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Complete Question Paper Solution
2024
FINANCE
NEW COURSE
Full Marks: 80
Pass Marks: 24
Paper Code: 24T FINC
The figures in the margin indicate full marks for the questions.
1. Answer the Following Questions:
(a) When was the RBI established?
Answer: April 1, 1935
(b) Which is the first development bank of India?
Answer: Industrial Finance Corporation of India (IFCI)
(c) Money market is the market for short-term funds. (State whether true or false)
Answer: True
(d) What is meant by the rate of exchange in foreign exchange market?
Answer: The rate of exchange, or exchange rate, in the foreign exchange market is the price of one currency in terms of another currency.
(e) What is meant by a merchant bank?
Answer: A merchant bank is a financial institution that provides services such as fundraising, advisory services, and investment management to businesses and governments.
(f) Name two subsidiaries of SBI.
Answer: Two subsidiaries of SBI : -
(i). State Bank of Bikaner and Jaipur.
(ii). State Bank of Hyderabad.
2. Write two advantages of underwriting. 2
Answer:
The company is sure of getting the value of shares issued
It enhances goodwill of the company
It facilitates wide distribution of securities
The company gets expert advice from underwriters in the matter of marketing securities
It fulfills requirement of minimum subscription
(Write any two of them)
3. What is meant by the proportional reserve system method of issuing notes? 2
Answer: The proportional reserve system refers to the requirement that the Reserve Bank of India (RBI) maintains a specific proportion of its issued currency in the form of gold and foreign securities. For instance, the RBI needs to keep a minimum reserve of ₹200 crore, of which ₹115 crore should be in gold. This system ensures that the currency issued by the RBI is partially backed by tangible assets, promoting trust and stability in the currency.
4. Write two features of foreign exchange market. 2
Answer: Two features of foreign exchange market:
i. Global Market: It's a worldwide market where buyers and sellers come from various countries. They connect through global communication networks and geographical boundaries don't restrict their transactions.
ii. Continuous Operation: The forex market operates 24 hours a day, excluding weekends. It never closes, allowing for constant trading opportunities.
5. Give the meaning of factoring. 2
Answer: Factoring is a financial service where businesses sell their accounts receivable to a third party (the "Factor") at a discount. This provides the business with immediate cash flow while the Factor collects the payments from the customers. The Factor charges a fee for this service.
6. Write three objectives of IFCI. 3
Answer: Three objectives of IFCI :
i. Industrial Credit: It provides long and medium-term credit to industrial concerns engaged in key sectors like manufacturing, mining, shipping and electricity generation & distribution, driving economic development.
ii. Project Support: It assists in setting up new projects and modernizing existing industrial concerns in the medium & large-scale sector, fostering technological progress.
iii. Cooperative & Backward Areas: It supports projects in cooperative and backward areas, offering financial aid, expert guidance and managerial support to uplift small-scale industries.
7. Write three differences between lease and hire purchase. 3
Answer: The Three differences between lease and hire purchase :
8. State the minimum reserve system of note issue. 3
Answer: Minimum Reserve System (MRS): The Minimum Reserve System is a widely adopted framework for note issuance across various countries. Under this system, the central bank is mandated to uphold a minimum reserve comprising of gold and foreign securities to facilitate the issuance of currency notes. As long as this minimum reserve requirement is met, the central bank has the flexibility to print and distribute notes based on the country's economic needs.
9. Write three functions of NABARD. 3
Answer: The following are the Three Objectives of NABARD:
i. Integrated Rural Development Focus: NABARD aims to provide dedicated attention and focused guidance to integrated rural development initiatives.
ii. National Rural Credit Hub: It serves as a central entity for the entire national rural credit system, coordinating its activities effectively. iii. Additional al Funding: NABARD acts as a source of additional funding for rural credit institutions, bolstering their resources.
iii. Support for Rural Industries: The organization facilitates investment credit for small industries, village/cottage industries, handicrafts, artisans and farmers.
Or
Briefly discuss the structure of the Indian money market. 3
Answer: STRUCTURE OF THE INDIAN MONEY MARKET:
The Indian Money Market has two parts: the organized and the unorganized sectors.
A. Organized Sector:
1. Reserve Bank of India (RBI): Established in 1935, it leads and controls the market.
2. Scheduled Banks: Listed in the 2nd Schedule of the RBI Act, 1934, with a minimum capital of Rs. 5 lakhs. These include:
- Cooperative Banks
- Commercial Banks (Public Sector, Private Sector, Regional Rural Banks, Foreign Banks, Small Finance Banks, Payments Banks)
3. Non-Scheduled Banks: Not listed in the 2nd Schedule of the RBI Act.
4. Development Banks and Financial Institutions: Include institutions like NABARD and LIC, contributing indirectly.
5. Discount and Finance House of India (DFHI): Established in 1988 to provide liquidity and develop a secondary market.
B. Unorganized Sector:
Includes indigenous bankers and money lenders who operate without direct RBI control, often in rural areas.
Defects of the Indian Money Market:
1. Division between Organized and Unorganized Sectors: Limited cooperation between these sectors hinders RBI control.
2. Unorganized Sector: Predominant in rural lending, leading to potential exploitation.
3. Unhealthy Competition: Exists within and between sectors, including between Indian and foreign banks.
4. Inadequate Banking Facilities: Insufficient to meet the country's needs.
5. Shortage of Funds: Due to low savings, inadequate rural banking, and poor banking habits.
6. Disparity in Interest Rates: Varies across different market segments.
7. Seasonal Fluctuations of Funds: Demand varies seasonally, e.g., high during the harvest season.
8. Underdeveloped Bill Market: Despite efforts, it remains inadequate.
9. Limited Availability of Instruments: Insufficient to meet the diverse needs for short-term funds.
If this question asked for 5 /8 Marks:
Answer: Structure of the Indian Money Market The Indian Money Market is divided into two parts: the organized sector and the unorganized sector.
A. Organized Sector:
1. Reserve Bank of India (RBI): The RBI is like the head of the Indian Money Market. It was started in 1935. It controls and leads the market.
2. Scheduled Banks: Scheduled banks are those listed in the 2nd Schedule of the Reserve Bank of India Act, 1934. They need to have a paid up capital and reserves of at least Rs. 5 lakhs. Their operations must not harm their depositors. They are also required to keep a certain portion of their money as reserves with the RBI.
Scheduled banks are classified as:
a. Cooperative Banks: These are banks run by groups of people to help each other financially. It includes both State Cooperative Banks and Urban Cooperative Banks.
b. Commercial Banks: These banks are very important in the money market. They provide money to the market. (i) Scheduled Public Sector Banks - State Bank of India, Bank of Baroda, Bank of India, Union Bank of India, UCO Bank, Punjab National Bank, Punjab & Sind Bank, Indian Overseas Bank, Indian Bank, Canara Bank and Bank of Maharashtra.
(i) Scheduled Private Sector Banks- Axis Bank Ltd., Bandhan Bank Ltd., Federal Bank Ltd., HDFC Bank Ltd., ICICI Bank Ltd.. YES Bank Ltd., IDBI Bank Ltd., Kotak Mahindra Bank Ltd., IDFC FIRST Bank Ltd, Indusind Bank Ltd., Karnataka Bank Ltd., Jammu & Kashmir Bank Ltd., etc.
(ii) Regional Rural Banks: These banks serve specific regions and are designed to support rural development. Some examples include Assam Gramin Vikash Bank, Arunachal Pradesh Rural Bank, Manipur Rural Bank, Meghalaya Rural Bank and many others.
(iii) Foreign Scheduled Banks: These are banks based in foreign countries that operate in India. Some examples are HSBC Ltd., Barclays Bank Pic, Standard Chartered Bank and Deutsche Bank.
(iv) Scheduled Small Finance Banks: These are smaller banks that focus on providing financial services to specific areas. Examples include North East Small Finance Bank Ltd., Ujjivan Small Finance Bank Ltd. and Utkarsh Small Finance Bank Ltd.
v) Scheduled Payments Banks: These banks offer limited banking services, especially focusing on digital and electronic payments. Examples are India Post Payments Bank Ltd., Fino Payments Bank Ltd. and Paytm Payments Bank Ltd. their
3. Non-Scheduled Banks: These banks are not included in the 2nd Schedule of the RBI Act, 1934, and number is decreaseing now a days.
4. Development Banks and Other Financial Institutions: Development banks and financial institutions like Industrial Finance Corporation of India, State Financial Corporations, Small Industries Development Corporation, National Bank for Agriculture and Rural Development, Life Insurance Corporation of India and General Insurance Corporation of India also play a role in the Indian Money Market, often indirectly through banks.
5. Discount and Finance House of India (DFHI): The Discount and Finance House of India (DFHI) was set up on March 9, 1988, as a special institution for the money market. It was created to achieve two main goals: (i) providing liquidity to money market instruments and
(ii) developing a secondary market.
B. Unorganised Sector:
The unorganized sector of the Indian Money Market includes indigenous banks and money lenders. This sector is not structured/ organised because it operates without direct control and coordination of the RBI.
i. Indigenous Bankers: Indigenous bankers are part of India's ancient banking system. An indigenous bank or banker is an individual or private company that takes deposits, deals with documents called "HUNDIES," or lends money. According to the Indian Central Banking Enquiry Committee, these bankers are people or firms that accept deposits and are involved in lending money using "HUNDIES."
ii. Money Lenders: Money lenders primarily lend money from their own funds. They usually don't take deposits. Their business is mainly in rural areas. Money lenders work with cash and lend money for various purposes, including personal spending. So, the Indian Money Market has organized and unorganized parts, each with its own way of working.
10. Write five advantages of credit rating. 5
Answer: Credit Rating involves rating agencies evaluating how trustworthy borrowers are. They consider if borrowers can pay back interest and loan amounts on time. This evaluation can be for overall trustworthiness or for a specific debt or financial responsibility. The purpose of credit rating is to assist investors in deciding whether to invest in debt instruments issued by borrowing companies.In other words, credit rating is like a grade given by rating agencies to show how well a company can manage its debts.
Following are the five Advantages of credit rating:
(a) Informed Risk-taking: Investors in debt investments can make smarter decisions as credit ratings provide them with information to understand and manage risks.
(b) Affordable High-Quality Information: Credit rating agencies offer excellent information to investors at a reasonable cost.
(c) Encouraging Higher Returns: Investors are motivated to invest in companies that offer better returns.
(d) Reduced Dependence: Investors don't have to rely heavily on brokers or merchant bankers for information.
(e) Quick Decision-Making: Investors can swiftly decide where to invest based on the rating information.
Or
Write the advantages of investing in mutual funds.
Answer: Advantages / Benefits of Investing in Mutual Funds:
(i) Liquidity: Mutual funds offer easy ways to sell your investment. Open-end funds can be sold back to the Fund company, while closed-end funds can be sold on the stock exchange where they're listed.
(ii) Risk Diversification: Mutual funds spread investments across many companies and types, reducing risk because not all stocks drop in value together.
(iii) Returns: Skilled professionals manage mutual funds, aiming for good returns by picking carefully chosen investments.
(iv) Expert Management: Experienced professionals manage mutual funds, knowing how to choose the right investments.
(v) Convenience: Investing in mutual funds is easy and doesn't involve much paperwork. It avoids problems like late payments, incorrect deliveries and hassles with brokers.
(vi) Cost Efficiency: Large-scale investments in mutual funds reduce costs like brokerage, paperwork and other charges, making it less expensive for investors.
(vi) Protection: All mutual funds are registered and regulated by SEBI to safeguard investors' interests.
(vill) Tax Benefits: Many mutual funds offer tax exemptions to investors under the Income Tax Act.
11. What are the promotional functions of RBI. 5
Answer: The RBI also plays a role in promoting various aspects of the financial sector through the following functions:
a. Fostering Banking Habits: The RBI encourages the adoption of banking habits among the populace.
b. Banking System Expansion: It contributes to the growth and expansion of the banking system.
c. Export Refinancing: The RBI provides refinance facilities to support export promotion.
d. Agricultural Credit Enhancement: Through institutions like NABARD, it aids in expanding agricultural credit facilities.
e. Support for Small-scale Industries: The RBI helps extend financial facilities to small-scale industries.
f. Cooperative Sector Development: It contributes to the development of the cooperative sector.
g. Innovations in Banking: The RBI promotes innovation within the banking industry.
Or
Write the defects of the Indian money market. 5
Answer: The Indian Money Market suffers from several shortcomings that hinder its optimal functioning and effectiveness.
The main defects in the Indian Money Market are as follows:
1. Presence of Unorganized Sector: One of the major drawbacks is the existence of the unorganized sector, primarily composed of indigenous bankers and money lenders. This sector holds a prominent position in lending, particularly in rural regions. Its activities are not directly regulated by the RBI, leading to potential exploitation and debt-related issues for borrowers.
2. Inadequate Banking Facilities: The availability of banking facilities in India is not commensurate with the country's size and population. This inadequacy hampers the Indian Money Market's ability to meet the diverse financial needs of the economy.
3. Division between Organized and Unorganized Sectors: The Indian Money Market is split into two sectors, namely the organized sector and the unorganized sector. This division poses a significant challenge as there is limited cooperation and coordination between these sectors. This lack of synchronization makes it difficult for the Reserve Bank of India (RBI) to exert consistent control over both sectors.
4. Shortage of Funds: Several factors contribute to a shortage of capital funds in the Indian Money Market. These factors include low saving capacity among the population, inadequate banking services.
5. Unhealthy Competition: Unhealthy competition exists not only between the organized and unorganized sectors but also within each sector. For instance, commercial banks, including prominent ones like State Bank of India, compete among themselves. Additionally, there is competition between Indian commercial banks and foreign banks.
12. Write a note on the wholesale market of foreign exchange market. 5
Answer: Wholesale Market: This market exists to help individual banks manage large purchases or sales. The wholesale market can be further categorized based on how it operates: a. Interbank Market: This is essentially the core of the wholesale market. Banks trade in currencies held in different currency-dominated bank accounts. They assist in transferring bank deposits from the seller's account to the buyer's account. No physical exchange of currency occurs; instead, it involves accounting entries in the customer's deposit accounts with the bank. While there are only a few traders in the interbank market, the transaction volumes are very high. Banks don't charge commissions for currency transactions but profit from the differences between buying and selling rates.
Or
What are the advantages of the private placement method of new issue market? 5
Answer: Private Placement: Private placement is a method of issuing securities without the need for a formal prospectus. Instead, shares are offered privately to issue houses or brokers. Typically, issue houses acquire shares or securities from a specific company first and then sell them to individual and Institutional investors. These intermediaries maintain their own lists of clients and transfer shares to Investors with a margin. Private placement is cost-effective because it avoids various expenses such as brokerage, underwriting, advertising and printing costs.
Advantages of Private Placement:
a. Suitable for smaller companies locking to issue shares.
b. Eliminates the delays associated with public offerings.
c. Low issuance expenses compared to public offerings.
d. Faster process than public issuance.
e. Appropriate for first-time entrepreneurs.
f. No entry barriers for companies seeking access to the private placement market.
g. A suitable option when a public response to a prospectus is uncertain.
13. Write the functions of merchant banking. 5
Answer: Merchant banking goes back to the 13th century when family businesses combined banking with buying and selling goods. A merchant bank is like a financial helper for big companies and rich people. It helps them with things like finding money, giving advice about money and raising funds. In the past, these banks helped trade goods, so they're called "merchant" banks.
The Following are the functions of merchant banking;
(a) Assisting in Project Development: Merchant bankers provide valuable guidance in finding promising projects, creating feasibility studies, aiding investors in obtaining necessary licenses and helping with capital structure planning. They also support in forming foreign collaborations, provide insights into amalgamations, mergers and takeovers.
(b) Corporate Advice: Merchant bankers offer advice to corporations to enhance their performance and build a positive reputation among investors. They provide opinions, suggestions and detailed analyses of corporate laws applicable to businesses.
(c) Arranging Loans and Project Funding: Once a project is approved, merchant bankers assist in applying for Financial support from institutions. They offer expert advice on government policies, raw material availability, production planning and machinery requirements.
(d) Issue management: Merchant bankers aid corporate clients in conducting public share and debenture offerings. They help decide the size and timing of the offerings, assist in selecting bankers and brokers, manage the issuance process and prepare necessary documents and promotional materials.
(e) Providing Working Capital Support: Merchant bankers assist clients in obtaining financial support for meeting working capital needs from financial institutions. They help estimate the required working capital, aid in preparing applications and expedite documentation and formalities.
(f) Lease Financing: Some merchant bankers also offer lease financing services. Lease finance involves an arrangement between a lessor (banker) and a lessee (customer) where the banker provides equipment for the lessee's use. Payments are made as rent at an agreed-upon rate and the equipment is returned to the lessor after the agreement term ends.
14. Discuss the objectives of State Finance Corporations (SFC). 5
Answer: The State Financial Corporations Act of 1951 empowers Indian states and union territories to establish State Financial Corporations (SFCs) to provide financial aid to micro, small and medium-scale industries. SFCS offer loans to various types of businesses, including individual trading concerns, partnership firms and both private and public limited companies.
Objectives of State Financial Corporations (SFCs):
i. Providing Long & Medium-Term Loans: SFCs aim to provide industrial concerns with loans repayable within a maximum period of 20 years.
ii. Setting Financial Assistance Limits: These corporations extend financial aid with an upper limit of Rs. 60 lakhs for corporate and cooperative sector enterprises, while the limit is Rs. 30 lakhs for other entities such as partnerships and Hindu Undivided Families.
iii. Supporting Smaller Businesses: SFCs focus on assisting industrial concerns with paid-up share capital and free reserves not exceeding Rs. 3 crores.
iv. Promoting Regional Development: SFCs emphasize the development of backward areas and the growth of small-scale industries to foster overall economic progress and create employment opportunities.
v. Encouraging Ownership Diversity: The objective includes promoting wider ownership in industrial ventures.
vi. Engaging in Refinancing and Equity Finance: SFCS participate in refinancing and equity finance activities on behalf of SIDBI.
vii. Diversified Support to Various Sectors: These institutions provide financial assistance to a wide range of sectors, including road transport, tourism, healthcare and emerging fields like floriculture and poultry Farming.
15. What are the advantages of hire purchase to the seller? 5
Answer: The advantages of hire purchase to the seller include:
1. Increased sales: Hire purchase can attract more customers who may not have the full amount to pay upfront, leading to higher sales volumes.
2. Higher profits: Sellers can often charge higher prices or interest on hire purchase agreements, increasing their overall profit margins.
3. Regular income: The installment payments provide a steady and predictable cash flow, which can help with financial planning and stability.
4. Reduced stock levels: By selling goods on hire purchase, sellers can reduce their inventory levels more quickly, freeing up space and reducing storage costs.
5. Customer retention: Offering hire purchase options can improve customer satisfaction and loyalty, as customers may appreciate the flexibility and affordability it provides.
16. Discuss the importance of venture capital. 5
Answer: Importance of Venture Capital :
a. Assisting New Ventures: Venture capital financing is crucial in helping individuals who are new to starting businesses, especially those who lack prior experience in entrepreneurship.
b. Promoting Manufacturing Initiatives: Venture capital plays a vital role in encouraging entrepreneurs to establish manufacturing ventures that use advanced technologies and introduce innovative products to the market.
c. Providing Expert Guidance: Venture capitalists offer valuable advice and expertise to entrepreneurs, guiding them in setting up their businesses, devising effective marketing strategies and managing operations efficiently.
d. Enhancing Technological Capabilities: Venture capital also supports smaller businesses in upgrading their technology, enabling them to meet the requirements of larger industrial counterparts.
e. Rescuing Sick Units: Venture capital has a significant impact in revitalizing struggling companies, helping them overcome financial challenges and regain stability.
Or
What are the instruments of money market? Discuss. 5
Answer: Types of Financial Instruments in the Money Market
1. Treasury Bills: Treasury bills are essential tools in the money market. They are short-term obligations issued by the Reserve Bank of India on behalf of the government. These bills are like promissory notes, representing the government's short-term borrowings. They are issued when the government needs temporary funds, usually for less than a year. There are three types of treasury bills based on their duration: 91 days, 182 days and 364 days. These bills are traded in the market and serve as vital instruments for managing short-term liquidity.
2. Commercial Bills: Commercial bills emerge from real trade transactions where goods are sold on credit. They are short-term and negotiable instruments that facilitate credit transactions. A seller drafts a bill on the buyer and the buyer agrees to pay on a specified date. These bills are known as "bills of exchange" and are governed by the Negotiable Instruments Act, 1881. When banks accept these bills, they become "commercial bills." Banks can even re-discount them when necessary.
3. Commercial Papers: Commercial papers are issued by well-established corporations to raise short- term funds for their working capital needs. They are unsecured promissory notes with fixed maturities. These papers are issued at a discount to their face value and are negotiable through endorsements and delivery. They are issued in bearer form and can be bought back by the issuer if needed. Corporations, primary dealers and financial institutions approved by the RBI can issue commercial papers.
4. Certificate of Deposits: Certificate of deposits (CDs) are another form of short-term time deposits. They are receipts for such deposits issued by banks. CDs are issued at a discount to their face value and serve as a way to raise significant sums of money for banks. They are unsecured, negotiable, transferable and subject to certain regulations like SLR and CRR requirements. Only scheduled commercial banks and selected all-India financial institutions permitted by the RBI can issue CDs.
5. Call Money/Notice Money: The call money market is a crucial part of the money market, providing very short-term funds. In this market, funds are lent or borrowed for a brief period, often just a day. When funds are borrowed for one day, it's called "call money," and if it's borrowed for more than a day up to 14 days, it's called "notice money." This market is highly liquid but also risky and volatile. Various banks, including foreign banks, cooperative banks and the Discount and Finance House of India, can participate in this market.
These financial instruments serve different purposes within the money market, catering to short-term borrowing and lending needs while contributing to the overall functioning of the financial system.
17. What are the advantages of the capital market? Discuss. 5
Answer: The advantages of the capital market:-
i. Link between Savers and Investors: The capital market links people who save money with those who want to invest it. It moves savings into productive projects and sectors that need funds.
ii. Encourages people to save: It offers various ways to save money, making saving more attractive. Banks and financial institutions provide facilities that encourage people to save more.
iii. Transforms Savings into Investments: The capital market allows people to lend money to governments and companies, turning savings into Investments. Different financial tools like shares and bonds make this possible.
iv. Promotes Economic Growth: By directing money to areas that need it most, the capital market promotes economic growth. It ensures that funds support business expansion and balanced economic development.
v. Promotes Stability: The capital market helps keep stock and security prices stable, reducing price fluctuations. It achieves this by providing capital at lower interest rates to borrowers.
Or
Discuss the functions of modern commercial bank. 5
Answer: Modern commercial banks in India perform several essential functions:
1. Accepting Deposits: They offer savings, fixed, current, and recurring deposit accounts.
2. Providing Loans and Advances: They provide term loans, overdrafts, cash credit, and bills discounting.
3. Agency Functions: They handle fund transfers, bill payments, and cheque collections.
4. Utility Services: They offer safe deposit lockers, issue drafts, provide credit/debit cards, and offer forex services.
5. Investment and Insurance: They manage portfolios, sell mutual funds, provide bancassurance, and offer risk management services.
6. Digital Banking: They provide online banking, mobile banking, and ATM services.
7. Economic Development: They promote financial inclusion and provide credit to priority sectors.
18. Explain the characteristics of non-banking financial institution. 8
Answer: Non-banking financial institutions (NBFIs) play a critical role in the financial system, providing various financial services and products that complement those offered by traditional banks.
Following are the key characteristics of NBFIs:
1. No Full Banking License: Unlike commercial banks, NBFIs do not hold a full banking license. They cannot accept demand deposits, which are deposits that can be withdrawn at any time without any notice, like checking accounts.
2. Range of Services: NBFIs offer a wide range of financial services including asset management, leasing, insurance, venture capital, and microfinance. They also provide specialized services like investment in securities and advisory services.
3. Regulation and Supervision: NBFIs are typically regulated and supervised by specific regulatory bodies, which vary from country to country. For example, in India, the Reserve Bank of India (RBI) regulates and supervises NBFIs, but the regulatory framework is usually less stringent compared to that of commercial banks.
4. Funding Sources: Since NBFIs cannot accept demand deposits, they rely on alternative funding sources such as issuing bonds, commercial papers, or borrowing from banks and financial markets. They may also depend on equity financing and retained earnings.
5. Credit Provision: NBFIs are crucial in providing credit to sectors that are underserved by traditional banks. They often extend loans to small and medium enterprises (SMEs), individual entrepreneurs, and other entities that might not have easy access to banking services.
6. Risk Management: These institutions often engage in higher risk activities compared to traditional banks. For example, they may finance ventures that involve higher risks but also potentially higher returns. Effective risk management strategies are therefore vital for their operation.
7. Role in Financial Inclusion: NBFIs significantly contribute to financial inclusion by offering financial services to segments of the population that are not covered by the formal banking sector. This includes rural populations, low-income individuals, and small businesses.
8. Economic Impact: By diversifying the financial system, NBFIs enhance the stability and resilience of the economy. They provide liquidity and credit to various economic sectors, support economic growth, and foster innovation through venture capital and other financing options.
Overall, NBFIs serve as an essential component of the financial ecosystem, bridging gaps in the provision of financial services and fostering economic development.
Or
Explain briefly about the different types of crossing of cheques with suitable examples. 8
Answer: Crossing of cheques refers to the practice of drawing two parallel lines on the face of the cheque, with or without additional words. This is done to instruct the bank to not pay the cheque over the counter but to deposit it directly into a bank account. There are different types of crossings:
1. General Crossing:
- This is done by drawing two parallel lines across the cheque, sometimes with the words “and company” or “& Co.”, or simply “not negotiable” between the lines.
- Example: Two lines with “& Co.” between them.
- Purpose: It indicates that the cheque must be deposited into a bank account and cannot be cashed immediately.
2. Special Crossing:
- This involves the addition of the name of a specific bank between the parallel lines.
- Example: Two lines with "State Bank of India" between them.
- Purpose: It directs the cheque to be deposited only into the account of the bank mentioned.
3. Restrictive Crossing:
- Words like “Account Payee” or “A/c Payee Only” are added within the parallel lines.
- Example: Two lines with “Account Payee Only” between them.
- Purpose: Ensures that the cheque is credited only to the account of the payee mentioned on the cheque, enhancing security against misuse.
4. Not Negotiable Crossing:
- The cheque carries the words “Not Negotiable” between the two lines.
- Example: Two lines with “Not Negotiable” between them.
- Purpose: While it can be transferred, the transferee does not get better rights than the transferor. If the cheque is stolen, the rightful owner can claim it back.
FOR OLD COURSE
Questions in Lieu of Project work
Answer any four from the following: 5×4=20
19. What are the objectives of the World Bank? Discuss. 5
Answer: The World Bank, established in 1944, aims to reduce poverty and support development by providing financial and technical assistance to developing countries. Its objectives include:
1. Reducing Poverty: The primary objective of the World Bank is to alleviate global poverty. This involves targeting initiatives that support economic development and improve living standards for the poor.
2. Promoting Sustainable Development: The World Bank focuses on projects that promote sustainable economic growth, ensuring that development efforts do not deplete resources or harm the environment. This includes investing in renewable energy, sustainable agriculture, and climate change mitigation.
3. Building Infrastructure: By financing infrastructure projects such as roads, schools, and hospitals, the World Bank aims to create a foundation for economic development and improve access to essential services.
4. Strengthening Governance and Institutions: Improving the efficiency and transparency of government institutions is another objective. The World Bank provides support to enhance the capability of public institutions to effectively deliver services and implement policies.
5. Fostering International Trade and Investment: The World Bank helps countries integrate into the global economy by supporting trade reforms and investment climate improvements, thereby stimulating economic growth and development.
Through these objectives, the World Bank strives to create a more equitable and prosperous world.
20. Write five essential elements of valid endorsement. 5
Answer: An endorsement, especially in the context of negotiable instruments like checks or promissory notes, must meet certain criteria to be considered valid. Here are five essential elements of a valid endorsement:
1. Signature of the Endorser: The endorsement must include the signature of the person endorsing the instrument. This signature indicates the endorser’s consent to transfer the rights of the instrument to another party.
2. Unconditional Order: The endorsement should not be conditional. Any conditions attached to the endorsement may render it invalid. The endorser must transfer the instrument without stipulating additional terms.
3. Delivery of the Instrument: For the endorsement to be valid, the endorsed instrument must be delivered to the endorsee (the person to whom the instrument is endorsed). Delivery signifies the transfer of possession and rights associated with the instrument.
4. Intent to Transfer: The endorser must have the clear intent to transfer the instrument to the endorsee. This intention is typically evidenced by the act of signing and delivering the instrument.
5. Endorsement Must Conform to the Instrument: The endorsement must be consistent with the instrument itself. For example, if a check is made out to a specific person, that person’s endorsement must match the name as it appears on the check.
These elements ensure that the endorsement is legally effective and that the rights to the instrument are properly transferred.
21. Write the functions of IMP. 5
Answer: In finance, IMP (Investment Management Process) involves several key functions that are critical to effective investment management. Here are five primary functions:
1. Asset Allocation:
Asset allocation is the process of deciding how to distribute an investment portfolio among different asset classes such as equities, fixed income, real estate, and cash. This function is crucial for managing risk and achieving the desired balance between risk and return according to the investor’s goals and risk tolerance.
2. Security Selection:
Security selection involves choosing specific securities within each asset class. This step requires thorough analysis and evaluation of individual investments to identify those that are expected to perform well and align with the overall strategy and objectives of the portfolio.
3. Portfolio Optimization:
Portfolio optimization aims to create the most efficient portfolio by maximizing expected returns for a given level of risk or minimizing risk for a given level of expected return. Techniques such as Modern Portfolio Theory (MPT) are often employed to achieve optimal diversification and balance within the portfolio.
4. Performance Measurement and Evaluation:
This function involves monitoring and assessing the performance of the investment portfolio. Key metrics such as returns, volatility, and benchmark comparisons are used to evaluate how well the portfolio is meeting its objectives and whether adjustments are needed.
5. Risk Management:
Risk management is the process of identifying, assessing, and mitigating risks that could negatively impact the investment portfolio. This includes managing market risk, credit risk, liquidity risk, and other types of financial risks. Tools such as diversification, hedging, and insurance are often used to manage these risks effectively.
These functions work together to ensure that an investment portfolio is well-managed, aligns with the investor’s goals, and adapts to changing market conditions and individual needs.
22. Explain the duties of collecting bankers. 5
Answer: The duties of collecting bankers primarily involve handling the collection of checks, drafts, and other instruments on behalf of their customers. Here are five key duties:
1. Receipt of Instruments: Collecting bankers receive checks, drafts, and other negotiable instruments from their customers for collection. They ensure that all necessary endorsements and other formalities are completed before proceeding.
2. Presentment for Payment: They present the instruments to the drawee bank or other relevant parties for payment. This involves timely and accurate submission to ensure that the instruments are honored.
3. Follow-up and Communication: Collecting bankers monitor the status of the instruments and follow up with the drawee bank or other entities as necessary. They keep their customers informed about the progress and any issues that arise during the collection process.
4. Credit to Customer’s Account: Upon successful collection of the funds, collecting bankers credit the customer’s account with the received amount. This includes ensuring that the funds are accurately processed and reflected in the customer's account.
5. Handling Dishonored Instruments: If an instrument is dishonored (i.e., not paid), collecting bankers notify their customers promptly and return the dishonored instrument. They also provide details about the reasons for dishonor and any charges incurred, while offering assistance for further action if needed.
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