"Banking and Financial Institutions" — Practice

Question 1

A commercial bank is required to hold a specified percentage of its net demand and time liabilities as cash reserves with RBI, earning no interest on this amount. This requirement is known as the:
(a) Statutory Liquidity Ratio (SLR)  (b) Cash Reserve Ratio (CRR)  (c) Bank rate  (d) Marginal Standing Facility (MSF)

Accepted Answer

Holding a percentage of net demand and time liabilities strictly as non-interest-bearing cash with RBI is the defining feature of CRR; SLR, by contrast, is held by the bank itself in cash, gold, or approved securities, not necessarily with RBI.

Answer: (b) Cash Reserve Ratio (CRR). Trap (a) confuses the custodian and asset type required under SLR. Trap (c) names a largely penal, legacy rate rather than a reserve requirement. Trap (d) names an emergency overnight borrowing window, not a standing reserve ratio.

Question 2

A bank's inclusion in which schedule of the RBI Act, 1934 confers 'scheduled bank' status, along with access to RBI facilities such as bank-rate borrowing and clearing-house membership?
(a) Second Schedule of the RBI Act, 1934  (b) First Schedule of the Banking Regulation Act, 1949  (c) Companies Act, 2013, Schedule III  (d) Third Schedule of the RBI Act, 1934

Accepted Answer

Scheduled bank status specifically comes from inclusion in the Second Schedule of the RBI Act, 1934, once a bank meets RBI's minimum paid-up capital and reserve requirements.

Answer: (a) Second Schedule of the RBI Act, 1934. Trap (b) names the wrong statute entirely — the Banking Regulation Act governs banking operations, not scheduled status. Trap (c) references an unrelated corporate-law schedule. Trap (d) names a real schedule of the RBI Act but not the one governing scheduled-bank status.

Question 3

Regional Rural Banks, established under the RRB Act, 1976, are typically jointly owned by the central government, a sponsor public sector bank, and the concerned state government in approximately what ratio?
(a) 60 : 20 : 20  (b) 40 : 40 : 20  (c) 50 : 30 : 20  (d) 50 : 15 : 35

Accepted Answer

The standard RRB ownership structure splits capital roughly 50% central government, 15% sponsor public sector bank, and 35% state government.

Answer: (d) 50 : 15 : 35. Traps (a), (b), and (c) all invent plausible-sounding but incorrect ratios that don't match the RRB Act's actual ownership structure.

Question 4

Which apex institution, established in 1990, has the specific mandate of financing, promoting, and developing India's Micro, Small and Medium Enterprises (MSME) sector?
(a) NABARD  (b) National Housing Bank (NHB)  (c) SIDBI  (d) EXIM Bank

Accepted Answer

SIDBI (Small Industries Development Bank of India), established in 1990, is the apex refinancing and development institution specifically mandated for the MSME sector.

Answer: (c) SIDBI. Trap (a) names the institution mandated for agriculture and rural credit instead. Trap (b) names the apex refinancing institution for housing finance companies. Trap (d) names the institution mandated for financing India's foreign trade.

Question 5

A bill of exchange, as defined under the Negotiable Instruments Act, 1881, differs from a promissory note in that it:
(a) Involves three parties — drawer, drawee, and payee — and is an unconditional order rather than a promise  (b) Involves two parties — maker and payee — and is an unconditional promise  (c) Involves four parties, including a mandatory guarantor  (d) Requires no signature from any party to be valid

Accepted Answer

A bill of exchange is an unconditional written order (not a promise) signed by the drawer, directing the drawee to pay the payee — three distinct parties. A promissory note, by contrast, involves only two parties (maker and payee) and is a promise, not an order.

Answer: (a). Trap (b) actually describes a promissory note, the instrument the question contrasts against. Trap (c) invents a guarantor requirement that doesn't exist in the Act's definition. Trap (d) is factually wrong — both instruments require the relevant party's signature to be valid.

Question 6

A cheque bearing two parallel transverse lines across its face, with the name of a specific bank written between them, restricting collection to that named bank alone, is an example of:
(a) A general crossing  (b) A bearer cheque  (c) An open (uncrossed) cheque  (d) A special crossing

Accepted Answer

Naming a specific bank between the two transverse lines, so that only that bank can collect payment on the cheque, is precisely what defines a special crossing; a general crossing uses the same two lines but names no bank, routing payment through any bank instead.

Answer: (d) Special crossing. Trap (a) describes the crossing type that specifically omits a named bank. Traps (b) and (c) both describe cheques with no crossing-based restriction at all, the opposite of what the question describes.

Question 7

Mutual funds, stock exchanges, and market intermediaries in India are primarily regulated by:
(a) RBI  (b) SEBI  (c) IRDAI  (d) Ministry of Corporate Affairs, directly

Accepted Answer

SEBI, established with statutory powers under the SEBI Act, 1992, regulates India's securities markets — mutual funds, stock exchanges, depositories, and market intermediaries — while RBI's regulatory scope covers banks and NBFCs, and IRDAI covers the insurance sector.

Answer: (b) SEBI. Trap (a) misassigns this regulatory scope to the central bank. Trap (c) misassigns it to the insurance regulator. Trap (d) invents a direct regulatory role for a ministry rather than the statutory regulator actually responsible.

Question 8

Payments banks, a differentiated banking licence category introduced by RBI from 2014-15, are specifically restricted from:
(a) Accepting savings deposits  (b) Issuing RuPay debit cards  (c) Extending loans and advances  (d) Offering fund-transfer and remittance facilities

Accepted Answer

Payments banks can accept deposits (subject to a per-customer ceiling), issue debit cards, and provide remittance services — but lending is the one core banking activity they are specifically barred from, which is exactly what distinguishes them from small finance banks.

Answer: (c) Extending loans and advances. Traps (a), (b), and (d) all describe activities payments banks ARE permitted to carry out, the opposite of what the question asks.

Question 9

Dishonour of a cheque due to insufficient funds, under Section 138 of the Negotiable Instruments Act, 1881, is treated as:
(a) A purely civil matter, remediable only through a recovery suit  (b) Automatically void, requiring no further legal action by the payee  (c) Punishable only by a fine, with no provision for imprisonment  (d) A criminal offence, carrying possible imprisonment and/or a fine, subject to the statutory notice procedure being followed

Accepted Answer

Section 138 specifically criminalises cheque dishonour for insufficient funds (once the payee follows the statutory notice-and-repayment procedure), making it punishable with imprisonment up to two years, a fine up to twice the cheque amount, or both — not merely a civil recovery matter.

Answer: (d). Trap (a) understates the provision, which is criminal, not purely civil. Trap (b) invents an automatic-void outcome the Act does not provide for. Trap (c) understates the available penalty by omitting the imprisonment provision.

Question 10

When RBI sells government securities outright in the open market, the immediate effect on banking-system liquidity is:
(a) An injection of liquidity into the banking system  (b) A withdrawal of liquidity from the banking system  (c) No change in liquidity, only in interest rates  (d) An automatic reduction in the repo rate

Accepted Answer

Selling government securities absorbs cash from buyers (typically banks), directly withdrawing liquidity from the banking system; a purchase of securities would instead inject liquidity by paying cash out to sellers.

Answer: (b). Trap (a) describes the effect of an OMO purchase, the opposite transaction. Trap (c) wrongly claims no liquidity effect, when liquidity impact is precisely the point of an OMO. Trap (d) confuses OMOs with a separate policy-rate decision, which OMOs do not automatically trigger.

Question 11

The Marginal Standing Facility (MSF), introduced by RBI in 2011, primarily allows a bank facing a sudden liquidity shortfall to:
(a) Deposit its excess overnight funds with RBI at the reverse repo rate  (b) Access unlimited interest-free credit from RBI with no collateral  (c) Borrow overnight from RBI against government securities, generally at a rate above the repo rate  (d) Temporarily suspend its SLR maintenance requirement altogether

Accepted Answer

MSF is specifically an emergency overnight borrowing window against government securities, used when a bank's shortfall exceeds what ordinary repo borrowing covers, typically priced above the repo rate to keep it a last-resort facility rather than a routine one.

Answer: (c). Trap (a) describes the reverse repo facility, the opposite transaction direction. Trap (b) invents an interest-free, collateral-free facility that does not exist. Trap (d) invents a suspension of SLR that MSF does not provide.

Question 12

RBI's Priority Sector Lending (PSL) norms mandate banks to direct a specified share of net bank credit toward sectors such as:
(a) Agriculture, MSMEs, export credit, housing, and weaker sections  (b) Large corporate borrowers and commercial real estate  (c) Foreign institutional portfolio investment  (d) Government securities purchases by the bank itself

Accepted Answer

PSL exists precisely because sectors such as agriculture, MSMEs, export credit, housing, education, and weaker sections would otherwise struggle to access adequate formal credit on purely commercial terms, so RBI mandates a defined share of credit toward them.

Answer: (a). Trap (b) names segments with strong independent access to commercial credit, the opposite of PSL's target. Traps (c) and (d) both describe activities unrelated to directed lending toward underserved sectors.

Practice — "Banking and Financial Institutions"

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