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Question 1Principles & Practices of Banking

Under the Banking Regulation Act, 1949, a banking company must maintain the aggregate value of its paid-up capital and reserves at a level that is not less than what proportion of its deposits?

  1. Twenty percent of its total demand and time liabilities
  2. Five percent of its total demand and time liabilities
  3. Fifteen percent of its total demand and time liabilities Correct answer.
  4. Ten percent of its total demand and time liabilities

Explanation

Section 11 of the Banking Regulation Act, 1949 requires a banking company to keep the aggregate of its paid-up capital and reserves at not less than fifteen percent of its total demand and time liabilities. This is a structural solvency requirement distinct from the CRR and SLR that apply to scheduled banks.

Question 2Principles & Practices of Banking

A customer deposits a cheque drawn on another bank into his savings account. Under the Negotiable Instruments Act, 1881, the collecting banker's statutory protection against conversion liability is available only when he acts in which capacity?

  1. As a pledgee holding the instrument as security for an advance
  2. As the holder in due course who has given value for the instrument
  3. As an agent of the customer collecting the proceeds in good faith and without negligence Correct answer.
  4. As the endorsee who acquires title to the instrument

Explanation

Section 131 of the Negotiable Instruments Act, 1881 protects a collecting banker only when he receives payment for a customer in good faith and without negligence, i.e., in a collecting agency capacity. The protection does not extend to a banker who takes the instrument as holder or owner in his own right.

Question 3Principles & Practices of Banking

In the KYC framework issued by the Reserve Bank of India, a customer is rated low risk. Which action is the bank permitted to take regarding periodic KYC updation for such a customer?

  1. Treat the customer as high risk and seek senior management approval annually
  2. Apply a longer periodic updation interval of ten years with simplified due diligence Correct answer.
  3. Conduct full re-verification of identity and address every six months
  4. Freeze the account until fresh documents are submitted

Explanation

The RBI Master Direction on KYC allows simplified due diligence for low-risk customers, with periodic updation permitted at a longer interval of up to ten years. High-risk customers face shorter cycles, and full re-verification every six months is not prescribed for low-risk clients.

Question 4Principles & Practices of Banking

A bank in India wishes to open a savings deposit account in the name of a minor aged 12 years who can read and write. Which statement reflects the correct position under RBI guidelines?

  1. Only the natural guardian may operate the account, and the minor can never sign cheques
  2. A minor cannot operate any deposit account until he attains majority
  3. A minor above ten years may operate the account independently, but the bank cannot permit an overdraft Correct answer.
  4. A minor of any age may operate the account independently, and the bank may also allow a minor to avail overdraft facilities

Explanation

RBI permits a minor above ten years of age who can read and write to operate a savings account independently, while the guardian remains responsible for the conduct of the account. Banks are not permitted to allow overdraft facilities to minors.

Question 5Principles & Practices of Banking

A term deposit receipt marked 'payable to the depositor or order' is pledged to a bank as security for a loan. In banking terminology, what is the bank's status with respect to that instrument?

  1. Endorsee
  2. Holder in due course
  3. Collecting agent
  4. Pledgee Correct answer.

Explanation

When a deposit receipt is delivered to a bank as security for a loan, the bank holds it as a pledgee with a lien over the instrument. It is not a holder in due course because it has not given value by negotiation of the instrument itself, nor an endorsee.

Question 6Principles & Practices of Banking

A bank holds a lien over securities belonging to a customer. Which characteristic distinguishes a banker's general lien from a particular lien?

  1. General lien covers all securities in the bank's possession until all claims are satisfied, while a particular lien covers only the specific property against the specific debt Correct answer.
  2. General lien requires a court order before it can be exercised
  3. General lien is available only to scheduled commercial banks
  4. General lien applies only to goods and not to securities

Explanation

A banker's general lien under Section 171 of the Indian Contract Act permits retention of all property in the bank's possession until all claims against the customer are satisfied. A particular lien, by contrast, is confined to the specific property against the specific debt.

Question 7Principles & Practices of Banking

A partnership firm operating a current account is reconstituted because one partner retires. What is the effect on the mandate of the firm's account under standard banking practice?

  1. The old mandate continues until the firm submits a fresh mandate signed by the continuing partners Correct answer.
  2. The bank must close the account immediately and open a new one in the names of the continuing partners
  3. The account is frozen until a new partnership deed is registered with the Registrar of Firms
  4. The retiring partner's signature continues to bind the firm until public notice of retirement is given

Explanation

A change in the constitution of a partnership firm requires the firm to submit a fresh mandate signed by the continuing partners. Until then the existing mandate remains operative, and the bank should obtain an indemnity from the continuing partners for transactions already effected.

Question 8Principles & Practices of Banking

Which of the following best describes the role of the Banking Ombudsman under the RBI's Integrated Ombudsman Scheme?

  1. A grievance-redressal authority who facilitates resolution and can award compensation within specified limits Correct answer.
  2. A prosecutor who initiates criminal proceedings against bank officials
  3. An adjudicator who passes binding decrees enforceable as court judgments
  4. A regulator that supervises the bank's capital adequacy and liquidity

Explanation

The Integrated Ombudsman Scheme provides a cost-free grievance-redressal mechanism in which the Ombudsman facilitates settlement and may award compensation within prescribed limits. The Ombudsman is not a court, regulator, or prosecutor.

Question 9Principles & Practices of Banking

A bank is evaluating whether a loan to a large corporate should be classified as a 'standard asset'. Which condition must be satisfied?

  1. The loan has been restructured at least once
  2. The loan is secured by a first charge on immovable property
  3. The loan has been overdue for more than 90 days but interest is being serviced
  4. The loan does not carry more than normal risk and no arrears of principal or interest are outstanding beyond the specified period Correct answer.

Explanation

A standard asset is one that does not carry more than the normal risk attached to the business and is not classified as sub-standard, doubtful, or loss. Arrears beyond the prescribed period trigger non-performing asset classification, regardless of security.

Question 10Principles & Practices of Banking

Under the RBI's Income Recognition, Asset Classification and Provisioning norms, a sub-standard asset that has remained so for more than twelve months is generally classified as which category?

  1. Sub-standard asset under restructuring
  2. Doubtful asset Correct answer.
  3. Standard asset
  4. Loss asset

Explanation

A sub-standard asset that continues as such for a period exceeding twelve months is upgraded to the doubtful category. Loss assets are those identified as uncollectible and usually written off, while standard assets carry only normal risk.

Question 11Principles & Practices of Banking

A bank's board is considering the constitution of its Audit Committee of the Board. Which requirement is mandated by RBI for such a committee?

  1. It must be headed by an independent director and meet at least once a quarter Correct answer.
  2. It must consist only of independent directors and meet daily
  3. It must include the statutory auditor as a permanent member
  4. It must be chaired by the Chief Financial Officer

Explanation

RBI requires the Audit Committee of the Board to be headed by an independent director and to meet at least once every quarter. The committee oversees internal audit, compliance, and financial reporting and does not include the statutory auditor as a member.

Question 12Principles & Practices of Banking

A bank is a member of the Clearing Corporation of India's Forex Clearing facility. What is the principal purpose of this arrangement?

  1. To fix the reference rate for the rupee
  2. To provide deposit insurance to forex depositors
  3. To regulate cross-border money transfers under FEMA
  4. To settle interbank foreign exchange transactions through a central counterparty Correct answer.

Explanation

The Forex Clearing facility of CCIL acts as a central counterparty for interbank foreign exchange deals, reducing settlement risk through novation and multilateral netting. It does not fix reference rates, insure deposits, or administer FEMA.

Question 13Principles & Practices of Banking

Which of the following is a key feature of the Negotiated Dealing System-Order Matching (NDS-OM) platform?

  1. It is an anonymous electronic order-matching system for government securities Correct answer.
  2. It is used for trading in corporate bonds only
  3. It is a platform for retail equity trading
  4. It is used exclusively for foreign exchange forwards

Explanation

NDS-OM is an anonymous electronic order-matching system operated for trading in government securities, providing transparency and efficient price discovery. Corporate bonds, equities, and forex forwards are traded on other platforms.

Question 14Principles & Practices of Banking

A bank accepts a bill of exchange and later the drawer fails to pay. In the context of a bill of exchange, what does 'acceptance' signify?

  1. The drawee's unconditional assent to the order to pay, creating liability on the bill Correct answer.
  2. The endorser's guarantee of payment if the drawee defaults
  3. The holder's agreement to extend the due date
  4. The notary's certification that the bill was dishonoured

Explanation

Acceptance is the drawee's signed, unconditional assent to the order to pay, which makes him the acceptor and principal debtor on the bill. Endorsement, extension, and noting are distinct concepts.

Question 15Principles & Practices of Banking

A customer presents a cheque that is more than three months old. What is the bank's correct course of action under standard practice?

  1. Pay it if the balance is sufficient
  2. Return it only if the amount exceeds the bank's limit for old cheques
  3. Return it unpaid as a stale cheque unless it is a government cheque with a longer validity Correct answer.
  4. Pay it after obtaining the drawer's oral confirmation

Explanation

Cheques are generally valid for three months from the date of issue, after which they are stale and must be returned unpaid. Government cheques may carry a longer validity as prescribed, and oral confirmation cannot revive a stale instrument.

Question 16Principles & Practices of Banking

A bank's customer instructs it to stop payment on a cheque already issued. What is the legal effect of such an instruction?

  1. It automatically cancels the underlying debt
  2. It is invalid because only a court can stop payment
  3. It transfers liability to the payee
  4. It revokes the bank's authority to pay and must be honoured if received before payment Correct answer.

Explanation

A stop-payment instruction withdraws the bank's mandate to pay the cheque, and if received before payment is made, the bank must honour it. It does not extinguish the underlying debt or shift liability to the payee.

Question 17Principles & Practices of Banking

A bank extends a 'bank guarantee' on behalf of a contractor. Which statement correctly describes the bank's obligation?

  1. The bank must pay on a demand that complies with the guarantee terms, independent of the underlying contract Correct answer.
  2. The bank's liability arises only after the beneficiary proves the contractor's default in court
  3. The bank can revoke the guarantee at will before the contract is completed
  4. The bank's liability is limited to the contractor's balance in his account

Explanation

A bank guarantee is an independent undertaking under which the bank pays on a compliant demand, irrespective of disputes in the underlying contract. The guarantee is irrevocable once issued and is not limited to the customer's balance.

Question 18Principles & Practices of Banking

Under the RBI's guidelines on 'wilful default', which of the following is a characteristic of a wilful defaulter?

  1. A borrower who fails to pay because of genuine business losses
  2. A borrower whose account turned NPA due to a natural calamity
  3. A borrower who has applied for restructuring before default
  4. A borrower who has defaulted despite having the capacity to honour the obligation, or has diverted funds Correct answer.

Explanation

Wilful default implies default despite the capacity to pay, or diversion of funds for purposes other than the sanctioned end use. Genuine business losses, natural calamities, and pre-default restructuring requests are not treated as wilful default.

Question 19Principles & Practices of Banking

A bank wants to set off a customer's deposit against a matured loan due from the same customer in the same capacity. Which condition must be satisfied for the right of set-off to be exercised?

  1. The bank must first file a suit for recovery
  2. The debts must be mutual, due, and in the same right and capacity Correct answer.
  3. The bank must obtain fresh consent from the customer before every set-off
  4. The deposit must be in a different branch and a different capacity

Explanation

The right of set-off requires mutual debts that are due and payable and held in the same right and capacity. Set-off cannot be exercised across different capacities, and a suit is not a precondition.

Question 20Principles & Practices of Banking

A bank grants a 'cash credit' facility against hypothecation of stock. Which statement correctly describes the bank's legal position over the stock?

  1. The bank acquires ownership of the stock until the loan is repaid
  2. The bank has possession of the stock and can sell it without notice
  3. The bank has a floating charge that crystallises only on liquidation
  4. The bank has a charge over the stock without possession, and the borrower retains ownership Correct answer.

Explanation

In hypothecation, the borrower retains ownership and possession of the stock while the bank holds a charge over it. The bank does not acquire ownership or possession, and the charge is not a floating charge in the debenture sense.

Question 21Principles & Practices of Banking

A bank is evaluating the capital treatment of a loan under Basel III. Which component is included in Common Equity Tier 1 capital?

  1. Subordinated debt with an original maturity of five years
  2. General provisions against standard assets
  3. Perpetual non-cumulative preference shares
  4. Paid-up equity capital and retained earnings Correct answer.

Explanation

Common Equity Tier 1 comprises paid-up equity capital, retained earnings, and other disclosed reserves, subject to regulatory adjustments. Preference shares and subordinated debt are Additional Tier 1 or Tier 2 instruments, and general provisions are Tier 2 items.

Question 22Principles & Practices of Banking

What is the principal purpose of the Deposit Insurance and Credit Guarantee Corporation (DICGC) in the Indian banking system?

  1. To guarantee loans advanced to priority sectors
  2. To supervise the liquidity position of banks
  3. To provide insurance cover to depositors up to a specified limit in the event of a bank failure Correct answer.
  4. To insure bank premises against fire and theft

Explanation

DICGC insures deposits up to the limit prescribed by law, protecting small depositors if an insured bank fails. It does not guarantee priority-sector loans, supervise liquidity, or insure physical assets.

Question 23Principles & Practices of Banking

A bank holds a customer's gold ornaments as security for a gold loan. Which relationship best describes the bank's position?

  1. Mortgagee of the ornaments
  2. Owner of the ornaments
  3. Trustee holding the ornaments for the borrower's benefit
  4. Bailee with a special interest as pledgee Correct answer.

Explanation

A pledge involves delivery of goods as security, making the bank a bailee with a special property interest and the right to retain and sell on default after notice. The bank does not become owner, mortgagee, or trustee of the ornaments.

Question 24Principles & Practices of Banking

Under RBI's guidelines, a bank's 'priority sector lending' target is expressed as a percentage of which base?

  1. Gross domestic product
  2. Net bank credit Correct answer.
  3. Total deposits
  4. Paid-up capital

Explanation

Priority sector lending targets are set as a percentage of adjusted net bank credit, which is derived from outstanding bank credit. GDP, total deposits, and paid-up capital are not the base for the target.

Question 25Principles & Practices of Banking

A bank's customer dies leaving a joint account operated on an 'either or survivor' basis with his spouse. What is the correct course of action for the bank?

  1. Close the account immediately and remit the balance to the nominee
  2. Freeze the account until the legal heirs obtain a succession certificate
  3. Transfer the balance to the deceased's legal heirs only
  4. Allow the survivor to continue operating the account and pay the balance to the survivor on closure Correct answer.

Explanation

In an 'either or survivor' joint account, the survivor is entitled to operate the account and to receive the balance on closure, subject to the bank's mandate. The bank does not require a succession certificate or automatically route the balance to legal heirs.

Question 26Principles & Practices of Banking

Under the RBI's Know Your Customer (KYC) norms, a bank must complete periodic updation of KYC for a high-risk customer at least once every:

  1. Five years
  2. Ten years
  3. Two years Correct answer.
  4. Eight years

Explanation

RBI's Master Direction on KYC prescribes periodic KYC updation based on risk category: high-risk customers at least every two years, medium-risk every eight years, and low-risk every ten years. The two-year cycle for high-risk customers is the shortest because heightened monitoring is required for them.

Question 27Principles & Practices of Banking

A bank customer wants to open a deposit account in the name of a minor aged 12 years. Under RBI guidelines, which of the following is the correct position?

  1. A minor's account cannot be opened in a bank under any circumstances
  2. The minor can operate the account independently, but no overdraft is permitted Correct answer.
  3. The minor can operate the account independently if the guardian gives written consent
  4. The account must be opened and operated by the natural guardian until the minor attains majority

Explanation

RBI permits minors above 10 years to open and operate savings bank accounts independently, provided they are literate and the account is operated without overdraft. This reflects the capacity to contract under Section 11 of the Indian Contract Act, with the safeguard that no overdraft is allowed.

Question 28Principles & Practices of Banking

A bank receives a request from an income tax authority to attach a customer's fixed deposit under Section 226(3) of the Income-tax Act, 1961. What is the bank's correct response?

  1. Inform the customer and await the customer's written consent before acting
  2. Comply with the notice and remit the attached amount to the tax authority, subject to the notice's terms Correct answer.
  3. Close the deposit account immediately and return the funds to the customer
  4. Refuse the attachment because bank deposits are outside the scope of Section 226(3)

Explanation

Section 226(3) empowers the Assessing Officer to require any person holding money on behalf of the assessee to pay it to the Central Government. A bank receiving such a notice must comply, and failure to do so can make the bank personally liable for the amount.

Question 29Principles & Practices of Banking

Which of the following is the correct order of priority among the claims on a bank's assets in the event of liquidation under the Banking Regulation Act, 1949?

  1. Depositors, secured creditors, preferential claims of employees, ordinary creditors
  2. Secured creditors, preferential claims, depositors, ordinary creditors Correct answer.
  3. Ordinary creditors, depositors, secured creditors, preferential claims
  4. Preferential claims, secured creditors, ordinary creditors, depositors

Explanation

In winding up of a banking company, secured creditors rank first against their security, followed by preferential claims (including certain employee dues and government dues), then depositors, and finally ordinary creditors. This order is derived from the Banking Regulation Act read with the Companies Act.

Question 30Principles & Practices of Banking

A bank is considering appointing a 'business correspondent' to extend banking services in unbanked areas. Which activity is a business correspondent permitted to perform?

  1. Open savings accounts and accept small deposits on behalf of the bank Correct answer.
  2. Approve overdrafts on existing accounts
  3. Decide on restructuring of non-performing loans
  4. Sanction loans independently and set interest rates

Explanation

Under RBI's Business Correspondent guidelines, BCs may identify customers, open accounts, accept small deposits, and disburse small loans as per the bank's policy, but they cannot sanction loans or set interest rates. Credit decisions and pricing remain with the bank.

Question 31Principles & Practices of Banking

A bank's customer uses the bank's mobile banking application to transfer funds. Under RBI's guidelines on customer protection, which principle applies to unauthorised electronic banking transactions?

  1. The bank has no obligation to reverse unauthorised transactions once the customer shares the OTP
  2. Zero liability applies to the customer if the fraud is due to the bank's negligence and is reported promptly Correct answer.
  3. The customer's liability is always limited to INR 10,000 regardless of when the fraud is reported
  4. The customer bears the entire loss if the fraud is not reported within three days

Explanation

RBI's framework on customer protection for unauthorised electronic banking transactions provides for zero liability where the deficiency lies with the bank and the customer reports the unauthorised transaction promptly. Liability shifts to the customer only when the fraud results from the customer's own negligence and reporting is delayed.

Question 32Principles & Practices of Banking

Which of the following best describes the role of a bank's 'internal ombudsman' under RBI's Integrated Ombudsman Scheme, 2021?

  1. To review complaints that remain unresolved or are rejected by the bank's own grievance redressal machinery Correct answer.
  2. To adjudicate disputes between two banks
  3. To issue directions to the bank's auditors on compliance
  4. To replace the RBI Ombudsman in all matters

Explanation

The Internal Ombudsman is an independent authority within the bank who reviews complaints that the bank has rejected or not resolved within the prescribed period. This is a pre-emptive layer before the customer escalates to the RBI Ombudsman.

Question 33Principles & Practices of Banking

A bank is evaluating a proposal to lend against the security of a warehouse receipt. Which statement correctly describes the bank's legal position when it takes possession of the warehouse receipt?

  1. The bank obtains only a hypothecation charge
  2. The bank obtains a pledge over the goods represented by the receipt Correct answer.
  3. The bank has no enforceable security interest
  4. The bank becomes the owner of the goods

Explanation

A warehouse receipt is a document of title, and its transfer with intent to create security operates as a pledge of the goods represented by it. The bank, as pledgee, obtains possession constructively and can enforce the security against the goods.

Question 34Principles & Practices of Banking

Under the RBI's guidelines on 'non-performing assets', when does a term loan become a non-performing asset?

  1. When the borrower's credit rating falls below investment grade
  2. When interest or instalment remains overdue for more than 90 days Correct answer.
  3. When the loan is restructured for the first time
  4. When the security value falls below the outstanding balance

Explanation

A term loan is classified as an NPA when interest or principal remains overdue for more than 90 days. The 90-day norm is the standard trigger for income recognition and asset classification under RBI's IRAC norms.

Question 35Principles & Practices of Banking

A bank is a member of the Real Time Gross Settlement (RTGS) system. Which statement correctly describes the settlement mechanism in RTGS?

  1. Settlement occurs only twice a day at fixed intervals
  2. Transactions are netted and settled at the end of the day
  3. Each transaction is settled individually and irrevocably in real time Correct answer.
  4. Only transactions above INR 10 crore are settled through RTGS

Explanation

RTGS settles each payment instruction individually and irrevocably as it is processed, without netting across transactions. This provides finality and reduces settlement risk for high-value payments.

Question 36Principles & Practices of Banking

A customer presents a cheque for payment where the signature differs from the specimen on record. What is the bank's correct course of action?

  1. Hold the cheque indefinitely until the customer provides a new specimen
  2. Pay the cheque and obtain an indemnity from the customer
  3. Return the cheque with the remark 'signature differs' Correct answer.
  4. Pay the cheque if the customer is known to the bank

Explanation

A cheque with a signature that does not match the specimen is not a valid mandate and must be returned with the remark 'signature differs'. Paying it would expose the bank to liability for unauthorised payment.

Question 37Principles & Practices of Banking

Under the Negotiable Instruments Act, 1881, what is the effect of crossing a cheque 'account payee'?

  1. The cheque can be paid to any person who presents it with identification
  2. The cheque becomes payable only to the named payee's account and not across the counter Correct answer.
  3. The cheque becomes invalid after 30 days
  4. The cheque can be endorsed in favour of a third party for cash payment

Explanation

An 'account payee' crossing restricts payment to the credit of the named payee's account and prevents payment across the counter. It protects the drawer against misappropriation by requiring collection through the banking channel.

Question 38Principles & Practices of Banking

A bank has granted a loan against the security of a life insurance policy. Which of the following is essential for the bank to enforce the security?

  1. The borrower must continue to pay premiums directly to the bank
  2. The policy must be surrendered to the insurer immediately
  3. The bank must obtain a fresh medical examination of the borrower
  4. The policy must be assigned in favour of the bank and the insurer must be notified Correct answer.

Explanation

To perfect its security interest in a life insurance policy, the bank must obtain an assignment of the policy in its favour and notify the insurer. This ensures the bank can receive the policy proceeds on maturity or death.

Question 39Principles & Practices of Banking

Which of the following is a correct statement about the 'Banking Ombudsman' under the RBI's Integrated Ombudsman Scheme, 2021?

  1. The Ombudsman can hear complaints only if the customer has filed a civil suit
  2. The Ombudsman's decision is binding on the customer but not on the bank
  3. The Ombudsman can award compensation exceeding INR 20 lakh in all cases
  4. The Ombudsman's jurisdiction covers complaints against banks and non-bank payment system participants Correct answer.

Explanation

The Integrated Ombudsman Scheme, 2021 covers complaints against banks and non-bank payment system participants, providing a single window for grievance redressal. The Ombudsman's award is binding on the bank if accepted by the customer.

Question 40Principles & Practices of Banking

A bank is considering a loan to a borrower where the security is a mortgage of immovable property. What is the effect of registering the mortgage with the Sub-Registrar?

  1. It extinguishes the borrower's right of redemption
  2. It transfers ownership of the property to the bank
  3. It creates the mortgage
  4. It provides public notice and helps establish priority Correct answer.

Explanation

Registration of a mortgage provides public notice of the charge and helps establish priority against subsequent creditors. The mortgage itself is created by the mortgage deed, not by registration.

Question 41Principles & Practices of Banking

Under the RBI's guidelines on 'priority sector lending', which of the following categories is included in the priority sector?

  1. Loans for purchase of luxury cars
  2. Loans to micro and small enterprises Correct answer.
  3. Loans to large corporate houses for expansion
  4. Loans to non-banking financial companies for on-lending to large borrowers

Explanation

RBI's priority sector lending guidelines include micro and small enterprises as a priority sector category. This is intended to channel credit to segments that may otherwise lack access to formal finance.

Question 42Principles & Practices of Banking

A bank's customer has a savings account and a loan account with the same bank. The customer instructs the bank to set off the savings balance against the loan. Which condition must be satisfied for the bank to exercise this right?

  1. The customer must provide a fresh indemnity
  2. The loan must be classified as a non-performing asset
  3. The accounts must be held in the same capacity and the loan must be due Correct answer.
  4. The bank must obtain prior approval from RBI

Explanation

The right of set-off requires that the accounts be held in the same capacity and that the debt be due. If these conditions are met, the bank can combine the accounts and adjust the balance.

Question 43Principles & Practices of Banking

Which of the following is a correct statement about the 'Deposit Insurance and Credit Guarantee Corporation' (DICGC) cover for bank deposits?

  1. The cover applies separately to each branch of the same bank
  2. Only savings bank deposits are insured
  3. Each depositor is insured up to INR 5 lakh per bank for both principal and interest Correct answer.
  4. Foreign currency deposits are fully insured

Explanation

DICGC insures deposits up to INR 5 lakh per depositor per bank, covering both principal and interest. The cover is per bank, not per branch, and applies to all commercial banks and eligible cooperative banks.

Question 44Principles & Practices of Banking

A bank is evaluating the capital adequacy of a loan under Basel III. Which of the following is included in Common Equity Tier 1 (CET1) capital?

  1. Subordinated debt with a fixed maturity
  2. Paid-up equity capital and retained earnings Correct answer.
  3. Perpetual non-cumulative preference shares
  4. Revaluation reserves from fixed assets

Explanation

CET1 capital primarily comprises paid-up equity capital, stock surplus, retained earnings, and other disclosed reserves. It is the highest quality of capital and must be at least 4.5% of risk-weighted assets under Basel III.

Question 45Principles & Practices of Banking

A bank accepts a fixed deposit from a customer for a period of five years. Under RBI guidelines, what is the maximum rate of interest the bank can offer on this deposit?

  1. The rate fixed by the bank's board, subject to RBI's overall ceiling Correct answer.
  2. The repo rate plus 2%
  3. The base rate plus 3%
  4. The bank rate plus 1%

Explanation

RBI has deregulated interest rates on domestic term deposits, allowing banks to set rates based on their board-approved policy, subject to overall regulatory ceilings. There is no fixed formula such as repo rate plus a margin for domestic deposits.

Question 46Principles & Practices of Banking

Which of the following best describes the 'statutory liquidity ratio' (SLR) requirement for a bank?

  1. The maximum proportion of loans that can be given to a single borrower
  2. The minimum capital to be maintained against risk-weighted assets
  3. The minimum proportion of net demand and time liabilities to be held in cash
  4. The minimum proportion of net demand and time liabilities to be held in approved liquid assets such as government securities Correct answer.

Explanation

SLR requires banks to maintain a minimum percentage of their net demand and time liabilities in approved liquid assets, including government securities and cash. It is a prudential measure to ensure liquidity and solvency.

Question 47Principles & Practices of Banking

A bank is considering a proposal for 'factoring' services. Which of the following is a correct description of factoring?

  1. A loan against the security of immovable property
  2. The outright purchase of receivables by the factor, with or without recourse Correct answer.
  3. A deposit accepted by a bank for a fixed term
  4. A guarantee issued by a bank on behalf of an exporter

Explanation

Factoring involves the purchase of a firm's accounts receivable by a factor, which may be with or without recourse. It provides the seller with immediate liquidity and may include collection and credit protection services.

Question 48Principles & Practices of Banking

Under the RBI's guidelines on 'securitisation of standard assets', which of the following is a key requirement for a bank to obtain capital relief on the securitised assets?

  1. The bank must transfer the assets to an SPV and meet the true sale and clean-up criteria Correct answer.
  2. The bank must retain the entire credit risk on its books
  3. The bank must retain a first loss facility of at least 10%
  4. The bank must obtain prior approval from the Central Government

Explanation

To obtain capital relief, the securitisation must involve a true sale of assets to a special purpose vehicle and satisfy RBI's clean-up criteria. Retention of risk or failure of true sale prevents capital relief.

Question 49Principles & Practices of Banking

A bank's customer has pledged gold ornaments for a gold loan. Which relationship best describes the bank's position with respect to the gold?

  1. Mortgagee without possession
  2. Bailee with a lien
  3. Pledgee with possession Correct answer.
  4. Hypothecatee without possession

Explanation

A pledge involves the delivery of goods as security, and the pledgee obtains possession. The bank, holding the gold ornaments, is a pledgee with possession and can enforce the security on default.

Question 50Principles & Practices of Banking

Which of the following is a correct statement about the 'cash reserve ratio' (CRR) maintained by banks with the RBI?

  1. CRR is maintained as a percentage of net demand and time liabilities and does not earn interest Correct answer.
  2. CRR can be maintained in the form of government securities
  3. CRR is maintained as a percentage of net demand and time liabilities and earns interest from RBI
  4. CRR is maintained only on the bank's term deposits

Explanation

CRR is the proportion of net demand and time liabilities that a bank must maintain as cash balances with the RBI. These balances do not earn interest, unlike SLR securities which do.