Dibrugarh University Solved Question Papers - Indian Banking System (May' 2014)

2014 (May)
Course: 404
The figures in the margin indicate full marks for the questions.
1.    Write true or false :                                                                                                         1x4=4
a)      Overdraft facility is regularly granted by bank.                                            False
b)      Punjab National Bank was nationalized in the year 1980.        False, it was nationalised in 1969.
c)       Underwriting is a primary function of capital market.               True
d)      Factoring is a method of raising long-term finance.                   False, Short term
2.    Answer the following questions :                                                                             1x4=4
a)      What was the previous name of the State Bank of India?                      Imperial Bank of India
b)      In which year ‘social control over banks’ was imposed?                          1967
c)       Name one private sector bank.                                         ICICI
d)      Write the full form of NDTL.                                Net Demand and Time liabilities
3.    Write short notes on (any four) :                                                                              4x4=16
a)      Scheduled Bank
b)      Cooperative Bank

c)       Retail Banking
d)      SLR
e)      Listing of securities
f)       ATM
Ans: a) Scheduled Bank: A scheduled bank means a bank included in the second schedule of the Reserve Bank of India Act, 1934. A bank is included in this schedule if, i.e.
1. It is carrying on the business banking in India.
2. Its paid-up capital and reserves are not less than Rs. 5 lakhs.
3. It is:
i) A state cooperative bank
ii) A company as defined in the Companies Act of 1956.
iii) An institution notified be the central government in this behalf
iv) A corporation or company incorporated be, or under any law in force in any place outside India.
b) Cooperative Bank: Cooperative Banks are those banks which are run by following cooperative principles of service motive. Their main motive is not profit making but to help the weaker sections of the society. Some examples of cooperative banks in India include Central Cooperative Banks, State Cooperative Banks.
Cooperative banks are a part of the set of institutions, which are engaged in financing rural and agriculture development. The other institutions in this set include the RBI, NABARD, commercial banks and regional rural banks, cooperative banking is small-scale banking carried on a no profit, no loss basis for mutual cooperation and help. Cooperative banks were assigned the important role of delivering of fruits of economic planning at the grass roots level. Cooperative banking structure is viewed as a vehicle for democratization of the Indian financial system. They were conceived to supplant moneylender and indigenous bankers by providing adequate short-term and long term institutional credit at reasonable rates of interest.
c) Retail Banking: Retail banking is a major form of commercial banking but mainly targeted to consumers rather than corporate clients. It is the method of banks' approach to the customers for sale of their products. The products are consumer-oriented like offering a car loan, home loan facility, financial assistance for purchase of consumer durables, etc. Retail banking therefore has large customer-base and hence, large number of transactions with small values. It may therefore be cost ineffective in a highly competitive environment. Most of the Rural and semi-urban branches of banks, in fact, do retail banking. In the present day situation when lending to corporate clients lead to credit risk and market risk, retail banking may eliminate market risk. It is one of the reasons why many a wholesale bankers like foreign banks also prefer to go for consumer financing albeit for marginally higher net worth individual.
d) Statutory Liquidity Ratio: Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers.  Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as % of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. The maximum limit of SLR is 40% and minimum limit of SLR is 23% In India.
If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that particular day. But, according to the circular, released by the Department of Banking Operations and Development, Reserve Bank of India; if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5% per annum above the Bank Rate.
e) Listing of Securities: A company, desirous of listing its securities on the Exchange, shall be required to file an application, in the prescribed form, with the Exchange before issue of Prospectus by the company, where the securities are issued by way of a prospectus or before issue of 'Offer for Sale', where the securities are issued by way of an offer for sale.  The company shall be responsible to follow all the requirements specified in the Companies Act, the listing norms issued by SEBI from time to time and such other conditions, requirements and norms that may be in force from time to time and included hereafter in these Bye-laws and Regulations to make the security eligible to be listed and for continuous listing on the Exchange. The Exchange may grant approval to the issuer for any security sought to be listed on the Exchange on completion of the listing conditions, requirements and norms by the issuer, as may be specified by the Exchange from time to time. Such security shall be called listed security.
f) ATM: An automated teller machine or automatic teller machine (ATM), is a Computerized telecommunications device that provides the clients of a financial Institution with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller.
ATM cards are the most convenient form of withdrawing money. It is a magnetic card having a secret PIN ( Personal Identification Number) which is kept to be confidential by the user to prevent it from misuse. One can easily get money withdrawal by simply inserting ATM cards into ATM with confidential pin code. These cards are also known as ATM- CUM DEBIT card. Nowadays ATM is serving more than just withdrawing machines. A minimum balance of Rs.1000 is compulsory to withdraw. ATM card of any bank can be access in any bank’s ATM.
4.    (a) What do you understand by Regional Rural Bank? Discuss its characteristics.                       3+8=11
Ans: Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural / semi-urban areas and grant loans and advances mostly to small and marginal farmers, agricultural laborers and rural artisans. The area of operation of RRBs is limited to the area as notified by Government of India covering one or more districts in the State.
The Regional Rural Banks (RRBs) have been set up to supplement the efforts of cooperative and commercial banks to provide credit to rural sector. The following were the reasons or need set up the RRBs:
1. To free the rural poor, small and marginal farmers from the clutches of money lenders
2. To provide credit to small farmers, marginal farmers, rural artisans, landless laborers who do not fulfill the criterion of creditworthiness as per the banking principles.
3. To provide banking services to the rural community at a relatively lower cost by adopting a different staffing pattern, wage structure and banking policies.
Salient Features of Regional Rural Banks:
The salient features of regional rural banks are as follows:
(i) The regional rural banks combine the local feel and familiarity with rural problems which the co-operatives possess and the degree of organisation ability to mobilise deposits, access to central money market and modernised out look which the commercial banks have.
(ii) Every rural banks will operate in a limited area or region comprising of one or more districts in a State. Each of its branches will serve a compact group of villages having a population of 5000 to 20,000. The area should be comparatively backward or a tribal area or where coverage by commercial banks and co-operatives is relatively poor. The area chosen should have a real potential for development and should be poised for a break-through once the flow of credit is assured.
(iii) The Regional Rural Banks will grant loans and advances mainly to small and marginal farmers, agricultural labourers, small artisans and small entrepreneurs engaged in productive activities in their area of operation. The repaying capacity of the borrower over a reasonable period of time would be the basis for sanctioning the loans.
(iv) These banks will adopt the pattern of operations to suit their requirements. To start with a branch may be managed by a manager, an Agriculture Officer, a clerk-cum-cashier and a peon.
(v) The forms and procedures for the operations of rural banks will be very simple. All the business would be conducted in the regional languages. Forms would be filled up on behalf of the loanees by the employees of the banks themselves so that brokers and intermediaries may not exploit them.
(vi) The rates of interest charged by the Regional Rural Banks will be comparable with those charged by the co operatives.
(b) Discuss about the organization and management of Reserve Bank of India. 5+6=11
Ans: The Reserve Bank was set up as corporate body. The organizational structure of the Reserve Bank is provided by the Reserve Bank of India Act, 1934. It comprises of the: (a) Central Board and (b) Local Boards.
Central Board: The Central Board of Directors is the supreme governing body of the Bank. It consists of 20 members. The members include the following:
1)      A Governor and not more than four Deputy Governors to be appointed by the Central Government.
2)      Four Directors to be nominated by the Central Government, one each from the four local boards.
3)      Ten Directors to be nominated by the Central Government. They are experts from the fields of business, industry, finance and co-operation.
4)      One Government Official (Secretary, Ministry of Finance) to be nominated by the Central Government.
The power of the Board vests with the Governor who is the Chief Executive Officer of the Bank. The Governor has the responsibility of directing the affairs and business of the Bank. The Governor and Deputy Governors hold office for a period of 5years and are eligible for the reappointment. The Governor in his work is assisted by four Deputy Governors and four Executive Directors. The executive directors are not the members of the Central Board but attend Board meetings by invitation. They are subordinate to Deputy Governors.
Local Boards: Apart from Central Board of Directors, four Local Boards are constituted representing each area specified in the first schedule to the Act. There is a Local Board in Eastern, Western, Northern and Southern regions of the country with headquarters at Kolkata, Mumbai, New-Delhi and Chennai.
Local Board consists of five members, each appointed by the Central Government. In each Local Board, a Chairman is elected from amongst the members. The members of the Local Board hold office for a period of four years and are eligible for reappointment.
The internal organisational set up of the Bank has been modified and expanded from time to time in order to cope with the increasing volume and range of Bank’s activities. In order to perform its various functions, the Bank has been divided and sub divided into a large number of departments. Apart from banking and issue departments, there are at present 20 departments and three training establishments at the central office of the bank.
DEPARTMENTS OF THE RBI: To ensure smooth and efficient functioning of the Bank the RBI has been divided and sub-divided into various department which are as follows:
1.       Issue department: The issue department is concerned with the proper and efficient management of the note issue.
2.       Banking department: The banking department is responsible for providing the banking services to the Government and to the banks.
3.       Exchange control department: The exchange control department is concerned with the purchase and sale of foreign exchange and maintaining stability in foreign exchange rates.
4.       Department of banking operations and development: This department is entrusted with the responsibility of the supervision, control and development of the banking system in the country.
5.       Agricultural credit department: This department looks into the problems of agricultural sector. It provides facilities of rural credit to state governments and state cooperative societies.
6.       Department of non-banking companies: This department administers and controls as well as regulates working of non banking financial companies.
7.       Legal department: It renders legal advice on various matters referred to it by the bank.
8.       Inspection department: It carries out internal inspection of the offices and department of the banks.
9.       Premises department: It is mainly concerned with the construction and maintenance of buildings for the Bank’s office, training institutions and staff quarters.
10.   Reserve Bank and India service board: It is concerned with conducting of examination/interviews for the selections and promotion of staff in the RBI.
11.   Department of accounts and expenditure: It maintains various records relating to the receipts and expenditure of RBI.
12.   External investment and operations: It undertakes investment into the securities of corporate sector or Government.

5.    (a) Explain the merits and demerits of unit banking.                                              6+6=12
Ans: Unit Banking – Introduction, Merits and Demerits
Unit Bank is a type of bank under which the banking operations are carried by a single branch with a single office and they limit their operations to a limited area. Normally, unit banks may not have any branch or it may have one or two branches. This unit banking system has its origin in United State of America (USA) and each unit bank has its own shareholders and board of management.
According to Shapiro, Soloman and White,” An independent unit bank is a corporation that operates one office and that is not related to other banks through either ownership or control.”
Advantages of Unit Banking: Unit banking system has the following advantages:
1. Easy Management: The management and control of unit banks is much easier and effective due to the small size and operations of the banks.  There are less chances of fraud and irregularities in the financial management of the unit banks.
2. Localised Banking: Unit banking is localized banking. The unit bank has the specialised knowledge of the local problems and serves the requirements of the local people in a better manner than branch banking. Since the bank officers of a unit bank are fully acquainted with the local needs, they cannot neglect the requirements of local development.
3. Quick Decision: A great advantage of unit banking is that there is no delay of any kind in taking decisions on important problems concerning the unit bank.
4. No Monopolistic Tendencies: Unit banks are generally of small size. Thus, there is no possibility of generating monopolistic tendencies under unit banking system.
5. Promotes Regional Balance: Under unit banking system, there is no transfer of resources from rural and backward areas to the big industrial commercial centres. This tends to reduce regional in balance.
6. Initiative in Banking Business: Unit banks have full knowledge of and greater involvement in the local problems. They are in a position to take initiative to tackle these problems through financial help.
7. Flexibility in operation: The unit banks are more flexible. The manager of the unit bank can use his discretion and arrive at quick decision.
8. No Inefficient Branches: Under unit banking system, weak and inefficient branches are automatically eliminated. No protection is provided to such banks.
9. No diseconomies of Large Scale Operations: Unit banking is free from the diseconomies and problems of large-scale operations which are generally experienced by the branch banks.
Disadvantages of Unit Banking: The following are the disadvantages of unit banking system:
1. Limited Scope: The scope of unit banking is limited. They do not get the benefits of large scale operations.
2. No. Distribution of Risks: Under unit banking, the bank operations are highly localised. Therefore, there is little possibility of distribution and diversification of risks in various areas and industries.
3. Inability to Face Crisis: Limited resources of the unit banks also restrict their ability to face financial crisis. These banks are not in a position to stand a sudden rush of withdrawals.
4. Lack of Specialization: Unit banks, because of their small size, are not able to introduce, and get advantages of, division of labor and specialization. Such banks cannot afford to employ highly trained and specialized staff.
5. Operates only in urban areas and big towns: Unit banks, because of their limits resources, cannot afford to open uneconomic banking business is smaller towns and rural area. As such, these areas remain unbanked.
6. Costly Remittance of Funds: A unit bank has no branches at other place. As a result, it has to depend upon the correspondent banks for transfer of funds which is very expensive.
7. Difference in Interest Rates: Since easy and cheap movement of does not exist under the unit banking system, interest rates vary considerably at different places.
8. Local Pressures: Since unit banks are highly localised in their business, local pressures and interferences generally disrupt their normal functioning.
9. Undesirable Competition: Unit banks are independently run by different managements. This results in undesirable competition among different unit banks.
(b) Distinguish between :
(a) Branch Banking and Unit Banking
The difference between branch banking and unit banking are as follows:
Branch Banking
Unit Banking
1. Operate
Under branch banking a big bank with a single institution and under single ownership operates through a network of branches.
Under unit banking an individual bank operators through a single office.
2. Decision
There may be undue delay to take the decision centrally in branch banking.
The unit banking, the bank can take the decision quickly.
3. Risk
Risk can be spread geographically by the system of branch banking.
The risk cannot be spread geographically this unit banking system.
4. Managerial costs
Managerial costs are high in Branch Banking system.
Managerial cost is comparatively less in Unit Banking.
5. Funds
Funds are transferred from one branch to another.
Funds are allocated in one branch and no support of other branches.
6. Deposits and assets
Deposits and assets are diversified, scattered and hence risk is spread at various places.
Deposits and assets are not diversified and are at one place, hence risk is not spread.
7. Specialisation
Division of labour is possible and hence specialisation possible.
Specialisation not possible due to lack of trained staff and knowledge
8. Rate of interest
Rate of interest is uniformed and specified by the head office or based on instructions from RBI.
Rate of interest is not uniformed as the bank has own policies and rates.

(ii) Universal and Regional Banking.
Difference between Regional Bank and Universal Bank
Regional Bank
Universal Bank
1. Objective
Its main aim is to provide adequate and timely credits to small borrowers in rural and semi-urban areas.
Its main objective is to meet working capital requirements of business houses and provide term loans for developmental
2. Customers
It deals mainly with small borrowers.
It deal with individual customers as well as big corporate customers.
3. Area of operation
Regional banks have particular operational area.
Universal banks do not have such limitations.
4. Services
It offers only banking services to its customers.
It offers both banking and financial services.
5. Finance
Regional banks are mainly financed by development banks.
These banks are not financed by development banks.

6.    (a) Explain the major achievements of nationalized banks.                                                         11
Ans: Achievements of Nationalized Banks
A banking revolution occurred in the country during the post-nationalization era. There has been a great change in the thinking and outlook of commercial banks after nationalization. There has been a fundamental change in the lending policies of the nationalized banks. Indian banking has become development-oriented. It has changed from class banking to mass-banking or social banking. This system has improved and progressed appreciably.
Various achievements of banks in the post-nationalization period are explained below:
1)      Branch Expansion: Initially, the banks were conservative and opened branches mainly in cities and big towns. Branch expansion gained momentum after nationalization of top commercial banks. This expansion was not only in urban areas but also in rural and village areas.
2)      Expansion of Bank Deposits: Since nationalization of banks, there has been a substantial growth in the deposits of commercial banks. Thus bank deposits had increased by 200 times. Development of banking habit among people through publicity led to increase in bank deposits.
3)      Credit Expansion: The expansion of bank credit has also been more spectacular in the post-bank nationalization period. At present, banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before.
4)      Investment in Government Securities: The nationalized banks are expected to provide finance for economic plans of the country through the purchase of government securities. There has been a significant increase in the investment of the banks in government and other approved securities in recent years.
5)      Advances to Priority Sectors: An important change after the nationalization of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalization of banks to extend credit facilities to the borrowers in the so far neglected sectors of the economy. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business. The bank lending to priority sector was, however, not uniform in all states.
6)      Social Banking - Poverty Alleviation Program: Commercial banks, especially the nationalized banks have been participating in the poverty alleviation Program launched by the government.
7)      Differential Interest Scheme: With a view to provide bank credit to the weaker sections of the society at a concessional rate the government introduced the “Differential interest rates scheme” from April 1972. Under this scheme, the public sector banks have been providing loans at 4% rate of interest to the weaker sections of the society.
8)      Growing Importance of Small Customers: The importance of small customers to banks has been growing. Most of the deposits in recent years have come from people with small income. Similarly, commercial banks lending to small customers has assumed greater importance.
9)      Diversification in Banking: The changes which have been taking place in India since 1969 have necessitated banking companies to give up their conservative and traditional system of banking and take to new and progressive functions. Globalization: The liberalization of the economy, inflow of considerable foreign investments, frequency in exports etc., have introduced an element of globalization in the Indian banking system.
10)   Profit making: After nationalization, banks are making profits in addition to achieving economic and social objectives.
11)   Safety: The government has given importance to safety of the banks. The RBI exercises tight control over banks and safeguards depositors interest
12)   Advances under self-employment scheme: Public sector banks play a significant role in promoting self employment through advances to unemployed through various schemes of the government like IRDP,JGSY, etc
(b) Write an explanatory note on ‘investment policy of Indian commercial banks’.                         11
Ans: Investments by Banks and Its principles
Investment: The term investment means employment of funds to buy an asset. Here investment means employment of funds by the banks to buy securities from the market. The securities which are purchased by the banker from the market includes:
a)      Government securities: These are the securities which are issued by the governments to raise funds. These securities are the safest of all securities because these are guaranteed by the government. Government securities may be of three types: (i) Stock, (ii) Bearer bonds and  (iii) Promissory notes.
b)      Semi-government securities: These are the securities which are issued by semi-govt. organisations like Municipal Corporations, Port Trusts, State Financial Institutions etc and these securities include debentures or bonds.
c)       Industrial securities: There are the securities which are issued by industrial or business concerns. Bank invests a small percentage of its funds in the shares and debentures issued by these industrial concerns.
Besides these securities, banks also invest in fixed deposits, units and capital of various financial institutions. However, amongst all these, a marked preference of the banker is noted in favour of government and semi-government securities. Investment by banks in these securities constitutes the “third line of defence” of the banks.
Principles of Sound Investment: Banks are one of the genuine investors in the securities market. Banks invest in the market in the hope of earning some return. However the investment of funds by banks involves borrowed funds and hence their prime concern is the safety of the funds invested. A banker therefore select the securities very carefully and follow the following principles of sound investments:
1)      Safety of principal: A banker deals in borrowed funds and therefore his main consideration is safety of principal invested in securities. The banker has to ensure that the principal invested in securities. The banker has to ensure that the principal amount invested by him remain safe. The safety of investments depend on the solvency and ability of the issuing authorities to honour their commitment made to the investors. The government and semi-government securities are the safest securities because they are guaranteed by the government.
2)      Price stability: The price of security selected by the banker should remain stable. The safety of investments depends on the stability in the prices of securities. Banker is not a speculator and hence his object of buying security should not be to gain by a possible rise in the price of securities which are liable to wide fluctuations in their prices and should prefer those securities whose prices remain fairly stable over a period of time. The Prices of government securities remain stable and do not fluctuate.
3)      Marketability or liquidity: The primary objective of buying securities by the banker is to earn income and at the same time maintain his liquidity position. Thus, the banker should see that the security in which he invests his funds possesses a ready market i.e. they can be sold in the market without loss of time and money. Marketability of securities ensure liquidity of investments Government and semi-government securities are highly liquid as they have a ready market.
4)      Profitability of yield: After ensuring the safety of the principal money invested in securities, the banker should consider the returns from the investments. In other words, the banker should not give undue importance to higher yields at the cost of safety. The banker should not expect windfall profit, because high profit may bear the germ of loss.
5)      Diversification of Investment: The banker should diversify the risk involved in investment by investing in wide variety of securities issued by wide variety of business enterprises belonging to different trade and industry.
6)      Refinance: To ensure the liquidity of his investments the banker has to see that the security is eligible to obtain refinance from the Central Bank and other refinancing institutions.
7)      Duration: In addition to the above factor, a banker also considers the duration and denomination of security and its future earnings prospects.
                In conclusion, it may be said that for a banker the government and semi-government securities are most ideal for investment of funds. Government securities with virtually no risks, have a ready market, are eligible for refinance and bring reasonably good return.
7.    (a) Discuss the various money market instruments.                                                                                        11
Ans: MONEY MARKET INSTRUMENTS (Constituents) or Structure of Indian money Market
The entire money market can be divided into two parts. They are
a)      Organised money market
b)      Unorganized money market.
Organised money markets are also known as authorised money market and unorganized money markets are known as unauthorized money market. Both of these components comprises off several components which are illustrated below with the help of a chart:

Structure of Indian Money Market

After studying above organizational chart of the Indian money market it is necessary to understand various components or sub markets within it. They are explained below.
1.       Call Money:  Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and up to 14 days it is called 'Notice money' otherwise the amount is known as Call money'. Intervening holidays and/or Sundays are excluded for this purpose. No collateral security is required to cover these transactions
Features of Call Money:
i.         The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of money.
ii.        Commercial banks, Co-operative Banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements.
iii.      Specified All-India Financial Institutions, Mutual Funds and certain specified entities are allowed to access Call/Notice money only as lenders.
iv.      It is a completely inter-bank market hence non-bank entities are not allowed access to this market.
v.        Interest rates in the call and notice money market are market determined.
2.       TREASURY BILLS MARKET: In the short term, the lowest risk category instruments are the treasury bills. RBI issues these at a prefixed day and a fixed amount. These are four types of treasury bills.
i.         14-day Tbill- maturity is in 14 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. 100 crores.
ii.        91-day Tbill- maturity is in 91 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. 100 crores.
iii.      182-day Tbill- maturity is in 182 days. Its auction is on every alternate Wednesday (which is not a reporting week). The notified amount for this auction is Rs. 100 crores.
iv.      364-Day Tbill- maturity is in 364 days. Its auction is on every alternate Wednesday (which is a reporting week). The notified amount for this auction is Rs. 500 crores.
A considerable part of the government's borrowings happen through Tbills of various maturities. Based on the bids received at the auctions, RBI decides the cut off yield and accepts all bids below this yield.
3. INTER-BANK TERM MONEY: Interbank market for deposits of maturity beyond 14 days and up to three months is referred to as the term money market. The specified entities are not allowed to lend beyond 14 days. The development of the term money market is inevitable due to the following reasons
i.         Declining spread in lending operations
ii.        Volatility in the call money market
iii.      Growing desire for fixed interest rates borrowing by Corporates
iv.      Move towards fuller integration between forex and money market
v.        Stringent guidelines by regulators/management of the institutions
4. CERTIFICATE OF DEPOSITS: After treasury bills, the next lowest risk category investment option is the certificate of deposit (CD) issued by banks and FIs.  CDs are issued by banks and FIs mainly to augment funds by attracting deposits from Corporates, high net worth individuals, trusts, etc. the issue of CDs reached a high in the last two years as banks faced with reducing deposit base secured funds by these means. The foreign and private banks, especially, which do not have large branch networks and hence lower deposit base use this instrument to raise funds.
The rates on these deposits are determined by various factors. Low call rates would mean higher liquidity in the market. Also the interest rate on one-year bank deposits acts as a lower barrier for the rates in the market.
5. INTER-CORPORATES DEPOSITS MARKET: Apart from CPs, Corporates also have access to another market called the inter- Corporates deposits (ICD) market. An ICD is an unsecured loan extended by one Corporates to another. Existing mainly as a refuge for low rated Corporates, this market allows funds surplus Corporates to lend to other Corporates. Also the better-rated Corporates can borrow from the banking system and lend in this market. As the cost of funds for a Corporates in much higher than a bank, the rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent in high. The ICD market is not well organised with very little information available publicly about transaction details.
6. COMMERCIAL PAPER MARKET (CP): CPs is negotiable short-term unsecured promissory notes with fixed maturities, issued by well rated companies generally sold on discount basis. Companies can issue CPs either directly to the investors or through banks / merchant banks (called dealers). These are basically instruments evidencing the liability of the issuer to pay the holder in due course a fixed amount (face value of the instrument) on the specified due date. These are issued for a fixed period of time at a discount to the face value and mature at par.
7. READY FORWARD CONTRACT: It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is called a Repo when viewed from the prospective of the seller of securities (the party acquiring fund) and Reverse Repo when described from the point of view of the supplier of funds.
(b) What is capital market? How does capital market help in economic development of a country?        4+7=11
Ans: Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government. The long-term funds are made available through various instruments such as debentures, preference shares, and common shares. The capital market can be local, regional, national, or international. The capital market is classified into two categories, namely,
Ø  Primary market or new issue market, and
Ø  Secondary market or stock exchange.
As a rule, only when a country’s primary market is alone, it is possible to ensure a good degree of activity in the secondary market because it is the primary market which ensures a continuous flow of securities to the secondary market.
On the contrary, if secondary marker is only active but not transparent and disciplined, it becomes difficult to develop and sustain the flow of equity and related investment in the primary market. This is because the liquidity which the secondary market imparts to such investments in the hands of the investors is adversely affected.
Role of Primary Market
The main function of a primary market can be divided into three service functions. They are: origination, underwriting and distribution.
1. Origination: Origination refers to the work of investigation, analysis and processing of new project proposals. Origination begins before an issue is actually floated in the market. The function of origination is done by merchant bankers who may be commercial banks, all India financial institutions or private firms.
2. Underwriting: When a company issues shares to the public it is not sure that the whole shares will be subscribed by the public. Therefore, in order to ensure the full subscription of shares (or at least 90%) the company may underwrite its shares or debentures. The act of ensuring the sale of shares or debentures of a company even before offering to the public is called underwriting. It is a contract between a company and an underwriter (individual or firm of individuals) by which he agrees to undertake that part of shares or debentures which has not been subscribed by the public. The firms or persons who are engaged in underwriting are called underwriters.
3. Distribution: This is the function of sale of securities to ultimate investors. This service is performed by brokers and agents. They maintain a direct and regular contact with the ultimate investors.
Role/Functions of stock exchange
Presence and vibrant functioning of a stock exchange is necessary for a developing economy. It reflects healthy financial and investment conducive atmosphere in the economy. The Indian securities market is considered as one of the most promising emerging markets. It is one of the top eight markets of the world. The stock exchange plays a vital role in the process of raising resources for the development of corporate sector. In the absence of the stock exchange it would be impossible for private enterprises, industries and entrepreneurs to survive and grow. A stock exchange plays a significant role in a capital market which are mentioned below:
a)      Encourages capital formation: A common investor is attracted to capital market. Today investor prefers to divert his surplus and savings in the securities like shares, debentures, mutual funds etc. As a result new capital formation is speeded up.
b)      Resource Mobilsation: Due to continuous buying and selling of the securities the resources of the economy flow from one company to other company giving comparatively higher returns. This helps mobilisation of resources.
c)       Help in repaid economic development: The stock exchanges help in the process of rapid economic development by speeding up the process of capital formation and resource mobilization. It helps in raising the medium and long term capital for the development and expansion of the companies. New industries and commercial enterprises easily get capital funds through a stock exchange.                                                                                        
d)      Flexibility in investments: The stock exchanges provide liquidity to the investment made in the securities. As there are multiple options, investors can flexibly go on switching their investment where it is more beneficial?
e)      Value addition to the securities: Listing of shares on a stock exchange adds to the prestige and reputation to companies. With the advantage of listed shares it can raise loans from corporate sector.
f)       Protects investor’s interest: All the transactions in the stock exchanges are effected and controlled by the Securities Control (Regulation) Act 1956. The stock exchanges protect the interests of the investors through the strict enforcement of their rules and regulations. The malpractices of the brokers are punishable with heavy fine, suspension of their membership and even imprisonment.
g)      Motivation to Management: A stock exchange allows the trading of listed securities only. Listing procedure requires to comply with certain guidelines for protecting the interests of investors and obviously are under strict supervision of stock exchange. If companies do not comply with the rules and regulations of the exchange, the shares of a company can be delisted. To avoid such unfavorable and undesirable consequences every company manages its affairs more cautiously and effectively.
Best utilization of capital: The stock exchange regulates and controls the flow of investment from unproductive to productive, uneconomic to economic, unprofitable to profitable enterprises. Thus, savings of the people are channelized into industry yielding good returns and underutilization of, capital is avoided. As the stock exchange provides an account of price variations of the securities listed on it (upward or downward fluctuations) it would be an opportunity for the investors to switch their investments. This would, keep companies performing in the best possible way. 
8.    (a) Discuss about the modern services provided by bank through internet banking.      11
Ans: Modern Services Provided by Bank through Internet Banking
1.       Centralized Banking Solution (CBS) = CBS, an inter-branch networking and data-sharing platform helps the customers to operate their account from any city in India having CBS networked branches, changing the status of customer from ‘Customer of the Branch’ to ‘Customer of the Bank’.
2.       Online Tax Payment = Banks provide the facility of online payment of service tax, excise duty, DGFT, Custom duty and all charges under MCA 21 through internet banking.
3.       Corporate Internet Banking = Online funds transfer, trade finance management, fund management, global access with unmatched benefits through banks’ corporate internet banking.
4.       Online Shopping = This service facilitates the customers to book hotels, buy gifts, send flowers, buy books and lot of activities by making payments online.
5.       Retail Internet Banking = Internet Banking assists the customers to have an online assess to bank account anytime and anywhere.
6.       Foreign Exchange = Banks have several branches authorized for handling foreign exchange business and these branches.
7.       E-Money India = Internet banking helps the customer in sending money to their loved ones in India through PNB’s e-Money India service.
8.       Online Railway Reservation = Say goodbye to long queues. Banks offer the customers online booking and information through IRCTC payment gateway. Just click and travel comfortably.
9.       Depository Service = Banks Depository service provides the facility of having shares and securities in Demat form and executes transactions of sales and purchase hassle free electronically to the customers through internet banking.
10.   Electronic Clearing Service and Electronic Funds Transfer (EFT) = Internet banking assists the customers in electronic clearing service for quick movement of funds in a paperless mode and EFT to ensure an expeditious transfer of funds by using electronic media.
11.   Online Bill Payment = No more queues to pay customers’ bills. Now the customers can pay their telephone, mobile, electricity, insurance and several other bills 24 hours, 365 days, from the desktop of customer.
12.   Online Air Ticket Booking = Banks provide facility of online airline ticket booking of domestic as well as international airlines to their customers through internet banking.
13.   Online Trading = Banks provide online trading facilities to customers having account with bank and trading account with approved brokers.
14.   Customer Care Facility = Banks present 24 hours customer care facility for all customers quarries and problems.
15.   Online Insta Remit-RTGS Service = Instant remittance by customer himself now made possible, from one bank to another bank at different centre’s on the same day with the help of Online Real Time Gross Settlement (RTGS)/National Electronic Fund Transfer (NEFT) at modest charges.
(b) What do you mean by core banking? Discuss its advantages.                                               4+7=11
Ans: Core Banking – Introduction, Features and Advantages
Core banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers and have a separate line of business to manage small business. Larger business is handled by the corporate banking division of the institution. Core banking basically is depositing and lending of money.
Now a days, most banks use core banking applications to support their operations where ‘CORE’ stands for “Centralized Online Real-time Environment”. This basically means that all the bank’s branches access applications from centralized data centres. It means that the deposits made are reflected immediately on the servers of bank and the customer can withdraw the deposited money from any of the branches of bank throughout the world. These applications now also have the capability to address the needs of corporate customers providing a comprehensive banking solution. Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, internet banking and branches.
Features of Core Banking
1.       Customer relationship management features including a 360 degree customer view.
2.       The ability to originate new products and customers.
3.       Banking analytics including risk analysis, profitability analysis and provisions for capital reserve allocation and collateral management.
4.       Banking finance including general ledger and reporting.
5.       Banking channels such as teller systems, side counter applications, mobile banking and online banking solutions.
6.       Best practice workflow process.
7.       Content management facilities.
8.       Governance and compliance capabilities such as internal controls management and auditing.
9.       Security control and audit capabilities.
10.   Core banking solutions to help maximize growth, increase productivity and mitigate risk.
Advantages of Core Banking
1.       Limited Professional Manpower to be utilized more effectively.
2.       Customer can have anywhere, more convenient and easier banking.
3.       ATM, Interest Banking, Mobile Banking, Payment Gateways etc. are available.
4.       More strong and economical way of management information system.
5.       Reduction in branch manpower.
6.       Additional manpower can be available for marketing, recovery and personalized banking.
7.       Instant information available for decision support.
8.       Quick and accurate implementation of policies.
9.       Improved Recovery Process causing reduction on recovery costs, NPA provisions.
10.   Innovative, redefined or improved processes i.e. Inter Branch Reconciliation causing reduction in manpower at Head Office.
11.   Reduction in software maintenance at branch and Head office.
12.   Centralized printing and backup resulting in reduction in capital and revenue expenditure on printing and backup devices and media at branches.
13.   Electronic Transactions with other Financial Institutions.
14.   Increased speed in working resulting in more business opportunities and reduction in penalties and legal expenses.
Factoring – Introduction, Advantages and Disadvantages
Factoring is a service of financial nature involving the conversion of credit bills into cash. Accounts receivables, bills recoverable and other credit dues resulting from credit sales appear, in the books of accounts as book credits. Here the risk of credit, risk of credit worthiness of the debtor and as number of incidental and consequential risks are involved. These risks are taken by the factor which purchase these credit receivables without recourse and collects them when due. These balance-sheet items are replaced by cash received from the factoring agent. Factoring is also called “Invoice Agent” or purchase and discount of all “receivables”.
Advantages of Factoring: Factoring provides various benefits to the clients, banks and customers. We shall dis­cuss the benefits of factoring hereunder:
A. Benefits to the Clients
The following are the advantages of factoring service to the clients:
1. The client or seller can convert accounts receivables into cash without bothering about sales ledger administration even repayment in some cases.
2. Factoring ensures a definite pattern of cash inflows.
3. Continuous Factoring virtually eliminates the need for the credit department. That is why receivable financing through Factoring is gaining popularity as useful source of financing short term fund requirements of business enterprises because of the inherent advantage of flexibility it affords to the borrowing firm.
The seller firm may continue to get finance on its receivables on a more or less automatic basis. If its sales expand or contract, it can vary the financing proportionately.
4. Unlike an unsecured loan, compensating balances are not required in this case. Another advantage consists of relieving the borrowing firm of substantial credit and collection costs and further to certain extent from a considerable part of cash management.
5. In export sales, difficulties of credit assessment and debt collection are more pro­nounced. Availing of Professional factoring services is more advantageous.
6. Under factoring arrangement, regular cash inflow at periodical intervals is as­sured. This helps, short term fund flow and availing of discounts from suppliers.
7. Firms engaged in a highly seasonal business may submit the peak loan of receiv­ables to the Factor for credit review and approval as a cheaper alternative to expanding its own credit department.
8. Finally, when credit is necessary and cannot be obtained elsewhere either be­cause of tight money conditions or poor financial position, the Factoring of re­ceivables will be more appropriate.
B. Benefits to the Customers
The following are the advantages of Factoring service to the customers:
1. The customer is relieved of maintaining record relating to credit sales customers a/c, reminders to debtors, initiating recovery measures, etc. This saves substan­tial administration expenditure.
2. Factoring as a professional approach in collection of debts inculcates discipline in cash management among customers.
3. Buyers have no need to accept any bill.
4. Buyers will have adequate credit period for payment.
5. Factoring will facilitate credit purchases.
6. Saving on bank charges and expenses.
7. No documentation problems; only a simple undertaking agreeing to make payment directly to factor is required.
8. Factor furnishes periodical statement of outstanding invoices drawn on the buyers.
C. Benefits to the Banks
The following are the advantages of Factoring service to the banks:
1. Factoring provides the banks an integrated receivables management.
2. Factoring improves the service efficiency of the banks through closer follow up of credit sales.
3. Factoring provides increasing cash flow and liquidity to the banks.
4. Factoring improves the quality of the advances made by the banks by reducing the turnover of receivables and by increasing operating cycles.
5. Factoring enhances the profits through cash discounts on purchase.

6. Factoring safeguards as insurance against non-performing assets of the banks. In this, all proceeds of factored bills are credited to bank; hence bank account will not become non-performing assets for shortage of credits.