there is an attempt to expand the capital base of commercial banks.

(ii) Reserves and surpluses:
Commercial banking operations hover around risk and liquidity. Therefore, it is obligatory on commercial banks to set aside at least 20% of their profits as reserves. Accumulated reserves and surpluses of commercial banks are now matching their paid-up capital. With greater diversification of banking activities into more profitable services, the share of reserves and surpluses in total resources of the banks is expected to increase.

(iii) Deposits:
Deposits from customers constitute a major source of funds for commercial banks. About 98 percent of total funds are obtained through Demand deposits, Savings deposits and time deposits. Three-fifths of total deposits are in the form of fixed deposits. They form the very basis for the lending operations of the banks.

Since the commencement of planning in 1951, total deposits with commercial banks have grown by more than 200 times. The growth is around, 50 times since the nationalisation at banks in 1969 deposits with banks are equivalent to about half the national income. Many factors have contributed to the phenomenal increase in bank deposits over the cast few decades, such as:

  • Increase in national income
  • Increase in the number of branches in the country.
  • Expansion of branches in rural sectors.
  • Introduction of a variety of new deposit schemes to suit different types of customers.
  • Confidence of public in the nationalised banks.
  • Higher rate of return on bank deposits.
  • Comparatively lower public confidence in corporate business enterprises and defaults by them in payment of interest and payment of principal.
  • Vigorous promotional efforts by banks.
  • Inflow of deposits from non-resident Indians (NRIs) – both repatriable and non-repatriable.

Question 6.
Discuss in brief the various types of mutual funds and also the advantages of mutual funds.
Types of Mutual Fund: The Mutual Funds in India offer a wide array schemes that cater to different needs suitable to any age, Financial position, risk tolerance and return expectations, some of the important types of mutual fund schemes are:
(i) Open ended mutual funds ;An open ended mutual funds is a fund with a non – fixed number of outstanding shares or units, that stands ready at any time to redeem them on demand. The fund itself buys back the shares surrendered and is ready to sell new shares.

(ii) Close – ended mutual funds: It is the fund where mutual fund managements sells a limited number of shares and does not stand ready to redeem them primary example of such mutual fund is UTI’s Master share. The shares of such mutual funds are traded in the secondary markets.

(iii) Income oriented schemes: The fund primarily offer fixed income to investors. Naturally, enough the main securities in which investments are made by such – funds are the fixed income yielding ones likes bonds.

(iv) Growth Oriented Schemes: These funds offer growth potentialities associated with investment in capital market namely : a) high source of income by way of dividend and b) rapid capital appreciation, both from hold of good quality scrips.

(v) Hybrid schemes ; These funds cater to both the investment needs of the prospective investors – namely fixed income as well as growth orientation. Therefore, investment targets of these Mutual Funds are judicious mix of both the fixed income securities like bonds and debentures and also sound equity scrips.

(vi) High Growth schemes: As the nomenclature depicts, these funds primarily invest in high risk and high return volatile securities in the market and induce
the investors with a high degree of capital appreciation.

(vii) Money market mutual funds; These funds invest in short term debt securities in the money market like certificates of deposits, commercial papers, government treasury bills etc. Owing to their large size, the funds normally get a higher yield on such short term investments than an individual investors.

(viii) Tax saving schemes : These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the government offer tax incentive for investment in specified avenues.

(ix) Special schemes : This category includes index schemes that attempt to replicate the performance of particular index such as the BSE, Sensex or the NSE – 50 or industry specific schemes or sectoral schemes.

(x) Real Estate Funds : These are close ended mutual funds which invest predominantly in real estate and properties.

(xi) Off-shore funds: Such funds invest in securities of foreign companies with RBI permission.

(xii) Leverage Funds : Such funds, also known as borrowed funds, increase the size and value of portfolio and offer benefits to members from out of the excess of gains over cost of borrowed funds. They tend to indulge in speculative trading and risky investments.

(xiii) Hedge Funds: They employ their funds for speculative trading, i.e. for buying shares whose prices are likely to rise and for selling shares whose prices are likely to dip.

(xiv) Fund of funds : They invest only in units of other mutual funds, such funds do not operate at present in India.

(xv) New Direction funds : They invest in companies engaged in scientific and technological research such as birth control, anti pollution; oceanography etc.

Advantages of Mutual Fund:
Mutual Funds are becoming very popular because of the its important advantages. They are:
(i) Diverrification:
The small savings investors their savings are pooled and entrusted to mutual funds and then these can be used to buy shares of many different companies. So, this diversification of investment ensures regular returns to investors.

(ii) Liquidity:
According to the regulations of SEBI, a mutual fund in India is required to ensure liquidity a paculiar advantage of a mutual fund is that investment mode in its scheme can be converted back into cash promptly without heavy expenditure on brokerage delay etc.

(iii) Expert supervision and management:
The mutual fund managers have Extensive research facilities at their disposal and they can analyse the performance and prospectus of various companies and take decisions in making investment.

(iv) Reduced Risk:
Mutual Funds which reduced risk factor. A mutual funds invest in large number of companies and are manager professionally, but on the other hand, it may not be in a position to minimize such risk.

(v) Tax advantage:
There are certain schemes of mutual funds which provide tax advantage under income tax act and the tax liability of an investor is also reduced when he invest in these schemes of the mutual funds.

(vi) Flexibility:
In case of mutual funds on investor can invest or withdraw funds according to his own requirements. It is flexible in nature.

(vii) Higher Returns;
Mutual funds are Expected to provide higher returns to the investors as compared to direct investment.

(viii) Investor Protection:
Mutual Funds which provides better protection to the investor, import a greater degree of flexibility and facilitate competition.

(ix) Low operating cost:
It reduced their operating costs by way of brokerage fees, commission etc. a small investor also gets the benefits of large scale economies and low operating costs.

Question 7.
What are the functions and problems of S.F.C.?
The main function of SFC is to provide loans to small and medium scale industries engaged in the manufacture, preservation or processing of goods, mining, hotel Industry, generation and distribution of power, transportation, fishing, assembling, repairing etc., It provides financial assistance in the following forms.

  • Granting of loans to industries repayable with in a period of not exceeding 20 years.
  • Subscribing debentures of industries repayable within a period of more exceeding 20 years.
  • Guaranteeing loans raised by industrial concern.
  • Underwriting issue of stock, debentures, bonds and shares of industrial undertaking.
  • Guaranteeing deferred payments.
  • Acting as an agent of central government, state government or Industrial finance corporation of India in respect of any business with an industrial concern in respect of loan sanctioned to them.

SFC suffers from the following problems:

  • SFC’s have not been able to collect the loan amount in time. This inturn leads to delay in payment of investments.
  • SFC finds it difficult to assess the credit capacity of industrial concerns of small size since they do not have Standardised form of financial statements.
  • SFC’s do not have expertise to assess the value of small scale firm as the documents are not maintained properly and at the same time they don’t have sufficient assets to offer it as security.
  • SFC’s do not have technical person to make assessment of the value of firm and also the soundness of financial position.
  • The needs of industries cannot be met because of in adequate funds.

Financial Institutions Short Answer Type Questions

Financial Institutions Short Answer Type Questions

Question 1.
Write a note on Exim Bank.
The Export-Import (EXIM) Bank of India is the principal financial institution in India for coordinating the working of institutions engaged in financing export and import trade. It is a statutory corporation wholly owned by the Government of India. It was established on January 1, 1982, for the purpose of financing, facilitating, and promoting foreign trade in India.

The authorised capital of the EXIM Bank is Rs. 200 crore and paid up capital is Rs. 100 crore, wholly subscribed by the Central Government. The bank can raise additional resources through:

  • Loans/grants from Central Government and Reserve Bank of India
  • Lines of credit from institutions abroad
  • Funds raised from Euro Currency markets
  • Bonds issued in India.

Question 2.
What are the functions of Export-Import Bank of India.
The main functions of the EXIM Bank are as follows:

  • Financing of exports and imports of goods and services, not only of India but also of the third world countries
  • Financing of exports and imports of machinery and equipment on lease basis
  • Financing of joint ventures in foreign countries
  • Providing loans to Indian parties to enable them to contribute to the share capital of joint ventures in foreign countries
  • To undertake limited merchant banking functions such as underwriting of stocks, shares, bonds or debentures of Indian companies engaged in export or import
  • To provide technical, administrative and financial assistance to parties in connection with export and import.

Question 3.
Explain the functions of industrial bank of India.
Various functions of or types of assistance to be provided by the IDBI are as follows:
(i) Direct Financial Assistance:
The IDBI provides direct financial assistance to the industrial concerns in the form of (a) granting loans and advances; and (b) subscribing to, purchasing or underwriting the issues of stocks, bonds or debentures.

(ii) Indirect Financial Assistance:
The IDBI provides indirect financial assistance to the small and medium industrial concerns through other financial institution, such as, State Finance Corporations, State Industrial Development Corporations, Cooperative banks, regional rural banks, commercial banks.

The Assistance to these institutions include:

  • refinancing of loans given by the institutions;
  • subscribing to their shares and bonds
  • rediscounting of bills.

(iii) Development Assistance:
The creation of the Development Assistance Fund is the special feature of the IDBI. The Fund is used to provide assistance to those industries which are not able to obtain funds in the normal course mainly because of heavy investment involved or low expected rate of returns. The financial resources of the Fund mainly come from contributions made by the government in the form of loans, gifts, donations, etc; and from other sources. Assistance from the Fund requires the prior approval by the government.

(iv) Promotional Function:
Besides providing financial assistance, the IDBI also undertakes various promotional activities such as marketing and investment research, techno- economic surveys. It provides technical and administrative advice for promotion, expansion and better management of the industrial concerns.

Question 4.
Explain the functions of small industries development corporation.
The various functions of small industries development corporation are as follows:

  • Development of industrial estates with infrastructure facilities and
  • Provision of work sheds & developed plots – Industrial Estate Scheme.
  • Supply of Raw Materials to SSIs
  • Marketing Assistance Scheme
  • Export Assistance Scheme
  • Guidance to entrepreneurs

Question 5.
Write a note on industrial development bank of India?
IDBI Bank Limited (BSE: 500116) is an Indian financial service company headquartered Mumbai, India. RBI categorised IDBI as an “other public sector bank”. It was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. It is currently 10th largest development bank in the world in terms of reach with 1594 ATMs, 1000 branches including one overseas branch at DIFC, Dubai and 678 centers including two overseas centres at Singapore & Beijing.[3]

Some of the institutions built by IDBI are the Securities and Exchange Board of India (SEBI), National Stock Exchange of India (NSE), the National Securities Depository Limited (NSDL), the Stock Holding Corporation of India Limited (SHCIL), the Credit Analysis & Research Ltd, the Exim Bank (lndia)(Exim Bank), the Small Industries Development Bank of India(SIDBI), the Entrepreneurship Development Institute of India, and IDBI BANK, which is owned by the Indian Government. IDBI Bank is on a par with nationalized banks and the SBI Group as far as government ownership is concerned. It is one among the 26 commercial banks owned by the Government of India. The Bank has an aggregate balance sheet size of Rs. 2,90,837 crore as on March 31, 2012.

Question 6.
Explain the functions of Life Insurance corporation.
(a) Stake holders Protection:
Corporations with stake holder have life insurance agreements in place so any unexpected transition goes smoothly. Both large and small companies insure the life of key employees, whose loss would affect business operations.

(b) Small Business Operations:
The sole proprietor of a business needs life insurance to protect the ability to continue operations when he dies, at least until there is time to arrange for future management. In a partnership, life insurance with an assigned beneficiary agreement will prevent half the business going to a disinterested heir of the deceased partner.

(c) Retirement Supplement:
Some life insurance policies can be converted into an annuity that will pay dividends to the holder after retirement. These usually are more expensive policies, and many financial planners urge buyers to make their investment programs separate from their insurance.

(d) Family Support:
One of the most important functions of life insurance in family life is to provide dependent survivors with a financial cushion in their bereavement. It may enable the family to maintain the same standard of living. Many homeowners carry life insurance that will pay off the mortgage, letting the family remain in their home. A life insurance policy on a non-working spouse is considered an integral part of a sound family life insurance plan since it would provide income for a surviving parent with children at home.

(e) Final Expenses:
Many people carry enough life insurance to cover funeral costs and other end- of-life expenses of the insured, and to pay off outstanding debt. Since funerals cost thousands of dollars, this life insurance meets an immediate need.

(f) Gifts and Special Bequests:
Another function of life insurance is to enable special bequests such as a major gift to a church or charity. A special provision in life insurance can be directed to fund education for a child. Parents of a child with a disability may want to set aside a portion of their life insurance in a special fund to care for the child.

Question 7.
Explain the constitution of small industries development bank of India.
(1) The Board shall consist of the following, namely:
(a) The Chairman of the Development Bank, if he is a whole-time Chairman, and if he is not a whole-time Chairman, the Managing Director of that Bank, shall be the ex officio Chairman of the Small Industries Bank.

(b) Two Directors to be nominated by the Central Government from amongst its officials.

(c) One Director to be nominated by the Reserve Bank from amongst its officials of, or above, the rank of the Executive Director;

(d) Ten Directors to be nominated by the Development Bank, of whom-
(i) One shall be from amongst its officials;

(ii) One representing the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981);

(iii) One representing the Khadi and Village Industries Commission established under section 4 of the Khadi and Village Industries Commission Act, 1956 (61 of 1981);

(iv) Seven from amongst the experts in industry in small-scale sector or cooperative sector or persons having such special knowledge or professional experience as the Development Bank may consider desirable or useful to the Small Industries Bank, or persons representing scheduled banks, State Financial Corporation, State Small Industries Corporations or the National Small Industries Corporation;

(v) The Managing Director, ex officio Director.

(2) Every Director referred to in clause (b), clause (c) or sub-clause (i) of clause (d) shall hold during the pleasure of the authority nominating him.

(3) Every Director, other than those referred to in sub-section (2), shall hold office for such term not exceeding three years as the Development Bank may specify in this behalf and shall be eligible for reappointment;

(4) The Directors shall be paid such fees and allowances as may be prescribed for attending the meetings of the Board or any of its Committees and for attending to any other work of the Small Industries Bank.

Question 8.
Explain the objectives of IDBI.
The main objectives of IDBI are to serve as the apex institution for term finance for industry in India. Its objectives include:

  • Co-ordination, regulation and supervision of the working of other financial institutions such as IFCI, ICICI, UTI, LIC, Commercial Banks and SFCs.
  • Supplementing the resources of other financial institutions and thereby widening the scope of their assistance.
  • Planning, promotion and development of key industries and diversifications of industrial growth.
  • Devising and enforcing a system of industrial growth that conforms to national priorities.

Question 9.
What is state financial corporation? State the objectives of state financial corporations.
A Central Industrial Finance corporation was set up under the industrial Finance corporations Act, 1948 in order to provide medium and long term credit to industrial undertakings which fall outside normal activities of commercial banks. The State governments expressed their desire that similar corporations be set up in states to supplement the work of the Industrial financial corporation.

State governments also expressed that the State corporations be established under a special statue in order to make it possible to incorporate in the constitutions necessary provisions in regard to majority control by the government, guaranteed by the State government in regard to the payment principal. In order to implement the views Expressed by the State governments the State Financial Corporation bill was introduced in the Parliament.

Question 10.
Explain the functions of state finance corporations.
The various functions of state finance corporations are as follows:
(a) Project advisory and Finance as a catalyst in small scale industrial growth the SFC’s provide the following services:

  • Investment appraisal
  • Project conceptualization and related services, including guidance in relation to selection of projects, preparation of feasibility studies, capital structuring, techno -economic feasibility, financial engineering, project management design etc.
  • Credit Syndication including assistance in legal documentation etc. Documentation of various project documents Indian Financial System.

(b) Placement of debt – equity including design of the structure of instruments, placement of instruments with financial institutions, bank etc.

(c) Assist in organizational structural changes like :

  • Analysis of operational performance
  • Study of existing organizational structure
  • Study of the existing statures and rules and regulations
  • Market analysis with respect to products
  • Review of domestic and international scenario
  • Valuation of fixed assets and inventory
  • Advising on formation of new entity
  • Preparation of relevant agreements / legal documents.

(d) Industry Research / Information Services: A dedicated research team looking at both macros – level issues as well as sector -specific, industry research.

Question 11.
Explain the classification of banks according to ownership?
On the basis of ownership, banks are of the following types:
(a) Public sector Banks:
Public sector banks are those banks which are owned by the Government .The Government runs these banks. In India 20 banks were nationalized in 1969 and 1980 respectively. All these banks now belong to the public sector category. Social welfare is their principal objective.

(b) Private sector Banks:
These are those banks which are owned and run by the private sector. Various banks in the country such as Vijaya bank belong to this category. An individual has control over these banks in proportion to the shares of the banks held by him.

(c) Co-operative bank:
Co-operative banks are those banks which are jointly run by a group of individuals. Each individual has an equal share in these banks.The affairs of the bank are managed by its shareholders. Profits are equally distributed among the shareholders. Mutual help of the members of co-operative banks is the principal objective of these banks.

Question 12.
Explain the classification of banks according to Law.
Banks are classified in two the following two categories on the basis of Reserve Bank Act, 1934:
(a) Scheduled Banks:
These are the banks having paid up capital of atleast Rs. 5 lacs. These are like a joint stock company or a cooperative organization. These banks find their mention in the second schedule of the Reserve bank.

(b) Non-Scheduled banks:
These banks are not mentioned in the second schedule of Reserve Bank. Paid up capital of these banks is less than Rs. 5 lacs. The number of such banks is gradually falling in India. These are only ‘3’ such banks at present.

Question 13.
Explain classification of Commercial Banks on the basis of their Organisation.
On the basis of their organization , commercial banks may be classified as under:
(a) Unit Banking:
According to kent, ‘Under the unit banking system, the banking operations are carried through a single banking office rather than through a net work of branches. Each banking a company is a separate company, separately licensed having its own capital, Board of Directors and shareholders. In this banking system a particular bank functions in a limited area. Bank is a small size and generally it has no branch office. Such a bank deposits its money in some big bank, called Correspondent Bank. The control and ownership of these banks is generally in the hands of local individuals. This banking system is popular in U.S.A.

(b) Branch Banking:
Branch banking refers to that system of banking in which bank establishes its head office in some big city and operates the various branches all over the country. Some of its branches may also be in foreign countries. Branch Banking system is popular in India, Britain, Canada, France, Germany and various other countries.

(c) Group Banking:
Group Banking is that banking system is which two or more banks operate under the control of a holding company. In the words of Goldfield and Chandler, ‘Group Banking refers to the system a corporation or a holding company operates two or more banks simultaneously. These banks are known as subsidiaries of the corporation or the holding company. These banks may be unit banks or branch banks.’ Group banking system is most popular in the United states of America.

According to Bank holding company Act, 1956 (U.S.A.) ‘ A holding company is the one which has at least 25% equity of the concerned group of banks. These can be more than one or many banks under the control and management of the holding company. The holding company is popularly known as parent company and the group of banks operating under it are called operating companies or subsidiary companies. Presently there are 500 group banks in America.

(d) Chain Banking:
Chain banking is a banking system where the same individual or group of individuals control two or more banks. In this system an undivided or a group of individuals buy the bulk of shares of two or more banks and thus happen to control and manage them. This system of banking became popular in U.S.A. in 1920. In this system every bank in the banking chain has its own identity as well as independent board of management. However, it is possible that one individual is the member of various management boards.

(e) Correspondent Banking:
‘Correspondent Banking is an arrangement that exists among banks throughout the country based on the practice of smaller banks carrying deposits with larger banks in exchange for the performance of various services, ‘ state Reed and Gill. Services rendered by the larger banks include cheque clearing, sale and purchase of securities, making advances for big loans and the like. These larger banks are called Correspondent Banks.

Question 14.
Explain the functions of exchange banks.
The chief functions of exchange banks are as follows:

  • They accept bills of exchange on behalf of exporters
  • They buy and sell gold and silver
  • They provide trade information to exporter and importer
  • They accept bills of exchange on behalf of importer
  • They purchase and sell foreign currencies
  • They collect export bills of exchange and on behalf of exporter
  • They issue circular letters of credit, circular notes, travellers cheques etc to tourists and travellers who wish to go to foreign countries on business or private tours

Question 15.
Explain the main functions of industrial banks.
The main functions of industrial banks are as follows:

  • They provide technical assistance to industries
  • They advise the government on matters relating to industries
  • They underwrite the shares and debentures issued by industrial concerns
  • They provide guidance to customers regarding the purchase and sale of shares and debentures of industrial concerns
  • They participate in the management of industrial concerns by having their representatives on the boards of directors of the industries
  • They subscribe the share capital of industrial concerns
  • They grant long terms to industries for a period ranging from 5 to 15 years for the construction of acquisition of factory buildings, purchase of machines etc

Question 16.
State the objectives of LIC.
(a) To spread Life Insurance widely and in particular to the rural areas and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them adequate financial cover against death at a reasonable cost.

(b) Maximize mobilization of people savings by making insurance-linked savings adequately attractive.

(c) To bear in mind, in the investment of funds, the primary obligation to its policyholders, whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and obligations of attractive return.

(d) Conduct business with utmost economy and with the full realization that moneys belong to the policyholders.

(e) To act as trustees of the insured public in their individual and collective capacities.

(f) To meet the various life insurance needs of the community that would arise in the changing social and economic environment.

(g) To involve all people working in the Corporation to the best of their capability in furthering the interests of the insured public by providing efficient service.

Question 17.
Define non banking financial corporation. Explain its importance
NBFCs are defined by the RBI (Amendment) Act, 1997 as an institution or company whose principal business is to accept deposits under any scheme or arrangement or in any other manner, and to lend in any manner. To be called a NRFC, a financial institution must fulfill the following-

A company
Principal business is the receiving of deposits under any scheme/ arrangement/ in any other manner or lending in any manner.
Have obtained certificate and permission to start the functioning as NBFC from the RBI.

NBFC includes not only non-banking institution, but also hire-purchase finance, investment, loan or mutual benefit financial company, equipment leasing company, insurance companies, stock exchange, stock broking company, merchant banks etc. are also recognized as non banking financial company.

Hence NBFCs perform a diversified range of functions and offer various fiqancial services to individuals, corporate and institutional clients. They cover a wicje range of institutions from highly specified institutions such as development banks or insurance companies to simple institutions like mutual savings society.

Question 18.
What are the problems of Mutual Funds?

  • Mutual Fund has liquidity crisis.
  • Mutual fund fails to provide innovative schemes.
  • Research facility is very less in mutual fund.
  • Pattern of investment in mutual fund is very much conservative.
  • There is no disclosure of material information’s.
  • Quick and adequate services are desired.
  • It fails to create investment base at rural area.

Question 19.
What are the factors considered by a Banker while sanctioning loan?
Loans & advances may be made either on the personal security of the borrower or on the security of some tangible assets. The former is called unsecured or clean or personal advances & later is called secured advance.

The following factors are considered in this issue.
Unsecured advances :clean advances are granted to customers of integrity with sound financial banking . .
(a) In such case general capacity of the customer is security in itself.

(b) Confidence in the borrower is the basis of unsecured advances. Banks will consider faith on the ability & willingness of the borrower.

(c) The confidence of borrower is judged by:
1) Character: which implies honesty responsibility, promptness, reputation & good will of the person. A person who possess these characters, bank can extend credit to him without any reservation.

2) Capacity: refers to ability to manage the business. Success of business depends on initiative, interest experience & managerial ability. So these things are considered while sanctioning the loan.

3) Capital: Capacity of borrowers a banks looks into another aspect. Bank mainly provides working capital requirements. Borrowers should have sufficient capital to conduct the business.

(d) The security deposited by the borrower in case of secured advances is one or more aspect banker will consider.

(e) Security deposited by the 3rd party to secure an advance for the borrower will also considered by bank before sanctioning the loan.

Question 20.
What are open-end, close-end and interval schemes of a Mutual Fund?
A fund established in the form of a trust by a sponsor, to raise money by the trustees through the sale of units to the public, under one or more schemes for investing in securities in accordance with these regulation, is called mutual fund. Open end scheme: In this size of funds are not predetermined.

The investors can buy any number of units of mutual fund & can invest any amount of funds. These schemes are offered throughout the year with no definite dosing period.


  • Repurchase facility available.
  • No listing in stock exchange.
  • Accept funds from investors an continuous basis.

Close ended scheme: Here the duration & amount to be raised from the funds is prefixed. Schemes are opened for specific period of time.


  • Schemes are opened only for short duration.
  • Market price may be below or above par.

Interval schemes:
Basically it is a close ended scheme with a peculiar features that every year for a specific period it is made open. Prior to & after such interval the schemes operates as closed ended schemes. During the said, period, mutual funds is ready to buy or sell the units directly from or to the investor.

Question 21.
What are the benefits of Life Insurance?
Benefits of life insurance are:

  • Financial interest of one’s family remain protected from circumstances such as loss of income due to critical illness or death of the policyholder.
  • Insurance products have strong inbuilt wealth creation proposition.
  • Customer can occupy a unique space in the landscape of investment options available.
  • The LIC offers corresponding benefits to customer as life goal changes in the life cycle of the customer.
  • It helps to retain your business from the loss of a key employee.
  • It provides liquidity to pay off personal loans or business loans.
  • Charitable reminder trust provide tax benefits. Helps replace a chartable gift.
  • It provide good returns which could be beneficial way for saving recessing funds for retirement years
  • Benefits are available immediately & used to help pay expenses such as final illness & funeral cost etc.

Financial Institutions Very Short Answer Type Questions

Financial Institutions Very Short Answer Type Questions

Question 1.
What is a bank?
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is a connection between customers that have capital deficits and customers with capital surpluses.

Question 2.
Define bank.
According to Walter Leaf “A bank is a person or corporation which holds itself out to receive from the public, deposits payable on demand by cheque.” Horace White has defined a bank, “as a manufacture of credit and a machine for facilitating exchange.”

Question 3.
What is commercial bank?
A commercial bank is a prot-seeking business, dealing in money and credit. It is a fanancial institution dealing in money in the sense that it accepts deposits of money from the public to keep them in its custody for safety.

Question 4.
What is industrial bank?
Bank owned by a non-banking company under section 2(c)(2)(H) of the Bank Holding Company Act. In this arrangement while the bank is state-chartered and is constantly under the full watch of government regulators, its parent company (such as American Express, General Electric, General Motors) is not. Industrial banks raise their capital by selling investment certificates.

Question 5.
What is savings bank?
A savings bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative, while in others, socially committed individuals created foundations to put in place the necessary infrastructure.

Question 6.
What is mutual fund?
A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Each Mutual Fund with different type of schemes is managed by respective Asset Management Company (AMC).

Question 7.
What is central bank?
A central bank, reserve bank, or monetary authoritys a public institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the nation’s monetary base, and usually also prints the national currency, which usually serves as the nation’ slegal tender.

Question 8.
What is a non banking financial institution?
A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.

Question 9.
Give the meaning of EXIM bank.
The Export-Import (EXIM) Bank of India is the principal financial institution in India for coordinating the working of institutions engaged in financing export and import trade. It is a statutory corporation wholly owned by the Government of India. It was established on January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade of India.

Question 10.
Give the meaning of agricultural bank.
An agricultural bank is a credit bank specifically established to assist agricultural development particularly by granting loan for longer periods than is usual with commercial bank.

Question 11.
What is equipment leasing company?
Equipment leasing company means any company whose principal business being leasing of equipment or the financing of such activity.

Question 12.
What is hire purchase company?
Hire Purchase companies means any company whose principal business is hire- purchase or financing such transactions. Hire-purchase Company finances the price of the goods to be sold on a future date. The goods are in fact let on hire by the hire purchase company with a condition to pay the installments by the hirer and after all the installments are paid by the hirer will have an option to purchase it later.

Question 13.
What is housing finance company?
Housing Finance company is a company which provides finance for acquisition and/or construction of houses, acquisition of land and development of plot/land.

Question 14.
What is mutual benefit financial companies?
Mutual Benefit Financial companies are the companies usually the ‘nidhi’ which are notified by the Central Government under section 620A of the Companies Act 1956 (1 of 1956). These companies provide finance to the members of the companies and accept deposits form them.

Question 15.
What is investment bank?
An investment bank is a financial intermediary that performs a variety of services. It includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker of institutional clients.

Question 16.
What is a public sector bank?
Public sector banks are those banks which are owned by the government and are runned by the government. In India 20 banks (14+6) were nationalized in 1969 and 1980 respectively. All these banks now belong to the public sector category.

Question 17.
What is a private sector bank?
Private sector banks are those banks which are owned and run by the private sector. Various bank in the country such as Vijaya Bank belong to this category. An individual control these banks in proportion to the shares of the bank held by them.

Question 18.
What is a co-operative bank?
Co-operative banks are those banks which are jointly run by a group of individuals. Each individual has an equal share in these banks. The affairs of these banks are managed by its shareholders. Profits are equally distributed among the shareholders.

Question 19.
What is a scheduled bank?
Scheduled banks are the banks having paid up capital of at least Rs. 5 lakhs. . These are just like a joint stock company or a cooperative organization. These banks find their mention in the second schedule of the Reserve bank.

Question 20.
What is a non-scheduled banks?
These banks are not mentioned in the second schedule of reserve bank. Paid up capital of these banks is less than Rs. 5 lakhs. The number of such banks falling gradually in India. There are only ‘3’ such banks at present.

Question 21.
What is a foreign bank?
Foreign banks are those banks which are incorporated in a foreign country. They have set up their branches in India. Their principal function is to make credit arrangement for the exports and imports of the country and these banks deal in foreign exchange.

Question 22.
Who is a banker?
A banker has been defined as “a dealer in capital, or, more properly, a dealer in money. He is an intermediate party between the borrower and the lender.” This definition applies to a banker who deals with the money of others; but he often lends his own money, and when thus acting he is one of the two original parties.

Question 23.
What do you mean by exchange banks?
Exchange banks are banks which finance mainly the foreign exchange business (i.e. the export and import trade) Of a country. They finance mainly the foreign exchange business of country and hence they are popularly termed as exchange banks.

Question 24.
What is Foreign Bank?
Foreign Bank is like an Multinational Bank which has branches in other countries and head office in Home country. They operates globally and they finance for international trade. Supported by world bank for IMF.

Question 25.
Who is an indigenous banker?
Indigenous banker is a person who grant loans against securities such as gold, jewellery, land, promissory notes, etc., to the local peoples. Generally, the interest rate charged by them is higher that the interest charged by other banking institutions.

Question 26.
State any four financial resourses of SFC.
Financial resourses of the SFCs are:

  • Their own share capital
  • Income from investment and repayment of loans
  • Sale of bonds
  • Loans from the IDBI
  • Borrowings from the RBI
  • Deposits from the public
  • Loans from state governments

Question 27.
State any 2 objectives of EXIM Bank.
The main objectives of EXIM Banks are:

  • Collecting Compiling and and credit information in respect of foreign trade.
  • Providing all kinds of assistance wheater financial, technical or administrative in the field of import and export.
  • Financial export oriented units and helping them in the planning, promotion and development.
  • Carrying out research, surveys and studies in convection with the promotion and development of foreign trade.

Question 28.
State any four public utility functions of Banks.
The any four public utility functions of banks are:

  • Safe custody of valuables
  • Issue of letters of credit
  • Factoring Service
  • Underwriting of securities.

Question 29.
State two objectives of ICICI.
The two objectives of ICICI are:

  • to stimulate the promotion of new industries.
  • to provide technical and managerial help to increase production and employment opportunities.

Question 30.
State any four factors which determine liquidity of banks.
The four factors determining liquidity of banks are:

  • CRR
  • Use of cheques
  • SLR
  • Nature of business conditions.

Question 31.
What are R.R.B’s?
Regional Rural Banks. These banks are setup to provide credit and other facilities to small and marginal formers agricultural labourers and artisans.

Question 32.
What is the statutory definition of the term “Banking”?
Authorized financial institutions which encompasses the receipt of money for deposit, to be payable awarding to the terms of the account, collection of cheques presented for payment. issuance of loans to individuals discount of commercial paper and other money related functions.

Question 33.
What are SIDCs? Mention any two roles played by them.
The state Industrial development corporations act as a catalyst for the promotion & development of medium & large enterprises in the respective states.


  • To offer a package of development services that include technical guidance, assistance in plan location etc.
  • To provide infrastructure facilities for the establishment of industrial units.

Question 34.
State any two functions of NABARD.
The two functions of NABARD are:

  • It undertakes monitoring & evaluations of projects refinanced by it.
  • It promotes research in the field of rural banking, agriculture & rural development.

Question 35.
What do you mean by financial institutions?
Financial institution are the participants in financial markets, they are business organisations dealing in financial resources. They collect resources by accepting deposits from individuals and institutions and lend them to trade, industry and others. They buy and sell financial instruments.

Question 36.
Mention the types of deposits of banks.
The types of deposits of banks are:

  • Savings deposits
  • Fixed deposits
  • Recurring deposits
  • Current deposits.

Question 37.
Expand NABARD.
NABARD : National Bank for Agriculture and Rural Development.

Question 38.
What is IDBI.
IDBI is the industrial development Bank of India limited. It is a leading public sector Banks established to provide credit and other facilities for the Indian Industries.

Marketing Environment Short Answer Type Questions

Marketing Environment Short Answer Type Questions

Question 1.
Explain the benefits of market segmentation.
Market segmentation offer the following benefits:
(a) A more precise definition of the market:
Market segmentation improves the company’s understanding of consumer preferences. By knowing this the company can make adjustments to meet changing market demands.

(b) A more effective marketing programme:
With the help of market segmentation more effective marketing prgoramme can be prepared to satisfy the needs of consumers.

(c) Better understanding of the competition:
Marketing segmentation helps in assessing the strength and weaknesses of the competitors. It helps the company to capture new market for the product.

(d) Customer satisfaction:
Market – segmentation helps to satisfy the consumer groups in terms of quantity quality and variety.

(e) Better allocation of resources:
Study of each segmented market situation, helps the company to invest marketing funds in effective manner.

(f) Appropriate timing of the introduction of new, product advertising etc., could be easily determined:
Therefore market segmentation is an adjustment of products and the marketing appeals to satisfy the customers.

Question 2.
What are the bases for market segmentation?
Marketing managers are taking decision on market segmentation. Main aim of segmentation is to get more profit from sale of products following are the methods used by marketing manager for market segmentation.
(a) Geographic segmentation:
Market is segmented oh the basis of geographic characteristics of people, regional difference in consumer tastes for products as a whole are well known. Marketing managers distinguish carefully among the regions in which they operate and select whose they have comparative advantage. Geographic segmentation helps the markets to concentrate their efforts to the exact places organizational promotional and distributional efforts can be fully and effectively utilized.

(b) Demographic segmentation:
Demography is the study of human population in terms of its size, density, and distribution, marketing manager also uses. Socio economic characteristics along with demography to segment market, age group, family size, income level, occupation, education, religion, social states etc., are main features of social and cultural approach. This segmentation is very popular because consumer durable goods are produced by the company by taking these information as a base for production.

(c) Psychographic segmentation:
Under this method buyers are divided into different groups on the basis of social class, life style, and personality characteristics, personality is the individuals consistent reactions to the world that surrounds him or her. These personality variables influence the buyer behaviour. This type of market segmentation helps for sale of motor car, ready made clothes, furniture’s etc.,

(d) Behaviour segmentation:
It is more important basis for market segmentation. Because consumer response to the market offerings are differ from product to product consumers gives importance to benefit, usage, loyalty and the occasion at the time of buying the product.

Question 3.
What are the essentials (Requisites) of sound marketing segmentation?
Company is segmenting the market by taking different factors as pre requisites. To optimize the benefits from market segmentation every company is to adopt five point criteria for segmentation. These are spelled out by professor. Martin L. Bell of Washington University USA.
These are –
(a) It is identifiable and measureable:
Market segmentation should be clearly defined. Who is in the segment? And who is outside the segment? Are two important questions to be answered before segmentation. It is essential to collect data on demographic, socio cultural, psycholographic segment members. These collected data information should permit the measurement of the size and benefits.

(b) It evidence adequate market potential:
Marketers should forecast actual or potential need of the members of segment prior to going in for market. Purchasing power, taste and preference, income, savings etc., are main factors for consideration in market segmentation.

(c) It is economically accessible:
Market segmentation is a technique used by a company to develop its market for products. Therefore there is enough scope for easy accessibility or approachability to the segment member.

(d) It reacts uniquely to marketing efforts:
Market segmentation should be meaningful and differ in their responses to marketing efforts. Because it will help in optimising the market operations by changing marketing efforts.

(e) It is relatively stable over a period of time:
Marketing segments are long range plan that project three to five years into future long term segments gives good marketing opportunities for a firm.

Question 4.
Distinguish between micro-and Macro Marketing Environment.
Micro-Marketing Environment:
The micro environment of our organisations consists of the elements which are controllable by the management.
(a) Organisation:
The organisation consists of many departments such as marketing production, finance, personnel, etc., & each department is placed under the control of manager. All departmental managers will work with co-ordination of each other. The marketing departments which is one of the important organs of the organisation has to straight line its activities.

(b) Corporate resources:
This comprises of men, material, money, machinery & management. All these are controllable & be adjusted according to marketing planning & policy. However, these factors influence the marketing environment.

(c) Marketing Mix:
Another controllable factor i§. Marketing Mix. The organisation can vary the price, or production can plan the promotion-activity according to external environment & that can have its own distribution strategy.

(d) Suppliers:
Even regarding supplier, the organisation can think of avialing the required material or labour according to its manufacturing programmes. It can adopt such a purchase policy which gives bargaining power to the organisation. Thus, the suppliers can be controlled.

(e) Employees:
Employees loyalty, sincerity, productivity & their attitude towards their job & the organisation & the behaviour can be controlled by following sound & employees oriented policies.

(f) Middlemen:
Middlemen are those who help the company in promoting & distributing the product. It can be controlled by imposing restriction on the middlemen regarding the distribution of the products.

Macro Marketing Environment:
The following are the external factors which influence the business activities.
(1) Demographic Environment:
Demographic environment refere to population structure or population characteristics like concentration & dispersion of population, rate of growth, life cycle, sex, age, education; income etc., of the population. A business firm cannot have control over population structure or characteristics.

Again the demographic structure or population structure does poi remain static. It goes oh changing. The changes in demographic structure or composition influence the behaviour of the consumers. Which, inturn, has a direct impact on the marketing plan & practice of the firm.

(2) Economic Environment:
Economic Environment refers to economic conditions. It comprises business depressions & booms, shortages, price level, money supply, take home pay of the people, rat of interest, etc.,

(3) Political & Legal Environment:
Political & Legal Environment refers to political & legal forces & conditions. Political & legal forces comprise the govt, monetary & fiscal policies, inport & export policies, customs & excise duties & numerous laws passed by the govt, for regulating the activities of business firms, & the public policies advocated by the govt. Today, political & legal environmental factors have considerable influence on the marketing activities of a business firm.

(4) Social & Cultural Environment:
Social & Cultural environment refers to Social & cultural forces. Social & Cultural environment comprises changes in life style, changing role of women, Social values, concern for ecological balance etc.

Social & Cultural environment influence the marketing activities of a business firm in the long run. To day, every business firm has Social obligation. The social marketing concept demands every business firm to pay greater attention to consumer welfare & citizen welfare.

(5) Technological Environment:
Technological environment refers to scientific & technological developments. Scientific & technological development provide Opportunities to business firms to produce & sell new products. Again, advances in science & technology have changed the life style of the people radically, & changed their consumption pattern, & have made the business firm to undertake production & sale of such products which satisfy the changing demand of the people.

(6) Competitive Environment:
Competitive environment refers to competition in the market. Competitive environment or competition includes price competition & non price competition. Competition inflences the marketing strategies of every business firm. No business firm can formulate its marketing plan & stratagies without assesing carefully the market competition. Competition influences the marketing strategies of every business concern, Particularly in relation to selection of target markets, marketing channels, product mix, promotion measures, price policy etc.

(7) Ecological Environment:
Ecological environment refers to nature & also the need for conservation of scarce natural resources & preservation of ecological balances. Ecological environment plays a very important role in the production & marketing activities of every business firm.

Ecological environment requires every business firm to satisfy not only the demands of the buyers of its products but also the wants of the society. Environment experts are vigorously advocating the conservation of natural, resources & the preservation of ecological balance.

Question 5.
Distinguish between controllable and uncontrollable environment.
Controllable Environment:
The controllable environmental forces refers to those forces which are within the control of a company. In other words, it refers to those environmental factors or forces which can be controlled by the organization. These forces include developing a sound marketing mix. That is four P’s : product, price, place and promotion.
(i) Product – A product is a bundle of utilities consisting of various product features and accompanying services.

(ii) Pricing – It is the process of determining the value of a product or service in terms of money before it is offered to the market for sale.

(iii) Promotion – Promotion includes advertising, personal selling, sales promotion arid other selling.

(iv) Place or physical distribution – It refers to making arrangements for the smooth flow of goods and services from the products to the consumers.

Uncontrollable Environment:
Uncontrollable environmental forces refers to those forces or factors which are not within the hold of the business firm. The uncontrollable forces are a company’s at side environmental aspects. A company cannot do anything to prevent it, but only to adjust for those outside or external environment. The uncontrollable forces includes demography, customer needs and desires, competition from other companies, social, political economic scientific and technological conditions.

Question 6.
Briefly explain the components of marketing mix.
In the simplest manner, the basic marketing mix is the blending of four inputs (or) submixes which form the core of the marketing system:

  • Product Mix
  • Price Mix
  • Distribution Mix
  • Promotion Mix

The outputs are optimum productivity & satisfaction.
(1) Product Mix:
Product is the thing possessing utility. It has four components –

  • Product range
  • Service after sale
  • Brand
  • Package

The product management evolues product mix in consultation with marketing manager.
Marketing Environment Short Answer Type Questions IMG 1

(2) Price Mix:
Price is the valuation placed upon the Product by the offerer. It has to cover pricing, discounts, allowances & terms of credit. It deals with Price competition.

(3) Distribution Mix:
Distribution is the delivery of the product right to consume it. It includes channels of distribution, transportation, warehousing and inventory control.

(4) Promotion Mix:
Promotion is the persuasive communication about product by the offerer to the prospect. It covers advertising personal selling, sales promotion, publicity, public relations exhibition & demonstrations used in promotion, largely it deals with non-price competition.

Financial System Long Answer Type Questions

Financial System Long Answer Type Questions

Question 1.
Explain the defects of money market. [Nov. 2012] OR Explain the features of Indian Money Market.
(i) Dichotomy:
Dichotomy i.e. existence of two markets (organized money market and unorganized money market is a major defect of the Indian money market. The unorganized money market comprises of indigenous bankers, money lenders, chit funds, nidhis, loan companies and finance brokers that do not come under the control and supervision of the RBI.

This unorganized sector is mainly concentrated in the rural areas and it does not differentiate between short term and long term finance and between the purposes of finance. This puts a limit on the RBI’s control over the money market.

(ii) Lack of Integration:
The RBI finds it difficult to integrate the organized and the unorganized money market. While the RBI can control and supervise the working of the organized sector effectively, the heterogeneous unorganized sector is out of RBI’s control. There is no uniformity in the practices and operations of the unorganized money market. Moreover, the interest rates in both the markets are also different. Thus there is lack of integration in the Indian money market.

(iii) Multiplicity in Interest Rates:
There is diversity in rates of interest in the Indian money market. This multiplicity in the interest rates is due to lack of mobility of funds from one section of the money market to another.The rates differ from institution to institution even for funds of the same duration. Although the wide differences are being narrowed down ,the existing differences do hamper the efficiency of the money market.

(iv) Absence of Organised Bill Market:
The existence of a well organized bill market is essential for effective linking up various credit agencies. It refers to a mechanism where bills of exchange are purchased and discounted by commercial banks/ financial institutions.
The bill market is not yet developed in India due to the following reasons:

  • Banks keeping large amount of cash.
  • Preference for borrowing rather than discounting bills.
  • Over dependence on cash / cheque transactions.
  • High stamp duty on usance bill, etc.

(v) Shortage of Funds:
The Indian money market is characterized by shortage of funds. Various factors like inadequate banking facilities, low savings, lack of banking habits, existence of parallel economy, etc lead to shortage of funds. Thus demand for short term funds far exceeds the supply. This results in high interest rate.
are flush, with, funds especially in urban area as people prefer to invest their money with banks rather than keeping them as deposits in the unorganized sector.

(vi) Seasonal Stringency of Money:
Since agriculture continues to play a major role in the Indian economy, farm operations do influence the demand for supply and money. Thus seasonal stringency of money and high interest rate during the busy season (November to June ) is a striking feature of the Indian money market. Also there is a wide fluctuations in the interest rates from one reason to another. However, the RBI makes attempt to reduce the fluctuations by adding money into the money market during the busy season and withdrawing the funds during the slack season.

(vii) Inadequate Credit Instruments:
The Indian money market lacked adequate short-term paper instruments till 1985-86. Only call money market and bill market existed. Also there were no specialized dealers / brokers in the money market. After 1985-86 the RBI introduced new credit instruments in the market like CDs, CPs, MMMF, etc, but they are not yet fully developed in India.

(viii) Absence of a Well-Organised Banking Sector in Rural Area:
There is a poor banking system in the rural area due to the problems of overheads and maintenance of branches.The commercial bank branches in rural area are only 40% of the total bank branches. This also hampers the development of money market in India.

(ix) Inefficient and Corrupt Management:
Faulty selection, lack of training, poor performance appraisal and faulty promotions result in inefficiency and corruption in the banking sector. This adversely affects the success and performance of money market.

Question 2.
Explain the various money market instruments.
Explain various components of money market.
The various money market instruments includes the following:

  • Call/Notice Money
  • Treasury Bills
  • Term Money
  • Certificate of Deposit
  • Commercial Papers
  • Capital Market Instruments
  • Hybrid Instruments

(a) Call /Notice-Money Market:
Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is “Call Money”. When money is borrowed or lent for more than a day and up to 14 days, it is “Notice Money”. No collateral security is required to cover these transactions.

(b) Inter-Bank Term Money:
Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/ Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.

(c) Treasury Bills:
Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.

(d) Certificate of Deposits:
Certificates of Deposit (CDs) is a negotiable money market instrument issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

(e) Commercial Paper:
CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided – (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies, (for more details visit faculty column)

(f) Capital Market Instruments:
The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc. .

(g) Hybrid Instruments:
Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc.

Question 3.
Explain the role of important players in the Indian money market.
The role of important players in the money market is discussed below:
Reserve Bank of India:

  • The Reserve bank of India is the most important player in the Indian money market.
  • The organized money market is to ensure that the levels of liquidity and short term interest rates are maintained at an optimum level so as to facilitate economic growth and price stability.
  • RBI also plays the role of a merchant banker to the government. It issues Treasury Bills and other
  • Government securities to raise funds for the government.
  • The RBI thus plays the role of an intermediary and regulator of the money market.


  • The government is the most active player and the largest borrower in the money market.
  • It raises funds to make up the budget deficit.
  • The funds may be raised through the issue of Treasury Bills (with a maturity period Of 91 day/182 day/364 days) and government securities.


  • Commercial Banks play an important role in the money market.
  • They undertake lending and borrowing of short term funds.
  • The collective operations of the banks on a day to day basis are very predominant and hence have a
  • major impact and influence on the interest rate structure and the liquidity position.

Flinancial Institutions:

  • Financial institutions also deal in the money market.
  • They undertake lending and borrowing of short-term funds.
  • They also lend money to banks by rediscounting Bills of Exchange.
  • Since they transact in large volumes, they have a significant impact on the money market.

Corporate Firms:

  • Corporate firms operate in the money market to raise short term funds to meet. their working capital requirements.
  • They issue commercial papers with a maturity period of 7 days to 1 year. These papers are issued at a discount and redeemed at face value o maturity.
  • These corporate firms use both organized and*unorganized sectors of money market.

Institutional Players:

  • They consist of mutual funds, Foreign institutional players, insurance Firms, etc.
  • Their level of participation depends on the regulations.
  • For instance the level of participation of the Flls in the Indian money market is restricted to investment in Government securities.

Discount Houses and Primary Dealers:

  • They are the intermediaries in the money market.
  • Discount houses discount and rediscount commercial bill and Treasury Bills.
  • Primary Dealers were introduced by RBI for developing an active secondary market for Government securities.
  • They also underwrite Government securities.

Question 4.
Explain different types of Classification of financial market?
Classification of financial market
Financial System Long Answer Type Questions 1
(1) Unorganised Markets:
Unorganised Markets are those where there are number of money lenders, Indigenous bankers, traders etc., who lend money to the public. Indegenous bankers also collect deposits from the public. There are also private finance companies, chit funds etc., whose activities are not controlled by the RBI.

(2) Organised Markets:
Organised markets are those where there are standardised rules and regulations governing their financial dealings. There is also a high degree of institutionalisation and instrumentalisation. These markets are subject to strict supervision and control by the RBI or other regulatory bodies.

These organised markets can be further classified into two they are:

  • Capital Market
  • Money Market.

(I) Capital Market: It is a market for financial assets which have a long or indefinite maturity. Generally, it deals with long term securities which have a maturity period of above one year.
Capital markets are diveded into:

  • Industrial securities market
  • Government securities market
  • Long term loans market.

(a) Industrial securities market:
It is a market for Industrial Securities namely, equity shares or ordinary shares, preference shares, debentures or bonds. It is a market where Industrial concerns raise their capital or debit by issuing appropriate instruments. It is diveded into.

(i) Primary markets or New issue Markets:
It is a market for new issues or new financial claims. Hence, it is also called new issue market. The primary market deals with those securities which are issued to the public for the first time. In the primary market, borrowers exchange new financial securities for long term funds. Thus, primary market facilitates capital formation. There are three ways by which a company may raise capital in a primary market.
They are:

  • Public issue
  • Rights issue
  • Private placement.

(ii) Secondary Market:
It is a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such continuous and regular market for buying and selling of securities. This market consists of all stock exchange recognised by the govt, of India.

(b) Government securities market:
It is otherwise called gilt – edged securities market. It is a market where Govt, securities – are traded. In India there are many kinds of govt, securities – short term and long term. Long term securities are traded in this market.

While short term securities are traded in the money market. Securities issued by the central govt, state govt, semi-government authorities like electricity corporations, Port trusts etc., Improvements trusts, state electricity boards. All India and state level financial institutions and public sector enterprices are dealt in this market. Government securities are in many forms.
These are generally –

  • Stock certificates or inscribed stock.
  • Promissory notes
  • Bearer Bonds which can be discounted.

(c) Long – term loans market:
Development banks and commercial banks play a significant role in this market by supplying long term loans to corporate customers. Long term loans market may further be classified into

(i) Term loans market:
In India many Industrial financing institutions have been created by govt. both at the National and regional levels to supply long term and medium term loans to corporate customer directly as well as indirectly. These development banks dominate the industrial finance in India. Institutions like IDBI, IFCI, ICICI, and other state financial corporations come under this category. These institutions meet the growing and varied long – term financial requirements of industries by supplying long term loans.

(ii) Mortgage market:
It refers to those centres which supply mortgage loan mainly to individual customers. A mortgage loan is a loan against the security of immovable property like real estate. The transfer of interest in a specific immovable property to secure a loan is called mortgage. This mortgage may be equitable mortgage or legal. Again it may be a first charge or second charge. Equitgable mortgage is created by a mere deposit of title deeds to properties as security where as in the case of a legal mortgage the title in the property is legally transfered to the lender by the borrower. Legal mortgage is less risky.

In first charge, the mortgager transfers his interest in the specific property to the mortgage as security. When the property in question is already mortgaged once to another creditor, it becomes a second charge when it is subsequently mortgaged to somebody else. The mortgage can also further transfer his interest in the Mortgaged property to another. In such a case, It is called a sub-mortgage.

(iii) Financial Guarantee Markets:
Guarantee market is a centre where finance is provided against the guarantee of a reputed person in the financial circle. Guarantee is a contract to discharge the liability of a third party in case of his default. Guarantee acts as a security from the creditor’s point of view.
Though there are many types of guarantees, the common forms are,

  • Performance Guarantee ; It covers the payment of earnest money, retention money, advance payments, non-completion of contracts etc.
  • Financial Guarantee : It covers only financial contracts.

(II) Money market:
It is a market for dealing with financial assets and securities which have a maturity period of upto one year. In other words, it is a market for purely short term funds. The money market may be subdivided into:

  • Call money market
  • Commercial bill market
  • Treasury bills market
  • Short-term loan market.

(a) Call money market:
It is a market for extremely short period loans say one day to fourteen days. So it is highly liquid. The loans are repayable on demand at the option of either the lender or the borrower. In India Call money markets are assosiciated with the presence of stock exchanges and hence, they are located in major industrial towns like Mumbai, Calcutta, etc. The special feature of this market is that the interest rate varies from day to day and even from hour to hour and centre to centre, it is very sensitive to changes in demand and supply of call money.

(b) Commercial bills market:
It is a market for Bills of exchange arising out of genuine trade transactions. In the case of credit sale, the seller may draw a bill of exchange op the buyer, the buyer accepts such a bill promising to pay at a later date specified in the bill. The seller need not wait untill the due date of the bill. Instead, he can get immediate payment by discounting the bill. In India the bill market is underdeveloped.

(c) Treasury bills Market:
It is a market for treasury bills which have ‘short-term’ maturity. A treasury bill is a promissory note or a financial bill issued by the govt, it is highly liquid because its repayment is guaranteed by the govt, it is an important instrument for short term borrowing of the govt. There are two types of treasury bills namely.

  • Ordinary or regular
  • Adhoc treasury bills properly known as ‘ad hoes’

Ordinary treasury bills are issued to the public, banks and other financial institution with a view to raising resources for the central govt, to meet its , short term financial needs. Adhoc treasury bills are issued in favour of the RBI only. They are not sold through tender or auction.

(d) Short-term loan Market:
It is a market where short – term loans are given to corporate customers for meeting their working capital requirements. Commercial banks play a significant role in this market. Commercial banks provide short – term loans . in the form of cash credit and overdraft.

Foriegn exchange Market:
It refers to tlte process of converting horhe currencies into foreign currencies and vice versa. The market where foreign exchange transactions take place is called a foreign exchange market.

Question 5.
Name and explain the financial institutions in India.
Following are the financial institutions works in India to cater the diverse financial requirements of the enterprises.
(a) All India development banks (AIDBs): It includes those development Banks which provide institutional credit to large, medium and small scale industries.

(b) Industrial development bank of India (IDBI): It is the main financial institution for industrial development in the country. It caters diversified needs of medium and large scale industries in the form of financial assistance both in direct and indirect ways

(c) Industrial finance corporation of India Ltd(IFCIL): It is oldest and first financial institutions established to provide financial assistance to industries for long term purpose.

(d) Small Industries Development Bank of India (SIDBI): It is established to give financial assistance for promotion, financing and development of small scale industries in the economy.

(e) Industrial Investment Bank of Indiaf IIBI): The main aim of this financial institution is to give credit for sick industrial units. It gives short term loans to companies to meet their fund requirements.

(f) Special finance Institutions (SFIs): SFI s are the financial institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing etc.

(g) IFCI Venture capital funds Ltd (IVCF): It is subsidiary of IFCI Ltd. It provides financial assistance by way of soft loans to promotes under its risk capital scheme. .

(h) ICICI venture funds Ltd : It is a technology venture finance company It is started to sanction project finance for new technology venture. The industrial units assisted by it are in the fields of computer, chemical drugs biotechnology, environmental engineering etc..

(i) Tourism Finance Corporation of India Ltd(TFCI): it is setup by government of India to promote the tourism industry in the country. It provides financial assistance for non- convential tourism projects.

(j) Investment institutions: It is a financial intermediaries catering the needs of small investors.

(k) Life Insurance Corporation of India (LIC): It gives financial assistance for development of infrastructure facilities like housing rural electrification water supply sewerage etc.

(l) Unit Trust of India(UTI): It mobilizes the savings of small investors and channelizes them into corporate jnvestments mainly by way of secondary capital market operations.

(m) General Insurance Corporation of India(GIC): It was formed for the purpose of superintending, controlling and carrying on the business of general insurance.

Question 6.
State the functions of secondary market?
Secondary market plays an important role in Indian financial system it performs following functions:
(a) Continuous and ready market for securities : Secondary market provides a ready and continuous market for purchase and sale of securities. Stock exchange market is a market for these listed security.

(b) Facilitates evaluation of securities : Secondary market is useful for the evaluation of industrial securities. This enables investors to know the true value of their holdings at any time

(c) Encourages capital formation : Secondary market creates the habit of saving. Investing and risk taking among the investing class. And converts their savings into profitable investment.

(d) Provides safety and security in dealings; It provides safety and security in dealings as transactions are conducted as per rule’s and regulations

(e) Regulates company management: Secondary market deals with listed securities and listed companies have to comply with rules and regulations of concerned stock exchange and work under the supervision of stock exchange authorities

(f) Facilitates public borrowings : Secondary market serves as a plat form for marketing government securities. It enables government to raise public debt easily and quickly.

(g) Provides cleaning house facility : Secondary market also provides a cleaning house facility to members. It settles the transactions among the members quickly and with ease

(h) Facilitates healthy speculation : Secondary market provides normal and healthy speculation of investors for more business in stock exchange

(i) Serves as economic barometer : Market indicates the state of health of companies and national economy. It acts as a barometer of the economic conditions

(j) Facilitates bank landing; Secondary market provides information about prices of quoted securities. Banks offer loans to consumers against corporate securities holding them. This gives conveniences to the owners of securities to transact more.

Marketing Environment Very Short Answer Type Questions

Marketing Environment Very Short Answer Type Questions

Question 1.
Define the term Consumer Behaviour.
Consumer behaviour is defined as “All psychological, social and physical behaviour of potential customers as they become aware of evaluate purchase and inform the others about product and services.”

Question 2.
Give the meaning of consumer behaviour?
Consumers behaviours includes the acts of individuals directly involved in ob- tainlng and using goods. In the buyer behaviour process individuals decide, whether, what, when, where, how and from whom to purchase goods and ser-vices. It also involves group process and in reflected by post purchase evaluation which indicates satisfaction or non satisfaction.

Question 3.
What is target marketing?
It is a process of identifying market segments, targeting one or more of these segments and developing products and marketing programmes to suit each se-lected segments.

Question 4.
Expand FMCG.
FMCG : Fast Moving Consumer Goods.

Question 5.
What do you mean by “Trade Mark”?
Trade mark is a symbol used by an organization which differentiate: product of that company.from others companies product and also it acts as salesman.

Question 6.
What is Marketing Environment.
Marketing Environment refers to forces or factors within the framework of which the marketing system is required to function. Such factors include both internal (controllable) & external (controllable) factors. But generally marketing environ-ment refers to tlie forces with in which the marketing system has to function & over which the business firm has no control or little control.

Question 7.
Differentiate between ‘Customer Satisfaction’ and Customer Delight’.
Customer satisfaction refer to a situation where the customer actual satisfaction received is equal to his expected satisfaction and when the actual amount of sat-isfaction received is more than the expected satisfaction it called as ‘customer delight.’

Question 8.
What are the attributes of a product?
The essential attributes of a product are tangibility, money value, customer satis-faction etc.

Question 9.
Give any two examples of consumer product.
The two examples of consumer product are –

  • Toothpaste
  • Pen, pencils etc.

Question 10.
What are controllable forces ? Give example.
Controllable forces refers to those forces which can be controlled by the manage-ment (ie., the firm)
Example : Marketing Mix and Employees.

Question 11.
Define market segmentation.
“Market segmentation is the act of identifying and profiling distinct groups of buyers who might require separate products and for marketing mix” Philip Kotler.

Question 12.
What is Market Segmentation?
Market segmentation means dividing a market into distinct groups of buyers each of which has one or more homogeneous characteristics.

Question 13.
Give the meaning of undifferentiated marketing?
It is an attempt to design a product and marketing programme that appeals to the large number of buyers. It relies on product differentiation to protect itself from competition. Its main aim is to show the product with superior image in the minds of people.

Question 14.
What is differentiated marketing?
Under this method company decides separate products and marketing programmes for each market segments. It main aim is to achieve good growth in sales brand identification and company name.

Question 15.
Name any two bases of market segmentation.
The two bases of market segmentation are –

  • Demographic segmentation
  • Geographic segmentation

Question 16.
What is meant by micro environment?
Micro Environment implies the factors or forces that are controllable by the company. They are supply, price, product etc.

Question 17.
What is the macro-marketing environment?
Macro Environments are the factors or forces that are uncontrollable to the company. They are Demand, competition, Buyer, supplier, Govt. Regulations etc.