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Wednesday, March 21, 2018

AHSEC Class 11: Banking Solved Question Paper' 2017

2017
BANKING
Full Marks: 100
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1. Answer as directed:                                   1x8=8
a)      In which year were the Presidency Banks of India amalgamated?
Ans: 1921
b)      The Banking Regulation Act was passed in the year 1949. [Fill in the blank]
c)       What is barter system?
Ans: The system in which goods are exchanged for goods is known as Barter System. It is a system in which goods and services are exchanged without the use of money.
d)      State a characteristic of inflation.
Ans: Increase in prices: Inflation is a process of uninterrupted increase in prices. It is always accompanied by persistent rise in price level.
e)      Write the full form of ATM.
Ans: Automatic Teller Machine
f)       Who is a bank customer?

Ans: A person or an institution or corporate body that opens an account in a Bank and undertakes banking services with the Banker is known as Customer of a Bank or Bank’s customer.
g)      Overdraft facility can be availed in current/savings/fixed deposit account. [Choose the correct answer]
h)      Write what is indigenous banker.
Ans: An individual or a firm accepting deposits, dealing in indigenous bill and leads money is known as Indigenous banker. Indigenous banks are the unorganized, unregulated, unsupervised and segmented banking institutions that have no link with the organized sector.
2. What do you mean by trade cycle?                                     2
Ans: The term trade cycle is used to denote the fluctuations in economic activity which occur in a more or less regular interval of time. Each fluctuation, the rise and fall taken together, is called trade cycle.
3. Give the meaning of Banking Ombudsman.                   2
Ans: Banking Ombudsman: Ombudsman in a bank is a person appointed to receive, investigate and report on complaints by customers against banking officials.
4. Write two advantages of current account.                      2
Ans: a) There is no restriction on withdrawal. b) Overdraft facility is given to current account holders.
5. Name any two public sector banks of India.                   2
Ans: Uco Bank, United Bank
6. State two important functions of commercial bank.                   2
Ans: a) Acceptance of Deposits: It is the most important function of a bank. According to this function, the commercial bank accepts deposits from different individuals and organizations. The bank accepts deposits from them and provides all securities to them.
b) Making loans and advances: The second important function of bank is advancing loan. The commercial banks earn interest by lending money.
7. What are the different types of e-banking services?                 3
Ans: The various E-Banking services of a Bank are: Electronic Clearing Services (ECS), Electronic Payments, Automated Teller Machine (ATM), Credit Card, Debit Card, Smart Card, Virtual Card, and Electronic Fund Transfer (EFT).
8. Explain the types of loans given by the of commercial bank.                  3
Ans: The various forms of loans and advances that the bank grants to a drawer are:
a)      Ordinary loans: The money or specific amount landed by a bank to a borrower with or without security is known as loan or Ordinary loan.
b)      Cash Credit: The agreement by which a bank allows his customer to borrow money up to a certain limit against some tangible securities is knows as Cash Credit.
c)       Overdrafts: The agreement with a bank by which a current account holder is allowed to withdraw money more than his balance up to certain limit is known as Overdraft.
9. State the procedure of opening joint account.                                              3
Ans: When an account is opened by two or more persons jointly in their names, it is called joint account. The banker before opening joint account must take the following precautions:
a)      The application for opening a joint account must be signed by all persons intending to open a joint account.
b)      The banker must obtain clear mandate in writing signed by all the joint account holders regarding the operation of the account.
c)       The banker should ascertain whether the person operating the account is authorised to do so.
d)      In case of insanity of a joint account holder, the banker should stop the operation of the account.
e)      In case of death of one or more joint account holder, the balance in the account will vest with the survivor or survivors.
10. Explain why Central Bank is called ‘lender of last resort’.                      3
Ans: 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.
11. State any three stimulating effects of inflation.                                         3
Ans: The effects of inflation are as follows:
a)      Effects on fixed income group: When the prices of goods and services rises in an economy, their purchasing power reduces as their income is fixed and is unable to meet their expenditure.
b)      Effects on production: When inflation occurs in an economy, the prices of goods and services rises leading to higher profits. This makes the business enterprises to concentrate more on earning profits.
c)       Effects on distribution: When inflation occurs in an economy, its leads to economic inequalities in the economy.
12. Discuss the general utility functions of a bank.                           5
Ans: General Utility functions: These are certain utility functions performed by the modern commercial bank to its customer for the community. These are:
a)      Safe custody of valuables.
b)      Issuing letters of credit.
c)       Gift Cheques.
d)      Dealing in foreign exchange.
e)      Credit cards.
f)       Collection of statistics.
13. State about licensing of banks.                                                          5
Ans: According to Sec. 22 of the Banking Regulation Act, 1949, no banking company can carry on banking business unless it holds a license granted by the RBI. Before granting license, the RBI may look into the following matters:
a)      The bank is or will in position to pay to the depositors in full.
b)      The affairs of the bank should not conducted in a way which is detrimental to the interest of its depositors.
c)       In case of foreign bank, the carrying of banking business will be in the public interest.
d)      Financial position of the bank is sound.
14. What are the differences between Commercial Bank and Central Bank?                       5
Ans: There are some fundamental differences between them:
1)      Profit making is not the objective of central banks, although, they do earn profits. But, the principle aim of a commercial bank is to make large amounts of profits.
2)      The central bank is owned any controlled by the Government. But A commercial bank is generally owned, managed and controlled by private citizens.
3)      There is only one central bank in a country. But, There are commercial banks operating in a country on a competitive basis.
4)      The central bank is the only agency in a country entrusted with the power of issuance of notes. But, The commercial banks do not have the power of issuing notes.
5)      The central bank s the lender of the money market. But, The commercial banks are just its sub-ordinates.
15. Describe the characteristics of regional rural bank.                  5
Ans:  RRBs are local level banking organisation operating in different states of our country to fulfill the needs of small and marginal farmers, agricultural labours and landless workers, small businessman, etc. by providing short-term and medium-term credit.
The features or characteristics of Regional Rural Banks are:
a)      The RRBs have a particular operation area. They remained confined to a particular district.
b)      They are sponsored by the public sector bank.
c)       The authorized capital of RRBs is Rs. 5 crore at present and issued capital is at Rs. 1 crore.
d)      The RRBs are dependent on NABARD for financial support. The NABARD provides refinance to the RRBs at concessional interest rate.
16. Explain the techniques of creating credit by a commercial bank.                                       5
Ans: Money is said to be created when the banks, through their lending activity, make net addition to the total supply of money in the economy. Thus, the giving of loans by the banks in the form of derivates deposits leads to the creation of money. The modern banks create deposits in two ways.
Firstly, in a passive way this results in primary or passive deposits.
Secondly, in a more active way this results in active or derivative deposits.
The bank creates passive when it opens a deposits account in the name of the customer who brings cash or cheques to be credited to his account. In this case, the rate of the bank is merely passive as it accepts the cash or the cheques brought by the customers and deposited them in his account. It is the primary deposits which later on form the basis of loan transaction by the bank. These primary deposits do not make any net addition to the stock of money in the economy. After keeping a small percentage of these deposits in cash, the bank utilities the balance for making loans and advances to the customer. The percentage of the primary deposits kept by the bank in cash is known as cash Reserve Ratio. The creation of these deposits can be explained with the help of an example.
Hence, the well-known maxim is that “Every loan creates a deposit”. Such actively created deposits lead to a net increase in the total supply of money in the economy. The active deposits are also created by the bank when it purchases securities or other forms of assets from the public. The actual process of multiple creation of credit may be explained thus:-
                When a bank grants loans to the borrowers, the loan money is created to his deposits account. Supposing, the borrower pays to his creditor, in connection with some business transaction, a cheque drawn upon his account with the bank. Let us further suppose that the creditor deposits the cheque in another bank in his account. The other bank now receives the primary deposits in the form of a cheque drawn upon the first bank. After keeping some cash as cash ratio the second bank may create another derivative deposit by giving loans to some borrowers. The second borrowers may make the payment to another creditor who happens to have a deposit account with the third bank. The third bank will know receive the primary deposits in the form of cheque drawn on the second bank. This process may be repeated until the total volume of derivative deposits created by all the banks would be a multiple of the initial amount created by the first bank.
17. What are the main phases of trade cycle?                                    5
Ans: The phases of trade cycle are:
a)      Depression phases
b)      Recovery or revival phases
c)       Prosperity phases
d)      Boom phases
e)      Recession phases
Depression: The phase of trade cycle where the economic activity of the country is far below the normal level and economic backwardness occurs is known as Depression. The Depression phrase of trade cycle may be short or it may continue for considerable period of time. In these phases, Economic activity lowers down, unemployment level rises.
Revival or Recovery phase: The phase of trade cycle when the economic activities of the country undergoes sudden changes for depression to prosperity which leads to improvement in economic activities is known as Revival or Recovery. It is the second phases of trade cycle. In this phases, level of employment, wages prices, profits etc. rises.
Prosperity: The phase of trade cycle in which the economy of the country prospers and economic activities increases and causes economic development of a country is called Prosperity. This is the third phrase of trade cycle. In these phases, employment, income, investment, etc are a high level.
Boom: The peak point of prosperity which is marked by greatly accelerated economic activity is called Boom. It is basically the outcome of various development process of the prosperity phases. It is a period of short duration. In this phases, the economic activity are at the highest level.
Recession: The phase where there is downward trend of economic expansion of the country from the peak and the whole of economy retards to zero is known as Recession. In this phases, the factors of production become scare leading to rise in prices, the rate of interest rises due to scarcity of capital, the investment, employment income and demand decline, etc.
Or
Explain the meaning of depression.
Ans: The phase of trade cycle where the economic activity of the country is far below the normal level and economic backwardness occurs is known as Depression. The Depression phrase of trade cycle may be short or it may continue for considerable period of time. In these phases, Economic activity lowers down, unemployment level rises.
18. State any two selective credit control techniques adopted by the RBI.                           5
Ans: Qualitative or Selective Methods: These are basically the selective and general methods of credit control. These methods are used for controlling the use and direction of credit. They have nothing to do with the control of the total volume of credit in economy. These methods are :
a)      Directions: Sec. 21 of the Banking Regulation Act gives wide power to the RBI for controlling granting of advances by an individual bank or by banking as a whole. The RBI can give directors to any particular bank or all banks in general in regard to the purposes for which advances may or may not be made, the maximum amount of advance to any individual, firm or company etc.
b)      Margin requirement: Margin means the difference between the market price of security and loan amount. Changing margin requirement is another credit control method followed by the RBI. This system was introduced in 1956. By requiring higher margin while accepting a commodity as a security, the RBI can decrease the flow of credit to particular sector or vice versa.
Or
Describe the procedure of opening a bank account in the name of a minor.                        5
Ans: A person who has not attained or completed the age of 18 years is known as Minor. A Minor is not capable of entering into a valid contract and a contract entered into by a minor is void. The Bank can open a saving, fixed or recurring deposit account in the name of minor.
The precautionary measures are:
a)      Nature of Account: The banker may open a savings bank account in the name of a minor. The banker should not open a current account in the name of minor.
b)      Age of opening account: The banker should allow the minor to open a savings bank account in his own name only if he/she has an age between 10 – 14 years and could be able to read and write English, Hindi or any other language. If the minor does have such quality, then the banker must open his account in the joint names of the minor and his guardian.
c)       Recording date of birth of minor: The banker must record the date of birth of the minor as disclosed by his/her guardian before opening account.
d)      Death of the minor: The banker must take special care at the time of death of the minor or his guardian. In case, if the minor dies, then the balance in the account should be paid to his guardian.
e)      Death of the guardian: In the event of death of guardian, the banker should be given to the minor on attaining majority or any other guarding appointed by court.
f)       Advance to a minor on the guarantee of a third party: The banker should not grant loan to a minor on the guarantee of a third party.
19. Discuss the evolution, origin and growth of banking in India.                                                              8
Ans: Pre-Independence: The General Bank of India was set up in 1786. Next came the Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called them presidency Banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, which started as private shareholders banks, was established with mostly European shareholders.
In 1865, the Allahabad Bank was established, and, for the first time, exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1923, Banks of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore were set up. The Reserve Bank of India (RBI) was established in 1935.
Post Independence: The government took major steps in the Indian Banking Sector Reforms after independence. In 1955, it nationalized the Imperial Bank of India (the State Bank of India Act) with extensive banking facilities on a large scale, especially in rural and semi-urban areas as the first phase of nationalization. It formed the State Bank of India (SBI) to as the principal agent of RBI and to handle banking transactions of the Union and the State Governments of the Country.
In 1969, seven subsidiary banks of the State Bank of India were nationalized as a major process of nationalization due to the effort of then Prime Minister Mrs. Indira Gandhi, Later in 1969, 14 Major Private Commercial Banks in the country were nationalized. Again in 1980, 6 more banks were nationalized. In 1993, New bank is merged will Punjab National Bank. So, there are 19 nationalized banks in our country at present.
PHASE III
The third phase of development of Indian banking introduced many more products and facilities in the banking sector in its reform measures. In 1991, under the chairmanship of M. Narsimham, a committee was set up under his name, which worked for the liberalization of banking practices.
Or
What do you mean by internal and external organization of commercial bank? Describe the different departments of a commercial bank.
Ans: Organisation of a bank is divided into two parts: Internal and External Organisation. Internal organisation of a bank refers to the organisation which establishes a structural relationship between different working groups and between different departments. Internal organisation of a bank is shown in the following sequence Top to bottom):
1.  
Shareholders
2.  
Board of directors
3.  
Chairman
4.  
Managing director
5.  
General manager
6.  
Deputy general manager
7.  
Departmental head or officer
External organisation of a business concern means legal and constitutional form of a business organisation. It is based on ownership division. Example of external organisation is sole trade, partnership, company, state enterprises etc. In India, a commercial bank is set up as joint stock companies under the Companies Act and sole trade and partnership basis is not allowed.
The different department of a commercial bank are discussed below:
a)      Secretary department: It is concerned with secretarial work such as organising meeting, preparation of agenda etc.
b)      Law department: It is concerned with legal problems.
c)       Accounts department: It prepares and maintain all the books of accounts like profit and loss account, balance sheet etc.
d)      Personal department: It is concerned with selection, training, appointment, salary and pension of staff.
e)      Investments department: This department formulates investment principles of the bank.
f)       Loans and advances department: This department formulates lending principles of the bank.
g)      Inspection department: This department looks after the working of different departments and takes necessary steps for its improvement.
h)      Regional or branch department: This department looks after the different regional or branch office of the bank. It is responsible for effective functioning of various branches.
20. Discuss the causes and effects of inflation.                                                  8
Ans: The causes of inflation are:
a)      Increase in money supply: Inflation may emerge in an economy when the supply of money increases due to increase in the purchasing power of people which may lead to inflation. The increase in supply of money may due to credit expansion of the commercial banks.
b)      Population expansion: The rapid growths of population raise the aggregate demand in the economy due to increase in consumption, investment etc. and thus lead to inflation.
c)       Weak supply of commodities: The weak supply of commodities also leads to rise in prices. When the supply of commodities decreases, the traders are unable to meet the demand of the people and thus they raises the prices of goods and services causing inflation.
d)      International factors: International factors may be the reason of inflation. Sometimes the prices of a basic raw material like diesel rise in the international market which leads to rise in the price of that commodity in all the countries of the world.
The effects of inflation are as follows:
a)      Effects on fixed income group: This section of people mainly includes pensioners, recipients of rents and interest belong to this group. When the prices of goods and services rises in an economy, their purchasing power reduces as their income is fixed and is unable to meet their expenditure.
b)      Effects on production: Inflation also affects the level of production. When inflation occurs in an economy, the prices of goods and services rises leading to higher profits. This makes the business enterprises to concentrate more on earning profits which leads to misallocation of resources, adulteration of commodities, hoarding and black marketing, etc.
c)       Effects on distribution: When inflation occurs in an economy, its leads to economic inequalities in the economy. The business man, industrialists, speculators, farmers, etc. gain during the inflation as they can sell their produce at higher price to earn profit but the salary earners, wages earners, etc. lose during inflation as they get fixed and less money as compared to their expenditure.
d)      Other effects: The other effects of inflation are increase in the govt. revenues, rise in the balance of payments, decrease in exchange rate, collapse of monetary system.
21. Explain in brief the various functions of the Central Bank.                    8
Ans: The main functions of the Central Banks are:
a)      Issue of paper currency.
b)      Banker to the government.
c)       Banker to the bank.
d)      Credit control.
e)      Supervision and inspection of banks.
f)       Development and promotional functions.
g)      Custodian of the Nation’s Gold and foreign exchange reserves.
A) Note issue: The first function or the primary function of money is to issue paper currency. The Central Bank has the sole power to issue paper currency. The notes are legal tender money. In India, the RBI issue currency notes of all types except One Rupee note which are issued by the Ministry of Finance, Govt. of India. But the notes are issued following some methods. The Central Banks follows different methods or system according to the currency or banking regulations to issue notes. These systems are:
Minimum reserve system: The minimum reserve system is a system in which the Central Bank is authorized to issue notes up to any limit by keeping a certain minimum reserve of gold and foreign securities. In India, the RBI is required to keep the minimum reserve of Rs. 200/- crore out of which Rs. 115/- crore should be kept in gold. The system is very elastic and economical for developing countries as it requires only a small and fixed amount of gold reserve. However, it lacks in public confidence due to non-convertibility of notes.
Simple deposit system of issuing currency: The simple deposit system is also knows as full reserve system. Under this system, the Central Bank is required to keep 100% of metal, either gold or silver or both as reserve for every note issued. The notes so issue becomes representative paper money. The advantage of this system is that it enjoys a public confidence but it is very costly and money supply cannot be increase as and when required.
Fixed Fiduciary System of issuing currency: Under this system, the Central Bank issue currency notes up to a certain limit against reserves of Govt. securities. The notes issued beyond the limit set by the law have to be fully banked by metallic reserves.
Proportional system of issuing currency: The proportional system of issuing currency is very simple and elastic. According to this system, the notes issued by Central Bank are banked by both metallic reserves and securities. A certain percentage (25 to 40%) of the total notes issued has to be backed by gold or silver reserves and the remaining by Govt. securities.
B) Central Bank acts as the banker to the Government
The Central Bank is the banker to the Govt. of that country. It performs the same function for the Govt. as the commercial banks performs for their customers. The Central Banks plays the role of the banker to the Govt. in the following three ways:
a)      As a banker: The Central Bank is the banker to the Govt. Under this, it maintains the accounts of the Govt., accepts deposits of the Govt. without interest, provides short term loans to the Govt., undertakes transactions of the Govt. related to purchase and sale of foreign exchange, etc.
b)      As an agent: The Central Bank also acts as the agent to the govt. In this, it recovers taxes and other payments from the public, floats loans and manages public debt etc.
c)       As an advisor: The Central Bank is the financial adviser of the Govt. It advices the Govt. on important economic fiscal and monetary matters such as controlling of inflation or deflation, deficit financing, trade policy, etc.
C) Central Bank as the Banker to the banks


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.
c)       Clearing agent: The Central Bank acts as the clearing house of the commercial banks. It maintains the accounts of the banks and settles their claims and counter claims by minimum use of money or cash.
Or
Explain the functions of Central Bank as (a) Bank of note issue and (b) Banker’s bank.   4+4=8
Ans: Refer above
22. Write short notes on any two of the following:                          4x2=8
a)      Banker’s clearing house.
b)      Investment bank.
c)       Recession.
d)      Overdraft.
e)      Pay-in-slip book.
Ans:
a)      Clearing agent: The Central Bank acts as the clearing house of the commercial banks. It maintains the accounts of the banks and settles their claims and counter claims by minimum use of money or cash.
b)      Investment Banks: Investment Banks are those banks which are specialized in provide medium and long term financial assistance to business and industry. They are also known as Industrial Banks as they are mainly concerned with industrial finance.
c)       Recession: The phase where there is downward trend of economic expansion of the country from the peak and the whole of economy retards to zero is known as Recession. In this phases, the factors of production become scare leading to rise in prices, the rate of interest rises due to scarcity of capital, the investment, employment income and demand decline, etc.
d)      Overdrafts: The agreement with a bank by which a current account holder is allowed to withdraw money more than his balance up to certain limit is known as Overdraft. The customer has to pay interest on the amount overdraw by him.
e)      Pay-in-slip book is a book contains some slip issued by a bank to his customer to deposit cash, cheque, drafts, bills, etc. to his account. These books are issued to the customer having a savings, current or recurring deposit account.
2017
BANKING
Full Marks: 100
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1. Answer as directed:                                   1x8=8
a)      In which year were the Presidency Banks of India amalgamated?
Ans: 1921
b)      The Banking Regulation Act was passed in the year 1949. [Fill in the blank]
c)       What is barter system?
Ans: The system in which goods are exchanged for goods is known as Barter System. It is a system in which goods and services are exchanged without the use of money.
d)      State a characteristic of inflation.
Ans: Increase in prices: Inflation is a process of uninterrupted increase in prices. It is always accompanied by persistent rise in price level.
e)      Write the full form of ATM.
Ans: Automatic Teller Machine
f)       Who is a bank customer?
Ans: A person or an institution or corporate body that opens an account in a Bank and undertakes banking services with the Banker is known as Customer of a Bank or Bank’s customer.
g)      Overdraft facility can be availed in current/savings/fixed deposit account. [Choose the correct answer]
h)      Write what is indigenous banker.
Ans: An individual or a firm accepting deposits, dealing in indigenous bill and leads money is known as Indigenous banker. Indigenous banks are the unorganized, unregulated, unsupervised and segmented banking institutions that have no link with the organized sector.
2. What do you mean by trade cycle?                                     2
Ans: The term trade cycle is used to denote the fluctuations in economic activity which occur in a more or less regular interval of time. Each fluctuation, the rise and fall taken together, is called trade cycle.
3. Give the meaning of Banking Ombudsman.                   2
Ans: Banking Ombudsman: Ombudsman in a bank is a person appointed to receive, investigate and report on complaints by customers against banking officials.
4. Write two advantages of current account.                      2
Ans: a) There is no restriction on withdrawal. b) Overdraft facility is given to current account holders.
5. Name any two public sector banks of India.                   2
Ans: Uco Bank, United Bank
6. State two important functions of commercial bank.                   2
Ans: a) Acceptance of Deposits: It is the most important function of a bank. According to this function, the commercial bank accepts deposits from different individuals and organizations. The bank accepts deposits from them and provides all securities to them.
b) Making loans and advances: The second important function of bank is advancing loan. The commercial banks earn interest by lending money.
7. What are the different types of e-banking services?                 3
Ans: The various E-Banking services of a Bank are: Electronic Clearing Services (ECS), Electronic Payments, Automated Teller Machine (ATM), Credit Card, Debit Card, Smart Card, Virtual Card, and Electronic Fund Transfer (EFT).
8. Explain the types of loans given by the of commercial bank.                  3
Ans: The various forms of loans and advances that the bank grants to a drawer are:
a)      Ordinary loans: The money or specific amount landed by a bank to a borrower with or without security is known as loan or Ordinary loan.
b)      Cash Credit: The agreement by which a bank allows his customer to borrow money up to a certain limit against some tangible securities is knows as Cash Credit.
c)       Overdrafts: The agreement with a bank by which a current account holder is allowed to withdraw money more than his balance up to certain limit is known as Overdraft.
9. State the procedure of opening joint account.                                              3
Ans: When an account is opened by two or more persons jointly in their names, it is called joint account. The banker before opening joint account must take the following precautions:
a)      The application for opening a joint account must be signed by all persons intending to open a joint account.
b)      The banker must obtain clear mandate in writing signed by all the joint account holders regarding the operation of the account.
c)       The banker should ascertain whether the person operating the account is authorised to do so.
d)      In case of insanity of a joint account holder, the banker should stop the operation of the account.
e)      In case of death of one or more joint account holder, the balance in the account will vest with the survivor or survivors.
10. Explain why Central Bank is called ‘lender of last resort’.                      3
Ans: 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.
11. State any three stimulating effects of inflation.                                         3
Ans: The effects of inflation are as follows:
a)      Effects on fixed income group: When the prices of goods and services rises in an economy, their purchasing power reduces as their income is fixed and is unable to meet their expenditure.
b)      Effects on production: When inflation occurs in an economy, the prices of goods and services rises leading to higher profits. This makes the business enterprises to concentrate more on earning profits.
c)       Effects on distribution: When inflation occurs in an economy, its leads to economic inequalities in the economy.
12. Discuss the general utility functions of a bank.                           5
Ans: General Utility functions: These are certain utility functions performed by the modern commercial bank to its customer for the community. These are:
a)      Safe custody of valuables.
b)      Issuing letters of credit.
c)       Gift Cheques.
d)      Dealing in foreign exchange.
e)      Credit cards.
f)       Collection of statistics.
13. State about licensing of banks.                                                          5
Ans: According to Sec. 22 of the Banking Regulation Act, 1949, no banking company can carry on banking business unless it holds a license granted by the RBI. Before granting license, the RBI may look into the following matters:
a)      The bank is or will in position to pay to the depositors in full.
b)      The affairs of the bank should not conducted in a way which is detrimental to the interest of its depositors.
c)       In case of foreign bank, the carrying of banking business will be in the public interest.
d)      Financial position of the bank is sound.
14. What are the differences between Commercial Bank and Central Bank?                       5
Ans: There are some fundamental differences between them:
1)      Profit making is not the objective of central banks, although, they do earn profits. But, the principle aim of a commercial bank is to make large amounts of profits.
2)      The central bank is owned any controlled by the Government. But A commercial bank is generally owned, managed and controlled by private citizens.
3)      There is only one central bank in a country. But, There are commercial banks operating in a country on a competitive basis.
4)      The central bank is the only agency in a country entrusted with the power of issuance of notes. But, The commercial banks do not have the power of issuing notes.
5)      The central bank s the lender of the money market. But, The commercial banks are just its sub-ordinates.
15. Describe the characteristics of regional rural bank.                  5
Ans:  RRBs are local level banking organisation operating in different states of our country to fulfill the needs of small and marginal farmers, agricultural labours and landless workers, small businessman, etc. by providing short-term and medium-term credit.
The features or characteristics of Regional Rural Banks are:
a)      The RRBs have a particular operation area. They remained confined to a particular district.
b)      They are sponsored by the public sector bank.
c)       The authorized capital of RRBs is Rs. 5 crore at present and issued capital is at Rs. 1 crore.
d)      The RRBs are dependent on NABARD for financial support. The NABARD provides refinance to the RRBs at concessional interest rate.
16. Explain the techniques of creating credit by a commercial bank.                                       5
Ans: Money is said to be created when the banks, through their lending activity, make net addition to the total supply of money in the economy. Thus, the giving of loans by the banks in the form of derivates deposits leads to the creation of money. The modern banks create deposits in two ways.
Firstly, in a passive way this results in primary or passive deposits.
Secondly, in a more active way this results in active or derivative deposits.
The bank creates passive when it opens a deposits account in the name of the customer who brings cash or cheques to be credited to his account. In this case, the rate of the bank is merely passive as it accepts the cash or the cheques brought by the customers and deposited them in his account. It is the primary deposits which later on form the basis of loan transaction by the bank. These primary deposits do not make any net addition to the stock of money in the economy. After keeping a small percentage of these deposits in cash, the bank utilities the balance for making loans and advances to the customer. The percentage of the primary deposits kept by the bank in cash is known as cash Reserve Ratio. The creation of these deposits can be explained with the help of an example.
Hence, the well-known maxim is that “Every loan creates a deposit”. Such actively created deposits lead to a net increase in the total supply of money in the economy. The active deposits are also created by the bank when it purchases securities or other forms of assets from the public. The actual process of multiple creation of credit may be explained thus:-
                When a bank grants loans to the borrowers, the loan money is created to his deposits account. Supposing, the borrower pays to his creditor, in connection with some business transaction, a cheque drawn upon his account with the bank. Let us further suppose that the creditor deposits the cheque in another bank in his account. The other bank now receives the primary deposits in the form of a cheque drawn upon the first bank. After keeping some cash as cash ratio the second bank may create another derivative deposit by giving loans to some borrowers. The second borrowers may make the payment to another creditor who happens to have a deposit account with the third bank. The third bank will know receive the primary deposits in the form of cheque drawn on the second bank. This process may be repeated until the total volume of derivative deposits created by all the banks would be a multiple of the initial amount created by the first bank.
17. What are the main phases of trade cycle?                                    5
Ans: The phases of trade cycle are:
a)      Depression phases
b)      Recovery or revival phases
c)       Prosperity phases
d)      Boom phases
e)      Recession phases
Depression: The phase of trade cycle where the economic activity of the country is far below the normal level and economic backwardness occurs is known as Depression. The Depression phrase of trade cycle may be short or it may continue for considerable period of time. In these phases, Economic activity lowers down, unemployment level rises.
Revival or Recovery phase: The phase of trade cycle when the economic activities of the country undergoes sudden changes for depression to prosperity which leads to improvement in economic activities is known as Revival or Recovery. It is the second phases of trade cycle. In this phases, level of employment, wages prices, profits etc. rises.
Prosperity: The phase of trade cycle in which the economy of the country prospers and economic activities increases and causes economic development of a country is called Prosperity. This is the third phrase of trade cycle. In these phases, employment, income, investment, etc are a high level.
Boom: The peak point of prosperity which is marked by greatly accelerated economic activity is called Boom. It is basically the outcome of various development process of the prosperity phases. It is a period of short duration. In this phases, the economic activity are at the highest level.
Recession: The phase where there is downward trend of economic expansion of the country from the peak and the whole of economy retards to zero is known as Recession. In this phases, the factors of production become scare leading to rise in prices, the rate of interest rises due to scarcity of capital, the investment, employment income and demand decline, etc.
Or
Explain the meaning of depression.
Ans: The phase of trade cycle where the economic activity of the country is far below the normal level and economic backwardness occurs is known as Depression. The Depression phrase of trade cycle may be short or it may continue for considerable period of time. In these phases, Economic activity lowers down, unemployment level rises.
18. State any two selective credit control techniques adopted by the RBI.                           5
Ans: Qualitative or Selective Methods: These are basically the selective and general methods of credit control. These methods are used for controlling the use and direction of credit. They have nothing to do with the control of the total volume of credit in economy. These methods are :
a)      Directions: Sec. 21 of the Banking Regulation Act gives wide power to the RBI for controlling granting of advances by an individual bank or by banking as a whole. The RBI can give directors to any particular bank or all banks in general in regard to the purposes for which advances may or may not be made, the maximum amount of advance to any individual, firm or company etc.
b)      Margin requirement: Margin means the difference between the market price of security and loan amount. Changing margin requirement is another credit control method followed by the RBI. This system was introduced in 1956. By requiring higher margin while accepting a commodity as a security, the RBI can decrease the flow of credit to particular sector or vice versa.
Or
Describe the procedure of opening a bank account in the name of a minor.                        5
Ans: A person who has not attained or completed the age of 18 years is known as Minor. A Minor is not capable of entering into a valid contract and a contract entered into by a minor is void. The Bank can open a saving, fixed or recurring deposit account in the name of minor.
The precautionary measures are:
a)      Nature of Account: The banker may open a savings bank account in the name of a minor. The banker should not open a current account in the name of minor.
b)      Age of opening account: The banker should allow the minor to open a savings bank account in his own name only if he/she has an age between 10 – 14 years and could be able to read and write English, Hindi or any other language. If the minor does have such quality, then the banker must open his account in the joint names of the minor and his guardian.
c)       Recording date of birth of minor: The banker must record the date of birth of the minor as disclosed by his/her guardian before opening account.
d)      Death of the minor: The banker must take special care at the time of death of the minor or his guardian. In case, if the minor dies, then the balance in the account should be paid to his guardian.
e)      Death of the guardian: In the event of death of guardian, the banker should be given to the minor on attaining majority or any other guarding appointed by court.
f)       Advance to a minor on the guarantee of a third party: The banker should not grant loan to a minor on the guarantee of a third party.
19. Discuss the evolution, origin and growth of banking in India.                                                              8
Ans: Pre-Independence: The General Bank of India was set up in 1786. Next came the Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called them presidency Banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, which started as private shareholders banks, was established with mostly European shareholders.
In 1865, the Allahabad Bank was established, and, for the first time, exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1923, Banks of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore were set up. The Reserve Bank of India (RBI) was established in 1935.
Post Independence: The government took major steps in the Indian Banking Sector Reforms after independence. In 1955, it nationalized the Imperial Bank of India (the State Bank of India Act) with extensive banking facilities on a large scale, especially in rural and semi-urban areas as the first phase of nationalization. It formed the State Bank of India (SBI) to as the principal agent of RBI and to handle banking transactions of the Union and the State Governments of the Country.
In 1969, seven subsidiary banks of the State Bank of India were nationalized as a major process of nationalization due to the effort of then Prime Minister Mrs. Indira Gandhi, Later in 1969, 14 Major Private Commercial Banks in the country were nationalized. Again in 1980, 6 more banks were nationalized. In 1993, New bank is merged will Punjab National Bank. So, there are 19 nationalized banks in our country at present.
PHASE III
The third phase of development of Indian banking introduced many more products and facilities in the banking sector in its reform measures. In 1991, under the chairmanship of M. Narsimham, a committee was set up under his name, which worked for the liberalization of banking practices.
Or
What do you mean by internal and external organization of commercial bank? Describe the different departments of a commercial bank.
Ans: Organisation of a bank is divided into two parts: Internal and External Organisation. Internal organisation of a bank refers to the organisation which establishes a structural relationship between different working groups and between different departments. Internal organisation of a bank is shown in the following sequence Top to bottom):
1.  
Shareholders
2.  
Board of directors
3.  
Chairman
4.  
Managing director
5.  
General manager
6.  
Deputy general manager
7.  
Departmental head or officer
External organisation of a business concern means legal and constitutional form of a business organisation. It is based on ownership division. Example of external organisation is sole trade, partnership, company, state enterprises etc. In India, a commercial bank is set up as joint stock companies under the Companies Act and sole trade and partnership basis is not allowed.
The different department of a commercial bank are discussed below:
a)      Secretary department: It is concerned with secretarial work such as organising meeting, preparation of agenda etc.
b)      Law department: It is concerned with legal problems.
c)       Accounts department: It prepares and maintain all the books of accounts like profit and loss account, balance sheet etc.
d)      Personal department: It is concerned with selection, training, appointment, salary and pension of staff.
e)      Investments department: This department formulates investment principles of the bank.
f)       Loans and advances department: This department formulates lending principles of the bank.
g)      Inspection department: This department looks after the working of different departments and takes necessary steps for its improvement.
h)      Regional or branch department: This department looks after the different regional or branch office of the bank. It is responsible for effective functioning of various branches.
20. Discuss the causes and effects of inflation.                                                  8
Ans: The causes of inflation are:
a)      Increase in money supply: Inflation may emerge in an economy when the supply of money increases due to increase in the purchasing power of people which may lead to inflation. The increase in supply of money may due to credit expansion of the commercial banks.
b)      Population expansion: The rapid growths of population raise the aggregate demand in the economy due to increase in consumption, investment etc. and thus lead to inflation.
c)       Weak supply of commodities: The weak supply of commodities also leads to rise in prices. When the supply of commodities decreases, the traders are unable to meet the demand of the people and thus they raises the prices of goods and services causing inflation.
d)      International factors: International factors may be the reason of inflation. Sometimes the prices of a basic raw material like diesel rise in the international market which leads to rise in the price of that commodity in all the countries of the world.
The effects of inflation are as follows:
a)      Effects on fixed income group: This section of people mainly includes pensioners, recipients of rents and interest belong to this group. When the prices of goods and services rises in an economy, their purchasing power reduces as their income is fixed and is unable to meet their expenditure.
b)      Effects on production: Inflation also affects the level of production. When inflation occurs in an economy, the prices of goods and services rises leading to higher profits. This makes the business enterprises to concentrate more on earning profits which leads to misallocation of resources, adulteration of commodities, hoarding and black marketing, etc.
c)       Effects on distribution: When inflation occurs in an economy, its leads to economic inequalities in the economy. The business man, industrialists, speculators, farmers, etc. gain during the inflation as they can sell their produce at higher price to earn profit but the salary earners, wages earners, etc. lose during inflation as they get fixed and less money as compared to their expenditure.
d)      Other effects: The other effects of inflation are increase in the govt. revenues, rise in the balance of payments, decrease in exchange rate, collapse of monetary system.
21. Explain in brief the various functions of the Central Bank.                    8
Ans: The main functions of the Central Banks are:
a)      Issue of paper currency.
b)      Banker to the government.
c)       Banker to the bank.
d)      Credit control.
e)      Supervision and inspection of banks.
f)       Development and promotional functions.
g)      Custodian of the Nation’s Gold and foreign exchange reserves.
A) Note issue: The first function or the primary function of money is to issue paper currency. The Central Bank has the sole power to issue paper currency. The notes are legal tender money. In India, the RBI issue currency notes of all types except One Rupee note which are issued by the Ministry of Finance, Govt. of India. But the notes are issued following some methods. The Central Banks follows different methods or system according to the currency or banking regulations to issue notes. These systems are:
Minimum reserve system: The minimum reserve system is a system in which the Central Bank is authorized to issue notes up to any limit by keeping a certain minimum reserve of gold and foreign securities. In India, the RBI is required to keep the minimum reserve of Rs. 200/- crore out of which Rs. 115/- crore should be kept in gold. The system is very elastic and economical for developing countries as it requires only a small and fixed amount of gold reserve. However, it lacks in public confidence due to non-convertibility of notes.
Simple deposit system of issuing currency: The simple deposit system is also knows as full reserve system. Under this system, the Central Bank is required to keep 100% of metal, either gold or silver or both as reserve for every note issued. The notes so issue becomes representative paper money. The advantage of this system is that it enjoys a public confidence but it is very costly and money supply cannot be increase as and when required.
Fixed Fiduciary System of issuing currency: Under this system, the Central Bank issue currency notes up to a certain limit against reserves of Govt. securities. The notes issued beyond the limit set by the law have to be fully banked by metallic reserves.
Proportional system of issuing currency: The proportional system of issuing currency is very simple and elastic. According to this system, the notes issued by Central Bank are banked by both metallic reserves and securities. A certain percentage (25 to 40%) of the total notes issued has to be backed by gold or silver reserves and the remaining by Govt. securities.
B) Central Bank acts as the banker to the Government
The Central Bank is the banker to the Govt. of that country. It performs the same function for the Govt. as the commercial banks performs for their customers. The Central Banks plays the role of the banker to the Govt. in the following three ways:
a)      As a banker: The Central Bank is the banker to the Govt. Under this, it maintains the accounts of the Govt., accepts deposits of the Govt. without interest, provides short term loans to the Govt., undertakes transactions of the Govt. related to purchase and sale of foreign exchange, etc.
b)      As an agent: The Central Bank also acts as the agent to the govt. In this, it recovers taxes and other payments from the public, floats loans and manages public debt etc.
c)       As an advisor: The Central Bank is the financial adviser of the Govt. It advices the Govt. on important economic fiscal and monetary matters such as controlling of inflation or deflation, deficit financing, trade policy, etc.
C) Central Bank as the Banker to the banks
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.
c)       Clearing agent: The Central Bank acts as the clearing house of the commercial banks. It maintains the accounts of the banks and settles their claims and counter claims by minimum use of money or cash.
Or
Explain the functions of Central Bank as (a) Bank of note issue and (b) Banker’s bank.   4+4=8
Ans: Refer above
22. Write short notes on any two of the following:                          4x2=8
a)      Banker’s clearing house.
b)      Investment bank.
c)       Recession.
d)      Overdraft.
e)      Pay-in-slip book.
Ans:
a)      Clearing agent: The Central Bank acts as the clearing house of the commercial banks. It maintains the accounts of the banks and settles their claims and counter claims by minimum use of money or cash.
b)      Investment Banks: Investment Banks are those banks which are specialized in provide medium and long term financial assistance to business and industry. They are also known as Industrial Banks as they are mainly concerned with industrial finance.
c)       Recession: The phase where there is downward trend of economic expansion of the country from the peak and the whole of economy retards to zero is known as Recession. In this phases, the factors of production become scare leading to rise in prices, the rate of interest rises due to scarcity of capital, the investment, employment income and demand decline, etc.
d)      Overdrafts: The agreement with a bank by which a current account holder is allowed to withdraw money more than his balance up to certain limit is known as Overdraft. The customer has to pay interest on the amount overdraw by him.
e)      Pay-in-slip book is a book contains some slip issued by a bank to his customer to deposit cash, cheque, drafts, bills, etc. to his account. These books are issued to the customer having a savings, current or recurring deposit account.