Finance Solved Question Paper 2025 [AHSEC Class 12 Finance Solved Question Papers]

Finance Solved Question Paper 2025 

[AHSEC Class 12 Finance Solved Question Papers]

Full Marks: 80

Pass Marks: 24

Time: Three hours

The figures in the margin indicate full marks for the questions.

Q. No. 1 carries 1 mark each. 1×6 = 6

Q. No. 2 carries 2 marks each. 2×4 = 8

Q. No. 3 carries 3 marks each (any four out of six) → 3×4 = 12

Q. No. 4 carries 5 marks each (any six out of eight) → 5×6 = 30

Q. No. 5 carries 8 marks each (any three out of five) → 8×3 = 24

Total = 80

1. Answer any six from the following questions: (1×6 = 6)

(a) __________ is the apex monetary institution of India.

Ans: RBI

(b) State the meaning of e-banking.

Ans: E- banking is a term used to describe the process whereby a client executes banking transactions via electronic means.

(c) Name the oldest stock exchange of our country.

Ans: Bombay Stock Exchange

(d) Write the full form of OTCEI.

Ans: OTCEI – Over the Counter Exchange of India

(e) __________ market deals with the short-term lending and borrowing of funds.

Ans: Money Market

(f) In India, who issues all notes other than one-rupee notes?

Ans: RBI

[The RBI issue currency notes of Rs. 2, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 200, Rs. 500 Rs. 2000 denominations. The One Rupee notes are issued by the Minister of Finance, Government of India.]

(g) NSE was set up in which year?

Ans: NSEI was set up in 1991 but was recognized in 1992.

(h) What is liquidity ratio?

Ans: Liquidity ratio is a measure used for determining a company's ability to pay off its short-term liabilities.

2. Answer the following questions briefly: (2×4 = 8)

(a) What is 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. 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) Give two objectives of GIC.

Ans: Objectives of GIC:

a) To carry on the general insurance business, other than life, such as fire, accident, theft, etc.

b) To provide loans and investments in capital market of the country.

(c) What is secondary capital market?

Ans: Secondary market also called stock exchange represents a market where existing securities i.e. shares and debentures are traded. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest and cheapest manner.

(d) State any two uses of ATM.

Ans: Functions and Uses of ATMs:

a) Ability to view Account Balances & Mini-statements

b) Payment of utility bills like Electricity bills, post-paid mobile bills

3. Answer any four from the following: (3×4 = 12)

(a) Write three objectives of NABARD.

Ans: Objectives/Functions of NABARD

1. To provide training and Research facilities for rural Development.

2. To keep a check on all the projects which are refinanced by NABARD; through timely inspection, monitoring and evaluation.

3. Promotion and development of agriculture, Small Scale industries, cottage and village industries, handicrafts and other rural crafts.

(b) What is cash credit? Give two advantages of cash credit.

Ans: Cash Credit is a short-term loan facility which is provided by banks provide to businesses to meet their working capital needs. It allows businesses to withdraw funds even without a credit balance, up to a predefined borrowing limit set by the bank.

Advantages of Cash Credit:

1. Flexibility: The businesses have the flexibility of withdrawing funds as and when needed.

2. Cost Efficiency: It is cost effective because only the used amount is charged on interest and the entire credit limit.

3. Collateral-Based Security: It is collateral-based which provides a sense of assurance to the bank.

(c) Mention three distinguishing features of capital market.

Ans: Features of Indian Capital Market

1. Dealing in Securities: It deals in long-term marketable securities and non-marketable securities.

2. 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.

3. Investors: It includes both individual investors and institutional investors such as Mutual funds, banks, Insurance companies etc. It also includes foreign institutional investors.

4. Link between savers and investment opportunities: Capital market is a crucial link between saving and investment process. It facilitates flow of long term capital from those who have surplus capital to those who need capital.

(d) Write three functions of Stock Exchange.

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.

(e) What are the different functions performed by RBI as a Banker of Government?

Ans: Bankers to Government: The RBI acts as banker to the Central and State Government as a banker as an adviser as an agent into their capacities:

a)    As a banker.

b)    As an agent.

c)    As an advisor.

As a Government banker the RBI performs the following functions: -

a)    It maintains and operates deposit account of the central and state governments.

b)    It receives and collects payment on behalf of the Central and state governments.

c)    It makes payments on behalf of the central and state governments.

d)    It provides short term advances to government for which are called ways and means advances etc.

As a Government agent the RBI perform the followings functions: -

a)    Collect tax and other payments on behalf of the government.

b)    Raise loan from the public and thus manages public debts.

c)    Transfer funds and provide remittances facilities to the government etc.

As an adviser the RBI acts as an advising the Government on all financial matters such as loan separations investment, agricultural and industrial finance, banking planning etc. It also advices to promote the attainment of the national economic goals.

(f) Write three differences between scheduled bank and non-scheduled bank.

Ans: Scheduled banks refer to those banking institutions whose names are included in the Second Schedule of the Reserve Bank of India Act, 1934. Moreover, the banking company may be included in scheduled list only after must fulfill some conditions.

Non-Scheduled banks refer to those banking institutions, whose names do not appear in the Second Schedule of the RBI Act, 1934. Non-Scheduled banks were engaged in lending money discounting and collecting bills and in providing various agency services.

Basis	Scheduled Banks	Non-Scheduled Banks
RBI Listing	Their names are on the official RBI list (Second Schedule).	Their names are not on the official RBI list.
Requirements	Must meet strict conditions set by the RBI.	Do not need to meet those specific RBI conditions.
Borrowing Power	Can borrow money from the RBI for regular needs.	Can only borrow from the RBI in emergency situations.
Cash Reserves	Must keep a Cash Reserve Ratio (CRR) with the RBI.	Can keep their cash reserves with themselves.
Member Status	They are considered "members" of the clearinghouse.	They are generally not members of the clearinghouse.

4. Answer the following (any six): (5×6 = 30)

(a) Discuss different methods of note issue of Central Bank.

Ans: The first function or the primary function of money is to issue paper currency. The Central Bank has the sole power to issue paper currency. The notes are legal tender money. In India, the RBI issue currency notes of all types except One Rupee note which are issued by the Ministry of Finance, Govt. of India. But the notes are issued following some methods. The Central Banks follows different methods or system according to the currency or banking regulations to issue notes. These systems are:

a)       Simple Deposit system/Full reserve system.                2015

b)      Fixed fiduciary system.

c)       Proportional reserve system.

d)      Minimum reserve system.  (Followed in India from 1956 onwards) – (2014, 2016, 2017, 2022)

e)      Maximum reserve system.

The simple deposit system is also known as full reserve system. Under this system, the Central Bank is required to keep 100% of metal, either gold or silver or both as reserve for every note issued. The notes so issue becomes representative paper money. The advantage of this system is that it enjoys a public confidence and there is no danger of over issue of currency notes. But it is very costly and money supply cannot be increase as and when required.

The system of fixed fiduciary was first introduced in England in 1844. Under this system, the Central Bank issue currency notes up to a certain limit against reserves of Govt. securities. The notes issued beyond the limit set by the law have to be fully banked by metallic reserves. Though the system inspires public confidence and ensures convertibility of currency notes without any danger of over issue, yet the system is uneconomical and un-elastic as it requires sufficient gold reserves and the supply of money cannot be increased easily at time of emergency.

The proportional system of issuing currency is very simple and elastic. According to this system, the notes issued by Central Bank are banked by both metallic reserves and securities. A certain percentage (25 to 40%) of the total notes issued has to be backed by gold or silver reserves and the remaining by Govt. securities. The system guarantees the convertibility of paper money and is economical to use.

The minimum reserve system is followed in India since 1956. This is a system in which the Central Bank is authorized to issue notes up to any limit by keeping a certain minimum reserve of gold and foreign securities. In India, the RBI is required to keep the minimum reserve of Rs. 200/- crore out of which Rs. 115/- crore should be kept in gold. The system is very elastic and economical for developing countries as it requires only a small and fixed amount of gold reserve. However, it lacks in public confidence due to non-convertibility of notes.

The system in which the Central Bank is authorized to issue notes up to a certain limit without any gold reserves is known as Maximum Reserve System. Under this system, the Central Bank is given power to determine the maximum limit and also the power to reserve the limit from time to time according to the needs of the economy. This system is elastic and economical to use. But it involves the danger of over issue of notes and lacks public confidence.

(b) Discuss the functions of foreign exchange market.

Ans: FUNCTIONS OF FOREIGN EXCHANGE MARKET: Following are the important functions performed by the foreign exchange market:

1. Facilitates transfer: The basic function of the foreign exchange market is to transfer purchasing power between countries i.e. to provide a platform whereby currency of one country is converted into currency of another country at the prevailing exchange rate.

2. Facilitates credit: Foreign bills of exchange used in the international payments normally have maturity period of three to six months. The foreign exchange market performs the function of providing credit to promote foreign trade. Credit is provided on the basis of such foreign bills of exchange.

3. Facilitates hedging: In a situation of exchange risks, the foreign exchange market performs hedging function. Hedging is the act of equating one’s assets and liabilities in a foreign currency to avoid the risk resulting from future exchanges in the value of foreign currency.

4. Facilitates trade and investment: International trade and investment would not have been possible without the arrangements or mechanism for buying and selling foreign currency. The foreign exchange market is required to undertake import/export transactions.

(c) What are the methods of trading in stock exchange?

Ans: Common methods for trading of stocks are given below:

1. Day Trading: Day trading involves buying and selling stocks within the same trading day. Day traders aim to profit from short-term price movements and typically do not hold positions overnight. They rely on technical analysis, charts, and intraday price patterns to make quick trading decisions.

2. Swing Trading: Swing trading aims to capture short to medium-term price swings in stocks. Swing traders hold positions for several days to weeks, taking advantage of price movements within that time frame.

3. Position Trading: Position trading takes a long-term perspective on stock trading. Investors who practice position trading may hold positions for months or even years. Fundamental analysis is typically employed to assess the long-term growth prospects of the stocks.

4. Value Investing: Value investors look for stocks that they believe are undervalued by the market. They focus on a company's fundamentals, such as earnings, dividends, and financial health, to identify opportunities for long-term investment.

5. Growth Investing: Growth investors seek stocks of companies with strong potential for future growth. They are willing to pay a premium for stocks that show promising revenue and earnings growth.

6. Momentum Trading: Momentum traders focus on stocks that are currently experiencing strong price trends. They buy stocks that are rising and sell stocks that are falling, aiming to profit from the continuation of existing trends.

7. Options Trading: Options trading involves trading contracts that give the holder the right to buy (call options) or sell (put options) a stock at a predetermined price within a specified time frame.

8. Futures Trading: Futures trading involves contracts to buy or sell an asset, including stock index futures. Traders use futures contracts for speculation or to hedge against future price movements.

(d) State the conditions under which a banker should refuse payment of a cheque.

Ans: The Paying banker is bound to pay the cheque if the following conditions are satisfied

a)       When the cheque has been drawn on the proper form i.e. on the forms supplied by the banker.

b)      When the cheque bears a date and which is due.

c)       When there is sufficient fund in the account of the customer to pay the cheque in full.

d)      When the fund is properly applicable for the payment of the cheque.

e)      When the amount of the cheque is mentioned in both words and figures and they are same.

f)        When the banker has no doubt regarding the signature of the drawer i.e. it has not been forged.

g)       In case of joint account, when all the account holders have signed the cheque.

h)      When the cheque has been drawn on the particular bank and branch in which the account has been opened by the customer.

(e) Mention the advantages of e-banking services.

Ans: 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.

(f) Explain the benefits of online stock trading.

Ans: Online trading refers to the process of buying and selling financial instruments, such as stocks, bonds, commodities, currencies, and derivatives, through internet-based trading platforms provided by brokerage firms or financial institutions. It allows individual investors, traders, and institutions to execute trades, monitor market data, and manage their investment portfolios electronically, without the need for physical presence or manual intervention.

Advantages of Online Trading:

1. Convenience: Online trading can be done from anywhere with an internet connection. Investors can trade at their convenience, even outside regular market hours.

2. Cost Efficiency: Online trading often comes with lower transaction costs and reduced brokerage fees compared to traditional methods. Many online brokers offer competitive pricing.

3. Real-Time Data: Online trading platforms provide real-time access to market data, including stock quotes, charts, news, and research tools, enabling informed decision-making.

4. Accessibility: It opens up financial markets to a broader audience, allowing both retail and institutional investors to participate in trading activities.

5. Speed: Trades can be executed swiftly, reducing the chances of missing out on market opportunities or reacting to price changes.

(g) Narrate the methods of qualitative or selective credit control.

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 have control over 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                     2012, 2015, 2017

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 limited 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. Under repo, buying and selling of securities takes place with the condition that at the end of the specified fixed period the buyer shall sell the securities at the predetermined rate. The difference between the repurchase price and the original sale price will be earning for the lender. An increase in repo rate means the commercial banks will get more interest on their reserve with RBI which leads to shortage of funds in the economy. On the other hand, decrease in repo rate means the commercial banks will earn less return on their balance with RBI which increases withdrawal of funds by commercial banks from RBI and thus increases liquidity.

2)      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 powers to the RBI for controlling granting of advances by an individual bank or by banking as a whole. The RBI can give directions 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 good sector and bad sectors in the system. This published information can help commercial banks to direct credit supply in the desired good sectors.

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. Under moral suasion central banks can issue directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes. It helps in restraining credit during inflationary periods.

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.

(h) Write the defects of Indian money market.

Ans: The distinguishing features of Indian money market are given below:             2007, 2009, 2011

1.       Existence of Unorganised Money Market: The Indian money market is dichotomized into organised and unorganised sectors. Existence of unorganised market is the major defect of Indian money market because such organised markets are not under the control of RBI.

2.       Lack of co-ordination: The Indian money market may be characterized as loose and unbalanced because there is no co-ordination between the organised and unorganised sectors.

3.       Disparity in interest rates: The rate of interest charged by the commercial banks, co-operative banks and financial institutions for the same kind of loan may be different. This was mainly due to lack of mobility of funds from one segment to another.

4.       Different lending policies: There is a wide divergence not only in the structure of interest rates, but also in the lending policies of the different financial institution.

5.       Inadequate control by the RBI: The RBI has inadequate control over the functioning of unorganised sector of the Indian money market.

6.       Instability and inelasticity: The instable and inelastic Indian money market acts as a great hindrance to the rapid economic development of the country.

7.       Lack of proper bill market: Indian traders prefer Hundies, rather than draw of bills of exchange. The reason for this is that there is no proper bill market or discount market for short term bills of exchange.

5. Answer any three from the following questions: (8×3 = 24)

(a) What is Central Bank? Discuss the traditional functions of RBI.

Ans: Central Bank: The central bank is the supreme monetary institution of any country. It is a national bank which provides banking services to the government and commercial banks. It also helps in implementing monetary policy of the government and issuing currency. It is established, owned, controlled and financed by the govt. of the country.

In the words of R.S. Sayers, “It is a bank which controls the commercial banks in such a way as to promote the general monetary policy of the country.”

India’s central bank is called the Reserve Bank of India. It is the apex monetary institution of India. Reserve Bank of India was established on April 1, 1935 under schedule II of the Reserve Bank of India Act, 1934. Originally it was constituted as private banks with a share capital of Rs. 5 Crores. Entire share capital was owned by the private individuals. After independence, it was decided to nationalize the Reserve Bank of India and it was nationalized under the Reserve Bank (Transfer to public ownership) Act 1948, on January 1, 1949. From January 1, 1949 the RBI started functioning as a state owned and state controlled central bank.

Traditional functions of RBI are:

1.    Note Issue: The reserves bank of India is the sole authority for the issue of currency in India other than one rupee coins/notes and subsidiary coins. The RBI has adopted the minimum reserves system of note issue to issue currency notes in the country. Under this system the RBI maintains a minimum reserve of Rs. 200 crores of which Rs. 115 crores are in gold and the rest in securities. The issue department of RBI has the responsibility to issue paper money. It is responsible for getting its periodical requirements of notes printed from the currency presses of the Government of India, distribution of currency among the public and withdrawal of unserviceable notes and coins from circulation. The Issue Department deals directly with the public in exchange of currency for coins and vice versa and exchange of notes of one denomination for another.

2.    Bankers to Government: The RBI acts as banker to the Central and State Government as a banker as an adviser as an agent into their capacities:

d)    As a banker.

e)    As an agent.

f)     As an advisor.

As a Government banker the RBI performs the following functions: -

e)    It maintains and operates deposit account of the central and state governments.

f)     It receives and collects payment on behalf of the Central and state governments.

g)    It makes payments on behalf of the central and state governments.

h)    It provides short term advances to government for which are called ways and means advances etc.

As a Government agent the RBI perform the followings functions: -

d)    Collect tax and other payments on behalf of the government.

e)    Raise loan from the public and thus manages public debts.

f)     Transfer funds and provide remittances facilities to the government etc.

As an adviser the RBI acts as an advising the Government on all financial matters such as loan separations investment, agricultural and industrial finance, banking planning etc. It also advices to promote the attainment of the national economic goals.

1.    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 (2017): 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 (2018): 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. The clearing house functions of RBI are:

Ø For settlement of banking transactions between two banks.

Ø To helps in economizing the uses of cash by banks.

Ø Look-over the liquidity position of the bank.

2.    Control of credit:  As a central bank, the RBI take the responsibility to control of credit in order to economic development and price stability in the country under credit control policy different method are used to control the volume of credit in the economy. Important of them are General Credit Control and Selective Credit Control.

3.    Custodian of gold and foreign exchange reserves: - The RBI act as a custodian of gold and foreign exchange reserves for both on its own and on behalf of the Government.

(b) Discuss the role of NABARD in the development of the agricultural economy of India.

Ans: The National Bank for Agriculture and Rural Development (NABARD), a developing bank, came into existence on July 12, 1982, under an Act of Parliament with an initial capital of Rs. 100 crores. It is an apex institution set up for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas. The NABARD has taken over the functions of ARDC (Agricultural Refinance and Development Corporation) and refinancing functions of RBI in respect of co-operative banks and the RRBs.

Objectives/Functions of NABARD

1. Integrated rural development.

2. To provide training and Research facilities for rural Development.

3. To keep a check on all the projects which are refinanced by NABARD; through timely inspection, monitoring and evaluation.

4. To Act as a coordinator and regulator for rural credit institutions.

5. Promotion and development of agriculture, Small Scale industries, cottage and village industries, handicrafts and other rural crafts.

6. To formulate rural credit plans on annual basis for all districts in country.

(c) What do you mean by stock broker? Write the functions of a stock broker.

Ans: Meaning of Broker: An individual cannot buy or sell securities directly at stock exchange. He can do so only through a broker. So he has to select a broker through whom the purchase or sale is to be made. Brokers are commission agents who act as an intermediary between buyers and sellers of securities in the primary and secondary markets. They are brokerage from both buyer and seller for their services.

Ans: Role and duties of stock brokers:

The duties of a broker can be divided into three categories:

A) General Duties:

1. Integrity: A stock broker maintains high standards of integrity in the conduct of all his business activities.

2. Exercise of due care and diligence: A stock broker shall act with due care and diligence in the conduct of his business.

3. Manipulation: A stock broker shall not indulge in manipulations of securities or spreading rumours in stock market.

4. Malpractices: A stock broker shall not create false market or do not indulge in any act which is detrimental to the interest of the investors.

5. Compliance with statutory requirements: A stock broker along with its sub-brokers shall abide by the all the provisions of the Act and the rules, regulations issued by the Government and SEBI.

B) Duties to the Investors:

1. Execution of orders: A stock-broker shall faithfully execute the orders of buying and selling of securities at the best available market price and not to refuse to deal with a small investor.

2. Issue of contract note: A stock-broker shall issue contract note of all the transactions made by client immediately or on the date of the transactions.

3. Not to Breach the trust: A stock-broker must not share the details of its client with third party.

4. Avoid doing Business with defaulting client: A stock-broker shall not deal or transact business with a client who already defaulted in carrying out his commitments with another stock-broker.

5. Investment Advice: A stock broker shall not make a recommendation to any client who might be expected to rely thereon to acquire or dispose of any securities unless he has reasonable grounds for believing that the recommendation is suitable for such a client.

C) Duties towards its sub-brokers and other stock-brokers:

1. Conduct of dealings: A stock-broker shall co-operate with the other stock-brokers or sub-brokers contracting party in comparing unmatched transactions.

2. Protection of client interests: A stock-broker shall extend fullest co-operation to other stock-brokers or sub-brokers in protecting the interest of his clients regarding their rights to dividends, bonus etc.

3. Advertisement and publicity: A stock-broker shall not advertise his business publicly unless permitted by the stock exchange.

4. Inducement of clients: A stock-broker shall not resort to unfair means of inducing clients from other stock-brokers.

5. False or misleading returns: A stock-broker shall not neglect or fail to refuse to submit the required return and not make any false or misleading statement on any returns required to be submitted to the board and the stock exchange.

(d) What do you mean by lease financing? Explain the different forms of lease financing.

Ans: Meaning: Leasing is a contractual transaction in which the owner of an asset (called lessor) gives the same to another party (called lessee) the right to use it for a specified period of time (called lease period) in consideration of certain payments (called lease rentals). The International Accounting Standard No.17 (IAS - No.17) defines Leasing as “an agreement whereby the Lessor conveys, to the lessee in return for rent, the right to use an asset for an agreed period of time.”

Lease financing is one of the important sources of medium- and long-term financing where the owner of an asset gives another person, the right to use that asset against periodical payments. The owner of the asset is known as lessor and the user is called lessee.

Types of Leases: Leasing is a unique type of commercial contract. Lease financing is often termed as equipment leasing and it is broadly classified into:

(a) Operating Lease: In operating lease, the lease is usually for a shorter term and is generally cancellable. As the asset is leasable repeatedly to several persons, the operating lease is usually said to be a non-payout lease.

Features of operating leases

1. The lease contract is generally for a period which is considerably shorter than the useful life of the leased asset.

2. The lessor does not, therefore, recover the full cost of the asset from one lessee only. The leased asset is returned back to the lessor at the end of the lease period and is, thereafter, leased again to another lessee for another lease period.

3. Operating lease generally contains a cancellation clause also, wherein the lessee retains the right to cancel the lease any time before the lease period is over.

4. The lease agreement contains a maintenance clause whereby the lessor is required to maintain the leased assets. Thus, necessary repairs, fuel, support staff may be provided by the lessor, as agreed upon.

(b) Financial Lease: Financial lease is a long-term lease usually coinciding with the economic life of the asset and is non-cancellable. It operates as a long-term debt financing and is usually full-payout as in contrast to operating lease, it is usually a single lease repaying the cost of the asset. They play a major role in financing of building of buildings and equipments to industries.

Features of Financial lease

1. In case of Financial lease, the asset is exclusively for the use of particular lessee.

2. The lease period may stretch over the entire the economic life of the asset.

3. The lessor is only a financier. usually he is not interested in the asset.

4. Lease period is non-cancellable.

5. The assets leased includes ships, aircraft, railway wagons, land, building, heavy machinery etc.

(c) Service Lease: It is an equipment leasing system under which the lessor provides financing as well as servicing of the assets during the lease period. The lessor will covenant with the lessee to provide maintenance and servicing of the leased asset during the existence of the lease.

(e) What is a non-banking financial institution? Explain the characteristics of non-banking financial institutions.

Ans: Non-Banking Financial Institutions (NBFI’s): NBFI’s include such institution as life-insurance companies, mutual savings bank, pension funds, building societies etc. which are doing diverse business. These financial institutions are thus a heterogeneous group of financial institutions other than commercial banks and co-operative societies. They include a wide variety of financial institutions, which raise funds from the public, directly or indirectly, to lend them to ultimate spenders. The growth of NBFI’s has been much faster than that of commercial banks. The main reason for this is that, in comparison to commercial banks, NBFI’s pay higher interest ratio to the depositors and change lower interest rate from the borrowers. Thus, they are competing with the commercial bank for public savings and as sources of Loanable funds.

Broadly NBFI’s in India are classified into two groups:

(i) Organised NBFI’s

(ii) Unorganised NBFI’s

(i) Organised NBFI’s: The organised NBFI’s include development banks and other specialised institutions. Development banks are further divided into Industrial Development banks and Agricultural Development banks:

Industrial Development banks are the following: (i) Industrial Development banks of India (IDBI). (ii) Industrial Credit and Investment Co-operations of India (ICICI). (iii) Industrial Development banks of India (IDBI). (iv) Life Insurance corporation (LIC). (v) Unit Trust of India (UTI). (vi) General Insurance Corporations (GIC).

Agricultural Development banks are the following: (i) National bank for agricultural and rural development (NABARD). (ii) Land Development Bank (LDB) (ii) Unorganised NBFI’s: A number of unorganised NBF’s also operate in the country. They are known as loan companies, higher purchase finance companies, chit funds etc.

Features of NBFI’s

a)       NBFI is a specialised financial institution which provides medium and long term finance to business units.

b)      It is a multi-purpose financial institution and not just a term-lending institution.

c)       It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.

d)      Financial assistance is provided by a development bank not only to the private sector but also to the public sector undertakings.

e)      One of its major aims is to promote the saving and investment habit in the community.

f)        Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.

g)       Its motive is to serve the public interest. It works in the general interest of the nation rather than to make profits. A development bank is motivated by social profits.

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