Class 12 Finance Chapter 1 Financial Institution

Class 12 Finance Chapter 1 Financial Institution Question answer to each chapter is provided in the list so that you can easily browse throughout different chapters SCERT Class 12 Finance Chapter 1 Financial Institution and select need one.

Class 12 Finance Chapter 1 Financial Institution

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Also, you can read the SCERT book online in these sections Solutions by Expert Teachers as per SCERT (CBSE) Book guidelines. Class 12 Banking Solutions These solutions are part of SCERT All Subject Solutions. Here we have given Assam Board/NCERT Class 12 Finance Chapter 1 Financial Institution Solutions for All Subject, You can practice these here.

Financial Institution

Chapter: 1

1. When was the Reserve Bank of India established?

Or

When the Reserve Bank of India started functioning as a Central Bank?

Ans: 1st April, 1935.

2. Where is the Head office of Reserve Bank of India situated?

Ans: Mumbai.

3. Who issues one rupee notes and coins in India?

Ans: Government of India.

4. When was the Reserve Bank of India nationalised?

Ans: January 1, 1949.

5. How many directors consist of the Board of directors of the Reserve Bank of India?

Ans: 20 members.

6. In which year the Reserve Bank of India Act was passed?

Ans: In 1934.

7. The Board of Directors of the Reserve Bank of India consists of _________ members. (Fill in the blank)

Ans: 20.

8. Which method is adopted by the Reserve Bank of India for issuing notes?

Ans: Minimum Reserve System.

9. In Which years the Reserve Bank of India was formed and nationalised?

Ans: The Reserve Bank of India was formed in 1st April, 1935 and was nationalised on 1st January, 1949.

10. What was the authorised capital of RBI at the time of its establishment?

Ans: At the time of establishment, the authorised capital of RBI was 5 crore rupees.

11. Who appoints Governor and deputy Government of RBI?

Ans: Central Government of India.

12. In which year RBI becomes a state owned institution?

Ans: From 1 st January 1949.

13. Who is the Executive head of the RBI?

(a) Governor of RBI.

(b) Deputy Governors of RBI.

(c) Members of RBI.

(d) None of the above.

Ans: (a) Governor of RBI.

14. Which of the following is not carried on by Central Bank?

(a) Issue of Notes.

(b) Credit Control.

(c) Banker of Government.

(d) Accepting deposits from public.

Ans: (d) Accepting deposits from public.

15. Which of the following is the oldest Central Bank of the World?

(a) Bank of England

(b) Bank of France.

(c) RBI.

(d) Federal Reserve Bank of USA.

Ans: (a) Bank of England.

16. What is the name of Central Bank of India?

Ans: Reserve Bank of India.

17. The Governor and Deputy Governors of RBI are appointed for a period of –

(a) 2 years.

(b) 4 years.

(c) 5 years.

(d) 6 years.

Ans: (c) 5 years.

18. What is the name of the present Governor of RBI?

Ans: Dr. D. Subbarao. (Sept. 6. 2008 to till date)

19. What is the present ratio of CRR?

Ans: 6%.

20. Name the three training establishments of RBI?

Ans: The three training establishments of RBI are: 

(i) Banker’s Training College, Mumbai.

(ii) College of Agricultural Banking, Pune.

(iii) Reserve Bank Staff College, Chennai.

21. In which year IFCI was established?

Ans: In 1948.

22. What was the authorized capital of IFCI at the time of its establishment?

Ans: Rs. 10 crores.

23. Where is the head office of IFCI situated?

Ans: New Delhi.

24. In which year IDBI was established?

Ans: In July, 1964.

25. What was the authorised capital of IDBI?

Ans: Rs. 50 crores.

26. In which year state Financial Corporation (SFC) Act passed?

Ans: In 1951.

27. In which year the first SFC was established?

Ans: In 1953.

28. In which year Assam Financial Corporation established?

Ans: In 1954.

29. In which year NABARD was established?

Ans: In July 12, 1982.

30. What was the authorised capital of NABARD?

Ans: Rs. 500 crores.

31. What is the full form of SIDC.?

Ans: State Industrial Development Corporation.

32. When was Unit Trust of India established?

Ans: On 1st February, 1964.

33. When was LICI established?

Ans: In September 1, 1956.

34. When was GICI established?

Ans: In November, 1972.

35. In which year IMF started functioning?

Ans: On March 1, 1947.

36. When was the Interim committee of IMF established?

Ans: In 1974.

37. What is the full form of IBRD?

Ans: International Bank For Reconstruction And Development.

38. What is the another name of IBRD?

Ans: World Bank.

41. What is the full form of IDA?

Ans: International Development Association.

39. In which year IBRD was established and where?

Ans: IBRD was established at the international economic conference held at Bretton Woods, in July, 1944.

40. When did IBRD/World Bank start functioning?

Ans: In June, 1946.

42. In which year IDA was established?

Ans: In 1960.

43. What is the full form of IFC?

Ans: International Finance Corporation.

44. When was IFC established?

Ans: In 1956.

45. What is the full form of ADB?

Ans: Asian Development Bank.

46. When did ADB start functioning?

Ans: On 19th December, 1966.

47. Where is the head office of ADB located?

Ans: Manila in the Philippines.

48. Where is the main office of IMF situated?

Ans: Washington.

49. How many members in the Board of Executive Directors of IMF?

Ans: 24 members.

50. Give two examples of Development bank.

Ans: NABARD: National Bank for Agriculture and Rural Development.

IFCI: Industrial Finance Corporation of India.

51. Give two examples of non-banking financial institutions in India.

Ans: IDBI: Industrial Development Bank of India.

SIDC: State Industrial Development Corporation.

52. Industrial Finance Corporation of India was established in the year __________ (Fill in the gap)

Ans: 1948.

53. What is the name of first development bank established in India?

Ans: Industrial Finance Corporation of India. (IFCI)

54. The first development bank established in India was IFCI/ IDBI/ UTI/NABARD. (Choose the correct answer)

Ans: IFC(I)

55. The IMF came into existence in the year ___________ (Fill in the blank)

Ans : 1944.

56. What is the full form of IMF?

Ans: International Monetary Fund.

57. What are the full forms of UTI, LICI, GICI?

Ans: UTI: Unit Trust of India.

LICI: Life Insurance Corporation of India.

GICI: General Insurance Corporation of India.

58. What is the full form of MMMF?

Ans: MMMF: Money Market Mutual Fund.

59. Name two international Financial institutions.

Ans: (i) International Monetary Fund (IMF).

(ii) International Bank For Reconstruction and Development (IBRD)

60. Mention two examples of non-banking financial institutions.

Ans: Two examples of non-banking financial institutions are:

(i) National Bank For Agriculture and Rural Development (NABARD).

(ii) Industrial Development Bank of India (IDBI).

61. What are the two categories of Financial Institutions?

Ans: The two categories of Financial Institutions are:

(a) Banking Institutions.

(b) Non-banking Financial Institutions.

62. Write the full form of IDBI.

Ans: Industrial Development Bank of India.

63. Write the full forms of NABARD and NEDFI.

Ans: NABARD: National Bank For Agriculture and rural Development.

NEDFI: North-East Development Finance Corporation (Institution) Ltd.

1. Name the various departments of RBI?

Ans: Various departments of RBI are:

(i) Secretary’s Department.

(ii) Department of Administration and personnel.

(iii) Department of Accounts and Expenditure.

(iv) Inspection Department.

(v) Legal Department.

(vi) Department of Banking operation and Development.

(vii) Department of Non Banking Companies.

(viii) Exchange Control Department.

(ix) Economic Department.

(x) Department of Statistics.

2. Mention the functions of the Reserve Bank of India. 

Ans: The functions of the RBI are:

(i) Note Issue. 

(ii) Bankers to the Government.

(iii) Banker’s Bank.

(iv) Lender of the last resort. 

(v) Controller of Credit.

(vi) Custodian of Foreign Exchange Reserves.

(vii) Acting as clearing House.

3. Name the various methods of issuing notes.

Ans: The various methods of issuing notes are:

(i) Simple Deposit System.

(ii) Fixed Fiduciary System.

(iii) Proportionate Reserve System.

(iv) Minimum Mixed Reserve System. 

(v) Maximum Reserve System. 

(vi) Proportionate Mixed Reserve System. 

(vii) Minimum Reserve System.

(viii) Bond Deposit System.

4. Mention the various methods or instruments of credit control used by the Reserve Bank of India?

Ans: The various methods or instruments of credit control used by the Reserve Bank of India can be broadly classified into two categories:

(a) Quantitative or general Methods:

(i) Bank rate.

(ii) Open Market Operation. 

(iii) Cash Reserve Ratio.

(iv) Statutory Liquidity Ratio.

(b) Qualitative or selective method:

(i) Direct Action.

(ii) Moral Suasion.

(iii) Directives.

(iv) Credit Rationing.

5. What is Bank Rate?

Ans: The Bank rate is the rate at which the RBI rediscounts papers presented by commercial banks or make advances to them directly against approved securities.

According to section 49 of the Reserve Bank of India Act, 1934, the Bank Rate has been defined as, “the standard rate as which the bank is prepared to buy or rediscount bills of exchange or their commercial papers eligible of purchase under the Act.”

6. What is CRR?

Ans: Cash Reserve Ratio (CRR) refers to the portion of total deposits of a commercial bank, which it has to keep with the RBI in the form of cash reserves. The Reserve Bank was authorised to vary the cash reserve ratio between 3 and 15% of the total demand and time liabilities. The present CRR is 6%.

7. What is SLR?

Ans: Statutory Liquidity Ratio (SLR) refers to that portion of total deposits of a commercial bank which it has to keep with itself in the form of cash reserves. The commercial banks are also required to maintain liquid assets in the form of cash, gold and approved securities equal to not less than 25% of their total deposits. This ratio is called SLR.

The RBI also empowered to raise it up to 40%. On the recommendations of the committee, it was reduced continuously and brought to 25% in 1999 as a part of the financial sector reform.

8. What is Minimum Reserve System?

Ans: Minimum Reserve System is an important method of issuing notes adopted by the Reserve Bank of India. Under this system, after maintaining a minimum reserve of gold and silver as a precious metals, paper money of any value can be issued by the Government. Under this system, due to unlimited elasticity, control on issue of notes is slackened. It enhances the possibility of money-oriented inflation greatly. Non convertible paper money is issued under this system.

9. Give the meaning of Central Bank?

Ans: The central Bank is the apex of the monetary structure of a country. To maintain monetary stability smoothly a country need the Central Bank specially. Central Bank is the special bank which organise the entire banking structure and maintain monetary policy.

According to R.P. Kent, “The Central Bank is an institution charged with the responsibilities of managing the expansion and contraction of the volume of money in the interest of the general public welfare.”

10. Explain in brief about Credit Authorisation Scheme.

Ans: Under Credit Authorization Scheme, the commercial banks were required to obtain the RBI’s prior approval for sanctioning any fresh credit of Rs. 1 crore or more and Rs. 5 crore or more to any single party or concern to the private and public sector respectively.

11. What is Full Reserve System?

Ans: Fractional reserve banking in which banks would be required to keep the full amount of each depositor’s funds in cash, ready for immediate withdrawal on demand. Funds deposited by customers in demand deposit accounts (such as checking accounts) could not be loaned out by the bank because it would be legally required to retain the full deposit to ensure an adequate reserve for customer payments. Proposals for full reserve banking systems generally do not place such restrictions on deposits that are not payable on demand, for example time deposits or savings accounts.

12. Expand: 

(a) SLR. 

(b) CRR.

Ans: SLR: Statutory Liquidity Ratio.

CRR: Cash Reserve Ration.

13. What is maximum fiduciary system?

Ans: Under maximum fiduciary system, a maximum limit of issue of paper money is determined. Thereafter notes cannot be issued in any case or any situations. Is issuing additional quantity of notes are indispensable, the maximum limit would be predetermined i.e. limit would be enhanced.

14. Explain the brief about Credit Authorization Scheme.

Ans: The Credit Authorisation Scheme (CAS) for bank advances was introduced by the Reserve Bank of India in 1965. Under the Scheme, all scheduled commercial banks have to obtain prior authorisation of the Reserve Bank before granting any fresh credit limit of Rs. 1 crore or more to any single borrower. This limit was, however, raised to Rs. 2 crores in 1975. The banks first scrutinise the proposals of the borrowers and then send them to the Reserve Bank for approval. The Reserve Bank goes through the proposal and if found suitable, then it may authorise the concerned bank to sanction the loans asked for. The CAS is being reviewed by the Reserve Bank from time to time and is progressively liberalised.

15. State in brief the external organization of Reserve Bank of India.

Ans: The organizational structure of RBI is divided into two parts, the Internal Organisation and the External Organisation. The internal structure includes the central office of the bank. The central office consists of various departments for the efficient discharge of its functions. The external structure includes its local offices, situated at important metropolitan cities of India. In other places where the RBI does not have its offices, the State Bank of India and its subsidiaries act as its agents.

16. State any two functions of stock exchange.

Ans: Two functions of stock exchange are stated below:

(i) Stock exchange is a convenient and permanent place of market, where sellers and buyers meet to deal with securities.

(ii) Stock Exchange helps in mobilisation of savings for productive purposes by inducing, directing and allocating the flow of savings into the most productive channels.

7. Explain in brief about Statutory Liquidity Ratio.

Ans: Statutory Liquidity Ratio: Under the original Banking Regulation Act 1949, banks were required to maintain liquid assets in the form of cash gold and unencumbered approved securities equal to not less than  15% of their total demand and time deposits liabilities. The minimum statutory liquidity ratio is in addition to the statutory cash reserve ratio. The Reserve Bank has to been empowered to change the minimum liquidity ratio.

8. Explain in brief about Credit Authorisation Scheme.

Ans: Credit Authorisation Scheme: Credit Authorisation Scheme is a type of selective credit control introduction by the Reserve Bank of India. An November, 1965. Under this scheme, the commercial bank had to obtain Reserve Banks authorisation before granting any fresh credit to any single party. Under this scheme the Reserve Bank requires the commercial banks to collect examine and supply detailed information regarding borrowing concerns. The main purpose of this scheme is to keep a lose watch on the flow of credit to the borrowers.

9. What do you mean by Banking Institutions?

Ans: Banks are one of the oldest financial intermediaries in the financial system. A bank is a profit seeking business enterprise which deals in money and credit. It accepts deposits of money from the public and creates credit by making advances out of funds received as deposits. A bank is therefore, like a reservoir, into which flow the savings of the community and from which loans are given to the needy borrowers.

According to G. Crowther, “A bank is one that collects money from those who have it to spare or who are saving it out of their income and lends the money so collected to those who require it.”

1. Explain briefly about the different credit control techniques adopted by the RBI.

Ans: The various methods or instruments of credit control used by the Reserve Bank of India can be broadly classified into two categories: 

(a) Quantitative or General Methods.

(b) Qualitative or Selective Methods.

(a) Quantitative or General Methods: The quantitative or general methods are adopted with the object of expansion or contraction in the volume of credit and no attention is paid on the uses of credit.

The instruments of quantitative or general credit control are as  follows:

(i) Bank Rate: The Bank rate is the rate at which the Reserve Bank advances to the member banks against approved securities or rediscounts the eligible bills of exchange and other papers. Changes in the bank rate influence the entire interest rate structure. A rise in the bank rate leads to a rise in the others market interest rates. Similarly a fall in the bank rate results a fall in the other market rates, which implies a cheap money policy reducing the cost of borrowing. The Reserve Bank has changed the bank rate from time to time to meet the changing conditions of the economy.

(ii) Open Market Operation: Through the technique of open market operations, the central bank seeks to influence the excess reserves position of the banks by purchasing and selling of government securities, commercial papers etc. When the central bank purchases securities from the banks, it increases their cash reserve position and hence their credit creation capacity. On the other hand, when the central bank sells securities to the banks, it reduces their cash reserves and the credit creation capacity.

(iii) Cash Reserve Ratio: The Reserve bank can change the cash reserve requirements of the bank in order to affect their credit creation capacity. An increase in the cash reserve ratio reduces the excess reserves of the bank and a decrease in the cash reserve ratio increases their excess reserves.

(iv) Statutory Liquidity Ratio: Statutory Liquidity Ration is the another important method which is used by the Reserve Bank for controlling the credit volume in the economy. Reserve bank of India has statutory right to change the liquidity ratio maintained by the scheduled banks.

(b) Qualitative or Selective Methods: The methods used by the Reserve bank to regulate the flows of credit into particular directions of the economy are called qualitative or selective methods of credit control.

The important methods of qualitative or selective credit control are as follows:

(i) Direct Action: This method or instrument is used by the Reserve Bank for controlling credit. According to the banking Regulation Act, 1949, the Reserve Bank has the powers to take actions against any such scheduled banks who are found guilty of neglecting the orders of RBI.

Banking Regulation Act, 1949 conferred some powers to the Reserve Bank which are given below:

(a) Reserve Bank of India is empowered to inspect any bank and its books of accounts at any time as and whenever required.

(b) Reserve Bank of India is empowered to execute the orders of the central government to prohibit any bank from receiving fresh deposits.

(c) Reserve Bank of India is empowered to order the binding up of a particular bank or its merger with some other bank.

(ii) Credit Rationing: Credit Rationing is a selective method of controlling and regulating the purchase for which credit is granted by the commercial bank.

Rationing of credit may assume two forms:

(a) The Central Bank may fix its rediscounting facilities for any particular bank.

(b) The Central Bank may fix the minimum ratio regarding the capital of a commercial bank to its total assets.

(iii) Moral Suasion: Reserve Bank of India use the method of moral suasion for effective activities of the scheduled commercial banks by requests, suggestions, advices etc. Reserve Bank is the banker’s bank, so all the banks carry on their functions in accordance with the intentions of the Reserve Bank of the country.

(iv) Directives: Sometimes, selective credit controls may be enforced on the commercial banks through directives, issued by the Reserve Bank of India from time to time. These directives may be in the form of written orders, appeals or warnings by the Reserve Bank addressed to the Commercial Banks.

2. Explain the organisation and management of the Reserve Bank of India.

Ans: Details of the organisation of R.B.I. are as follows:

(i) Central Board of Directors: The organisation and management of R.B.I. is vested on the Central Board of Directors. It is responsible for the management of R.B.I. Central Board of Directors consists of 20 members. It is constituted as follows:

(a) One Governor: It is the highest authority of R.B.I. He is appointed by the Government of India for a term of 5 years.

(b) Four Deputy Governor: Four Deputy Governors are nominated by Central Government for a term of 5 years.

(c) Fifteen Directors: Other fifteen members of the Central Board are appointed by the Central Government. Out of these four directors one each from the four local boards are nominated by the Government ten directors and one Government Officer is also nominated separately by the Central Government.

(ii) Local Boards: Besides the Central Boards, there are local Boards for four regional areas of the country with their headquarters at Mumbai, Kolkata Chennai and New Delhi, Local Boards consist of five members each, appointed by the Central Government for a term of 4 years to represent territorial and economic interest and the interests of Cooperatives and indigenous banks.

(iii) Offices of R.B.I.: The Head office of the bank is situated in Mumbai and the offices of Local Boards are situated in Delhi, Kolkata, Mumbai and Chennai. In order to maintain the smooth working of banking system, R.B.I. has opened local Offices or branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthapuram, Kochi, Lucknow and Byculla (Mumbai).

Management of Reserve Bank of India :- The management of Reserve Bank of India is vested with the central Board of Directors. The Governor of the RBI is the Chief Executive Authority. He is the Chairman of the Central Board of Directors.

The Governor has the power of general management to direct the affairs and business of the bank subject to the regulations made by Central Board. In the absence of the Governor, the Deputy Governor nominated by him (governor) would exercise his powers.

The Central Board must meet at least six times in a year and not less than once in a quarter. The Board delegates some of its functions to a committee called committee of Central Board.

The Governor of the RBI is assisted by four Deputy Governors and four Executive Directors.

The central Office of the Reserve Bank of India is located in Mumbai. The RBI has local head offices and branches at several places for its two major departments, viz, the issue and the Banking Departments. In places, where there is no office of the Reserve Bank, the State Bank of India. Group represents it as its agents/sub-agents.

3. Discuss the main traditional functions of the Reserve Bank of India as a Central bank.

Or

Name Central Banking Functions performed by the Reserve Bank of India and explain them.

Ans: As a central Bank, the Reserve Bank of India performs the following functions:

(i) Note Issue: The Reserve Bank is the sole authority for the issue of currency in India other than one rupee notes, coins and subsidiary coins. One rupee notes are issued by the Ministry of Finance of the Government of India, but these are put into circulation through the Reserve Bank only. The Reserve Bank can issue notes in the denomination of Rs. two, five, ten, twenty, fifty, one hundred, five hundred, one thousand, five thousand and ten thousand. The Issue Department of the RBI has the responsibility to issue paper currency. The issue of currency into circulation and its withdrawal from circulation take place through the banking department of the Bank.

(ii) Banker to the Government: Another important function of the Reserve Bank is it acts as the banker to the Government. It transacts the business on behalf of the Government. Government funds are held in Reserve Bank of India. Where there are no branches of Reserve Bank in the country, branches of SBI acts as the representatives of the Reserve Bank and State Banks are authorised to carry out the transactions on behalf of the Government. Moreover, Reserve Bank also performs the functions of exchange and transfer of payments on behalf of the Central and State Government. It carries on the functions of purchasing from Government and selling the securities in the market. Reserve Bank of India advises the Government on all financial matters such as loan separations, investments, agricultural and industrial finance, banking, planning etc.

(iii) Banker’s Bank: Reserve Bank of India also acts as the banker of all the scheduled banks in India. From time to time, Reserve Bank of India advances loan to these banks as required by them. According to the Banking Regulation Act, 1949, every scheduled bank is required to deposit a certain sum as cash reserve in Reserve Bank of India, which ranges between 3% to l5% of net fixed.and demand liabilities. Interest is not payable on the amount deposited as cash reserve. The purpose of these reserve is to enable the Reserve Bank to extend financial assistance to the scheduled banks in times of emergency. The Reserve Bank provides financial assistance to the scheduled banks by discounting their eligible bills and through loans and advances against approved securities.

(iv) Controller of Credit: As a Central Bank, the Reserve Bank of India adopts the. credit control policy for controlling the fluctuating price levels, economic instability and business cycle. Through the function of credit control, the Reserve Bank attempts to achieve price stability in the country for the purpose of economic development . Under credit control policy, different methods are used to control the volume of credit in the economy. Important of them are Bank Rate, Open Market Operations, Cash Reserve Ratio, Statutory Liquidity Ratio, Selective Credit Control etc.

(v) Lender of the Last Resort: As the supreme bank of the country and the banker’s bank, the Reserve Bank acts as the lender of the last resort. This means that, in case the commercial banks are not able to meet their financial requirements from other sources, they can, approach the Reserve Bank for financial accommodation. Reserve Bank of India provides financial accommodation to the commercial banks by rediscounting their eligible securities and exchange bills.

(vi) Acting as clearing House: In India, the central clearing function is managed by the RBI or the State Bank of India is authorised to manage clearing house functions. Every day each commercial banks receive a number of cheques for collection from other banks on account of their customers. If a bank has to collect several cheques from different bank even locally, it is risky, time consuming and costly. To avoid such trouble, banks join the membership of clearing house managed by central bank. Each a bank office depute an employee to attend clearing house next day, carries a list of cheque receivable from different banks separately for each bank. Similarly other member banks also follow the process. Each bank adjust cross claim against each other ultimately one bank may have to pay certain amount to another bank. Again the RBI will transfer fund from debtor to creditor’s account.

(vii) Custodian of Foreign Exchange Reserves: Reserve Bank has been entrusted with the responsibility of maintaining the external value of the rupee and for this purpose the bank holds most of the foreign exchange reserves. India is a member of International Monetary Fund (IMF), the Reserve Bank has to maintain fixed exchange rates with all other member countries of the IMF. Therefore, the Reserve Bank sells and buys foreign exchange to/from authorised person at rates fixed by the Government.

(viii) Exchange Rate Management: For maintenance of the external value of rupee, RBI prepares domestic policies. Also it need to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. For maintenance of exchange rate stability it has to bring demand and supply of foreign currency (U.S.) dollar close to each other.

4. Explain the objectives of Credit-Control in an economy.

Ans: The main objectives of credit control are explained below:

(i) Price Stability: The main objective of credit control is stabilisation of prices. Violent price fluctuations cause disturbances and maladjustments in the economic system and have serious social consequences. Therefore, the central bank adopts the credit control policy with a view to price stability.

(ii) Economic Stability: Another important objective of credit control policy is stabilisation of economy. With a view to economic stability in the economy, the central bank adopts the credit control policy from time to time.

(iii) Maximisation of Employment: Another objective of credit control policy is economic stability with full employment.

(iv) Economic Growth: The main objective of credit control policy in the underdeveloped countries should be the promoter of economic growth within the shortest possible time.

(v) Exchange Rate Stability: Instability in the exchange rate is harmful for the foreign trade of the country. Therefore, the central bank adopts the credit control policy with the object of exchange rate stability.

(vi) Stabilisation of Money Market: Another objective of the central Bank’s credit control policy is the stabilisation of the money market so as to reduce the fluctuations in the interest rates to the minimum. Credit Control should be exercised in such a way that the equilibrium in the demand and supply of money should be achieved at all times.

5. Explain briefly the system of issuing currency notes by the Reserve Bank of India.

Or

Explain the various methods of issuing notes.

Ans: Methods of issuing notes means the policy and procedures followed for issuing notes which is concerned with the amount of reserves kept behind it. Reserve may include precious metals i.e. gold and silver or government securities etc.

There are different systems of note-issue adopted by different countries.

These systems are as follows:

(i) Simple Deposit System: Under this system, the paper currency notes are fully backed by the reserves of gold or silver or both. This system is based on the currency principle of note issue. This is also known as cent percent reserve method of issuing notes.

(ii) Fixed Fiduciary System: Under this system, the central bank is authorised by law to issue a fixed amount of notes against Government securities and any excess is to be fully backed by gold/silver.

(iii) Proportionate Reserve System: Under this system, certain proportion of currency notes (40%) are backed by gold and silver reserves and the remaining part of the note issued by the approved securities. This system was adopted in 1927 and continued till 1957.

(iv) Minimum Reserve System: Under this system, after maintaining a minimum reserve of gold and silver as a precious metals, paper money of any value can be issued by the Government. Under this system, due to unlimited elasticity, control on issue of notes is slackened. It enhances the possibility of money-oriented inflation greatly. Non-convertible paper money is issued under this system.

(v) Maximum Reserve System: Under this system, a maximum limit of issue of paper money is determined. Thereafter notes cannot be issued in any case or any situations. If issuing additional quantity of notes are indispensible, the maximum limit would be predetermined i.e. limit would be enhanced.

(vi) Minimum Mixed Reserve System: Under this system, after maintaining a minimum reserve of certain value, Government can issue paper money of any value. But the minimum reserve would be the combination of Government securities and precious metals in predetermined ratios.

6. What are the various administrative departments of Reserve Bank of India?

Ans: The various administrative departments of Reserve Bank of India are:

(i) Issue department: The main function of this department in issuing notes and currency in are country.

(ii) Economic department: This department is concerned with the framing proper banking policies for better implementation of economic policies of the government.

(iii) Legal department: For implementation of banking laws in our country, this department gives advice to various departments on legal issues.

(iv) Industrial Finance department: This department is deals with providing financial assistance to various industrial banks for industrial development.

(vi) Department of Accounts: This department keeps proper records of all receipts and expenditures of Reserve Bank.

(vii) Banking department: This department deals with the government transactions, manages public debt and arranges for the transfer of government funds. Moreover, this department also maintains the cash reserves of the scheduled banks, provides financial assistance to banks.

7. Explain briefly the nationalization of the Reserve Bank of India.

Ans: RBI is the central Bank of the country which was nationalized on 1st January, 1949 after the country’s independence.

The main reasons for nationalization of RBI were as follows:

(i) After the end of the second world war there was a trend towards nationalization of central banks of the country in all parts of the world.

(ii) The inflationary tendencies had started right from the beginning of the second world war i.e. 1939. In order to control there tendencies effectively. It was thought proper to nationalize the RBI.

(iii) The country had embarked upon a planned economic program after independence. Nationalization of the RBI was necessary to use it as an effective instrument for economic development of the country.

8. Discuss the achievements and failures of Reserve Bank of India.

Ans: Achievements of the Reserve Bank of India are listed below:

(a) Flexible Monetary Policy: The Reserve Bank has adopted a flexible monetary policy. It has introduced changes in monetary regulations keeping in view the seasonal character of Indian money market. The pressure of seasonal demand has been adequately met. On account of it the seasonal fluctuations in money rates have been negligible.

(b) Stable Structure of Interest Rates: The interest rate policy of the Reserve Bank has resulted into a relatively stable structure of interest rates in the economy. The bank initially adopted cheap money policy from its beginning. The bank rate remained unchanged at the low level of 3 percent upto 1951. Some upward changes have been made in subsequent years to combat inflationary pressure. The Bank rate has remained substantially lower than the market rate of interest. The bank rate has remained more or less stable.

(c) Modern Banking and Credit structure: The Reserve Bank has succeeded in building up a sound modern banking and credit structure. The Bank enjoyed vast supervisory powers which enabled it to guide the development of banking on sound lines. Training of bank personnel has improved their efficiency. The geographical and fundamental coverage of the banking has also increased substantially.

(d) Cheap Remittance Facilities: The Reserve Bank has introduced very cheap remittance facilities. These have been widely used by the commercial banks, the Government and cooperative banks.

(e) Successful Management of Public Debt: The Reserve Bank has successfully managed the public debt. It has floated loans for the Government at low rates of interest. It has helped in raising funds for the expansion of public sector in the economy. It has also provided short term advances to the Government.

(f) Exchange Stability: The Reserve Bank has succeeded in maintaining the exchange stability to a large extent. The Bank has maintained the exchange value of the rupee at a relatively higher rate than would have prevailed in the market. It has made judicious use of exchange control measures to keep the demand for foreign exchange within the limits of the available supplies.

Looking at the performance of Reserve Bank of India, one can state with a sense of pride that Reserve Bank of India has appreciably contributed to the growth and stability of the economy. Yet there have been certain failures of the Bank too.

(a) Lack of Adjustment in the Money Market: Reserve Bank has succeeded in controlling the organised sector of the Money Market, but not the unorganised one. It has virtually failed in regulating or controlling the activities of rural money lenders and other indigenous bankers. These bankers just do not come within the scope of the Reserve Bank.

(b) Lack of Uniformity in the Rate of Interest: Because of the lack of control on different sectors of the money market, different rates of interest continue to prevail. Outside the organised sector of the money market, rates of interest are exorbitantly higher than the bank rate. Reserve Bank has rather miserably failed in this regard.

(c) Lack of Bill Market: Reserve Bank prepared a plan for the development of Bill Market in 1952. But till date there is no independent and organised widespread bill market in India. Bill Market in India does not receive first-rate Discountable Bills.

(d) Insufficient Availability of Agricultural Credit: Despite the fact that lot of steps have been initiated by the Reserve Bank to provide enough agricultural credit, its availability continues to be far behind its requirement. Agricultural credit it still being dominated by rural money lenders and other indigenous bankers who charge very high interest rates.

(e) Insufficient Banking Facility: During 46-years, after independence, Reserve Bank has tried to spread banking activity in all parts of the country. Yet it is not sufficient in view of the large size of population. Also, most of the banking activity is concentrated in urban areas. People in small villages and sub-urban areas still deprived of the banking facility.

(f) Instability in the Internal Value of the Rupee: Instability in the internal value of the rupee has been the biggest failure of the Reserve Bank. Because of the ever increasing circulation of money, prices have been rising almost non-stop. Value of the rupee has been reduced to just 7 Paise during the last 47-years or so.

9. Write a brief note on IFCI.

Ans: The Industrial Finance Corporation of India (IFCI) was established in 1948. This was set up under the provisions of the IFCI Act, 1948. It was se up to overcome the short coming of the World Bank. Its function is to assist, the economic development of less developed countries by promoting growth in the private sector of their economics. It helps in mobilising the domestic and foreign capital for this purpose.

Objectives:

(i) It makes investment in productive, private enterprises in association with private investors and without government guarantee of repayment in cases where sufficient private capital is not available on reasonable terms.

(ii) It seeks to bring together investment opportunities, domestic and foreign private capital and experienced management.

(iii) It also seeks to stimulate the international flow of private capital.

(iv) It assists the growth of capital markets in less developed countries.

(v) To provide equity and loans capital for private enterprise is association with private investor and management.

Functions: The IFCI performs the following functions:

(i) Grant: Granting loans and advances to or subscribing to debentures of approved industrial concerns, repayable within 25 years.

(ii) Guarantee: Guaranteeing loans raised by industrial enterprise from scheduled banks or state co-operative banks, which are repayable within a period of 25 years.

(iii) Underwriting: Underwriting of shares, debentures, bonds or stocks issued by industrial concerns and disposable within 7 years.

(iv) Subscribing: Subscribing directly to the shares of industrial concerns eligible for assistance from the corporation.

(v) Agent: Acting as an agent for the central government and the World Bank is respect of loans granted by them to industrial concerns.

(vi) Promotional Activities: In recent years, the corporation has started taking interest in the promotional activities such as organising techno-economic surveys, setting up of technical consultancy organisations etc.

Organisation of IFC: The membership of the IFC is open to all government which are the members of the World Bank. The president of the World Bank is ex-office chairman of the Board of Directors of the corporation and has been appointed by the Director to be the president of the corporation.

10. Write a brief note on SFCs.

Ans: In order to provide finance to small and medium scale industries, need for a separate financial institution was felt. Accordingly, the government of India passed the State Financial Corporation Act in 1951, enabling the state government to set up State Financial Corporation. As a result, the first SFC was set up by the Punjab Government in 1953. In Assam, Assam Finance Corporation was set up in 1954. The SFCs meet the financial requirements of small industrial concerns in private sector.

Objectives: The main objective of the SFCs is to provide financial assistance to medium and small scale industrial concerns. SFC especially comes into the picture when traditional banking system does not provide requisite funds. The assistance by SFC is for medium and long term capital requirements. They help both new as well as existing units for purposes of establishment, modernization, renovation, expansion and diversification.

As per the SFCs Act amended from time to time, they can assist industrial concerns engaged in any of the following activities:

(a) Manufacturing, preservation or processing of goods.

(b) Mining.

(c) Hotel Industry.

(d) Road Transport.

(e) Generation or distribution of electricity or any other form of power.

(f) Development of any area of land as an industrial concerns.

Functions of SFCs: The main function of the SFCs is to provide loans to small and medium scale industries engaged in the manufacture, preservation or processing of goods, mining etc.

State Financial Corporations are authorised to grant financial assistance in the following forms:

(i) Granting of loans or advances to Industrial concerns repayable within a period not exceeding 20 years.

(ii) Guaranteeing loans raised by industrial concerns repayable within 20 years.

(iii) Underwriting the issue of stocks, shares, bonds or debentures by the industrial concerns subject to their being disposed off within 7 years.

(iv) Acting as an agent of the central Government or the Industrial Finance Corporation of India in respect of any business with an industrial concern in respect of loans sanctioned to them.

(v) Guaranteeing deferred payments due from and individual concern in connection with purchase of capital goods in India.

11. Write a brief note on NABARD.

Or

What are the functions of NABARD.

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 with a view to promoting integrated rural development and securing prosperity of rural areas and for matters connected therewith or incidental thereto.

The NABARD has taken over the functions of ARDC (Agricultural Refinance and Development Corporation) and the refinancing functions of RBI in respect of co-operative banks and the RRBs. The subscribed and paid up capital of NABARD was Rs 100 crore which was enhanced to Rs 500 crore, contributed by the Government of India and the Reserve Bank of India in equal proportions. The capital is. now enhanced to Rs 2000 crore.

Objectives:

(i) Rendering capital investment support in agriculture, fishery, poultry, horticulture, etc. activities.

(ii) Creating credit flow in the activities incorporated by NABARD and the government.

(iii) Identification and fulfillment of self-help groups (SHGs) and joint -liability groups (JLGS) credit requirements.

(iv) Promotion of non-agriculture employment opportunities by encouraging the semi-rural and rural people to explore and opt for alternate professions and job options.

(v) Extending support and assistance for mitigation and climate adaptation projects.

(vi) Refinancing the credit linked with subsidy on capital investments by the Indian government under the authority of the NABARD subsidy.

Functions of NABARD: The important functions of NABARD are as follows:

(i) It serves as an apex refinancing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas.

(ii) It provides short term credit to Regional Rural Banks, State Co- operative Banks and other financial institutions approved by the Reserve Bank. Such credit is given by the NABARD for a period upto 18 months.

(iii) It provides medium term credit to State Co-operative Banks and other financial institutions approved by the Reserve Bank. This credit is provided for a period between 18 months and 7 years.

(iv) It provides long term credit to State land Development Banks, Commercial Banks and other financial institutions approved by Reserve Bank of India. This credit is given for a period upto a maximum period of 25 years.

(v) It provides facilities for training and research and information in rural banking and development.

(vi) NABARD undertakes monitoring and evaluation of projects refinanced by it.

(vii) It functions as an apex institution i.e. it takes up all the functions performed by the Reserve Bank of India with regard to rural credit.

(viii) NABARD has the responsibility to inspect Regional Rural Banks, Central and State Co-operative Banks.

Features:

(i) Offering support for funding or refinancing.

(ii) Growing the infrastructure of rural communities in India.

(iii) Creating credit plans available at a district level for these communities.

(iv) Offering guidance and support to the banking sector so the latter can achieve their own credit targets for the year.

(v) Carrying out the supervision of cooperative banks and Regional Rural Banks (RRBs) in India.

(vi) Devising new projects that aid in rural development of the country.

(vii) Putting into place any of the government’s developmental schemes aimed at helping the growth of rural areas.

(viii) Offering training services for handicraft artisans.

12. Write a brief note on SIDC.

Ans: The State Industrial Development Corporation (SIDCs) were established under the companies Act 1956, as wholly owned undertakings of the state governments. They act as catalysts for the promotion and development of medium and large enterprises in their respective states/ union territories. They act as nodal agencies of state governments for promotion of industrial growth and development of infrastructure facilities. There are 28 SIDCs in the country. SIDCs extend financial assistance in the form of rupees loans, underwriting and direct subscription to shares/ debentures, guarantees, inter-corporate deposits and also open letter of credit on behalf of their borrowers.

SIDCs raise resources through refinance from IDBI/SIDBI, the government and banks. They can borrow funds by way of issue of bonds/debentures. They also receive subsidies/incentives from government for disbursements. SIDCs accept deposits to meet their fund requirements.

The main objectives of SIDC are as follows:

(i) SIDC aims to promote micro, small and medium enterprises.

(ii) It aids in the establishment of entrepreneurship and skill development.

(iii) It helps in facilitating industrial infrastructure development. It aims at providing publicity and marketing support to industries.

Functions of SIDCS: As a state level financial institution, SIDCS performs the following functions:

(i) Grant of financial assistance to industrial unit by way of loans, guarantees, lease finance etc.

(ii) Providing risk capital of entrepreneurs by way of equity participation and seed capital assistance.

(iii) Administrating incentive schemes of central/state government.

(iv) Promotional activities such as identification of project, ideas through industrial potential surveys, preparation of feasibility reports, selection and training of entrepreneurs.

(v) Developing industrial areas/estate by providing infrastructure facilities.

(vi) SIDCs help in setting up skill development centres where workers are trained in various skills and industrial activities. This is to ensure the supply of skilled labourers to various small scale industries.

(vii) SIDCs have developed websites so that the products manufactured by the industrial units are displayed in foreign markets. It provides export marketing assistance and helps in procuring export orders.

(viii) SIDCs take up various schemes to provide the various industrial units with efficient marketing assistance. SIDCs participate in tenders floated by the state government departments.

13. Discuss the Developmental functions of RBI.

Ans: Developmental functions are described as under:

(a) Development of the Financial System: The financial systems includes – financial institutions, financial markets and financial instruments. The sound and efficient financial system is necessary for rapid economic development of the nation. RBI encourages the banking and non – banking institution for maintenance of sound and healthy financial system.

(b) Development of Agriculture: As we know, India is an agrarian economy so RBI always give attention to agriculture sector by assessing credit needs of this sector. Regional Rural Banks (RRB), National Bank for Agriculture and Rural Development (NABARD) which are only for agriculture finance comes under the control of the RBI.

(c) Industrial Finance: For economic development of country, Industrial development is necessary. As we know industries includes small industries, middle industries, large scale industries etc. all these industries development is necessary for overall economic development of country. For this purpose RBI supports the industrial sector also. RBI had played the vital role for setting up of such industrial finance institutions like ICICI Limited, IDBI, SIDBI, EXIM etc.

(d) Training Provision: RBI always tried to provide essential training to the staff of the banking industry. RBI has set up banker’s training college at several places. The training institute namely National Institute of Bank Management (NIBM), Bankers Staff College (BSC), College of Agriculture Banking (CAB) etc.

(e) Data Collection: RBI always collects important statistical data on several topics such as interest rates, inflation, savings, investment deflation etc. This data is very much useful for policy makers and researchers.

(f) Publication of the Reports: RBI has its separate publication division. This division collect and publish data on different sector of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI annual reports, Report on Trend and Progress of commercial banks. This information is made available to the public also at cheaper rates.

(g) Promotion of Banking Habits: RBI always takes necessary steps to promote the banking habits among people for economic development of country. RBI has set up many institutions such as Deposit Insurance Corporation 1962, UTI 1964, IDBI 1964, NABARD 1982, NHB 1988 etc. These organizations develop and promote the banking habits among t the people.

(h) Export Promotion: RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The Export-Import Bank of India (EXIM), and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose.

14. Write the Supervisory functions of RBI.

Ans: The supervisory functions of RBI are discussed as under:

(a) Granting Licence to Banks: RBI grants licence to banks for carrying its business. RBI also provide licence for opening extension counters, new branches even to close down existing branches.

(b) Bank Inspection: RBI has power to ask for periodical information from banks on various components of assets and liabilities.

(c) Control Over NBFIs: The non – bank financial institutions are not influenced by the working of a monitory policy. RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs.

(d) Implementation of Deposit Insurance Scheme: The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposit of small depositors. All bank deposits below Rs. 1 Lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.

15. What is the prohibited function of the RBI under section 18 of the RBI Act 1934?

Ans: Section 18 of the Reserve Bank of India Act, 1934 outlines the prohibited functions of the Reserve Bank of India (RBI). These functions prohibit the RBI from engaging in activities that could potentially interfere with its primary mandate of maintaining monetary stability in the economy.

(a) The first prohibited function under Section 18 is that the RBI cannot grant loans or advances to any individual, corporation, or institution except under specific circumstances. The RBI may provide advances or loans to the government, or to other banks, but only for short periods and under strict conditions. The intention behind this prohibition is to prevent the RBI from getting involved in business activities and to keep it focused on its primary mandate of monetary stability.

(b) The second prohibited function under Section 18 is that the RBI cannot buy or sell securities other than government securities. Government securities are the only securities that the RBI can purchase or sell. This restriction ensures that the RBI does not participate in the securities market and maintains its independence from any market manipulation.

(c) The third prohibited function under Section 18 is that the RBI cannot assume or undertake any liability, other than its own notes and coins. This means that the RBI cannot take on any financial obligation beyond its own currency. This prohibition is in place to prevent the RBI from taking on any obligations that could potentially put its financial stability at risk.

(d) The fourth prohibited function under Section 18 is that the RBI cannot make any permanent improvements or undertake any capital expenditure except for its own offices or buildings. The RBI can only make temporary improvements to any property it owns or leases, and any capital expenditure must be solely for the purpose of maintaining its own offices or buildings. This restriction is in place to prevent the RBI from getting involved in real estate investments or any other business ventures.

(e) The fifth prohibited function under Section 18 is that the RBI cannot issue bearer instruments, other than bank notes. Bearer instruments are financial instruments that are not registered to any specific owner and can be transferred by physical delivery. This restriction ensures that the RBI does not create any financial instruments that could potentially be used for illegal purposes, such as money laundering or terrorism financing.

(f) The sixth prohibited function under Section 18 is that the RBI cannot undertake trading or otherwise deal in commodities, except for gold and silver. The RBI may deal in gold and silver only for the purpose of maintaining its monetary reserves. This restriction is in place to prevent the RBI from getting involved in any business activities and to keep it focused on its primary mandate of monetary stability.

(g) The seventh prohibited function under Section 18 is that the RBI cannot provide any guarantee or indemnity to any individual, corporation, or institution. This means that the RBI cannot provide any form of financial guarantee or protection to any third party. This restriction is in place to prevent the RBI from assuming any financial obligations that could potentially put its financial stability at risk.

(h) The eighth prohibited function under Section 18 is that the RBI cannot accept deposits from the public. The RBI is not a commercial bank and does not accept deposits from the public. This restriction is in place to ensure that the RBI remains focused on its primary mandate of monetary stability and does not get involved in any commercial banking activities.

Meaning of Minimum Reserve System: Printing of currency notes in India is done on the basis of Minimum Reserve System (MRS). This system is applicable in India since 1956.

According to this system, the Reserve Bank of India has to maintain assets of at least 200 crore rupees all the times. Out of this 200 crore, the 115 crore rupee should in the form of Gold or gold bullion and rest 85 cr. should be in the form of foreign currencies.

After maintaining the Minimum reserve the RBI can print any number of currency notes as per the requirement of the economy. Although RBI has to take prior permiSsion from the government.

Objectives of Minimum Reserve System (MRS): There are many objectives of MRS but a few are;

(a) To ensure the confidence of the Indian currency holders that the currency held by them is a legal tender and they will receive the value of the currency held by them.

(b) The Minimum Reserve System is a token of confidence to the general public that the Indian government is liable to pay them as per the face value of the notes because the RBI governor promise to the public that “I promise to pay a the bearer a sum of 100/500 rupee.”

(c) RBI wants to ensure the appropriate supply of currency in the economy through MRS.

(d) Through the MRS the RBI accelerate the economic growth of the country without increasing the rate of inflation in the economy.

(e) Due to its widespread benefits the Minimum Reserve System still continues in India. Sole purpose of the Minimum Reserve System is to maintain the money supply in the economy without increasing the inflation and maintain the confidence of the general public in the currency.

Advantages:

The advantages of the minimum reserve system are as follows:

(a) This strategy is adaptable.

(b) An increase in the number of notes issued does not need a rise in the minimum reserve.

(c) This strategy is dependable throughout financial crises as well as calamities such as war, earthquakes, and floods.

(d) This approach is appropriate for low-income and developing countries.

Disadvantages:

(a) The disadvantages of the minimum reserve system are as follows.

(b) There is a risk of over-issuance, which increases the money supply and causes inflation.

(c) The appropriate deployment of monetary policy instruments can produce positive results in terms of inflation management.

16. What is the meaning of Proportional Reserve System? Write its merits and demerits.

Ans: Under the proportional reserve system, certain proportion of currency notes (40%) are backed by gold and silver reserves and the remaining part of the note issue by approved securities. India adopted this method on the recommendation of Wilton Young Commission. According to the Reserve Bank of India Act 1933, not less than 40 per cent of the total assets of the Issue Department should consist of gold bullion, gold coins and foreign securities, with the additional provision that gold coins and gold bullion were not at any time to be less than Rs. 40 crores. The proportional reserve system was later replaced by the minimum reserve system by the Reserve Bank of India (Amendment) Act, 1956.

Merits:

(i) It guarantees convertibility of paper currency.

(ii) It ensures elasticity in the monetary system; the monetary authority can issue paper currency much more than that warranted by reserves.

(iii) It is economical and can be easily adopted by the poor countries.

Demerits:

(i) Under this system, it is easy to expand currency but very difficult to reduce it. The reduction of currency has deflationary effects in the economy.

(ii) There is wastage of gold because large amount of gold lies in the reserve and cannot be put to productive use.

(iii) The convertibility of paper notes is not real. In practice, high denomination notes are converted into low denomination notes and not into coins.

17. Write a short note on selective credit controls of RBI.

Ans: Selective Credit Controls of R.B.I: Selective credit controls are qualitative credit control measures undertaken by the Central bank to divert the flow of credit from speculative and unproductive activities to productive and more urgent activities. The Reserve Bank of India has undertaken the following selective credit controls to checks speculative activities and inflationary pressures and extend credit in developmental lines.

(i) Directives: The Reserve banks has been making extensive use of the selective controls and has issued many directives to the banks.

(a) The first directives was issued l on May l7, 1956 to restrict advances against paddy and d rice. Later on other commodities of common use were also included.

The Reserve Bank has fixed minimum margins to be maintained by the banks regarding their advances against the commodities subject to selective controls.

(ii) Credit Authorisation Scheme (CAS): Credit Authorisation Scheme is a type of selective credit control introduction by the Reserve Bank of india in November, 1965. Under this scheme, the commercial banks had to obtain Reserve Banks authorisation before granting any fresh credit to any single party.

(iii) Moral Suasion: The Reserve Bank has also been using moral suasion as a selective credit control measure. It has been sending periodic letters to the commercial banks to use restraints over their credit policies in general and in respect to certain modesties and unsecured loans in particular.

18. Discuss the role of Reserve Bank of India in economic development of India.

Ans: Role of Reserve Bank of India in Economic Development of India.

Following are the role of R.B.I. in economic development of India:

(i) Issue and control of Money: Only Reserve Bank enjoys monopoly in issue and control of Currency. It also play an important role in controlling credit and monetary policy. Along with economic development. The demand for currency also increases.

(ii) Development of Banking and Financial institutions: The economic development of any country depends on the availability of credit and banking facilities. Reserve bank has played an important roll in economic development by developing banking and financial institutions.

(iii) Increase in Capital Formation: Reserve bank has collected scattered money in rural areas by establishing financial institution. It has inspired mobility of small servings. The R.B.I. helped in capital formation through investing small savings in productive purpose.

(iv) Administration of Foreign Reserves: Reserve Bank also managed by scare foreign reserves. India always faces problem of foreign currency due to more import and less export. To cape up with this, bank  provides protection to foreign reserve and control exchange rate.

(v) Balanced Development: Reserve Bank has important role in the balanced development of the country. It attracts peoples saving towards Industries and thus contributes in balanced economic development of are country.

(vi) Control of Inflation: Controlling of inflation is also the function of Reserve Bank. Reserve Bank followed policy of credit control, decreasing exports and encouraging imports, reduction in expenditures etc. Which could control inflationary conditions in small duration.

(vii) Credit Control: Reserve Bank Controls credit by increasing decreasing supply of money according to requirement and this Control prices. This prevents inflationary trends in the economy and maintains economic stability.

(viii) Economic and Technical Advice: Reserve Bank not only provides finance and advice to industries but also collects statistical data, for economical and technical development of a developing country.

19. What are the objectives for establishment of Reserve Bank of India as the Central Bank of India?

Ans: Objectives for Establishment of R.B.I. as the C.B.I.

The main objectives for establishment of R.B.I. as the Central Bank of India were as follows:

(i) To manage the monetary and credit system of the country.

(ii) To stabilise internal and external value of rupee.

(iii) For balanced and systematic development of banking in the country.

(iv) For the development of organised money market in the country.

(v) For proper arrangement of agricultural finance.

(vi) For proper arrangement of industrial finance.

(vii) For proper management of public debts.

(viii) To establish monetary relations with other countries of the world international financial institution.

(ix) For Centralisation of cash reserves of commercial banks.

(x) To maintain balance between demand and supply of currency.

20. Explain the Role of RBI in industrial finance and agricultural credit.

Ans: Efforts of the RBI toward Promoting Agricultural Finance:

(a) The Reserve Bank of India in a developing economy like ours may be regarded as an engine of growth. It not only regulates bank finance, but deliberately promotes development finance.

(b) It has made special efforts in catering to the growing financial needs of agriculture, industry and export sectors of the country.

(c) Agriculture is the king-pin of India’s rural economy. Thus, rural credit – agricultural finance – is the prerequisite of agricultural growth and development.

(d) Since the inception of planning in our country, the Reserve Bank of India has been paying specific attention to promoting rural/agricultural finance.

Agricultural Credit Department: In fact, the Reserve Bank of India Act, 1934 did assign to the Reserve Bank the responsibility of developing an institutional credit system for the agricultural sector in the country. As such, the Agricultural Credit Department of the Bank was constituted along with the establishment of the Reserve Bank in April 1935, whose main task was to develop co-operative credit movement in agricultural finance.

Promotion of Industrial Finance: While with some change in the credit policy of commercial banks, the short-term credit needs of large-scale industries could be taken care of relatively easily, the need for special measures was especially acute in two spheres:

(a) The provision of long-term development finance. and

(b) Bank credit for small-scale industries.

In both the spheres on the active advice and participation of the RBI special measures have been successfully taken. For providing long-and medium-term finance as well as underwriting of new issues, specialised financial institutions in the form of industrial development banks such as the IDBI, IFCI, ICICI, SIDBI, SFCs and SIDCs have been established in the public sector and the ICICI in the private sector.

The RBI subscribed to the share capital of public sector development banks. It provides them loans from its National Industrial Credit (Long-Term Operations) Fund to which the RBI makes annual contributions from its profits. Started in July 1968 with an initial contribution of only Rs. 10 crore, the Fund had grown to Rs. 5,678 crore on June 30, 1995 and the loans and advances from it stood at Rs. 5,460 crore.

For the small-scale industries, finance is made available by SIDBI, SFCs, and SIDCs and more importantly by commercial banks which are the most important source of credit to them. The recognition of small-scale industries as a ‘priority sector’ has made all the difference.

At the end of June 1995, credit outstanding-to these industries from public sector banks stood at Rs. 26,800 crore which was about 40% of the total priority sector advances (excluding export credit). Additionally, this finance is provided on concessional terms. One important measure in the promotion of credit to small-scale industries has been the Credit Guarantee Scheme for such industries instituted in 1960 and operated by the RBI on behalf of the Government of India.

Promotion of Export Finance:

(i) Various steps have been taken to provide export credit at internationally competitive rates of interest. For example, a scheme was made operative in October 1993 for rediscounting export bills abroad at rates linked to international interest rates. Under another scheme of November 1993, exporters are given pre-shipment credit in major foreign currencies for financing imports.

The RBI provides export credit refinance limits to banks. On March end 1995, they were Rs. 9,400 crore. Export credit refinances limits for post-shipment credit was about Rs. 6,700 crore during 1994-95. Moreover, the rate of interest on export credit has been decontrolled. 

The percentage outstanding export credit to net bank credit was 9.3 per cent as on March end 1995. But, the percentage of export credit refinance limits of banks to their outstanding export credit eligible for such refinance was 48 per cent.

(ii) Export-Import Bank: The government has set up in January 1981 an Export-Import Bank, which has taken over the functions of the international financing wing of the IDBI and which acts as the apex institution relating to financing of foreign trade.

21. What are the various types of Non-Banking Financial Institutions?

Ans: There are various types of Non-Banking Financial Institutions operating in India.

The chart of various types of (NBFIs) is given below:

22. State the meaning of Non-Banking Financial Institutions with example.

Or

What do you mean by Non-Banking Financial Institutions?

Ans: Non-Banking Financial Institutions (NBFIs) form an important segment of financial institutions. NBFIs are a heterogenous group of financial institutions undertaking a variety of financial activities. These institutions provide both fund-based and fee-based services.

NBFIs are set up to supplement the efforts of banking institutions, i.e. commercial banks and co-operative banks. These institutions help in filling up the gap in financial services in the economy of a country by providing those services which the banking institutions cannot provide. Non-Banking Financial Institutions include such institutions as life insurance companies, mutual savings banks, pension funds etc.

Some examples of NBFIs are:

(a) Industrial Development Bank of India (IDBI).

(b) State Financial Corporation (SFC).

(c) National Bank for Agriculture and Rural Development (NABARD) etc.

23. Highlight the role of Non-Banking Financial Intermediaries.

Ans: The non-banking financial institutions may be broadly categorised into two groups: 

(a) Organised financial institutions.

(b) Unorganised financial institutions.

(a) Organised financial institutions: The organised non-banking financial institutions include:

Development finance institutions: These include:

(i) The institutions like IDBI, IFCI, IRDC etc. at all India level.

(ii) State Financial Corporations (SFCs), State Industrial Development Corporations (SIDCs) at the state level.

(iii) Agriculture Development Finance Institutions as NABARD, LDBS etc.

Development banks provide medium and long term finance to the corporate and industrial sector. They also take up promotional activities for economic development of the country.

(a) Investment institutions: These include LIC, GIC, UTI and mutual funds. It includes those financial institutions which mobilise savings of the public at large through various schemes and invest these funds in corporate and government securities.

(b) Unorganised financial institutions: The unorganised non- banking financial institutions include number of non banking financial companies (NBFCs). They provide whole range of financial services. These include merchant banking companies, credit rating agencies, factoring companies, housing finance companies, leasing companies, hire- purchase and consumer finance companies, etc. NBFCs mobilise public funds and provide loanable funds. The regulatory framework of NBFCs is prescribed by RBI. There has been remarkable increase in the number of such companies since 1990s.

24. State the basic features of non banking financial institutions.

Ans: The important features of non banking financial institutions are stated below:

(i) NBFIs accepts deposits repayable on the expiry of specified time and certain NBFI receive funds from government.

(ii) The liabilities of NBFI are not accepted as money as a means of payment of debt.

(iii) Increase in deposit of funds in the hands of NBFI will not increase money supply. In this case, circulating currency is transferred from depositors to NBFI.

(iv) NBFI deals with medium and long term funds in the capital market.

(v) NBFIs are heterogenous group doing diverse business in the financial system of the economy.

(vi) People invest their surplus funds with NBFI for earning income rather than safety and liquidity.

(vii) NBFI supply finance for acquiring fixed assets.

(viii) NBFIs are regulated by their special statutes.

(ix) Mobilisation of savings by the NBFI is highly affected by the interest rate. The operation of mobilisation of savings and investment is governed by prevailing interest rate.

25. Discuss the features of Non Bank Financial Institutions of India.

Ans: (a) A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.

(b) NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include insurance firms, pawn shops, cashier’s check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations.

(c) The Non – Banking Financial Companies (NBFCs) which are heterogeneous in nature in terms of activity and size are important financial intermediaries and an integral part of the Indian Financial system.

(d) A non – banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non – banking financial company (Residuary non – banking company).

26. Distinguish between Commercial Bank and Non Bank Financial Institutions (NBFIs).

Ans: Distinguish between Commercial Bank and Non Bank Financial Institutions:

27. Explain the role and function of non-banking financial institutions.

Ans: The role and importance of non-bank financial intermediaries is clear from the various functions performed by these institutions. Major functions of the NBFIs are as follows:

(A) Financial Intermediation: The most important function of the non-bank financial intermediaries is the transfer of funds from the savers to the investors.

Financial intermediation is economical and less expensive to both small businesses and small savers.

(a) It provides funds to small businesses for which it is difficult to sell stocks and bonds because of high transaction costs.

(b) It also benefits the small savers by pooling their funds and diversifying their investments.

(B) Economic Basis of Financial Intermediation: Handling of fund by financial intermediaries is more economical and more efficient than that by the individual wealth owners because of the fact that financial intermediation is based on

(a) the law of large numbers. and

(b) economies of scale in portfolio management.

(i) Law of Large Numbers: Financial intermediaries operate on the basis of the statistical law of large numbers. According to this law not all the creditors will withdraw their funds from these institutions. Moreover, if some creditors are withdrawing cash, some others may be depositing cash. Again, the financial intermediaries also receive regular interest payments on loans or investments made by them. All these factors enable the financial intermediaries to keep in cash only a small fraction of the funds provided by the creditors and lend or invest the rest.

(ii) Economies of Scale: Large size of the asset portfolios enables the financial intermediaries to reap various economies of scale in portfolio management.

The main economies are:

(a) reduction of risk through portfolio diversification.

(b) employment of efficient and professional managers. and

(c) low administrative cost of large loans and

(d) low costs of establishment, information and transactions.

(C) Inducement to Save: Non-bank financial intermediaries play an important role in promoting savings in the country. Savers need stores of value to hold their savings in. These institutions provide a wide range of financial assets as store of value and make available expert financial services to the savers. As stores of value, the financial assets have certain special advantages over the tangible assets (such as, physical capital, inventories of goods, etc.). They are easily storable, more liquid, more easily divisible, and less risky. In fact, saving- income ratio is positively related to both financial institutions and financial assets; financial progress. Induces larger savings out of the same level of real income.

(D) Mobilisation of Saving: Mobilisation of savings takes place when he savers hold savings in the form of currency, bank deposits, post office savings deposits, life insurance policies, bills, bond’s equity shares, etc. NBFI provides highly efficient mechanism for mobilising savings. There are two types of NBFTs involved in the mobilisation of savings.

(a) Depository Intermediaries, such as savings and loan associations, credit unions, mutual saving banks etc. These institutions mobilise small savings and provide high liquidity of funds.

(b) Contractual Intermediaries, such as life insurance companies, public provident funds, pension funds, etc. These institutions enter into contract with savers and provide them various types of benefits over the long periods.

(E) Investment of Funds: The main objective of NBFIs is to earn profits by investing the mobilised savings. For this purpose, these institutions follow different investment policies. For example, savings and loan associations, mutual saving banks invest in mortgages, while insurance companies invest in bonds and securities.