Indian Banking system solved Question
Paper 2021
Dibrugarh University BCOM 5th
SEM CBCS Pattern
5 SEM TDC DSE COM (CBCS) 501 (GR-IV)
2021 (Held in January/February, 2022)
COMMERCE (Discipline Specific
Elective)
(For Honours/Non-Honours)
Paper: DSE-501 (Group-IV)
(Banking
and Insurance)
(Indian Banking System)
Full Marks: 80
Pass Marks: 32
Time:
3 hours
The figures in the margin indicate full marks for the questions
1.
Answer the following as directed: 1x8=8
(a)
Priority sector lending does not include educational loan. (Write True or
False)
Ans:
False
(b)
The name of the first bank established in India was Bank of Bengal. (Write True
or False)
Ans:
True
(c)
Cash credit is a non-fund based advance available from bank. (Write True or
False)
Ans:
False
(d)
Which nationalized bank was merged with Punjab National Bank in 1993?
Ans:
New Bank of India Merged with PNB in 1993
(e)
Which was the first bank to introduce ATM in India?
Ans:
The first bank to introduce ATM in India was HSBC.
(f)
The Cooperative Societies Act was enacted in the year _______. (Fill in the
blank)
Ans:
1912
(g)
When was Deposit Insurance and Credit Guarantee Corporation established under
RBI?
Ans:
1978
(h)
Failed ATM transactions should be resolved within _______ days. (Fill in the
blank)
Ans:
T+5 days where T is the transaction date
2. Write short notes on the following
(any four): 4x4=16
(a) Indigenous Banking.
Ans: Indigenous
Banking: That
unorganised unit which provides productive, unproductive, long term, medium
term and short term loan at the
higher interest rate are known as indigenous bankers. These banks can be found
everywhere in cities, towns,
mandis and villages. Banking
in its crude from is as old as authentic history. All throughout the period of
India history, indigenous bankers and money lenders are recorded to have
existed and carried on the business of banking and money lending on a large
scale. Between 2000 and 1400 BC during the Vedic Period records of deposits and
lending are found. Renowned Hindu Law giver Manu has dealt with the matter of
deposits and pledges in section of his work. According to Manu – “a sensible
man should deposit has money with a person of good family, or good conduct,
will acquainted with the Law, veracious, having many relatives, wealthy and
honourable”. Reference is also made to the same in Kautilya’s Arthashastra. The
Indian banks enjoyed considerable public confidence and this can be gauged from
fact that hundis were used from the days of Mahabharata. During the Moghul
Period, the indigenous bankers were most prominent in connection with the
financing of trade and use of instruments of trade. From the early Vedic period
right through the Moghul period as well as that of the East India Company’s
rule until the middle of the 19th Century, indigenous bankers were
the hub of the Indian Financial System providing credit not only to the trade
but also to the Government.
(b) Cooperative Banking.
Ans: Co-operatives
banks are those banks which established in co-operative sectors. Co-operative
banks offer short term and medium term loans to the agricultural sector.
Farmers get various kinds of loan for purchasing various agriculture inputs
from co-operative banks.
(c) Syndicated Loan.
Ans: It is a
loan facility provided to a single borrower by a group of banks. As the loan is
extended by a group of lenders, the size of syndicated loan is normally large
and a single lender/ banker may not have been in a position to extend such a
facility. Since, the bankers involved in providing such loan facility are many;
usually co-ordination work is done by a 'lead manager' who acts as an
intermediary between the lenders and the borrower. Also under this arrangement
one bank in the syndicate acts as an agent for collecting interest and other
payments from borrower and distributes to other banks.
(d) CRR.
Ans: All the banks operating in a country, beside, cash in hand also
maintain certain cash with the Central Bank of the country. This is called cash
reserve. In fact, maintenance of these cash reserves has been made compulsory
by the Law and the Central Bank has been given the power to determine the
percentage of cash to be kept as reserves. This is termed as cash reserve
ratio. In case of emergency these cash reserve can be utilised by the banks to
safeguard their liquidity position.
In India, under Sec 42(1) of the Reserve Bank of
India Act, 1934, every scheduled bank is required to maintain with the Reserve
Bank a minimum cash reserve as percentage of the time and demand liabilities of
the banks in India. The rate varies between 3% and 20%. In practice the bank
keep a higher percentage of cash reserve with the RBI then what the RBI
prescribes at different times. The RBI pays interest on the cash reserve
maintained in excess of the statutory minimum of 3% at a rate equivalent to the
rate of interest payable by the banks in case of savings bank deposit accounts.
(e) Universal Banking.
Ans:
As Narrow Banking refers to restricted and limited banking
activity Universal Banking refers to broad based and comprehensive banking
activities. Under this type of banking, a bank will deal with working capital
requirements as well as term loans for developmental activities. They will be
dealing with individual customers as well as big corporate customers. They will
have expanded lines of business activity combining the functions of traditional
deposit taking, modern financial services, selling long-term saving products,
insurance cover, investment banking, etc.
Advantages
of Universal Banking
a)
Economies of Scale: Universal banking
results in greater economic efficiency in the form of lower cost, higher output
and better products. It enables the banks to exploit economies of large scale
and wider scope.
b)
Profitable Diversions: The banks can
utilize its existing skill in single type of financial services in offering
other kinds by diversifying the activities. Therefore, it involves lower cost
in performing all types of financial functions by one unit instead of other
institution.
c)
Resources Utilization: A bank
possesses all types of information about the existing customers which can be
utilized to perform other financial activities with the same customer.
d)
Easy Marketing of Services: A bank
with established brand name can easily use its existing branches and staff to
sell the other financial products like insurance policies, mutual fund plans
without spending much effort on marketing.
(f) Credit Card.
3. (a) Discuss the
functions performed by modern commercial banks. 14
Ans: Modern banks not only deal in
money and credit creation, other useful functions management of foreign trade,
finance etc. The meaning of modern banks is used in narrow sense of the term as
commercial banks.SBI as a commercial bank renders the following functions under
Section 33 of the Act:
A) Primary
Functions:
I.
Accepting deposits
II.
Advancing loans
III.
Investments of funds
IV. Credit
creation
B)
Secondary Functions:
I. Agency
functions
II.
General utility functions
I.
Accepting Deposits: The most important function of
commercial banks is to accept deposits from public. This is the primary functions
of a commercial bank. Banks receives the idle savings of people in the form of
deposits and finances the temporary needs of commercial and industrial
firms. A commercial bank accepts deposit from public on various account,
important deposit account generally kept by bank are:
a)
Saving Bank Deposits: This
type of deposits suit to those who just want to keep their small savings in a
bank and might need to withdraw them occasionally. One or two withdrawals upto a
certain limit of total deposits is allowed in a week. The rate of interest
allowed on saving bank deposits is less than that on fixed deposits. Depositor
is given a pass book and a cheque book. Withdrawals are allowed by cheques and
withdrawal form.
b)
Current Deposits: These
types of account are generally kept by businessmen and industrialists and those
people who meet a large number of monetary transactions in their routine. These
deposits are known as short term deposits or demand deposits. They are payable
demand without notice. Usually no interest is paid on these deposits because
the bank cannot utilize these deposits and keep almost cent per cent reserve
against them. Overdraft facilities are also available on current account.
c)
Fixed Deposits: These
are also known as time deposits. In this account a fixed amount is deposited
for a fixed period of time. Deposits are payable after the expiry of the stipulated
period. Customers keep their money in fixed deposits with the bank in order of
earn interest. The banks pay higher interest on fixed deposits. The rates
depend upon the length of the period and state of money market. Normally the
withdrawals are not allowed from fixed deposits before the stipulated date. If
it happens, the depositor entails an interest penalty.
d)
Other Deposits: Banks
also provide deposit facilities to different type of customers by opening
different account. They also open. ‘Home Safe Account’ for housewife or very
small savers. The other accounts are: ‘Indefinite Period Deposit a/c’;
‘Recurring Deposit’ a/c; ‘Retirement Scheme’ etc.
II.
Advancing of Loans: The second main function of the
commercial bank is to advance loans. Money is lent to businessmen and
trade for short period only. These banks cannot lend money for long period
because they must keep themselves ready to meet the short term deposits.
The bank advances money in any one of the following forms:
a) Cash
Credit: Cash Credit is a type of advance wherein a banker permits his customer
to borrow money upto a particular limit by a bond of credit with one or more
securities. The advantage associated with this system is that a customer can
withdrawn money as and when required. The bank will charge interest only on the
actual amount withdrawn by the customer. Many industrial concerns and business
houses borrow money in this form.
b) Overdraft:
An overdraft is an arrangement by which the customer is allowed to overdraw his
account. It is granted against some collateral securities. The facility to
overdraw is allowed through current account only. Interest is charged on the
exact amount of overdrawn subject to the payment of minimum amount by way of
interest.
c) Loan:
Loan is an advance in lump sum amount the whole of which is withdrawn and is
supported to be rapid generally wholly at one time. It is made with or without
security. It is given for a fixed period at in agreed rate of interest.
Repayments may be made in installments or at the expiry of a certain period.
d) Discounting
Bill of Exchange: The bank also gives advances to their customers by
discounting their bills. The net amount after deducting the amount of discount
is credited to the account of customer. The bank may discount the bills with or
without any security from the debtor in addition to the personal security of
one or more person already liable on the bill.
III. Investment of funds: Besides
loan and advances, banks also invest a part of its funds in govt. and
industrial securities. Banks purchases both govt. and industrial securities
like govt. bills, share, debentures, etc from their market.
IV. Credit Creations: The banks
create credit. When a bank advances a loan, it does not give cash to the
borrower. It opens an account in the name of the borrower. The borrower is
allowed to withdraw money by cheque whenever he needs. This is known as Credit
Creation.
Secondary Functions of banks: It is
divided into two parts:
I. Agency
Services: Modern Banks render service to the individual or to the business
institutions as an agent. Banks usually charge little commission for doing
these services. These services are as follows:
a)
Remittance of Funds: Banks help their
customers in transferring funds from one place to another through cheques,
drafts etc.
b)
Collection and payment of Credit
Instruments: Banks collects and pays various credit instruments like cheques,
bill of exchange, promissory notes etc.
c)
Purchasing and Sale of securities:
Banks undertake purchase and sale of various securities like shares, stocks,
bonds, debentures etc. on behalf of their customers. Banks neither give any
advice to their customers, regarding this investment, nor levy any charge of
them for their services, but simply perform the function of a broker.
d)
Income Tax Consultancy: Sometimes
bankers also employ income tax experts not only to prepare income tax returns
for their customer but to help them to get refund of income tax in appropriate
cases.
e)
Acting as Trustee and Executor: Banks
preserve the wills of their customers and execute them after their death.
f)
Acting as Representatives and
Correspondent: Sometimes the banks act as representatives and correspondents of
their customers. They get passports, travelers tickets secure passages for their
customers and receive letters on their behalf.
II.
General Utility Services: A modern bank now a days serves its
customers in many other ways:
a)
Locker facility: Banks provides locker
facility to their customers. The customers can keep their valuables and
important documents in these lockers for safe custody.
b)
Traveler’s cheques: Bank issue
travelers cheques to help their customers to travel without the fear of theft
or loss of money.
c)
Gift cheque: Some banks issue cheques
of various denominators to be used on auspicious occasions. These are known as
“gift cheques” as they are gifted to others.
d)
Letter of Credit: Letter of credit is
issued by the banks to their customers certifying their credit worthiness. Letter
of credit is very useful in foreign trade.
e)
Foreign Exchange Business: Banks also
deal in the business of foreign currencies. Again, they may finance foreign
trade by discounting foreign bills of exchange.
f)
Collection of Statistics: Banks
collects statistics giving important information relating to industry, trade
and commerce, money and banking. They also publish journals and bulletins
containing research articles on economic and financial matters.
Or
(b) Explain the
provisions of the Banking Regulation Act regarding the following: 7+7=14
(1) Requirements as to
minimum paid up capital and reserve.
(2) Licensing of banking
companies.
4. (a) What is unit
banking system? How does it differ from branch banking system? Discuss. 14
Ans: 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.”
The
difference between branch banking and unit banking are as follows:
|
Basis |
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 operates 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. |
Or
(b) Distinguish the
following: 7+7=14
(1) Public Sector Bank
vs. Regional Rural Bank.
Ans: Public
Sector Banks are those banks in which majority stake (i.e., more than 50% of
the shares) is held by the government of the country. The words such as “The”
or “Ltd” will not be found in their names because the ownership of these banks is
with the government and the liability is unlimited in nature. Some examples of
public sector banks in India include Andhra Bank, Canara Bank, Union Bank of India,
Allahabad Bank, Punjab National Bank, Corporation Bank, Indian Bank and so on.
A
set of financial institution engaged in financing of rural sector is termed as
‘Rural Banking’. The polices of financing
of these banks have been designed in such a way so that these institution can
play catalyst role in the
process of rural development.
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.
Difference
between Public sectors banks and Regional Rural banks
|
Basis |
Public Sectors Banks |
Regional rural bank |
|
1. Ownership |
Public sector banks are owned,
managed and controlled by the government. |
Rural Banks were established under
the provisions of an Ordinance promulgated on the 26th September
1975 and the RRB Act, 1976. |
|
2. Indian and foreign bank |
Public sector banks are Indian banks
and they do not include foreign banks. |
RRBs are Indian banks. |
|
3. Objective |
Public sectors banks aim at serving
the society besides earning profit. |
Its main objective is to ensure
sufficient institutional credit for agriculture and other rural sectors. |
|
4. Shareholding |
In public sector banks more that 50%
of capital or full capital is supplied by the Government. |
RRBs are under the ownership of the Ministry
of Finance, Government of India, Sponsored Bank and concerned State Government in the ratio of 50:35:15 respectively. |
|
5. Employees |
In public sector banks required
employees are appointed by the Government. |
Employees are appointed by direct
recruitment which involves a written exam conducted by IBPS. |
|
6. Sharing of profit |
The profits earned by the public
sector banks go to the Government. |
The profits are distributed amongst
GOI, State government and Sponsored bank. |
(2) Retail Banking vs.
Wholesale Banking.
Ans: 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 wholesale bankers like
foreign banks also prefer to go for consumer financing albeit for marginally
higher net worth individual.
Wholesale Banking
Wholesale
or corporate banking refers to dealing with limited large-sized customers.
Instead of maintaining thousands of small accounts and incurring huge
transaction costs, under wholesale banking, the banks deal with large customers
and keep only large accounts. These are mainly corporate customer. Wholesale
banks are mainly engaged in financing, underwriting, market making,
consultancy, mergers and acquisitions and fund management.
Difference
between Retail Banking and Wholesale banking
a)
Retail banking refers to that banking
which targets individuals and the main focus of such banks is retail customer
whereas wholesale banking refers to that banking which targets corporate or big
customers and their main focus is providing services to corporate clients.
b)
Ticket size of loans given in retail
banking is low and due to it impact of NPA will be less pronounced due to
diversification as compared to wholesale banking where ticket size of loan is
very high and due to it impact of NPA is more pronounced.
c)
Loans such as car, housing,
educational, personal loans are some of the examples of loans given in retail
banking whereas loans such as loan for setting industry, machinery advance,
export credit are some of the examples of loans given in wholesale banking.
d)
Monitoring and recovery if the loan
turn out to be NPA in retail banking is more difficult because customer base is
wide whereas in case of wholesale banking due to low customer base it is easy
to monitor as well recover the loan given to customers.
e)
Cost of deposit is low in retail
banking because retail customers do not have the bargaining power due to less
deposit with them whereas in case of corporate customer’s banks have to offer
them high interest rates in order to attract funds from them.
f)
Retail banking requires large network
of branches in order to cater to large customer base and hence it results in
high operational costs while in case of wholesale banking small number of
branches is sufficient to cater to corporate clients.
5. (a) What do you mean
by Bank Nationalization? Discuss the arguments for and against Nationalization
of Banks in India. 14
Ans:
Nationalisation
of Banks in India
Nationalization
is a process whereby a national government or State takes over the private
industry, organisation or assets into public ownership by an Act or ordinance
or some other kind of orders. This strategy has been frequently adopted
by socialist governments for transition from capitalism to socialism.
The
banking sector in India has been facing extreme changes with the economic
growth of the country. In 1948, RBI (Transfer of public ownership) Act was
passed to nationalised the Reserve Bank. On Jan 1, 1949, RBI was nationalised.
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.
Arguments
in favour and against nationalisation of banks
Arguments in favour of nationalisation
1)
It
would enable the government to obtain all the large profits of the banks as its
revenue
2)
Nationalization
would safeguard interests of public and increase their confidence thereby
bringing about a rapid increase in deposits. Thus preventing bank failures
3)
It
would remove the concentration of economic power in the hands of a few
industrialists
4)
It
would help in stabilizing the price levels by eliminating artificial scarcity
of essential goods
5)
It
would enable the baking sector to diversify its resources for the benefit of
the priority sector.
6)
Eliminates
wasteful competition and raises the efficiency of the working of banks
7)
enables
rapid increase in the number of banking offices in rural & semi-urban areas
& helped considerably in deposit mobilization to a great extent
8)
necessary
for the furtherance of socialism and in the interest of community
9)
Enables
the Reserve Bank to implement its monetary policy more effectively
10)
It
would replace the profit motive with service motive
11)
It
would secure standardization of banking services in the country
12)
Would
check the incidence of tax evasion and black money
13)
Through
pubic ownership and control, banks function like other public utility services
by catering to the financial need of the common man.
14)
Like
other countries, India should also get profit by nationalizing her banking
industry.
15)
Essential
for successful planning and all-round progress of the national economy,
community development and for the welfare of the people.
Arguments against nationalisation (Criticism)
1)
Political purpose rather than
for Productive purpose: The government has acquired the
strength of a giant and there is the danger of using the financial resources
for political purposes rather than for productive purpose.
2)
Beginning of state capitalism:
Such a drastic step of nationalisation of about 90% of the banking resources is
wholly unnecessary, especially if we take into consideration the enormous
powers vested in the Reserve Bank of India for controlling banks' resources. It
is considered as the beginning of state capitalism and not socialism in India.
3)
Scope for inefficiency:
Some are of the opinion that after nationalisation banks will degenerate to the
level of agricultural co-operatives, which are known for their inefficiency and
corrupt practices.
4)
Less attractive customer's
service: Inefficiency, indecision, corruption, and
lack of responsibility are the evils with which the government undertakings
are suffering. A government bank may not care to attach importance to the customer
service.
5)
Secrecy of customer's accounts:
In spite of the assurances given and provisions made in the Act, businessmen
still fear about the maintenance of the secrecy of the customer's accounts. As
such, they may be forced to withdraw their deposits and go to some bank in the
private sector and foreign banks. Thus nationalisation of big Indian banks
.will diverts some of the deposits of Indian banks to the foreign banks which
is not at all desirable.
6)
Branch expansion:
To argue that nationalisation will help to facilitate branch expansion to
rural areas much more rapidly than the private banks cannot be supported by
facts. Weather it is private bank or nationalised bank; it has to go by
business principles and satisfy itself that the new branch is economically
viable. In other words, branch expansion can be achieved by private banks as
well, without nationalisation.
7)
Burden of compensation:
Nationalisation leads to the payment of heavy compensation to the
shareholders. This gives additional financial burden on the government. Moreover,
it is also argued that nationalisation will not bring much income to the
government.
Or
(b) Discuss the factors
that are taken into consideration by banks while lending or investing. 14
Ans: The principles of sound lending by commercial banks
Banks
should follow some basic principles at the time of lending. This ensures
efficient and long term working of
the banks. Some of the basic principles of lending are as follows:
1)
Safety of principal: The first and
foremost principle of lending is to ensure the safety of the funds lent. 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 repayment of the
loan depends upon the borrower’s (i) capacity to pay and (ii) willingness to
pay. 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.
2)
Profitability: 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.
3)
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.
4)
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.
5)
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.
Principles of Sound Investment: Banks should
follow some basic principles at the time of investing funds. This ensures
efficient and long term working of the banks. Some of the basic principles of
sound investments are as follows
1)
Safety of principal: The most
important rule for granting/lending loans is the safety of funds. A banker
deals in borrowed funds and therefore his main consideration is safety of
principal invested in securities. Banks must ensure the solvency and sound
financial position of the companies in which investments is made. The
government and semi-government securities are the safest securities because
they are guaranteed by the government.
2)
Marketability or liquidity: The second
important principle of sound investments is liquidity. Liquidity means
possibility of converting investments into cash without loss of time and money.
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.
3)
Return or Profitability: Return or profitability
is another important principle. The funds of the bank should be invested in
securities to earn highest return, so that it may pay a reasonable rate of
interest to its customers on their deposits, reasonably good salaries to its
employees and a good return to its shareholders. However, a bank should not
sacrifice either safety or liquidity to earn a high rate of interest.
4)
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 on wide fluctuations
in prices of the securities 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. .
5)
Diversification of Investment: One
should not put all his eggs in one basket’ is an old proverb which very clearly
explains this principle. A bank should not invest all its funds in one
particular industry or security or company. In case that industry or company
fails, the banker will not be able to recover his funds. Hence, the bank may
also fail. So, the bank should diversify its investments in different
industries and should invest in variety of companies with sound financial
record.
6. (a) What is Internet
Banking? Discuss the advantages and challenges of Internet Banking. 14
Ans: E-Banking or
Internet banking
Online banking also known
as internet banking, e-banking, or virtual banking, is
an electronic payment system that enables customers of
a bank or other financial institution to conduct a range
of financial transactions through the financial institution's website.
Internet banking is a term used to describe the process whereby a client
executes banking transactions via electronic means. This type of banking uses
the internet as the chief medium of delivery by which banking activities are
executed. The activities clients are able to carry out are can be classified to
as transactional and non transactional.
Advantages of
E-banking or Internet banking
1)
Convenience: Banks that offer
internet banking are open for business transactions anywhere a client might be
as long as there is internet connection. Apart from periods of website
maintenance, services are available 24 hours a day and 365 days round the year.
In a scenario where internet connection is unavailable, customer services are
provided round the clock via telephone.
2)
Low cost banking service: E-banking
helps in reducing the operational costs of banking services. Better quality
services can be ensured at low cost.
3)
Higher interest rate: Lower
operating cost results in higher interest rates on savings and lower rates on
mortgages and loans offers from the banks. Some banks offer high yield certificate of deposits and don’t
penalize withdrawals on certificate of deposits, opening of accounts without
minimum deposits and no minimum balance.
4)
Transfer services: Online
banking allows automatic funding of accounts from long established bank
accounts via electronic funds transfers.
5)
Ease of monitoring: A client
can monitor his/her spending via a virtual wallet through certain banks and
applications and enable payments.
6)
Ease of transaction: The speed
of transaction is faster relative to use of ATM’s or customary banking.
7)
Discounts: The credit cards and
debit cards enables the Customers to obtain discounts from retail outlets.
8)
Quality service: E-Banking
helps the bank to provide efficient, economic and quality service to the
customers. It helps the bank to create new customer and retaining the old ones
successfully.
9)
Any time cash facility: The
customer can obtain funds at any time from ATM machines.
Disadvantages of
E-banking Internet banking
1)
High
start-up cost: E-banking requires high initial startup cost. It includes
internet installation cost, cost of advanced hardware and software, modem,
computers and cost of maintenance of all computers.
2)
Security
Concerns: One of the biggest disadvantages of doing e-banking is the question
of security. People worry that their bank accounts can be hacked and accessed
without their knowledge or that the funds they transfer may not reach the
intended recipients.
3)
Training
and Maintenance: E-banking requires 24 hours’ supportive environment, support
of qualified staff. Bank has to spend a lot on training to its employees.
Shortage of trained and qualified staff is a major obstacle in e-banking
activities.
4)
Transaction
problems: Face to face meeting is better in handling complex transactions and
problems. Banks may call for meetings and seek expert advice to solve issues.
5)
Lack
of personal contact between customer and banker: Customary banking allows
creation of a personal touch between a bank and its clients. A personal touch
with a bank manager can enable the manager to change terms in our account since
he/she has some discretion in case of any personal circumstantial change. It
can include reversal of an undeserved service charge.
Or
(b) What is bridge loan?
Discuss the characteristics and uses of bridge loan. 4+5+5=14
Ans:
Bridge loan is a short-term temporary loan extended by financial institutions
to help the borrower to meet the immediate expenditure pending disposal of
requests for long- term funds or regular loans. Here, the bridge loan is not
against any main loan arrangement but against anticipated cash flow. Again, if
an individual is negotiating the sale of his asset, say a house, a bridge loan
may be extended by a bank to meet the seller's immediate cash requirements. The
loan will be paid off when the borrower realizes his sale proceeds.
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