Financial Institutions Short Answer Type Questions

Question 1.
Write a note on Exim Bank.
Answer:
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.

Capital:
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.
Answer:
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.
Answer:
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.
Answer:
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?
Answer:
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.
Answer:
(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.
Answer:
(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.
Answer:
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.
Answer:
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.
Answer:
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.

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?
Answer:
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.
Answer:
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.
Answer:
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.
Answer:
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.
Answer:
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.
Answer:
(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
Answer:
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?
Answer:

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?
Answer:
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 3^rd 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?
Answer:
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.

Characteristics:

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.

Characteristics:

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?
Answer:
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.