Money, Banking & Financial Institutions: previous-year questions

Answer: (B) General Insurance

Insurance is of two broad kinds: life insurance, which covers the risk to human life, and general (non-life) insurance, which covers loss of or damage to property and wealth through fire, marine, motor, theft, health and liability policies. Hence loss of wealth relates to general insurance. Crop insurance (for example PM Fasal Bima Yojana, 2016) is only one branch of general insurance, and social insurance means State-backed schemes such as ESI and provident fund. Facts: general insurance was nationalised in 1972-73 under the General Insurance Corporation with four companies, National (Kolkata), New India (Mumbai), Oriental (New Delhi) and United India (Chennai); LIC was set up in 1956; the regulator IRDAI (1999) is based in Hyderabad.

Answer: (D) Apex financial institution of industrial credit

NABARD (National Bank for Agriculture and Rural Development) was set up on 12 July 1982 on the recommendation of the B. Sivaraman Committee, taking over the agricultural credit functions of the RBI and the ARDC; its head office is in Mumbai. It is the apex institution for agricultural and rural credit: it refinances cooperative banks and Regional Rural Banks, lends to State governments (including long-term loans for share capital of cooperatives), runs the Rural Infrastructure Development Fund and pioneered the SHG-Bank Linkage Programme, so A, B and C are all its functions. Industrial credit (D) is not its field: IDBI (1964) was the apex body for industrial finance and SIDBI (1990, Lucknow) serves MSMEs. Also note EXIM Bank (1982) and the National Housing Bank (1988).

Answer: (A) cash reserves with it.

As bankers' bank the RBI requires every scheduled bank to keep a part of its deposits as cash reserves with it (the Cash Reserve Ratio). Banks are not required to keep gold or foreign exchange with the RBI.

Answer: (B) Repurchase Option

'Repo' is short for repurchase (agreement or option): the RBI lends to banks against government securities that the banks agree to buy back later. The other expansions are invented.

Answer: (B) decrease.

When the RBI sells securities in the open market, banks and the public pay for them out of bank balances, so commercial banks' cash reserves fall and their lending capacity shrinks. An open market purchase would have the opposite effect.

Answer: (C) credit for hoarding of goods in short supply and speculation in the market for such goods.

Selective (qualitative) credit controls such as margin requirements and credit ceilings are aimed at stopping bank credit from financing hoarding and speculation in sensitive commodities in short supply. They are not meant to restrict credit for normal production or transport of goods.

Answer: (C) 1949

The RBI, set up as a shareholders' bank in 1935, was nationalised on 1 January 1949 under the RBI (Transfer to Public Ownership) Act, 1948. 1935 is its founding year, so (A) is the tempting wrong option.

Answer: (C) a minimum reserve of gold and foreign exchanges.

Since 1957 the RBI has issued notes under the Minimum Reserve System, keeping a minimum of ₹200 crore in gold and foreign exchange, of which at least ₹115 crore must be gold. It is not a gold-only reserve, and rupee coins or bills of exchange are not part of the minimum reserve.

Answer: (A) To maintain financial stability

As central bank the RBI's core role is monetary and financial stability — price stability, a sound banking system and orderly financial markets. Agricultural growth, banking habits and regional balance are wider development goals pursued by other institutions and policies.

Answer: (D) Taking decision regarding the use of deficit financing to close the gap between revenues and expenditures of the Government.

Deciding how much deficit financing to use is a fiscal decision taken by the Government in its Budget, not by the RBI. Changing the bank rate, conducting open market operations and acting as lender of last resort are all RBI functions.

Answer: (C) NABARD

NABARD, set up in 1982, is the apex institution for credit to agriculture and rural development, refinancing banks and promoting sustainable rural growth. SBI is a commercial bank, RBI the central bank and SEBI the securities regulator.

Answer: (B) Cash Reserve Ratio

CRR is the Cash Reserve Ratio — the share of a bank's net demand and time liabilities that it must keep as cash with the RBI. The other expansions are invented.

Answer: (B) Reserve Bank of India

The repo and reverse repo rates are policy rates set by the Reserve Bank of India, now through its Monetary Policy Committee. The Finance Ministry, CAG and SBI do not set them.

Answer: (B) State Bank of India

State Bank of India is India's largest public-sector commercial bank. The RBI is the central bank, and a State Co-operative Bank is a co-operative bank, not a commercial bank.

Answer: (C) currency with the public, demand deposits of commercial banks and time deposits of commercial banks.

Under the RBI's revised monetary aggregates (1998), $NM_2$ = $NM_1$ (currency with the public and demand deposits) plus short-term time deposits of banks, so it combines currency, demand deposits and time deposits. Currency with demand deposits alone is narrow money ($M_1$), and the other options omit a component.

Answer: (D) Autonomy to the Development Financial Institutions

The second Narasimham Committee (1998) recommended greater autonomy for public-sector banks, mergers of strong large banks, and separating the RBI's role as regulator from its ownership of banks. It did not call for autonomy for development financial institutions; it wanted them eventually converted into banks or NBFCs.

Answer: (B) 1934

The RBI Act, 1934 (sections 17 and 33 among others) lays down how the RBI holds and invests foreign exchange reserves. 1949 is the year of nationalisation and of the Banking Regulation Act, and 1999 the year of FEMA, which regulates foreign exchange transactions rather than reserve management.

Answer: (C) the Reserve Bank charges the commercial banks for lending them money.

The bank rate is the rate at which the RBI lends to (or rediscounts bills of) commercial banks for the longer term, without collateral of securities. Rates charged by banks to businesses are lending rates, and the RBI does not lend to non-bank intermediaries at the bank rate.

Answer: (B) Bombay

The Bombay Stock Exchange, founded in 1875 as the Native Share and Stock Brokers' Association, is the oldest organised stock exchange in India and Asia. The Ahmedabad and Calcutta exchanges were set up later (1894 and 1908).

Answer: (D) 2016

Answer as of 2023 — this may have changed since.

The most recent demonetisation was announced on 8 November 2016, withdrawing the legal tender status of ₹500 and ₹1000 notes. The earlier demonetisation was in 1978 (high-denomination notes), and none occurred in 1995 or 2018.