Address: Near Jivan Jyoti Hospital, Tinsukia College Road; Contact Person: Naveen Mahato, 8876720920

Friday, February 02, 2018

AHSEC Class 12: Banking Solved Question Paper' 2013

AHSEC – Banking Previous year’s Question papers
Banking – 2013
Full Marks: 100
Pass Marks: 30
Time: Three hours
The figures in the margin indicate full marks for the questions.
1. Answer as directed:                                                                   1x10=10
a) In which year State Bank of India was established?
Ans: 1955
b) Who issues one rupee notes?
Ans: Ministry of Finance
c) What do you mean by unit banking?
Ans: It is a system of banking where an independent bank undertakes banking function in a particular area. The operation of a unit bank is limited to a particular area and hence this system is also known as “localized banking. A unit bank has just one office with no branches. This banking system was originated and developed in the USA.
d) Define promissory note.
Ans: A Promissory Note is an instrument in writing not being a bank note or a current note containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or do the order of, a certain person, or to the bearer of the instrument.

e) IMF was established in the year 1944 / 1945 / 1946 (choose the correct year)
f) Write the full form of MMMFs.
Ans: Money Market Mutual Funds
g) What is order cheque?
Ans: Ans: Order cheque is a cheque which is payable to a certain person named in the cheque by the drawer or to the order of the payee.
h) Capital Market is the market for long term funds. (State whether true or false)                           True
2. Give the meaning of Cash Reserve Ratio.                                                                                                2
Ans: Ans: Commercial banks have to maintain statutory cash reserve in the Reserve Bank of India against their time and Demand liabilities which is called cash reserve ratio. The 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.
3. Name two private sector banks in India.                                                                                                                  2
Ans: ICICI Bank, InudsInd Bank
4. What do you mean by stock exchange?                                                                                                                    2
Ans: Secondary market also called stock exchange represents a market where existing securities i.e. shares and debentures are traded. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest and cheapest manner.
5. What is Mutual Fund?                                                                                                                                                      2
Ans: Ans: Mutual Funds: A mutual fund is an institutional device through which the investors pool their funds to invest in a diversified portfolio of securities. The fund is termed as “Mutual” because all the profit & losses of the fund are shared by the investors in proportion to their investments.
6. Who is a paying banker?                                                                                                                                                 2
Ans: Ans: The term paying banker refers to the drawee banker who pays the amount of cheques to his customer. The paying banker is defined as the “banker to whom the order is made to pay, where the order is issued as the form of a cheque”.
7. What are the different types of financial market?                                                                              3
Ans: The financial market consists of two major segments
a) Money market
b) Capital market
Money market deals in cash or near money or liquid assets of short-term nature. It also trade in bills, promissory notes, government papers. Money market is essentially concerned with lending and borrowings of cash and also the buying and selling of assets which are close substitutes for money and can be easily converted into money within a short period.
Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government.
8. Write short notes on hypothecation.                                                                                                                        3
Ans: Ans: Hypothecation is mode of creating a charge against a movable property for payment of a debt without transferring the possession of the property. The goods remain at the disposal and in the godown of the borrower. The bank is given access to goods whenever it so desires. The instrument which creates such charge is called the ‘letter of hypothecation’ which is handed over by the borrower to the creditor. This document empowers the banker to take possession of the property whenever he wishes to do so and sell the property if required to clear the dues.
9. State any three differences between bill of exchange and Promissory Note.                         3                     
Ans: Difference between bill of exchange and Promissory Note
Bill of Exchange
Promissory Note
It is drawn by the creditor
It is drawn by the debtor.
There can be three parties to it, viz. the drawer, the Drawee and the payee.
There are only two parties to it, viz. the drawer and the payee.
Order or Promise
It contains an order to make payment.
It contains a promise to make payment.
10. State three objectives of Bank nationalisation in India.                                                                                  3
Ans: Objectives of Nationalisation:
a)      Preventing concentration of economic powers in the hands of few.
b)      Mobilization of savings of rural areas.
c)       Provide adequate financial assistance to the public and private sector industry whether big or small.
11. Draw a specimen copy of bill of exchange.                                                                                           3
Specimen of bill of exchange
Mr. A (Drawer)
April 01,2017
Three Months after date pay to me or on order, a sum of rupees fifty thousand for value received.
Mr. A
Mr. B (Drawee)
Dibrugarh, Assam
Accepted By
Mr. B
(July 04, 2017)                         
12. Write a short note on Imperial Bank.                                                                                                                      5
Ans: According to the provision of the Imperial Bank of India Act, 1920. The Imperial Bank was established by the amalgamation of the three presidency bank i.e. the Bank of Bengal (1809), Bank of Bombay (1840), the Bank of Madras (1843). In came into existence on January 27th, 1921. Most of the capital of this bank was external and its management was also in the hands of British. The Imperial Bank performed both Central and commercial banking business. The major central banking functions discharged by the bank before the establishment of the RBI were as follows:
a)      It acted as the sole ‘banker to the Government and as the custodian of public funds and Government cash balances.
b)      It acted as a banker’s bank.
c)       It acted as an exchange bank and performed foreign trade.
In addition to these central banking functions the Imperial Bank performed ordinary commercial banking business such as:
a)      Accepting deposits.
b)      Making loans and advances etc.
c)       Remitting funds from one place to another.
d)      Providing safe custody of valuables etc.
13. Discuss the main functions of Development Banks.                                                                         5
Ans: The study of the role of the development banks helps us to understand the objectives and importance of such banks. The role of development banks is presented below:
a)      Financing of industries: The foremost objective of institutional finance is to extend financial accommodation to industrial concerns on a long-term basis. Term loans are provided for setting up new concerns and also for modernisation of existing concerns.
b)      Balanced regional development: Another prime objective of institutional finance is to encourage the setting up of industries in the backward regions of the country for balanced regional development.
c)       Development of capital market: In India, financial institutions were set up to develop capital market by providing merchant banking, underwriting and issue house services to companies for raising capital from the capital market.
d)      Mobilisation of public savings: Financial institutions raise funds by issuing debentures and bonds. These funds are recycled for the industrial growth of the country.
e)      Procurement of foreign technology: Financial institutions help the industrialists to acquire latest foreign technology by extending foreign currency loans and guarantees.
f)       Gap-filler: Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.
g)      Management consultancy: Financial institutions provide technical and management consultancy to industrial units.
14. Briefly explain the agency services of a commercial bank.                                                            5
Ans: Agency functions: These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:
a)      Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.
b)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.
c)       Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.
d)      Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.
e)      Acting as Trustee and Executor: Banks preserve the wills of their customers and execute them after their death.
f)       Acting as Representatives and Correspondent: Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets secure passages for their customers and receive letters on their behalf.
15. Discuss about the institutions participating in India money market.                                         5
Ans: Major Participants in the Indian Money Market is given below:
1) The Central Government: The Central Government is an issuer of Government of India Securities (G-Secs) and Treasury Bills (T-bills). These instruments are issued to finance the government as well as for managing the Government’s cash flow. T-bills and G-secs are issued by RBI on behalf of central bank to meet its short-term financial needs. Money market is regulated by RBI.
2) Commercial Banks: Commercial banks are major participants in money market. Certificate of deposits are issued by banks in money market. Then invest in government securities to maintain their statutory liquidity ratio. They also participate in call and term markets both as lenders and borrowers.
3) Life Insurance Companies: Life Insurance Companies (LICs) invest their funds in G-Sec, Bond or short term money markets. They have certain pre-determined thresholds as to how much they can invest in each category of instruments.
4) Mutual Funds: Mutual funds invest their funds in money market and debt instruments. The proportion of the funds which they can invest in any one instrument varies according to the approved investment pattern declared in each scheme.
5) Non-banking Finance Companies: Non-banking Finance Companies (NBFCs) invest their funds in debt instruments to fulfill certain regulatory mandates as well as to park their surplus funds. NBFCs are required to invest 15% of their net worth in bonds which fulfill the SLR requirement.
16. State five objectives of IMF.                                                                                                                                       5
Ans: The objectives of I.M.F are:
a)      To promote international economic and financial co-operation amongst member countries. 
b)      To promote exchange stability and avoid currency devaluation.
c)       To promote the international trade by removing all obstacles.
d)      To promote investment of capital in backward and undeveloped countries.
e)      To make financial resources available to members.
f)       To seek reduction on payment imbalances.
g)      To elimination or reduction of existing exchange control.
17. Explain the circumstances under which a bank can dishonor cheque.                                      5
Ans: The bank may dishonour a cheque for the following cases.
a)      When the cheque is post dated and it is presented for payment before the date it bears.
b)      When there are insufficient funds to the credit of the drawer.
c)       When the cheque is presented for payment at branch where the drawer of the cheque has no account.
d)      When a cheque is not duly, presented, as for example a cheque presented outside banking hours.
e)      When the cheque is ambiguous, mutilated, materially altered or irregular.
f)       When the cheque has become stale, that is it is not presented within six months of the issue of the cheque.
g)      When the signatures of the drawer of a cheque do not tally with the specimen signatures in the records of the bank.
h)      When the amount in figures and in words is not the same in a cheque.
i)        When the cheque is crossed and it is not presented through a bank.
j)        Where the bank receives a notice of the insolvency or insanity of the customer.
18. Discuss the principles of sound lending to be followed by commercial bank.                      5
Ans: The principles of sound lending by commercial banks are:
a)      Safety of principal: The first and foremost principle of lending is to ensure the safety of the funds lent. It means that the borrower is in a position to repay the loans, along with interest, according to the terms of the loan contract. The repayment of the loan depends upon the borrower’s (i) capacity to pay and (ii) willingness to pay. The banker should, therefore, take utmost care in ensuring that the enterprise or business to which a loan in to be granted is a sound one and the borrower is capable to repay it successfully.
b)      Profitability: Commercial banks are profit earning institutions. They must employ their funds profitably so as to earn sufficient income out of which to pay interest to the depositors, salaries to the staff and to meet various other establishment expenses and distribute dividends to the shareholder. The sound principle of lending does not sacrifice safety or liquidity for the sake of higher profitability.
c)       Marketability or Liquidity: Liquidity of loans is another principle of sound lending. The term liquidity of loan indicates quick realisation of loans from the borrowers. Banks are essentially dealers in short term funds and therefore, they lend money mainly for short term period. The banker should see that the borrower is able to repay the loan on demand or within a short notice.
d)      Purpose of the loan: Before granting loans, the banker should examine the purpose for which the loan is demanded. If the loan is granted for productive purpose, thereby the borrower will make much profit and he will be able to pay back the loan. In no case, loan is granted for unproductive purpose.
e)      Diversification: The element of risk in relation to loans cannot be totally eliminated, it can only be reduced. Risks of lending can be reduced by diversifying the loans. While granting loans, the banker should not grant a major part of the loan to one single particular person or particular firm or an industry. If the banker grants loans and advances to a number of firms, persons or industries, the banker will not suffer a heavy loss even if a particular firm or industry does not repay the loan.
f)       National policies: Banks have certain social responsibilities towards society also. The banks have to take into account the economic and social priorities of the country beside safety, liquidity and profitability. While formulating the lending policy, the banks are guided by the government policies in relation to disbursal of credit. Thus, national interest and policies are influence the lending decisions of banks.
In conclusion, it may be said that due consideration of all the principles are necessary, while evaluating a loan proposal.
19. What is Negotiable Instrument? What are the essential characteristics of negotiable instrument?  2+6=8
Ans: Negotiable instrument: Negotiable Instrument means a written document which is transferable by delivery. According to Section 13 of the Negotiable Instrument Act 1881, “A Negotiable Instrument means a Promissory Note, Bill of Exchange and Cheque, payable either to order or to bearer.
There are different kinds of negotiable instruments:
a) Negotiable Instruments by statue: Bills of Exchange, Promissory Notes and Cheques.
b) Negotiable Instruments by customs or usages: Treasury Bills, Dividend Warrants, Share Warrants, Bearer Debentures, Hundi.
The characteristics of a Negotiable Instrument are:
a)      Witting and Signature according to the rules: A Negotiable Instrument must be in writing and signed by the parties according to the rules relating to (a) promissory notes, (b) Bills of Exchange and (c) Cheques.
b)      Payable by Money: Negotiable Instruments are payable by the legal tender money of India.
c)       Unconditional Promise and order:  If the instrument is a promissory note, it must contain an unconditional promise to pay. If the instrument is a bill or cheque, it must be an unconditional order to pay money.
d)      Freely transferable:  A negotiable instrument is transferable from one person to another by delivery or by endorsement and delivery.
e)      Acquisition of Property:  Any person, who possesses a negotiable instrument, becomes its owner and entitled to the sum of money, mentioned on the face of the instrument.
f)       No Need of Giving Notice: There is no need of giving a notice of transfer of a negotiable instrument to the party liable to pay the money.
20. Explain the traditional functions Reserve Bank of India.                                                                8
Ans: The functions of RBI are:
1.       Note Issue: The reserves bank of India is the sole authority for the issue of currency in India other than one rupee coins/notes and subsidiary coins. The RBI has adopted the minimum reserves system of note issue to issue currency notes in the country. Under this system the RBI maintains a minimum reserve of Rs. 200 crore of which Rs. 115 crore is in gold and the rest in securities. The issue department of RBI has the responsibility to issue paper money; the issue of currency into circulation and its withdrawal from circulation take place through the banking department of the Bank.
2.       Bankers to Government :- The RBI acts as banker to the Central and State Government as a bankers as a adviser as a agent into there capacities :-
a)      As a bankers.
b)      As an agent.
c)       As an advisor.
As a Government banker the RBI performs the following functions:-
a)      It maintains and operates deposit account of the central and state governments.
b)      It receives and collects payment on behalf of the Central and state governments.
c)       It makes payments on behalf of the central and state governments.
d)      It provides short term advances to government for which are called ways and means advances etc.
As a Government agent the RBI perform the followings functions:-
1)      Collect tax and other payments on behalf of the government.
2)      Raise loan from the public and thus manages public debts.
3)      Transfer funds and provide remittances facilities to the government etc.
As an adviser the RBI acts as an advising the Government on all financial matters such as loan separations investment, agricultural and industrial finance, banking planning etc. It also advices to promote the attainment of the national economic goals.
3.       Bankers Bank: The Central Bank is a banker to all the other banks. It is the supreme bank of all the banks. As the supreme bank it performs various functions. Some of the functions are:
a)      Custodian of cash reserve of the bank: The Central Bank acts as the custodian of cash reserve of the banks. Every Commercial bank has to keep a certain portion of their deposits and time and demand liabilities to the Central Bank in the form of cash reserves. The Central Bank maintains this cash reserve as the custodian and grants money to the commercial bank in times of emergency.
b)      Lender of the last resort: The Central Bank is the Lender of the last resort of the commercial banks. When the other banks shortage of funds, then they can approach to the Central Bank for financial assistance. The Central Bank lends money to them by discounting their bills. This enables the Central Bank to establish control over the banking system of the country. The RBI is ultimate source of money and credit provide fund to money market participate thus the RBI act as lender of last resort for the commercial banks.
c)       Clearing agent: In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers. One bank may have to pay certain amount to another bank again the RBI will transfer fund from debtor to creditors account. Since all banks have their accounts with the RBI, the RBI can easily settle the claims of various banks each other with least use of cash.
4.       Control of credit :- As a central bank, the RBI take the responsibility to control of credit in order to economic development and price stability in the country under credit control policy different method are used to control the volume of credit in the economy. Important of them are General Credit Control and Selective Credit Control.
5.       Custodian of gold and foreign exchange reserves: - The RBI act as a custodian of gold and foreign exchange reserves for both on its own and on behalf of the Government.
21. What is Lead Bank Scheme? State the effects of this scheme.                                                     8
Ans: Under the lead banking Scheme a particular bank was made responsible for a particular district to develop banking and credit in that district. This scheme was framed for surveying and developing the banking potential of all the districts in the country. This scheme was introduced by the RBI on 12 dec, 1969. The concept of a lead bank was formulated in order to involve commercial banks in rural development.
Effects of Lead bank
a)      Branch expansion: There was found more effectiveness in branch expansion, supervision and guidance after introducing the Lead Bank Scheme.
b)      Co-operation: There was found more co-operation among commercial bank, Co-operative bank, other financial institution and government authorities after introducing the Lead Bank Scheme.
c)       Identification: Identification of unbanked area within district was possible through Lead Bank Scheme.
d)      Credit facilities: Extending credit facilities in allotted district.
e)      Facilities to farmers: Provisions for training of small farmers so as to ensure proper utilization of funds and to make provisions for storage, repairing and services of agricultural equipments.
22. Discuss the functions of Public Sector Bank in India.                                                                                        8     
Ans: Public Sector Banks: Public Sector banks are those banks in which the Government has at least 51% shares. Public sector banks are owned and controlled by the Government either directly or indirectly through the RBI. These banks are also known as “National Banks”.
Modern banks not only deal in money and credit creation, other useful functions management of foreign trade, finance etc. The meaning of modern banks is used in narrow sense of the term as commercial banks. The various functions of banks are given below:
A) Primary functions:
a)      Acceptance of deposits: It is the most important function of a bank. Under this function, bank accept deposits from individuals and organizations and finances the temporary needs of firms.
b)      Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.
c)       Investments of Funds: Besides loans and advances, banks also invest apart of its funds in securities to earn extra income.
d)      Credit Creations: The Bank create credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.
B) Secondary functions of a bank: This function is divided into two parts
1)      Agency functions: These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:
g)      Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.
h)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.
i)        Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.
j)        Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.
k)      Acting as Trustee and Executor: Banks preserve the wills of their customers and execute them after their death.
l)        Acting as Representatives and Correspondent: Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets secure passages for their customers and receive letters on their behalf.
2)      General Utility functions: These are certain utility functions performed by the modern commercial bank which are:
1.       Locker facility: Banks provides locker facility to their customers where they can their valuables.
2.       Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.
3.       Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.
4.       Letter of Credit: Letter of credit are issued by the banks to their customers certifying their credit worthiness. Letter of credit are very useful in foreign trade.
5.       Foreign Exchange Business: Banks also deal in the business of foreign currencies.