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IIBF SFB practice questions

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Question 1Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Under the RBI Small Finance Bank licensing framework, what is the minimum paid-up equity capital required for a newly established Small Finance Bank?

  1. ₹300 crore
  2. ₹100 crore
  3. ₹500 crore
  4. ₹200 crore Correct answer.

Explanation

The RBI's December 2019 guidelines on 'on-tap' licensing of Small Finance Banks set the minimum paid-up voting equity capital at ₹200 crore for new entrants. Existing SFBs converted from other entities had to reach this level progressively. This threshold is a core licensing condition distinct from the ₹100 crore figure used in the earlier 2014 framework.

Question 2Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

The RBI's on-tap licensing guidelines for Small Finance Banks were issued in which year?

  1. 2014
  2. 2021
  3. 2016
  4. 2019 Correct answer.

Explanation

The 'Guidelines for on-tap Licensing of Small Finance Banks in the Private Sector' were issued on 5 December 2019. The earlier SFB licensing framework dated from November 2014, under which the first set of SFBs was approved. The 2019 guidelines made licensing continuous rather than round-based.

Question 3Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

What is the minimum paid-up voting equity capital required for an existing Non-Banking Financial Company to convert into a Small Finance Bank under the on-tap framework?

  1. ₹500 crore
  2. ₹100 crore
  3. ₹50 crore
  4. ₹200 crore Correct answer.

Explanation

Under the on-tap guidelines, entities including NBFCs, microfinance institutions and local area banks seeking conversion into an SFB must have a minimum paid-up voting equity capital of ₹200 crore. The requirement is uniform across applicant categories. This ensures a common capital floor for all new SFB entrants.

Question 4Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which promoter shareholding norm applies to a Small Finance Bank under the RBI on-tap licensing guidelines?

  1. Promoters must dilute to 26% within three years of commencement
  2. Promoters may hold any percentage provided they retain board control
  3. Promoters must hold at least 40% of paid-up voting equity capital for the first five years Correct answer.
  4. Promoters must hold at least 51% of paid-up voting equity capital at all times

Explanation

The SFB guidelines require promoters to hold a minimum of 40% of the paid-up voting equity capital of the bank for the first five years from commencement of business. This mirrors the promoter lock-in logic applied to universal banks. After five years, promoter holding must be brought down in a phased manner.

Question 5Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A newly licensed Small Finance Bank must list its shares on a recognised stock exchange within what period from commencement of business?

  1. Ten years
  2. Three years Correct answer.
  3. Seven years
  4. Five years

Explanation

The on-tap SFB guidelines require a new SFB to get its shares listed on a recognised stock exchange within three years of reaching a net worth of ₹500 crore. This staged trigger is tied to net worth rather than to a fixed date from licensing. Listing is a mandatory licensing condition for new SFBs.

Question 6Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which activity is expressly outside the permitted area of operation for a Small Finance Bank?

  1. Issuing credit cards
  2. Setting up subsidiaries for non-banking financial activities Correct answer.
  3. Accepting deposits from the public
  4. Lending to small business units

Explanation

The RBI permits SFBs to undertake basic banking activities of accepting deposits and lending to small business units, small and marginal farmers, micro and small industries and unorganised sector entities. They may not set up subsidiaries to undertake non-banking financial services activities. Credit cards and deposits are permitted subject to applicable conditions.

Question 7Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank is required to extend at least 75% of its Adjusted Net Bank Credit to which category of borrowers?

  1. Overseas borrowers through branches abroad
  2. Priority sector borrowers Correct answer.
  3. Borrowers with a credit rating from external agencies
  4. Corporate borrowers rated AA and above

Explanation

SFBs must maintain at least 75% of their Adjusted Net Bank Credit in priority sector lending. This is higher than the 40% target applicable to universal banks, reflecting the financial inclusion mandate of SFBs. The requirement is a continuing licensing obligation.

Question 8Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Loans extended by a Small Finance Bank to microfinance institutions for on-lending are treated as priority sector lending only up to what proportion of the bank's total priority sector lending?

  1. 15%
  2. 10%
  3. 5% Correct answer.
  4. 20%

Explanation

RBI norms allow SFB lending to microfinance institutions for on-lending to be counted as priority sector lending, but only up to 5% of the bank's total priority sector lending. This prevents indirect exposure from crowding out direct lending to eligible segments. The cap supports the objective of direct lending to small borrowers.

Question 9Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

What is the minimum net worth requirement for an existing NBFC to be eligible to apply for conversion into a Small Finance Bank under the on-tap guidelines?

  1. ₹200 crore
  2. ₹100 crore Correct answer.
  3. ₹50 crore
  4. ₹500 crore

Explanation

The on-tap guidelines require an eligible applicant, including an NBFC, to have a minimum net worth of ₹100 crore. This is separate from the ₹200 crore paid-up voting equity capital required after conversion. The two thresholds serve different purposes: eligibility for entry and capital strength post-licence.

Question 10Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

What is the prescribed minimum capital adequacy ratio for a Small Finance Bank?

  1. 9%
  2. 12%
  3. 18%
  4. 15% Correct answer.

Explanation

SFBs are required to maintain a minimum capital adequacy ratio of 15% of risk-weighted assets. This is higher than the 9% minimum applicable to universal banks, reflecting the riskier, less diversified portfolio profile of SFBs. The requirement is part of the prudential licensing conditions.

Question 11Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank must maintain its exposure to loans and advances to a single borrower at what maximum percentage of its capital funds?

  1. 15% Correct answer.
  2. 5%
  3. 25%
  4. 40%

Explanation

The RBI prescribes that an SFB's exposure to a single borrower shall not exceed 15% of its capital funds. This single-borrower limit is tighter than the 15% of capital funds plus additional headroom available to universal banks under certain conditions. The concentration norm reinforces the small-ticket lending focus of SFBs.

Question 12Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

What is the maximum permissible exposure of a Small Finance Bank to a single group of borrowers as a percentage of its capital funds?

  1. 40%
  2. 15%
  3. 30% Correct answer.
  4. 25%

Explanation

The group exposure limit for an SFB is 30% of capital funds, while the single-borrower limit is 15%. These limits are calibrated to keep concentration risk in check for institutions serving small-ticket borrowers. The group limit is double the single-borrower limit.

Question 13Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which entity is eligible to apply for a Small Finance Bank licence as a resident individual promoter?

  1. A resident individual with at least ten years of experience in banking or finance Correct answer.
  2. A large industrial house with majority business interests in manufacturing
  3. A joint stock company with no prior financial services experience
  4. A non-resident individual with no banking experience

Explanation

The on-tap guidelines require resident individual promoters to have at least ten years of experience in banking and finance. Large industrial houses and non-financial business groups are generally not permitted to promote SFBs. Professional competence and fit-and-proper criteria are central to the eligibility assessment.

Question 14Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

What is the minimum experience requirement in banking and finance for a resident individual promoter applying for an SFB licence?

  1. Three years
  2. Five years
  3. Ten years Correct answer.
  4. Seven years

Explanation

Resident individuals proposing to promote an SFB must have at least ten years of experience in banking and finance. This condition ensures that promoters bring professional expertise to the institution. The requirement applies alongside fit-and-proper and financial soundness criteria.

Question 15Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which of the following best describes the 'fit and proper' criterion applied to directors of a Small Finance Bank?

  1. Directors must be assessed for integrity, competence and absence of adverse records Correct answer.
  2. Directors must have prior experience as employees of a commercial bank
  3. Directors must hold shares in the bank
  4. Directors must be residents of the state where the head office is located

Explanation

The fit and proper criterion requires that directors and senior management possess integrity, relevant competence and a clean record free of adverse regulatory or legal findings. It is assessed by the bank and reviewed by the RBI. Neither shareholding nor regional residence is a substitute for this assessment.

Question 16Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which of the following is a permitted banking activity for a Small Finance Bank?

  1. Opening branches abroad without RBI approval
  2. Accepting a fixed deposit of ₹2 crore from a corporate depositor Correct answer.
  3. Setting up a wholly owned subsidiary to carry on insurance distribution as a non-banking financial activity
  4. Providing investment banking and merchant banking services

Explanation

SFBs may accept deposits, including fixed deposits, subject to the applicable deposit and interest rate norms; there is no prohibition on accepting a large corporate deposit as such. They may not set up subsidiaries for non-banking financial activities. Investment banking and merchant banking are not part of the permitted SFB activity set.

Question 17Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which statement about the priority sector lending target for Small Finance Banks is accurate?

  1. It is 75% of Adjusted Net Bank Credit, with sub-sector targets applying Correct answer.
  2. It is 75% of total deposits, computed on a quarterly average basis
  3. It is 40% of Adjusted Net Bank Credit, the same as universal banks
  4. It is 60% of Adjusted Net Bank Credit, with no sub-sector limits

Explanation

The SFB priority sector target is 75% of Adjusted Net Bank Credit, and within this overall target the applicable sub-sector targets also apply. The requirement is calculated on Adjusted Net Bank Credit, not on deposits. The higher overall target reflects the inclusion-oriented mandate of SFBs.

Question 18Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which of the following would disqualify an NBFC from applying for conversion into a Small Finance Bank?

  1. The NBFC has maintained regulatory compliance with no material adverse findings
  2. The NBFC has a track record of at least five years of operations
  3. The NBFC has a net worth of ₹150 crore
  4. The NBFC is part of a group with substantial real estate and trading interests Correct answer.

Explanation

Applicants linked to large industrial houses or business groups with substantial non-financial interests, such as real estate and trading, are generally not considered suitable for an SFB licence. The framework aims to keep banking separate from commerce. A five-year track record, adequate net worth and clean compliance record support eligibility rather than disqualify.

Question 19Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

What is the maximum permissible shareholding of a non-promoter investor in a Small Finance Bank, in the case of a natural person?

  1. 15%
  2. 5%
  3. 26%
  4. 10% Correct answer.

Explanation

Under the RBI's shareholding norms for private sector banks, including SFBs, a non-promoter natural person may hold up to 10% of the paid-up voting equity capital. Holdings beyond this threshold require prior RBI approval. The norms are designed to prevent undue concentration of ownership.

Question 20Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

An SFB wishes to open a new branch in an unbanked rural centre. What is the applicable regulatory position?

  1. Prior RBI approval is required for every individual branch
  2. SFBs are prohibited from opening branches in rural areas
  3. Branch expansion is governed by the bank's board-approved policy, with a prescribed share of branches in unbanked rural centres Correct answer.
  4. Branch expansion is permitted only through the business correspondent model

Explanation

SFB branch expansion is governed by a board-approved policy, and the RBI requires that a prescribed proportion of new branches be opened in unbanked rural centres. Individual branch-by-branch approval is not required. This supports the financial inclusion objective of the SFB model.

Question 21Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

What is the requirement for an SFB regarding listing of its shares after it attains a net worth of ₹500 crore?

  1. Listing must be completed within three years of attaining that net worth Correct answer.
  2. Listing is required only if the bank raises fresh capital from the public
  3. Listing must be completed within one year of licensing
  4. Listing is optional and left to the board

Explanation

An SFB that reaches a net worth of ₹500 crore must list its shares on a recognised stock exchange within three years of attaining that net worth. The trigger is the net worth threshold, not the date of licensing. This staged requirement brings in market discipline over time.

Question 22Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which of the following is true of the foreign shareholding limit in a Small Finance Bank?

  1. Foreign investment is permitted up to 100% for all categories of investors
  2. Foreign investment is not permitted in SFBs
  3. Foreign investment is permitted up to 74% of paid-up capital, subject to the foreign investment rules Correct answer.
  4. Foreign investment is permitted up to 49% without any conditions

Explanation

Foreign investment in SFBs is permitted up to 74% of the paid-up capital, subject to the applicable foreign investment rules and approvals. This aligns SFB ownership norms with the broader private sector banking framework. The limit applies cumulatively across foreign investor categories.

Question 23Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

What is the minimum proportion of branches an SFB must open in unbanked rural centres as prescribed by the RBI?

  1. 50% of total branches
  2. 25% of total branches Correct answer.
  3. 10% of total branches
  4. 15% of total branches

Explanation

The RBI requires that at least 25% of an SFB's total branches be opened in unbanked rural centres. This norm is part of the branch authorisation policy for SFBs and supports their inclusion mandate. Unbanked rural centres are defined as centres without a brick-and-mortar presence.

Question 24Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

An SFB has been in operation for eight years. Which statement best reflects its promoter shareholding obligations?

  1. Promoters must increase their holding to 51% to strengthen capital
  2. Promoters may continue to hold 40% indefinitely with no dilution requirement
  3. Promoters must reduce their holding to 26% of paid-up voting equity capital within five years of commencement Correct answer.
  4. Promoters must fully exit the bank at the end of eight years

Explanation

Promoters must hold at least 40% of paid-up voting equity capital for the first five years, after which the holding must be brought down to 26% within five years. For a bank in its eighth year, the dilution to 26% should therefore be in place. The framework balances promoter commitment with eventual ownership diversification.

Question 25Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which statement correctly describes the application of the CRR and SLR requirements to a Small Finance Bank?

  1. SFBs maintain only SLR and are exempt from CRR
  2. SFBs maintain CRR at double the rate applicable to universal banks
  3. SFBs are exempt from maintaining CRR and SLR
  4. SFBs must maintain CRR and SLR as applicable to scheduled commercial banks Correct answer.

Explanation

Once included in the Second Schedule, an SFB is subject to the CRR and SLR requirements applicable to scheduled commercial banks. These reserve requirements apply on the same basis as for other banks. Exemption or differential treatment is not provided under the framework.

Question 26Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Under the RBI licensing framework, a Small Finance Bank must commence operations within what period from the date of the licence being granted, unless an extension is permitted?

  1. Six months
  2. Twenty-four months
  3. Eighteen months
  4. Twelve months Correct answer.

Explanation

The RBI's licensing conditions for Small Finance Banks require the entity to commence banking business within twelve months of the licence being issued. This timeline is intended to ensure the promoter completes the transition from the NBFC or microfinance structure without undue delay. Any extension would require specific approval and would not be granted as a matter of course.

Question 27Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

An existing NBFC seeking conversion to a Small Finance Bank must satisfy a minimum track record of profitable operations. Which requirement reflects the RBI's prescribed position?

  1. A minimum of ten years of operations with continuous dividend payment
  2. A minimum of three years of operations with no regulatory penalty
  3. A minimum of two years of operations with any profit in the final year
  4. A minimum of five years of operations with satisfactory performance Correct answer.

Explanation

The RBI's guidelines for conversion into a Small Finance Bank require the applicant NBFC to have a successful track record of at least five years of operations. This is meant to demonstrate that the entity has a stable lending model and governance record before it is entrusted with a banking licence. A shorter track record does not meet the eligibility threshold.

Question 28Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank wants to expand its delivery network. Which statement correctly describes the RBI's approach to the branch authorisation regime for SFBs?

  1. Every single branch opening requires prior written approval from the RBI before the premises are made operational
  2. Branch expansion is prohibited until the SFB has completed ten years of operations
  3. Branch openings are entirely at the discretion of the board with no regulatory conditions attached
  4. Branch expansion is governed by a general permission subject to compliance with specified conditions, rather than prior case-by-case approval for every branch Correct answer.

Explanation

The RBI grants Small Finance Banks general permission for branch expansion, subject to conditions such as meeting the unbanked rural centre requirement and maintaining required capital. This differs from a regime where each individual branch needs prior case-by-case clearance. The board remains accountable for compliance with the attached conditions.

Question 29Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A resident individual promoter of a Small Finance Bank wishes to know how the RBI treats the promoter's minimum contribution at the time of licensing. Which statement is accurate?

  1. The promoter's contribution is capped at 10% of the minimum paid-up capital
  2. The promoter may contribute any amount, since only the aggregate capital matters
  3. The promoter must contribute at least 40% of the minimum paid-up capital, held in a manner that supports the bank's initial capital base Correct answer.
  4. The promoter is required to contribute 100% of the minimum paid-up capital at licensing

Explanation

The RBI's licensing conditions require the promoter group to hold a minimum initial contribution, generally 40% of the paid-up voting equity capital of the SFB. This ensures the promoter has meaningful skin in the game at the outset. The stake is then subject to the phased dilution requirements over the following years.

Question 30Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank has completed three years of operations and its promoter group holds a large majority stake. Under the RBI's shareholding norms, what is the general expectation regarding dilution of the promoter stake over time?

  1. The promoter stake must be reduced to nil within three years of commencement
  2. The promoter stake must be brought down to 40% within five years of commencement and to 26% within twelve years Correct answer.
  3. The promoter stake may be retained indefinitely at any level the board approves
  4. The promoter stake must be increased to 74% within five years to strengthen the capital base

Explanation

The RBI requires SFB promoters to dilute their shareholding to 40% within five years of commencing business and to 26% within twelve years. The staged dilution is intended to broaden ownership and reduce concentration of control. The schedule applies to the promoter group as a whole.

Question 31Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A newly licensed Small Finance Bank is preparing its first board. Which statement best reflects the RBI's expectation on board composition for an SFB?

  1. Independent directors are not required, but a government nominee must be appointed
  2. At least half of the directors should be independent directors, and the board should include a mix of professionals with banking and finance experience Correct answer.
  3. All directors may be nominees of the promoter group, provided they meet the fit and proper test
  4. The board must consist entirely of whole-time directors drawn from the promoter entity

Explanation

The RBI expects SFBs to have a professionally run board with a significant proportion of independent directors, generally at least half. Directors must satisfy the fit and proper criteria, and the board should carry banking and finance expertise. This governance structure is a condition of the licence rather than an optional best practice.

Question 32Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank is considering whether it may act as a corporate agent for insurance distribution. What is the correct regulatory position?

  1. It may not undertake any insurance distribution because SFBs are confined to core lending
  2. It may distribute insurance products as a corporate agent, subject to the applicable IRDAI and RBI conditions, in addition to its banking business Correct answer.
  3. It may distribute insurance only after converting into a universal bank
  4. It may distribute insurance only through a separately capitalised non-banking subsidiary

Explanation

SFBs are permitted to earn fee income through distribution of insurance products as corporate agents, subject to compliance with IRDAI norms and the RBI's conditions. This is part of the permitted additional business beyond core lending. It does not require conversion into a universal bank.

Question 33Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank wants to lend to a non-banking financial company for on-lending to priority sector borrowers. How does the RBI treat such lending for the SFB's priority sector computation?

  1. It counts as priority sector lending only if the on-lending is to specified eligible segments and the conditions on tenor and end-use are met Correct answer.
  2. It never counts as priority sector lending under any circumstances
  3. It counts only if the borrowing NBFC is itself a Small Finance Bank
  4. It automatically counts as priority sector lending regardless of the end-use of funds

Explanation

The RBI permits SFB lending to NBFCs for on-lending to count towards priority sector targets only when the funds are deployed to eligible segments and the prescribed conditions on tenor and end-use are satisfied. The concession is conditional, not automatic. Unrestricted on-lending does not qualify.

Question 34Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which statement correctly describes the treatment of a Small Finance Bank's holdings of government securities for statutory liquidity purposes?

  1. Government securities can never be counted towards SLR because SFBs are exempt from SLR
  2. Eligible government securities held for SLR purposes may be counted towards the SLR, and the bank may also hold them in its trading book subject to the prescribed classification rules Correct answer.
  3. Only securities held in the held-to-maturity category count, and all other categories are disregarded
  4. SLR may be met entirely by holding cash balances with the RBI

Explanation

SFBs must maintain SLR in the form of cash, gold or approved securities, and eligible government securities count towards the requirement. The bank can hold such securities across the prescribed classification categories subject to the rules. SLR compliance is measured against the prescribed percentage of net demand and time liabilities.

Question 35Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank is approached by a foreign investor wishing to acquire a stake. Which statement correctly reflects the regulatory treatment of foreign shareholding in an SFB?

  1. Foreign investment is not permitted in a Small Finance Bank at any level
  2. Foreign shareholding is capped at 26% for all categories of investors
  3. Foreign shareholding is permitted only through a single investor holding 100% of the capital
  4. Foreign shareholding is permitted subject to the applicable foreign direct investment limits and the RBI's licensing conditions, with the aggregate cap set at 74% Correct answer.

Explanation

The RBI permits foreign shareholding in SFBs up to 74% of the paid-up capital, subject to the FDI policy and licensing conditions. The limit applies to the aggregate foreign holding and is monitored alongside the promoter dilution schedule. Investment beyond the cap would require specific regulatory consideration.

Question 36Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank wants to pay dividends to its shareholders in its fourth year of operations. Which condition governs dividend distribution?

  1. Dividends may be declared freely once the bank reports any profit
  2. Dividends are prohibited for the first ten years of an SFB's existence
  3. Dividends may be paid only out of the statutory reserve without reference to capital adequacy
  4. Dividend payment requires compliance with the RBI's dividend declaration norms, including capital adequacy, asset quality and profitability thresholds, and prior approval where applicable Correct answer.

Explanation

Dividend declaration by SFBs is governed by the RBI's dividend norms, which link eligibility to capital adequacy, net non-performing assets and profitability. The bank must also meet the conditions on prior approval where the framework requires it. Profit alone does not create an unrestricted right to declare a dividend.

Question 37Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

Which statement correctly describes the applicability of the cash reserve ratio to a Small Finance Bank?

  1. CRR must be maintained entirely in the form of government securities
  2. CRR applies only to the SFB's microfinance portfolio and not to its other deposits
  3. CRR is voluntarily maintained by SFBs and is not a statutory requirement
  4. CRR must be maintained on net demand and time liabilities at the rate prescribed by the RBI, and it is maintained as a cash balance with the RBI Correct answer.

Explanation

SFBs are subject to the CRR requirement on their net demand and time liabilities at the rate the RBI prescribes from time to time. CRR is maintained as a cash balance with the RBI and earns no interest. It is distinct from SLR, which is held in approved securities, cash or gold.

Question 38Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank has an opportunity to lend to a large corporate borrower that is not in the priority sector. What does the RBI framework permit?

  1. The SFB is absolutely barred from lending to any non-priority sector borrower
  2. The SFB may lend only with prior written approval from the RBI for each such loan
  3. The SFB may lend only if the borrower is a micro, small or medium enterprise
  4. The SFB may lend to such borrowers within the permitted exposure limits, while still meeting its priority sector and other regulatory obligations Correct answer.

Explanation

SFBs are not confined to priority sector lending; they may lend to other borrowers within the prescribed exposure limits and while meeting their priority sector targets. The framework sets concentration limits rather than a blanket prohibition. Each such exposure is subject to the single and group borrower limits.

Question 39Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank is reviewing its classification of advances to a borrower whose account has been restructured. Which principle governs the asset classification treatment?

  1. Restructured accounts are subject to the RBI's prudential norms on income recognition, asset classification and provisioning, with the classification reflecting the borrower's actual repayment capacity after restructuring Correct answer.
  2. Restructuring automatically upgrades the account to standard status from the date of the restructuring
  3. Restructured accounts are permanently exempt from provisioning requirements
  4. Asset classification is left entirely to the discretion of the SFB's auditors without reference to RBI norms

Explanation

SFBs must apply the RBI's prudential norms on income recognition, asset classification and provisioning to restructured accounts. Restructuring does not by itself restore standard status; the classification follows the borrower's demonstrated repayment capacity and the applicable norms. Provisioning requirements continue to apply.

Question 40Small Finance Bank - Regulatory Framework and Licensing (RBI Guidelines)

A Small Finance Bank wants to offer internet banking and mobile banking services to its customers. What is the regulatory position?

  1. Digital channels may be offered only to corporate customers and not to retail customers
  2. Digital channels are prohibited because SFBs are meant to serve customers only through physical branches
  3. The SFB must convert into a universal bank before offering any digital channel
  4. The SFB may offer digital banking channels subject to compliance with the RBI's guidelines on internet banking and customer protection, without needing a fresh licence for each channel Correct answer.

Explanation

SFBs are permitted to offer internet and mobile banking subject to the RBI's guidelines on internet banking, technology risk and customer protection. Offering a new delivery channel does not require a separate banking licence. The bank remains responsible for security, grievance redressal and compliance with the applicable norms.

Question 41Priority Sector Lending and Financial Inclusion Obligations of SFBs

Under the RBI priority sector lending framework applicable to Small Finance Banks, the overall PSL target that an SFB must achieve is:

  1. 60% of Adjusted Net Bank Credit
  2. 40% of Adjusted Net Bank Credit
  3. 75% of Adjusted Net Bank Credit Correct answer.
  4. 50% of Adjusted Net Bank Credit

Explanation

Small Finance Banks are required to maintain priority sector lending at 75% of Adjusted Net Bank Credit, a higher target than the 40% applicable to universal commercial banks, reflecting their financial inclusion mandate. The target is measured on ANBC or Credit Equivalent of Off-Balance Sheet Exposures, whichever is higher.

Question 42Priority Sector Lending and Financial Inclusion Obligations of SFBs

Within the priority sector lending requirement for Small Finance Banks, the sub-target earmarked for agriculture (including small and marginal farmers) is:

  1. 25% of ANBC for agriculture, of which 15% for small and marginal farmers
  2. 18% of ANBC for agriculture, of which 8% for small and marginal farmers Correct answer.
  3. 18% of ANBC for agriculture, of which 10% for small and marginal farmers
  4. 12% of ANBC for agriculture, of which 6% for small and marginal farmers

Explanation

SFBs must direct 18% of ANBC to agriculture, and within that, at least 8% must go to small and marginal farmers. These sub-targets mirror the structure applied to universal banks but operate within the higher 75% overall SFB target.

Question 43Priority Sector Lending and Financial Inclusion Obligations of SFBs

A Small Finance Bank is computing its priority sector shortfall for a financial year. Which of the following is the correct treatment of the shortfall amount?

  1. It must be deposited in the Small Industries Development Bank of India
  2. It must be invested in approved priority sector instruments such as RIDF or held in permitted PSL investment avenues Correct answer.
  3. It must be transferred to the Reserve Bank of India as a penalty
  4. It is simply carried forward with no funding consequence

Explanation

Where an SFB falls short of the PSL target, the shortfall must be parked in permitted avenues such as the Rural Infrastructure Development Fund or other approved priority sector funds, earning a lower return. This creates an economic cost for non-compliance rather than a simple accounting entry.

Question 44Priority Sector Lending and Financial Inclusion Obligations of SFBs

For the purpose of priority sector lending classification, a loan to a small and marginal farmer generally refers to a farmer holding:

  1. Not more than 2 hectares of irrigated land Correct answer.
  2. Any landholding below 10 hectares
  3. Not more than 5 hectares of irrigated land
  4. Not more than 2 hectares of unirrigated land

Explanation

A small and marginal farmer is defined as one holding not more than 2 hectares of irrigated land, with a correspondingly higher limit for unirrigated land. This definition determines whether the loan counts toward the small and marginal farmer sub-target.

Question 45Priority Sector Lending and Financial Inclusion Obligations of SFBs

Loans to micro enterprises under priority sector lending are classified on the basis of the Micro, Small and Medium Enterprises Development Act. Which criterion correctly identifies a micro enterprise under the investment and turnover limits?

  1. Investment up to Rs 5 crore and turnover up to Rs 25 crore
  2. Investment up to Rs 1 crore and turnover up to Rs 5 crore Correct answer.
  3. Investment up to Rs 50 crore and turnover up to Rs 250 crore
  4. Investment up to Rs 10 crore and turnover up to Rs 50 crore

Explanation

Under the revised MSMED classification, a micro enterprise is one with investment in plant and machinery not exceeding Rs 1 crore and turnover not exceeding Rs 5 crore. Loans to such units qualify as priority sector lending under the micro enterprise category.

Question 46Priority Sector Lending and Financial Inclusion Obligations of SFBs

A Small Finance Bank is assessing whether its lending to weaker sections meets the prescribed share. The weaker sections sub-target within priority sector lending for SFBs is:

  1. 12% of ANBC Correct answer.
  2. 9% of ANBC
  3. 15% of ANBC
  4. 18% of ANBC

Explanation

SFBs must ensure that at least 12% of ANBC goes to weaker sections within their priority sector lending. This sub-target ensures that the inclusion objective is met by reaching the most disadvantaged borrower groups rather than only the broader priority sectors.

Question 47Priority Sector Lending and Financial Inclusion Obligations of SFBs

Which of the following categories of borrowers is included within the definition of 'weaker sections' for priority sector lending purposes?

  1. Salaried employees earning above the income tax threshold
  2. Companies listed on a recognised stock exchange
  3. Partnership firms with turnover above Rs 100 crore
  4. Persons with disability and distressed farmers indebted to non-institutional lenders Correct answer.

Explanation

Weaker sections include persons with disability, distressed farmers indebted to non-institutional lenders, scheduled castes and scheduled tribes, and other specified disadvantaged groups. Large corporates and high-income salaried individuals are excluded from this category.

Question 48Priority Sector Lending and Financial Inclusion Obligations of SFBs

A Small Finance Bank lends to a self-help group for on-lending to its members. For priority sector classification, such lending is:

  1. Eligible only if the SHG is registered as a company
  2. Eligible as priority sector lending where the SHG and its members meet the prescribed criteria Correct answer.
  3. Eligible only if the loan exceeds Rs 10 lakh
  4. Not eligible because the ultimate borrower is not identified

Explanation

Loans to self-help groups and joint liability groups are recognised as priority sector lending where the group and its members satisfy the eligibility criteria, since SHG lending is a core financial inclusion channel. Registration as a company is not a condition, and the amount threshold in the options is not a requirement.

Question 49Priority Sector Lending and Financial Inclusion Obligations of SFBs

Under the priority sector lending guidelines, loans to individuals for housing are treated as priority sector lending subject to a loan ceiling. Which of the following best states the current approach for SFBs?

  1. Housing loans up to Rs 35 lakh in metropolitan centres where the dwelling cost does not exceed Rs 45 lakh Correct answer.
  2. Housing loans up to Rs 75 lakh in all centres
  3. Housing loans of any amount provided the borrower is a first-time buyer
  4. Housing loans up to Rs 10 lakh in all centres without any dwelling cost condition

Explanation

Priority sector housing loans are capped at Rs 35 lakh in metropolitan centres, with the dwelling unit cost limited to Rs 45 lakh, and at lower ceilings in other centres. The twin conditions of loan amount and dwelling cost determine eligibility.

Question 50Priority Sector Lending and Financial Inclusion Obligations of SFBs

A Small Finance Bank wishes to count its education loans as priority sector lending. Which condition must be satisfied?

  1. The loan must be secured by immovable property
  2. The loan must be sanctioned only to students below 18 years
  3. The loan must be for education in India or abroad, subject to the prescribed ceiling Correct answer.
  4. The loan must be for professional courses only and exceed Rs 10 lakh

Explanation

Education loans qualify as priority sector lending up to the prescribed ceiling, whether the study is in India or abroad. There is no requirement that the loan be secured by property or restricted to professional courses only.