AHSEC - Class 12 Solved Question Paper: Banking' 2018 | Class 12 Banking Solved Question Papers

[Banking Solved Question Papers, AHSEC, Class 12, 2018]

Full Marks: 100
Time: 3 hours
The figures in the margin indicate full marks for the questions.

1. Answer as directed:          1x10=10

a) In which year fist Presidency Bank was established?
Ans: 1809, Bank of Bengal
b) What do you mean by private sector bank?
Ans: Private Sector Banks: Private Sector banks are those which are owned by private individuals or business corporations.
c) Give the meaning of bank rate.
Ans: Bank rate or discount rate is the rate at which the Central Bank of a country makes advances to the banks against approved securities or rediscounts the eligible bills.
d) Capital market is the market for Long term market. (State whether True or False)
Ans: True
e) Write the full form of SIDC.
Ans: State Industrial Development Corporation
f) A collecting banker can claim statutory protection only in the case of _____ cheque.
Ans: Crossed Cheque
g) What is primary market?
Ans: Primary market which is also called new issue market represents a market where new securities i.e. shares and bonds that have never been previously issued are offered. It is a market of fresh capital.
h) IFCI was established in the year 1947/1948/1950.
Ans: 1948
2. Name two subsidiaries of State Bank of India.            2
Ans: The two subsidiaries or associate banks of S.B.I. are as follows:
a)      State Bank of Bikaner and Jaipur.
b)      State Bank of Hyderabad.
3. Who is paying banker?        2
Ans: The term paying banker refers to the drawee banker who pays the amount of cheques to his customer. The paying banker is defined as the “banker to whom the order is made to pay, where the order is issued as the form of a cheque”.
4. What is postdated cheque?           2
Ans: If a cheque bears a date later than the date of issue it is termed as post dated cheque. Such cheques cannot be honoured till the date of cheque is arrived.
5. Write the meaning of hypothecation.       2
Ans: Hypothecation is mode of creating a charge against a movable property for payment of a debt without transferring the possession of the property. The goods remain at the disposal and in the godown of the borrower. The bank is given access to goods whenever it so desires.
6. State the meaning of liquidity.                             2
Ans: Liquidity means the ability of the bank to give cash on demand.
According to R.S. Sayers’ “Liquidity is the word that the banker uses  to describe this ability to satisfy demands for cash in exchange for deposit.”
7. State any three differences between Bill of Exchange and Promissory Note     3
 Ans: Difference between bill of exchange and Promissory Note
Bill of Exchange
Promissory Note
It is drawn by the creditor
It is drawn by the debtor.
There can be three parties to it, viz. the drawer, the Drawee and the payee.
There are only two parties to it, viz. the drawer and the payee.
Order or Promise
It contains an order to make payment.
It contains a promise to make payment.
8. What are the basic features of Development Bank?                                   3
Ans: Features of Development banks:
a)      Development banks is a specialised financial institution which provides medium and long term finance to business units.
b)      They do not issue cheque book and ATM like other commercial banks.
c)       It does not accept deposits from the public, unlike commercial banks. An NBFI does not perform ordinary banking functions.
9. Mention the different kinds of endorsement.                                                              3
Ans: Different kinds of endorsement with their respective significance are explained below:
a)      Blank or General Endorsement.
b)      Full or Special Endorsement.
c)       Conditional Endorsement.
d)      Restrictive Endorsement.
e)      San Recourse endorsement and San frais endorsement.
f)       Facultative endorsement.
g)      Partial Endorsement.
h)      Forged endorsement.

10. Draw a specimen copy of Promissory Note.                                                                 3
Specimen of Promissory Note
Mr. X
April 01,2015
Three months after date I promise to pay Mr. Y or order a sum of Rupees Fifty Thousand only for value received.

Mr. Y
Dibrugarh, Assam
Mr. X
Tinsukia, Assam
11. Explain the functions of clearing house.                                                        3
Ans:  In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers. One bank may have to pay certain amount to another bank again the RBI will transfer fund from debtor to creditors account. Since all banks have their accounts with the RBI, the RBI can easily settle the claims of various banks each other with least use of cash.
Describe briefly any three kinds of endorsement.
Ans: Different kinds of endorsement with their respective significance are explained below:
i)        Blank or General Endorsement: An endorsement is said to be blank or general, if the endorser sings on the back or on the face of the instrument without specifying the name of any endorsee. The effect of his endorsement makes the instrument payment to bearer even though originally it was payable to order. For example, a cheque payable to Mr. X or order and Mr. X endorse the cheque by simply affixing her signature. The effect of this endorsement makes the instrument payable to bearer even though originally it was payable to order.
j)        Full or Special Endorsement: If an endorser signs his name and adds a direction to pay the amount mentioned in the instrument to or to the order of a specified persons, such an endorsement is said to be a full or special endorsement.  For example, “Pay to Mr. X or order” S/d Mr. Y is an example of full endorsement. Here Mr. Y is the endorser and he has mentioned the name of the endorsee – Mr. X.
k)      Conditional Endorsement: An endorsement is conditional or qualified if it limits or neglects the liability of the endorser.  For example, “Pay to Mr. X on his marriage” s/d Mr. Y is a conditional endorsement. In case of conditional endorsement, the liability of the endorser and the rights of the endorsee becomes conditional on the happening of a particular event.
12. Write a brief note about the Imperial Bank of India.                                                5
Ans: Ans: According to the provision of the Imperial Bank of India Act, 1920, the Imperial Bank was established by the amalgamation of the three presidency bank i.e. the Bank of Bengal (1809), Bank of Bombay (1840), the Bank of Madras (1843). In came into existence on January 27th, 1921. Most of the capital of this bank was external and its management was also in the hands of British. After independence, the imperial bank was nationalised in the year 1955 and is renamed as State Bank of India with a view to provide credit facilities in rural areas.
 The Imperial Bank performed both Central and commercial banking business. The major central banking functions discharged by the bank before the establishment of the RBI were as follows:
a)      It acted as the sole ‘banker to the Government and as the custodian of public funds and Government cash balances.
b)      It acted as a banker’s bank.
c)       It acted as an exchange bank and performed foreign trade.
In addition to these central banking functions the Imperial Bank performed ordinary commercial banking business such as:
a)      Accepting deposits.
b)      Making loans and advances etc.
c)       Remitting funds from one place to another.
d)      Providing safe custody of valuables etc.
13. Explain the functions of Stock Exchange.         5
Ans: Functions of stock exchange
As the barometer measures the atmospheric pressure, the stock exchange measures the growth of the economy. it performs the following vital functions:
1.       Ready market and liquidity: Stock exchange provides a ready and continuous market where investors can convert their money into securities and securities into money easily and quickly. It provides a convenient meeting place for buyers and sellers of securities.
2.       Evaluation of securities: Stock exchange helps in determining the prices of various securities that reflect their real worth. The forces of demand and supply act freely in the stock exchange and help in the valuation of securities.
3.       Mobilisation of savings: Stock exchange helps in mobilising surplus funds of individuals and institutions for investment in securities. In the absence of facilities for quick and profitable disposal of securities, such funds may remain idle.
4.       Capital formation: Stock exchange not only mobilises the existing savings but also induces the public to save money. It provides avenue for investment in various securities which yield higher returns. It helps in allocation of available funds into the most productive channels.
5.       Regulation of corporate sector: Stock exchanges frame their rules and regulations. Every company which wants its securities to be dealt in at the stock exchange has to follow the rules framed by the stock exchange in this regard.
14. What are the main objectives of World Bank (IBRD)           5
Ans: Ans: The International Bank for Reconstruction and development (IBRD) generally known as the ‘World Bank’. This bank was established as a result of the deliberations at the economic conference held at Breton Woods in July 1944. This bank began its operations in June 1946. The World Bank was established with the object of reconstructing the economies of the war devastated countries, economic development of the member countries and to raise the standard of living of the people of the world. Initially, only nations that were member of the IMF could be members of the World Bank. But now any country can become the member of the World Bank.
The objectives of World Bank are:
a)      To provide long-run capital to the member countries for reconstruction and development.
b)      To promote private capital investment by providing guarantee on private loans and capital investment.
c)       To maintain equilibrium in balance of payments and balanced development of international trade.
d)      When private capital is not available on reasonable terms, to supplement private investment by providing finance for productive purpose on suitable conditions.
e)      To encourage the development of productive facilities and resources in less developed countries.

Give the meaning of crossing. Explain briefly about the different types of crossing with example.
Ans: Crossing of a cheque: A cheque is said to be crossed when two parallel transverse line with or without any words are drawn on the left hand corner of the cheque. The negotiability of a cheque doesn’t affect for crossing. Crossing of a cheque refers to the instruction to the banker relating to the payment of the cheque. A crossing is the direction to the paying banker that the cheque should be paid only to a banker. Crossing of cheque is very safety because the holder of the cheque is not allowed to cash it across the counter. A crossed cheque provides protection not only to the holder of the cheque but also to the receiving and collecting bankers.
Types of crossing:
1. General crossing: A general crossing is a crossing where a cheque simply bears two parallel lines with or without any words and without any specification. A general crossing cheque protects the drawer and also the payee or the holder thereof. Whenever a drawer desires to make payment to an outstation party, he can cross the cheque so that even if the cheque is lost, only a piece of paper is lost and nothing beyond that. If by any chance, it is encashed by a third and unauthorized person, it is possible to find out to whose account the amount is credited and the unauthorized person can be identifies and suitable action taken against him.
2. Special crossing: Section 124 of the Negotiable Instruments Act, 1881 defines special crossing as “where a cheque bears across its face, an addition of the name of a banker with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker.”
3. Account payee crossing: This type of crossing is done by adding the words ‘Account Payee’. This can be made both in general crossing and special crossing. The implication of this type of crossing is that the collecting banker has to collect the amount of the cheque only for the payee. If he wrongly credits the amount of the cheque to another account, he will be held responsible for the same. 
4. Not negotiable crossing: When the words ‘not negotiable’ is added in generally or specially crossed cheques, it is called not negotiable crossing. A cheque bearing not negotiable crossing cannot be transferred. If a cheque bearing ‘Not negotiable crossing’ is transferred, care must be taken regarding the ownership of title of both the transferor and transferee.
15. Discuss various classification of Banks.         5
Ans: There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession etc. The banking institution may be divided into following types:
a) Public Sector Banks: Public Sector banks are those banks in which the Government has at least 51% shares. Public sector banks are owned and controlled by the Government either directly or indirectly through the RBI. These banks are also known as “National Banks”.
b) Private Sector Banks: Private Sector banks are those which are owned by private individuals or business corporations. Some examples of private banks in India include The Lakshmi Vilas Bank Ltd., The Karur Vysya Bank Ltd., The City Union Bank Ltd., HDFC Bank, Axis Bank and son.
c) Foreign Banks: These banks are originated outside India but have a place of business in India. At present there are 27 Foreign Banks. E.g. City Bank, Standard Chartered Bank, HSBC Bank, Bank of Tokyo.
d) Cooperative Banks: 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.
e) Development Banks: Development banks are specialized financial institutions which provide medium and long term finance to private entrepreneurs and help in economic development of the country.
f) Agricultural/Land Development Banks: Agricultural/Land Development Banks are those banks which provide long term loan for the purposes of purchase of new land, purchase of heavy agricultural machinery such as tractor, repayment of old debt, conservation of soil and reclamation of loans.
g) Investment Banks: Investment Banks are those banks which are specialized in provide medium and long term financial assistance to business and industry.  
16. Briefly explain the functions of Reserve Bank of India as banker’s bank.                        5
Ans: Bankers Bank: The Central Bank is a banker to all the other banks. It is the supreme bank of all the banks. As the supreme bank it performs various functions. Some of the functions are:
a)      Custodian of cash reserve of the bank: The Central Bank acts as the custodian of cash reserve of the banks. Every Commercial bank has to keep a certain portion of their deposits and time and demand liabilities to the Central Bank in the form of cash reserves. The Central Bank maintains this cash reserve as the custodian and grants money to the commercial bank in times of emergency.
b)      Lender of the last resort: The Central Bank is the Lender of the last resort of the commercial banks. When the other banks shortage of funds, then they can approach to the Central Bank for financial assistance. The Central Bank lends money to them by discounting their bills. This enables the Central Bank to establish control over the banking system of the country. The RBI is ultimate source of money and credit provide fund to money market participate thus the RBI act as lender of last resort for the commercial banks.
c)       Clearing agent: In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers. One bank may have to pay certain amount to another bank again the RBI will transfer fund from debtor to creditors account. Since all banks have their accounts with the RBI, the RBI can easily settle the claims of various banks each other with least use of cash.
17. What are the features of Non-Bank Financial Institution?          5
Ans: Features of Non-Banking Financial Institution (NBFI)
d)      NBFI is a specialised financial institution which provides medium and long term finance to business units.
e)      It is a multi-purpose financial institution and not just a term-lending institution.
f)       It does not accept deposits from the public, unlike commercial banks. An NBFI does not perform ordinary banking functions.
g)      Financial assistance is provided by a non-bank financial institution  not only to the private sector but also to the public sector undertakings.
h)      One of its major aims is to promote the saving and investment habit in the community.
i)        Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.
j)        Its motive is to serve the public interest. It works in the general interest of the nation rather than to make profits. NBFI is motivated by social profits.
18. What are the privileges of a holder in due course?           5
Ans: A Holder in Due Course enjoys the following rights and privileges:
a)      He possesses better title free from all defects: He always possesses better title than that of his transferor or any of the previous parties and can give to the subsequent parties the good title that he possesses. The holder in due course is entitled to recover the amount of the instrument from any or all of the previous parties.
b)      All prior parties liable: All prior parties to the instrument i.e. its maker or drawer, acceptor or endorser, is liable thereon to a holder in due course until the instrument is duly satisfied. The holder in due course can file a suit against the parties liable to pay in his own name.
c)       No effect of conditional delivery: Where a negotiable instrument delivered conditionally or for a special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively presumed and he acquires good title to it.
d)      Right in case of factitious bills: Where both drawer and payee of a bill are fictitious persons, the acceptor is liable on the bill to a holder in due course, it the letter can show that the signature of the supposed drawer and the first endorser are in the same hand, for the bill being payable to the drawer’s order the fictitious drawer must indorse the bill before he can negotiate it.
e)      Right of the holder in due course in case of inchoate instrument: If a negotiable instrument was originally an inchoate (incomplete) instrument and subsequent transferor completed the instrument for a sum greater than what was the intention of the market, the right of a holder in due course to recover the money of the instrument is not at all affected.
f)       Right is cane the instrument is obtained by unlawful means or for unlawful consideration: A person liable on negotiable instrument cannot defined himself against a holder in due course on the ground that the instrument was lost or obtained from him by means of an offense or fraud or far an unlawful consideration.
19. Explain briefly about the growth of commercial banks in India during the post-Independence period.           8
Ans: The word Bank has been originated from many words. There is no single word or answer to this origin of the word ‘Bank’. According to some economists, the word ‘Bank’ has been originated from the German word ‘Banck’ which means heap or mound or joint stock fund. From this, the Italian word ‘Ban co’ has been derived. It means heap of money. But according to this group, the word bank is derived from the Greek word ‘Banque’ which mean a ‘bench’. It refers to a place where money-lenders and money changers used to sit and display their coins and transact business. Thus the origin of the word ‘Bank’ can be traced as follows.
Bank → Banco → Banque → Bank
Banking industry in India has a long history. It has travelled a long path to assume its present form. The banking industry in Indian started with small money lenders and has now large joint stock world class banks in its fold. The growth of banks in India is discussed below over two eras:
Banking industry in India has a long history. It has travelled a long path to assume its present form. The banking industry in Indian started with small money lenders and has now large joint stock world class banks in its fold. The growth of banks in India after independence are given below:
Post-Independence Period: After independence, Government has taken most important steps in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name “State Bank of India”, to act as the principal agent of RBI and to handle banking transactions all over the country. It was established under State Bank of India Act, 1955.
In 1959, the 'State Bank of India' (Subsidiary Banks) Act was passed by which the public sector banking was further extended. The following banks were made the subsidiaries of State Bank of India:
(i) The State Bank of Bikaner
(ii) The State Bank of Jaipur
(iii) The State Bank of Indore
(iv) The State Bank of Mysore
(v) The State Bank of Patiala
(vi) The State Bank of Hyderabad
(vii) The State Bank of Saurashtra
(viii) The State Bank of Travancore
These banks forming subsidiary of State Bank of India was nationalized in1960. In 1963, the first two banks were amalgamated under the name of "The State Bank of Bikaner and Jaipur".
On 19th July, 1969, 14 major Indian commercial banks of the country were nationalized. In 1980, another six banks were nationalized, and thus raising the number of nationalized banks to20. Seven more banks were nationalized with deposits over 200 Crores. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. Till the year1980 approximately 80% of the banking segment in India was under government’s ownership. On the suggestions of Narsimhan Committee, the Banking Regulation Act was amended in 1993 and hence, the gateways for the new private sector banks were opened.
The third phase of development of Indian banking introduced many more products and facilities in the banking sector in its reform measures. In 1991, under the chairmanship of M. Narsimham, a committee was set up under his name, which worked for the liberalization of banking practices.
Narrate the advantages and disadvantages of branch banking about unit banking.
Ans: Unit Banking: It is a system of banking where an independent bank undertakes banking function in a particular area. The operation of a unit bank is limited to a particular area and hence this system is also known as “localized banking. A unit bank has just one office with no branches. This banking system was originated and developed in the USA.                                           
Merits of Unit Banking
1.       Easy management and control: The management and control of unit banks is much easier due to single office and is small size.
2.       Quick decision: Decision making process is quick because there is no necessity of any consultation with external authorities.
3.       Local Development: Unit banking is limited to a particular area. Funds of the bank are utilized locally and are not significance to other areas.
4.       Prevention of monopoly: Unit banks are generally of small size. Thus, there is no possibility of monopoly in unit banking system.
Demerits of Unit Banking
1.       No distribution of risks: There is no possibility of distribution of risks because the banking operations are highly localized.
2.       Less ability to face risks: The chance of failure of unit bank is more because of its limited resources, limited area of operations and lack of diversification of risks.
3.       Local pressure: Since unit banks are highly localized in their business, local pressure and interferences generally disrupt their normal functioning.
4.       Difference in Interest rate: Different banks charges different rate of interest depending on demand and supply of Funds in the area of operation.
Branch Banking: It is system of banking where large commercial bank undertakes banking activities with a network of branches. The operation of this type of bank is not limited upto a particular area but spread across the country and hence this system is also known as “delocalized bank”. A bank under this system may open branches both within and outside the country. This system was originated in England. Merits and demerits of branch banking over unit banking are given below:
Merits of Branch Banking
1.       Benefits of large Scale Production: Due to large scale production, the cost per unit of operation is very low in case of this system.
2.       Distribution of Risks: There is a distribution of risks because the losses incurred by one branch are made up by the profits earned by other branches.
3.       Effective Central Bank control: Due to presence of few big banks in the banking system, the RBI can effectively and easily regulate the activities of banks.
4.       Public Confidence: Branch banking system gains greater public confidence because of its large scale operations and huge financial resources.
5.       Easy transfer of funds: Since the branches of bank under branch banking are spread all over the country, it is easier and cheaper, for it to transfer funds from one place to another.
Demerit of branch banking
1.       Problems of Management: The effective management and control of bank under branch banking system is difficult due to large network of branches.
2.       Delay in Decision Making: Decision making is delayed because the branch manager has to consult with the head office before taking decision.
3.       Ignorance of local heads: Branches follows the policies framed by the head office. The head office and the branch may not be aware of the local conditions.
4.       Monopolistic tendencies: Branch banking encourages monopolistic tendencies. A few big banks can dominate and control the whole banking system.
5.       Regional imbalances: Under branch banking system the financial resources collected in smaller and backward regions are transferred to the bigger industrial centre. This encourages regional imbalances in the country. 
20. Explain any two credit control techniques adopted by the RBI.       8
Ans: Ans: The principle methods or instruments of Credit Control used by the Central Bank are:
1)      Quantitative or General Methods
2)      Qualitative or Selective methods
1)      Quantitative or General Methods: These are the traditional or general methods of credit control. These methods one used by Central Bank to expand or contract the total volume of credit in the economy neglecting the purpose for which it is used. These methods are :-
a)      Variation in the bank rate
b)      Open Market operations:
c)       Variation in cash reserve ratio:
d)      Variation in the statutory liquidity ratio:
e)      ‘Repo’ Transactions:
a)      Variation in the bank rate: Bank rate or discount rate is the rate at which the Central Bank of a country makes advances to the banks against approved securities or rediscounts the eligible bills. The purpose of change in the rate is to make the credit cheaper or expensive depending upon whether the purpose is to expand or control credit. An increase in bank rate result, in increase in lending rate of commercial banks lending to contraction of credit while a decrease in bank rate leads to decrease in lending rates of commercial banks lending to expansion of credit.
b)      Open Market operations: Open market operations means deliberate and direct buying and selling of securities and bills in the market by the Central Bank. The open market operations of the RBI are mostly confined to government securities. In order to increase money supply in the market, the RBI purchases securities in the open market. On the other hand, in order to contract credit, the RBI starts selling the securities in the open market.
c)       Cash reserve ratio: Every scheduled bank in India is required to maintain a minimum percentage of their deposits with the RBI. Larger the reserve, lesser is the power of the banks to create credit and smaller the reserves, greater is the power of the banks to create credit.
d)      Statutory liquidity ratio: Statutory liquidity ratio is another reserve requirement used by the RBI to control money supply. In India, besides maintaining the cash reserve, every bank has to maintain a statutory reserve of liquid assets in terms of cash, gold or unencumbered securities. This is termed as statutory liquidity ratio. In increase in the liquidity ratio implies a transfer of banking funds to Government and corresponding reduction in credit available to the borrowers.
e)      ‘Repo’ Transactions: ‘Repo’ stands for repurchase. Repo or repurchase transactions are undertaken by the Central Bank in the money market to manipulate short term interest rates and to manage liquidity levels. In case the RBI desire to inject fresh funds in the economy it conducts ‘Repo’ transactions. On the other hand, to absorb liquidity the RBI ‘Reserve Repo’ transactions. The securities eligible for carrying out this operation are selected by the RBI. It includes government promissory notes, treasury bills and public sector bonds.
3)      Qualitative or Selective Methods: These are basically the selective and general methods of credit control. These methods are used for controlling the use and direction of credit. They have nothing to do with the control of the total volume of credit in economy. These methods are :
a)      Directions: Sec. 21 of the Banking Regulation Act gives wide power to the RBI for controlling granting of advances by an individual bank or by banking as a whole. The RBI can give directors to any particular bank or all banks in general in regard to the purposes for which advances may or may not be made, the maximum amount of advance to any individual, firm or company etc.
b)      Margin requirement: Margin means the difference between the market price of security and loan amount. Changing margin requirement is another credit control method followed by the RBI. This system was introduced in 1956. By requiring higher margin while accepting a commodity as a security, the RBI can decrease the flow of credit to particular sector or vice versa.
c)       Consumer Credit Regulation: Under this method, consumer credit supply is regulated through hire-purchase and installment sale of consumer goods. Under this method the down payment, installment amount, loan duration, etc is fixed in advance. This can help in checking the credit use and then inflation in a country.
d)      Publicity: This is yet another method of selective credit control. Through it Central Bank (RBI) publishes various reports stating what is good and what is bad in the system. This published information can help commercial banks to direct credit supply in the desired sectors. Through its weekly and monthly bulletins, the information is made public and banks can use it for attaining goals of monetary policy.
e)      Credit Rationing: Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount available for each commercial bank. This method controls even bill rediscounting. For certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit. This can help in lowering banks credit exposure to unwanted sectors.
f)       Moral suasion: It implies to pressure exerted by the RBI on the Indian banking system without any strict action for compliance of the rules. It is a suggestion to banks. It helps in restraining credit during inflationary periods. Commercial banks are informed about the expectations of the central bank through a monetary policy. Under moral suasion central banks can issue directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes.
g)      Direct action: Under this method the RBI can impose an action against a bank. If certain banks are not adhering to the RBI's directives, the RBI may refuse to rediscount their bills and securities. Secondly, RBI may refuse credit supply to those banks whose borrowings are in excess to their capital. Central bank can penalize a bank by changing some rates.
21. Discuss the principles of sound lending policy of a bank.                       2+6=8
Ans: The principles of sound lending by commercial banks are:
a)      Safety of principal: A banker deals in borrowed funds and therefore his main consideration is safety of principal lent by it. The banker has to ensure that the principal amount lent by him remain safe. It means that the borrower is in a position to repay the loans, along with interest, according to the terms of the loan contract. The banker should, therefore, take utmost care in ensuring that the enterprise or business to which a loan in to be granted is a sound one and the borrower is capable to repay it successfully.
b)      Profitability or yield: Commercial banks are profit earning institutions. They must employ their funds profitably so as to earn sufficient income out of which to pay interest to the depositors, salaries to the staff and to meet various other establishment expenses and distribute dividends to the shareholder. The sound principle of lending does not sacrifice safety or liquidity for the sake of higher profitability. The banker should not expect windfall profit, because high profit may bear the germ of loss.
c)       Marketability or Liquidity: Liquidity of loans is another principle of sound lending. The term liquidity of loan indicates quick realisation of loans from the borrowers. Banks are essentially dealers in short term funds and therefore, they lend money mainly for short term period. The banker should see that the borrower is able to repay the loan on demand or within a short notice.
d)      Purpose of the loan: Before granting loans, the banker should examine the purpose for which the loan is demanded. If the loan is granted for productive purpose, thereby the borrower will make much profit and he will be able to pay back the loan. In no case, loan is granted for unproductive purpose.
e)      Diversification: The element of risk in relation to loans cannot be totally eliminated, it can only be reduced. Risks of lending can be reduced by diversifying the loans. While granting loans, the banker should not grant a major part of the loan to one single particular person or particular firm or an industry. If the banker grants loans and advances to a number of firms, persons or industries, the banker will not suffer a heavy loss even if a particular firm or industry does not repay the loan.
f)       National policies: Banks have certain social responsibilities towards society also. The banks have to take into account the economic and social priorities of the country beside safety, liquidity and profitability. While formulating the lending policy, the banks are guided by the government policies in relation to disbursal of credit. Thus, national interest and policies are influence the lending decisions of banks.
In conclusion, it may be said that due consideration of all the principles are necessary, while evaluating a loan proposal.
Who is collecting banker? Explain the duties of collecting banker.
Ans: A collecting banker is one who collects the cheques and other negotiable instruments deposited by his customers and places the amount to the credit of the customers account. A collecting banker acts as an intermediary between the paying banker and his customer in collecting the proceeds of a cheque from the paying banker and crediting the same to the customer’s account.
The duties of a collecting banker towards his customers are as follows:
a)      Due care and Diligence in the collection of cheques: The collecting banker is bound to show due care and diligence in the collection of cheques presented to him. In case a cheque is entrusted with the banker for collection, he is expected to show it to the drawee banker within a reasonable time.
b)      Presentation of cheque for payment within reasonable time: The collecting banker should present the cheque of his customer to the drawee banker within a reasonable time. If the banker makes undue delay in presentation of cheque and the customer suffers a loss then the banker will be held responsible for the loss and shall be required to reimburse the loss.
c)       Remittance of proceeds to the customer: It is the duty of the collecting banker to inform his customer immediately about the collection of the cheques. When the proceeds are collected, the banker may debit his customer’s account in respect of his commission and credit the gross proceeds to the customers account.
d)      Serving Notice of Dishonour: When the cheque is dishonoured, the collecting banker is bound to give notice of the same to his customer within a reasonable time. If he fails to give such a notice, the collecting banker will be liable to the customer for any loss that the customer may have suffered on account of such failure.
22. What is Capital Market? Explain briefly the features of Capital Market.                         2+6=8
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. 99,04,08,09,11,14
The capital market is classified into two categories (Components), namely,
(i)      Primary market or new issue market, and
(ii)    Secondary market or stock exchange.
Features of Indian Capital Market                           2015
a)      Dealing in Securities: It deals in long-term marketable securities and non-marketable securities such as shares, debentures and bonds. The instruments of capital market are of long duration, i.e. more than one year.
b)      Segments: It included both primary and secondary market. Primary market is meant for issue of fresh shares and secondary market facilitates buying and selling of second hand securities.
c)       Investors: It includes both individual investors and institutional investors. Capital market arranges large amount of funds for institutional investors.
d)      Flow of capital: It facilitates flow of long term capital from those who have surplus capital to those who need capital. It bring about balance between demand and supply of capital by creating a link between those who demand capital and those who supply capital.
e)      Intermediaries: It acts through intermediaries which includes bankers, brokers, underwriters etc.
f)       Liquidity: The industrial securities issued through the primary market are traded in the secondary market which provides liquidity and short-term as well as long-term yields.   


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