47 Short Questions with Answers on “Banking and Financial Institutions” for Commerce Students:
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1. Define the terms bank and banking.
Bank is an institution which deals in money and credit It accepts deposits from the public and grants loans and advances to those who are in need of funds for various purposes.
ADVERTISEMENTS:
Banking is an activity which involves acceptance of deposits for the purpose of lending or investing.
2. Make a list of different types of banks in India
Various types of banks are as follows:
ADVERTISEMENTS:
1. Reserve Bank of India
2. Commercial Banks
3. Industrial Banks
4. Foreign Exchange Banks
ADVERTISEMENTS:
5. Development Banks
6. Regional Rural Banks
7. Co-operative Banks
3. What do you mean by industrial banks?
Industrial Banks are corporate organisations which specialise in providing industrial capital by subscribing to the share and debenture issues of public companies. Industrial banks normally meet the long term requirements of funds for purchase of land, plant and machinery, and financing of expansion and diversification activities of industrial companies
4. State briefly the function of foreign exchange banks.
Business firms engaged in foreign trade receive and make payment through foreign currency. In order to facilitate such transactions and also help exporters and importers, there are banking institutions which primarily engage in transactions involving foreign exchange. These are known as Foreign Exchange Banks. Besides financing foreign trade, the exchange banks also render services such as acting as referees, collecting and supplying information about the foreign customers, providing remittance facilities.
5. What commercial banks? What type of services do banks provide as agent of their customers?
Commercial banks are banking institutions which accept deposits from the public and grant short term loans and advances to their customers.
Banks provide agency services, such as collection of bills, payment of insurance premium, purchase and sale of securities, etc. to the customers.
6. Explain the utility of banking services to business.
Some utilities of banking services to business are as follows:
(a) Money deposited in a bank remains safe. Precious articles too can be kept in the safe custody of banks in the lockers
(b) Banks provide credit facilities to their customers.
(c) Banks provide convenient and safe means of transferring money from one place to another and facilitate business dealings/transactions.
(d) Banks meet the financial needs of small scale business units which are located in economically backward areas
7. Describe the services of a commercial bank to the business community.
A commercial bank performs the following services to business community.
(a) Issue of letter of credit, traveller’s cheque and circular notes.
(b) Supply of trade information.
(c) Acting as a reforce as regards financial status of customers.
(d) Safe custody of important documents in safe deposits vaults (lockers) available on hire.
8. Explain the role of banking in modern society
Following are the advantages of banks in a modern society:
1. Money deposited in commercial banks can be withdrawn on demand by cheque. Payments can also be made by cheque. Thus, business firms are not required to make large payments in cash and also not required to maintain large cash balances with them.
2. Financial assistance is provided by banks by way of cash credit, overdraft, loans and advances on discounting of bills of exchange.
3. Various agency services provided by commercial banks are prompt and reliable, for all these services bank charge only a nominal fee or commission.
9. Describe the possible effects of suspension of banking activities
1. In the event of suspension of banking activities, the people would not be able to deposit their savings in banks, nor able to withdraw money from banks. Saving are then likely to decline with a corresponding increase in consumption expenditure.
2. Farmers and small business units will suffer badly if banking operations are suspended. They will be forced to go to money lenders to borrow money at high rates of interest when bank finance is not available.
3. Foreign trade will be badly affected in the absence of facilities regarding issue of letter of credit and foreign exchange transactions.
10. Do banks provide services other than accepting deposits and lending money? Discuss.
Banks provide many services other than accepting deposits and lending money. The various other services of banks are:
1. Promoting and mobilising savings of the public.
2. Providing funds to trade and industry by way of discounting bills, overdraft, cash credit facility and transfer of funds from one place to another.
3. Providing agency services to customers, such as collection of bills, payments of insurance premium, purchase and sale of securities, etc. and other general services, such as issue of travellers cheques, credit cards, locker facility, etc.
11. Write a short note on Reserve Bank of India.
In every country, the bank which is entrusted with the responsibility of guiding and regulating the banking system is known as the Central Bank. In India, Reserve Bank of India is entrusted with this responsibility. It regulates the volume of currency and credit and has powers of control and supervision overall banking institutions.
12. What are co-operative banks?
Co-operative banks in India are established under the provisions of the Co-operative Societies Act, 1912. These are organised on co-operative basis. Co-operative banks are organised both at primary and district level. A co-operative credit society at the primary level can be formed by the local people having common interest and common purposes.
13. What do you understand by development banks?
Development banks are special financial institutions which provide long-term capital to industry. These banks assist the promotion, expansion and modernisation of industries. They act as underwriters also. Development banks which have been established and functioning in India are IFCI, SFCs, IDBI, ICICI, IRBI, etc.
14. Write a short note on the functions of commercial banks.
The functions of commercial banks are divided into two categories.
(i) Primary functions,
(ii) Secondary function.
Primary functions include accepting deposits and lending money. Loans given by banks are: Short- term loans and long-term loans. Banks grant short-term loan to its customers by way of cash credit, overdraft discounting of bills.
Bank accepts deposits from the public and their customers in the form of current deposit, saving deposit, fixed deposit and under other deposit scheme. Bank grant loans to customers as demand loans and term loan.
The auxiliary services of banks are agency services and general utility services. Agency services are rendered as agent of customers whereas general utility services are rendered to the general public.
15. What are gift cheques?
Cheques printed with attractive colours and designs, which are issued by banks to the members of public to enable them to present a specific amount to a friend or relative on special occasions, are called gift cheques.
16. What type of services do banks provide as ‘Agent’ of customers? Mention any five services.
Services of bank to its customers as agent’s are:
1. Dealing in Bills of Exchange, Promissory Notes, Hundies and Drafts.
2. Issuing letter of credit, Travellers cheques and circular notes.
3. Buying, selling and dealing in bullion as well as foreign exchange and foreign bank notes.
4. Acting as ‘agent’ for clients, buying and selling shares and debentures and acting as underwriter.
5. Collection and remittance of money and extending guarantee against loans raised by customers.
17. In what ways a bank may be helpful to (a) a retired pensioner, (b) a traveller and (c) a housewife
(a) A Retired Pensioner:
Bank provides various services as collecting pension on behalf of clients is one of the important services by the bank to their customers.
(b) A Traveller:
Banks issue traveller’s cheques mainly for the convenience of travelling executives or individuals. These cheques can be encashed from the branch office of the bank at the place of visit and also used to pay for airlines booking, settling hotel bills, etc.
(c) A Housewife:
Safe custody of valuable articles can be arranged by hiring lockers in banks, etc.
18. What do you mean by non-banking services and agency services?
Non-banking Services:
Non-banking services are rendered in the interest of general public. Some of these services are issue of traveller’s cheques, gift-cheques, bank drafts, circular notes and safe custody of valuable articles and documents in bank lockers, etc.
Agency Services:
Agency services include payment of subscription, insurance premium, collection of cheques and dividends, buying and selling snares and debentures on behalf of customers.
19. How do commercial banks serve the business community in our country? Briefly explain.
(i) Banks undertake collection of book debts, bills of exchange promissory notes dividend warrants, etc., which greatly facilitate business activities.
(ii) Foreign trade activities are also greatly facilitated by banks undertaking issue of letter of credit; acceptance and payment of documentary bills, and providing financial assistance by way of pre-shipment and post-shipment credit, etc.
(iii) An important service provided by banks to individuals and business firms is that of acting as a reference.
20. Explain the methods of granting loan by bank.
The loan can be granted as:
(a) Demand loan,
(b) Term loan.
(a) Demand Loan:
Demand loan is repayable on demand. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lumpsum or as agreed with the bank.
(b) Term Loans:
Medium and long term loans are called, Term loans’. Term loans are granted for more than one year and repayment of such loans is spread over a longer period The repayment is generally made in suitable instalments of fixed amount. These loans are repayable over a period of 5 years and maximum upto 15 years.
21. What do you mean by bank overdraft? Explain the procedure for granting overdraft by bank.
Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to withdraw a specified amount over and above the credit balance in his/her account. It is a short term facility. This facility is made available to current account holders only who operate their account through cheques. Overdraft facility is generally granted by bank on the basis of a written request by the customer.
22. Differentiate between loans and advances.
A loan is granted for a specific time period. Generally commercial banks grant short-term loans. But term loans, that are loan for more than a year, may also be granted. Loans are generally granted against the security of certain assets. An advance is a credit facility provided by the bank to its customers.
It differs from loan in the sense that loans may be granted for a longer period but advances are normally granted for a short period of time. The rate of interest charged on advance varies from bank to bank.
23. Explain cash credit facility allowed by banks to customers.
A cash credit facility is an arrangement whereby the bank agrees to lend money to the borrower upto a certain limit. The bank put this amount of money to the credit of the borrower.
The borrower draws the money as and when he needs. Interest is charged only on the amount actually drawn and not on the amount placed to the credit of borrower’s account. Cash credit is generally granted on a bond of credit or certain other securities.
24. What do you mean by discounting of bills by bank?
Banks purchase the bills at face value minus interest at current rate of interest for the period of the bill. This is known as ‘Discounting of bills’. Bills of exchange are negotiable instruments and enable the debtors to discharge their obligations towards their creditors, such bills of exchange arise out of commercial transactions both in internal trade and external trade. By discounting these bills before they are due for a nominal amount, the banks help the business community.
25. Explain in brief the agency functions of a commercial bank.
The agency functions of a commercial bank are as follows:
(a) Collection and payment of cheques and bills on behalf of the customers.
(b) Collection of dividends, interest and rent, etc on behalf of customers, if so instructed by them.
(c) Purchase and sale of shares and securities on behalf of customers.
(d) Payment of rent, interest, insurance premium subscription etc. on behalf of customers, if so instructed.
(e) Acting as a trustee or executor.
26. Differentiate between primary and secondary functions rendered by bank.
Primary functions of a commercial bank include:
(a) Accepting deposits: and
(b) Granting loans and advances. Secondary functions of a commercial bank include as follows:
(i) Issuing letters of credit traveller’s cheques, circular notes, etc.
(ii) Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers.
(iii) Providing customers with facilities of foreign exchange.
(iv) Collecting and supplying business information, etc.
27. Describe briefly the various modes of acceptance of deposits by banks.
The various modes of acceptance of deposits by bank:
(i) Current Deposit:
Current deposit can be withdrawn by the depositor at any time by cheques. Current accounts do not carry any interest as the amount deposited in these accounts is repayable on demand without any restriction
(ii) Saving Deposit:
Saving deposit accounts meant for individuals who wish to deposit small amounts out of their current income. It helps in safeguarding their future and also earning interest on the savings
(iii) Fixed Deposit:
The term ‘fixed deposit’ means deposit repayable after the expiry of a specified period. Fixed deposits are most useful for a commercial bank.
(iv) Recurring Deposit:
Under this type of deposit, the depositor is required to deposit a fixed amount of money every month for a specified period of time
(v) Miscellaneous Deposits:
Bank have introduced several deposit schemes to attract deposits from different types of people, like home construction deposit scheme, sickness benefit deposit scheme, children gift plan, old age pension scheme, mini deposit scheme, etc.
28. Describe the procedure of opening and operating a current account.
Opening the Current Account: To open a current account, one has to fill up the application form giving all the information required by bank. The application must be introduced by a person known to the bank and operating current account with it. The specimen signature of the person who will operate the account must also be put on a separate card.
After completing all the formalities, the applicant is given an account number to be mentioned at the time of withdrawing money or depositing any amount in the account.
Operating the Current Account: A current account is an account which is generally opened by business people at their convenience. Money can be deposited and withdrawn at any time Money can be withdrawn only by means of cheques usually a banker does not allow any interest on this account.
29. Can a customer encash a fixed deposit receipt before the due date? Discuss.
In case a depositor requires the money before the due date, he or she makes a request to the bank for its payment. When the payment of fixed deposit is made before the due date, the depositor loses interest which is normally 1 % less compared to the rate applicable for the period.
30. Write short note on recurring deposit account.
It is one form of saving deposits. Depositors save and deposit regularly every month a fixed installment so that they are assured of sizeable amount at a later period. This will enable the depositors to meet contingent expenses. The interest earned on recurring account is higher than on the saving account.
31. What are pay-in-slips?
Pay-in-slips are printed forms with perforated counterfoils used for depositing cash or cheque. It contains information in respect of the name of the account holder, amount deposited, and the signature of the person depositing it. On the receipt of money, the cashier signs and stamps the pay-in-slip and the counterfoil is given back to the depositor which serves as proof of deposit.
32. Can we withdraw any amount in excess of the balance in current account? Discuss.
With the permission of the bank, a depositor can withdraw money in excess of what he has deposited in the bank. This facility in known as overdraft facility and is normally granted only to current account holders.
33. What do you understand by ‘secured loans’? Enumerate the types of securities generally required by banks for such loans.
Secured loans are those which are granted against the security of tangible assets, like stock in trade and immovable property.
There are various types of securities which are accepted for giving secured loans:
(a) Tangible assets such as plant and machinery, motor vehicles, etc.
(b) Document of title to goods, like Railway Receipt, Bills of Exchange, etc.
(c) Financial securities (Shares and Debentures)
(d) Life insurance policy
(e) Real estates (land, building, etc.)
(f) Fixed deposit receipt (FDR)
(g) Gold ornaments, jewellery, etc.
34. Enumerate the advantages of loans and advances raised from banks by business firms.
The advantages of loans and advances raised from banks by business firm are as follows:
(a) Loan and advances can be arranged from banks in keeping with the flexibility in business operations. Thus business may be run efficiently with borrowed funds from banks for financing its working capital requirements.
(b) Loans and advances are utilized for making payment of current liabilities, wages and salaries of employees, and also the tax liability of business.
(c) Bank loans and advances are found to be convenient as far as its repayment is concerned.
(d) Loans and advances by banks generally carry element of secrecy with it.
35. State the meanings of Term Loan. Cash Credit and Borrowing Rate.
Term Loan:
Medium-term loans and long-term loans are generally known as Term loans’. These loans are granted for more than one year for heavy repairs, expansion of units, modernisation/renovation, etc. Such loans are sanctioned against the security of permanent immovable assets.
Cash Credit:
A cash credit is an arrangement by which the customer (borrower) is allowed to borrow money upto a certain limit. This is a permanent arrangement and the borrower need not draw the sanctioned amount at once, it draws the amount as and when required.
Borrowing Rate:
On the deposits received, the bank pays interest to the depositors at a specified rate. This is known as the borrowing rate.
36. Write a short note on the Reserve Bank’s role in loan operations
The Reserve Bank manages the public debt and is responsible for the issue of new loans. The rupee loans of the Central Government are floated in the form of stock certificates and promissory notes through the Public Debt offices of the bank.
The State Governments also avail themselves of the bank’s facilities for the issue of new loans. In view of the bank’s close contacts and an intimate knowledge of the financial markets, it is in a position to advise the Government on the quantum, timing and terms of the new loans. The bank actively operates in the gilt-edged market to ensure the success of loan operation
37. Does the Reserve Bank sell treasury bills? Discuss.
The Reserve Bank sells Treasury Bills whenever necessary on behalf of the Central Government. The sale of Treasury Bills provides short-term finance to the Government and also helps to absorb any excessive liquidity in the money market Treasury bills are also rediscounted by the bank for state government’s banks and other approved bodies.
38. Briefly discuss the advisory function of the Reserve Bank.
Like all central banks, the Reserve Bank also acts as adviser to the government not only on banking and financial matters but also on a wide range of economic issues including those in the field of planning and resources mobilisation.
The Bank’s advice is sought on different aspects of formulation of the country’s five-year plans such as the financing pattern, mobilisation of resources and institutional arrangements with regard to banking and credit matters. The bank has also to tender advice to Government on various matters of international finance.
It has, of course, a special responsibility in respect of financial policies and measures concerning new loans, agricultural finance, co-operative organisation, industrial finance and legislation affecting banking and credit.
39. Describe the Reserve Bank’s regulatory and supervisory functions relating to commercial banks.
The Reserve Bank’s regulatory and supervisory functions relating to commercial banks cover their establishment {i.e., licensing), branch expansion, liquidity of their assets management and methods of working, amalgamation, reconstruction and liquidation.
The control is exercised by the bank through periodic inspections conducted by its own staff and follow-up action after the inspections, as also by calling for returns and necessary information from banks
40. Describe the functions of the Reserve Bank regarding controlled monetary expansion.
The bank has made use of both traditional and quantitative methods of credit control, and selective or qualitative controls. The primary objective of credit control can be summed up in the phrase controlled monetary expansion’. In terms of this objective, the Reserve Bank has endeavoured to do two things:
(a) To control the supply of credit so as to curb the inflationary tendencies in the economy, and
(b) To make available adequate liquidity to meet the increasing developmental requirements of trade, industry, agriculture and other sectors of the economy
41. What is the role of the Reserve Bank in agricultural credit?
The role of the Reserve Bank in agricultural credit is highly significant. The Reserve Bank of India Act envisages (a) provision of agricultural credit by the Bank through the scheduled or state co-operative banks for different purposes, and (b) setting up a special agricultural credit department to maintain the necessary staff for study and review of all questions of agricultural credit for consultation by the Government of India, the State Governments. State co-operative banks and other banking organisations.
42. What is NABARD?
The National Bank for Agriculture and Rural Development (NABARD) was established in July 1982 for the purpose of strengthening the system of rural credit and coordinating the activities of all other financial institutions engaged in financing of agriculture and rural development programme.
NABARD does not give direct loans and advances to agriculturists. It provides credits to the rural sector through the network of cooperative banks, commercial banks, RRB’s and other financial institutions. Over the years, NABARD has emerged as the most significant institution responsible for rural transformation.
43. Describe the functions of NABARD.
The main functions of NABARD are as follows:
(i) To provide short, medium and long term credit to State Co-operative Bank, Regional Rural Banks. Land Development Banks and other financial institutions approved by the RBI.
(ii) To grant long term loans to State Government for subscribing to the share capital of cooperative societies
(iii) To coordinate activities of Central and State Governments and other all India or State level institutions entrusted with the work of development of small scale industries, village industries and rural crafts
(iv) To inspect cooperative banks, RRB’s and co-operative societies.
(v) To promote research in agriculture and rural development.
(vi) To act as a refinancing agency for institutions providing finance to agricultural and rural development programmes.
44. Write a short note on Kisan Credit Card scheme.
Kisan Credit Card (KCC) scheme was introduced in 1998-99 to facilitate farmer’s access to credit from Commercial Banks and Regional Rural Banks Farmers are being provided with credit cards and passbooks.
With these credit cards, the farmers can avail the loan facilities made available by the banks upto the prescribed limits. The limits are fixed on the basis of operational land holding of the farmers, cropping pattern, scale of operations, etc.
The card is valid for three years, but is renewed on the basis of good performance and timely repayment of loans. The scheme is implemented by some selected Commercial Banks. Central and State Cooperative Banks and Regional Rural Banks.
45 (a) Give the brief introduction of SIDBI.
(b) What are the forms of financial assistance from state financial corporations?
(a) SIDBI became operational on April 2, 1990 with an initial paid up capital of Rs. 250 Crore and taking over the outstanding portfolio of IDBI relating to small scale sector held under the Small Industrial Development Fund as on March 31, 2000 amounting to Rs. 4200 crore.
(b) State financial corporations extend financial assistance in the following forms :
(i) Granting of loans or advances and subscribing to the debentures of industrial concerns, repayable within a period of not exceeding twenty years.
(ii) Underwriting the issues of stocks, shares, bonds or debentures by industrial concerns.
46. What is the main objective of UTI ? What are the advantages which UTI offers for small investors?
The main objective of the UTI is to mobilise the savings of the community and channelise them into productive corporate investments so as to provide with growth and diversification of the economy UTI offers the following advantages for small investors:
(a) Considerably reduced risk since, funds are invested in a balanced and well distributed portfolios,
(b) The benefit of expert management,
(c) A steady income,
(d) Liquidity.
47. (a) What are the functions of NABARD ? (b) What are the main features of IDBI?
(a) (i) The Bank gives long-term assistance to state Governments (Upto 20 years) for subscribing to the share capital of co-operative credit institutions.
(ii) The Bank has the responsibility of inspecting state cooperative banks and RRBS.
(b) (i) Planning, promoting and developing industries to fill vital gaps in industrial structure.
(ii) Providing technical and administrative assistance for promotion, management and expansion of industry.