Class 11 Finance Unit-2 : Meaning and Different Types of banks Important Questions Answers (ASSEB-AHSEC Division-I)

Prepare for Assam Board Class 11 Finance Unit- 2 with key questions and answers for the upcoming exam to boost your exam preparation

Assam Board (ASSEB-AHSEC) Class 11 Finance Unit-2 : Meaning and Different Types of banks Important Questions and Answers for the 2025 Examination. These notes and important questions and answers, prepared by The Treasure Notes, are helpful for your exam preparation.

Assam Board (ASSEB-AHSEC) Class 11 Finance Unit-2 : Meaning and Different Types of banks Important Questions and Answers

Unit-2 : Meaning and Different Types of banks

Chapter-3 Bank


1. What is meant by a bank? Give some definitions. Who/what type of company can use 'bank,' 'banker, or 'banking' in their names?

Ans: A bank is a financial institution that deals in money and credit, collecting deposits from the public, lending funds, and facilitating various financial transactions. It also performs agency functions, credit creation and offers general services, ultimately seeking profit from the interest rate difference between deposits and loans.

Definitions:

According to section 5 (b) of the Banking Regulation Act, 1949 banking is defined as "accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal cheque, draft, order or otherwise." by

According to section 5 (c) of the Banking Regulation Act, 1949 "Banking company means any company which transacts the business of banking in India."

According to R.P. Kent, "Bank is an institution which collects idle money temporarily from the public and lends to other people as per requirement."

According to Cairn Cross, "Bank is a financial intermediary institution which deals in loans and advances."

As per Section 7 of the Banking Regulation Act, 1949, only banking companies are allowed to use the terms 'bank, 'banker,' or 'banking' in their names. These companies are financial institutions that accept various types of deposits from the public, which are repayable on demand or otherwise and provide loans and advances to needy borrowers.


2. What are the characteristics/features of Banks/Banking?

Ans: The following are the characteristics/features of Banks/Banking:

i. Financial Institution: Banks are financial institutions primarily concerned with monetary activities.

ii. Dealing in Money: Banks accept and lend money, offering various deposit types, such as savings, current, fixed and recurring deposits.

iii. Withdrawable Deposits: Bank deposits are withdrawable through cheques, drafts, or other means.

iv. Deposits Repayable on Demand: Bank deposits are repayable upon demand or as otherwise agreed

V. Credit Creation: Banks uniquely possess the ability to create credit, a fundamental aspect of their operations.

VI. Commercial Nature: Banks operate with a commercial motive, seeking profits in their various functions.

vii. Role of an Agent: Banks act as agents for their customers, offering a range of agency services.

viii. Banking Nature: The primary business of a bank should center around banking operations.

ix Financial Services: Banks provide diverse financial services to their clientele.

x. Name of the banking company: Banking companies must include at least one of the words bank,' 'banker,' 'banking, or 'banking company in their names.

Extra: Banks play a crucial role in the financial system and economic development. To serve the diverse financial needs of various sectors, different types of banks have been established. These include Central Banks, Commercial Banks, Exchange Banks, Regional Rural Banks, Investment Banks, Development Banks, Export-Import Banks, Co- operative Banks, Agricultural Banks, Land Development Banks, Savings Banks and International Banks.


Chapter-4- Central Bank


1. What is a Central Bank?

Ans: A central bank is the apex/highest authority of monetary and banking system in a country. It holds a pivotal position in the financial structure of a nation, overseeing the money market and regulating commercial banks. The central bank acts as the primary monetary authority, managing the currency and credit policies of the country. It serves as a banker to both commercial banks and the government. Each country typically has one central bank, such as the Reserve Bank of India (RBI), Bank of England in Great Britain, Goss Bank in Russia and the Federal Reserve System in the United States.

Definitions:

"Central Bank " A central bank is that bank which is the lender of last resort". Hawtry "A central bank is that bank which is a bank of bankers."-P.A. Samuelson "A central bank is that bank which controls credit." W.A. Shaw

According to De Kock, "A bank which constitutes the apex of the monetary and banking structure of the country and which performs as best it can in the national economic interest the following functions:

(a) Currency Regulation

(b) General Banking Services

(c) Cash Reserves Custody

(d) International Reserves

(c) Management

(e) Lender of Last Resort

(f)Clearing Balance Settlement

(g) Credit Control"


2. What are the characteristics of Central Bank?

Ans: The following are the characteristics of central bank:

i. Non-profit Organization: Central banks are not profit-oriented; their primary goal is national welfare.

ii. Right of Note Issue: Central banks have the monopoly to issue and circulate currency notes.

iii. Limited Public Interaction: Central banks do not have direct interactions with the general public.

iv. Government Fund Management: Central banks act as the government's financial manager and banker.

V. Custodian of Foreign Exchange: They manage and control a country's foreign exchange reserves.

vi. Regulatory Authority: Central banks have regulatory control over commercial banks and other financial institutions.

vii. Non-Competitive: Central banks do not compete with commercial banks within the country.

viii. Apex Banking Institution: They serve as the highest authority in the banking system.


3. Discuss the functions of central bank.

Ans: The different functions of a Central Bank are:

i. Issuing Money: Central banks are responsible for creating and distributing paper money. They have a monopoly on this, which means only they can make legal currency.

ii. Government's Financial Helper: Central banks act as the government's bank. They keep track of government accounts, take government deposits, offer short-term loans to the government, and handle things like collecting taxes and issuing treasury bills. They also represent the government in international financial matters.

iii. Banker's Banks: Central banks serve as the bank for other commercial banks. They safeguard a portion of the commercial banks' money, which they can use in emergencies. The central bank also helps commercial banks when they need financial assistance.

iv. Clearing House: Central banks help commercial banks settle their claims with one another. They maintain records of accounts, which makes it easier for banks to exchange money.

v. Managing Gold and Foreign Currency: Central banks are responsible for keeping a country's gold and foreign currency reserves. They use these reserves to deal with balance of payments problems and maintain stable exchange rates.

vi. Credit Control: One of the central bank's most crucial jobs is controlling the amount of credit available in the economy. By doing this, they keep prices steady and maintain a stable exchange rate. This is vital for a healthy economy.


4. What are the advantages of the central bank having a monopoly on the issuance of currency notes?

Ans: The central bank's monopoly on issuing currency notes offers several advantages:

i. Uniformity in Note Issue: It ensures that currency notes are uniform in design and quality, contributing to a standardized and easily recognizable currency in circulation.

ii. Enhanced Money Supply Control: With this monopoly, the central bank can effectively regulate the money supply in the country, making it a vital tool for monetary policy.

iii. Increased Public Confidence: This monopoly instills confidence in the public regarding the stability and integrity of the monetary system, as they know that the currency is issued and backed by the central bank.

iv. Simplified Monetary Management: It simplifies the management of paper currency, making it easier to track, replace and control.

V. Control Over Credit Expansion: The central bank can use this monopoly to prevent excessive credit expansion by commercial banks, helping maintain financial stability.


5. How does a central bank act as a banker to the government and what are the specific services it provides in this role?

Ans: A central bank serves as a banker to the government through several key services:

i. Maintaining Government Accounts: The central bank keeps and manages the accounts of both the central and state governments, ensuring the proper recording of financial transactions.

ii. Receiving Government Deposits: It accepts deposits from the government, providing a secure place for the government to store its funds.


iii. Short-Term Advances: The central bank can extend short-term loans to the government when needed, helping to address temporary financial requirements.

iv. Handling Cheques and Drafts: The central bank processes and clears cheques and drafts that are deposited in government accounts, facilitating financial transactions.

v. Foreign Exchange Support: In international dealings, the central bank can offer foreign exchange resources to the government for various payments and foreign transactions, assisting in managing the country's external financial matters.


6. In what ways does the central bank act as an agent to the government?

Ans: The central bank serves as an agent to the government in several ways:

i. Collects Taxes and Payments: The central bank collects taxes and other payments on behalf of the government, making the process more efficient and convenient for the government and the public.

ii. Raises Loans: It helps the government raise funds by issuing government bonds or securities to the public. This enables the government to finance its various projects and initiatives.

iii. Issues Treasury Bills: The central bank manages the issuance of treasury bills, which are short-term government debt instruments used to cover temporary budgetary shortfalls.

iv. Represents the Government: The central bank represents the government in international financial institutions and conferences, ensuring the government's interests are advocated and protected on the global stage.


7. What are the advantages of a central bank acting as the custodian of cash reserves for commercial banks?

Ans. The advantages of a central bank serving as the custodian of cash reserves for commercial banks are as follows i.

i. Inspiring Public Confidence: Centralization of cash reserves in the central bank instills confidence in the public regarding the stability of the banking system, knowing that their money is securely held.

ii. Foundation for a Larger Credit System: These cash reserves form the foundation for a more substantial and flexible credit structure, allowing for the expansion of credit in the economy.

iii. Providing Emergency Funds: Centralization enables the central bank to provide additional funds to commercial banks facing temporary financial difficulties, helping maintain stability in the banking sector and the broader economy.


8. What are the advantages of a central bank acting as the lender of last resort?

Ans: The central bank acting as the lender of last resort provides several advantages:

a. Elasticity and Liquidity: By offering financial assistance when needed, it enhances the flexibility and liquidity of the entire credit system, ensuring that banks can access funds to meet their obligations.

b. Financial Support for Banks: During challenging times, this role allows commercial banks to receive much- needed financial aid, preventing bank failures and contributing to overall financial stability.

c. Control Over Banking System: The central bank's ability to step in as a lender of last resort gives it a powerful tool to regulate and maintain control over the banking system in the country. It helps in preventing systemic crises and ensuring the stability of the financial sector.


9. What are the advantages of the central bank acting as a clearing house for commercial banks?

Ans: The central bank acting as a clearing house for commercial banks offers several benefits:

a. Economy in Money Usage: By serving as a clearing house, the central bank helps banks settle their claims more efficiently. This reduces the need for physical cash transfers, leading to cost savings and efficiency in banking operations.

b. Reduced Cash Withdrawals: When banks can settle their claims through transfers, it decreases the necessity for clients to withdraw cash from their accounts. This contributes to enhanced security and less strain on the physical cash supply.

c. Strengthened Banking System: Acting as a clearing house generally reinforces the overall banking system of a country. It fosters trust, streamlines interbank transactions and supports financial stability.


10. What are the primary reasons for a central bank to act as the custodian of a country's gold and foreign exchange reserves?

Ans: The central bank serves as the custodian of a nation's gold and foreign exchange reserves for two main reasons:

a. Overcoming Balance of Payments Difficulties: By holding these reserves, the central bank can use them to address balance of payments challenges, helping to stabilize a country's international trade and financial position.

a. Maintaining Exchange Rate Stability: These reserves are essential for maintaining stability in exchange rates. 

b. The central bank can use them to influence the value of its currency in foreign exchange markets, ensuring it remains relatively stable and predictable.


11. Why is controlling credit considered a primary function of a central bank and what are the benefits of effective credit control?

Ans: Controlling credit is a fundamental role of a central bank because unregulated credit can lead to economic instability. By effectively controlling credit, the central bank achieves the following:

a. Stability in Internal Prices: Effective credit control helps maintain stable internal prices within the country. This means that the central bank can prevent rapid inflation (rising prices) or deflation (falling prices), which are both harmful to the economy. Stable prices ensure that the purchasing power of a country's currency remains relatively constant.

b. Stability in Foreign Exchange Rates: By managing credit, the central bank can also stabilize foreign exchange rates. This is crucial for international trade and economic stability. When exchange rates are stable, it fosters confidence in the country's currency, making it more attractive to foreign investors and trading partners.

To ensure economic growth and the smooth operation of the economy, both stable internal prices and stable foreign exchange rates are necessary. These conditions create a more predictable and favorable environment for businesses and consumers, facilitating investment, trade and overall economic progress.


CHAPTER-5-COMMERCIAL BANK


1. What do you mean by commercial banks? What are its functions?

Ans: Commercial banks are financial institutions that accept deposits from the public, provide loans, and offer various banking services. They play a crucial role in meeting short and medium-term financial needs in an economy. Commercial banks are often structured as joint-stock companies, operating for profit. Some examples of commercial bank in India are State Bank of India, Allahabad Bank, Union Bank of India and Bank of Baroda etc.

Functions/Services of Commercial Banks: Commercial banks offer a range of services, which can be categorised into three main types:

1. Primary Functions:

a. Accepting Deposits of Money: Commercial banks accept various types of deposits, including:

i. Savings Deposit Account: It aims at encouraging small-scale savers.

ii. Current Deposit Account: These are used by individuals, businesses, and other entities for frequent transactions.

iii. Recurring Deposit Account (RD): It is a type of compulsory regular savings over specific intervals.

iv. Fixed Deposit Account: It means fixed-term deposits with varying maturities.


b. Granting Loans and Advances: Commercial banks offer different types of loans:

i. Loans: Lump-sum advances with a specified interest rate and repayment terms.

ii. Overdraft: Allows customers to withdraw beyond their account balance, up to a set limit.

iii. Cash Credit: Customers can borrow up to a specified limit with a separate account.

iv. Bill Discounting: Commercial Banks lend money by discounting bills of exchange, charging a commission.

v. Money at Call or Call Loan: Very short-term loans provided in financial markets.

vi. Consumer Credit: Short-term loans for purchasing household items, including electronics and appliances.


2. Secondary Functions: The secondary functions / services of a commercial bank can be classified into-

(i) Agency functions or Agency Services:

(a) Remittance of funds,

(b) Making payment on behalf of customers,

(c) Collection of Cheques, etc,

(d) Buying and Selling of Stocks, Securities etc,

(e) Acting as trustee, executors, etc, and

(f) Other agency Services.

(ii) General utility or Public Utility Services:

(a) Safe deposit locker facility,

(b) Safe custody of valuable articles,

(c) Issue of gift cheques,

(d) Issue of letter of credit,

(e) Collection and Supply of Statistics,

(f) Underwriting of shares, debentures etc, and

(g) Acting as referee.


3. Modern functions/services:

(1) Automated Teller Machine (ATM) cum Debit Card,

(ii) Credit Card facility,

(iii) SWIFT Message facility,

(iv) Mail and Telegraphic Transfer,

(v) Tele Banking Services,

(vi) S.M.S (Short Messaging Service),

(vii) Internet banking -

(a) Retail and corporate internet banking,

(b) Electronic Cleaning and Electronic Fund Transfer (EFT),

(c) RTGS/NEFT Service and

(viii)Online Shopping and Bill Payment etc.


2. What are the Primary Functions of Commercial Banks?

Ans: The following are the Primary Functions of Commercial Banks:

1. Accepting Deposits: One of the fundamental primary functions of commercial banks is the acceptance of deposits, which are typically divided into two main categories.

i)Demand Deposits: Demand deposits are repayable upon the customer's request and mainly consist of:

(a) Savings Deposits: Primarily aimed at encouraging small-scale saving, these accounts can be opened by individuals, guardians (on behalf of minors) and various entities. They offer lower interest rates than term deposits, and the funds are repayable on demand.

(b) Current Deposits: Geared towards facilitating frequent business or financial transactions, current accounts provide overdraft facilities. Typically, banks do not pay interest on these accounts and may charge incidental fees for maintaining them.

ii) Term Deposits: Term deposits are repayable on agreed-upon maturity dates and include:

(a) Recurring Deposits: These require customers to deposit a fixed amount at specific intervals for a set period, promoting regular savings habits among low and middle-income groups. They offer higher interest rates than savings deposits but lower than fixed deposits.

(b) Fixed Deposits: Banks accept fixed deposits for specified periods, ranging from 45 days to several years. These deposits yield higher interest rates compared to savings deposits. Generally, they cannot be withdrawn before the maturity date.

2. Granting Loans and Advances: The second primary function involves granting loans and advances to customers through various modes or mechanisms.

i) Loans: Loans are lump-sum advances provided by the bank, typically at an agreed interest rate. The entire loan amount is paid out at once and may be repaid in predetermined installments or upon reaching a specific period. Loans can be categorized into

(a) Short-term Loans: These are granted for periods not exceeding one year and often support working capital needs.

(b) Medium-term Loans: These are offered for durations ranging from one to five years, these loans are commonly used for purchasing tools, equipment, vehicles and similar assets.

(c) Long-term Loans: These are allocated for capital expenditure, including projects like building construction, land purchase, machinery acquisition and plant modernization

ii) Overdraft: Overdraft is a credit arrangement that permits customers to withdraw funds exceeding their account balance up to a specified limit. It's a short-term, temporary arrangement, often secured by collateral or personal guarantees. Customers pay interest only on the overdrawn amount during its utilization, with a potential commitment charge on the unused overdraft limit.

iii) Cash Credit: Cash credit involves creating a separate account for a customer, allowing them to borrow money up to a specified limit. It's a permanent arrangement, typically secured by collateral such as pledged goods or personal security. Customers can withdraw and deposit funds as needed, with interest charged only on the actual amount withdrawn.

vi) Bill Discounting: Commercial banks offer bill discounting services, allowing customers to obtain immediate funds by discounting bills of exchange. Banks charge a commission for this service.

v) Money at Call or Call Loan: Call loans provide very short-term advances, often utilized by financial institutions, dealers and stock exchange brokers. These loans may be repaid within one to fourteen days and can be recalled by the bank on short notice. They typically carry comparatively high-interest rates and are secured by collateral securities like equity shares and debentures.

vi) Consumer Credit: Consumer credit involves the provision of term loans by banks, enabling customers to purchase items like televisions, washing machines, air conditioners, and other household goods. These loans may also cover personal needs such as medical bills and other household expenses, with repayment in installments over a short period, making it a form of short-term credit.


3. What are the Secondary Functions of Commercial Banks?

Ans: The following are the Secondary Functions of Commercial Banks:

1) Agency Functions/Services:

(a) Fund Remittance: Banks assist in transferring funds from one place or account to another, using methods like cheques, drafts, mail transfers, or telegraphic transfers. A service charge is usually levied on customers for these agency services.

(b) Payment on Behalf of Customers: Banks make various payments on behalf of customers, including electricity bills, municipality taxes, coupons, drafts, promissory notes, rent, insurance premiums, and more as instructed by the customers.

(c) Collection of Cheques: Commercial banks collect cheques and other negotiable instruments on behalf of customers, crediting the proceeds to their accounts.

(d) Buying and Selling of Securities: Banks facilitate the purchase and sale of stocks, shares, other securities, and foreign exchange, including foreign banknotes. They also engage in the buying and selling of mutual fund units based on customer instructions for a nominal fee.

(e) Acting as Trustee, Executors, etc: Banks serve as trustees, executors, administrators, and take care of customers' assets and trust administration. As executors, they preserve customers wills and execute them after the customers' demise.

(f) Other Agency Services: In addition to the above functions, commercial banks provide valuable advice on income tax calculation, tax payment, and tax return submissions to the relevant authority. They also serve as Serve financial advisors to their customers.

2) General Utility Functions/Services:

(a) Safe Deposit Locker Facility: Banks offer safe deposit lockers for customers to store valuable items securely. Customers receive two keys, one held by the bank and the other by the customer, to access the locker.

(b) Safe Custody of Valuable Articles: In addition to locker facilities, banks provide safe custody services for valuable articles and documents, charging fees based on the duration and value of items kept.

(c) Issue of Gift Cheques: Banks issue gift cheques in various denominations for use on special occasions.

(d) Issuing Letters of Credit: Commercial banks issue letters of credit to vouch for the creditworthiness of their customers, often used in foreign trade.

(e) Collection and Supply of Statistics: Banks collect and disseminate information and statistics related to trade, commerce and industry. They offer financial advice on growth, development, modernization, and diversification of businesses.

(f) Underwriting of Shares and Debentures: Banks act as underwriters for capital issues of companies and government bodies. They purchase and sell shares and debentures to raise capital for corporate entities, charging a commission for underwriting services.

(g) Acting as a Referee: Banks provide references regarding their customers' financial position, business reputation, and respectability.


4. What are the Modern Functions of Commercial Banks?

Ans: The following are the Modern Functions of Commercial Banks:

i. Automated Teller Machine (ATM) cum Debit Card: ATMs are computerized devices that grant customers access to withdraw and deposit money. Customers use plastic ATM cards with magnetic strips or smart cards with chips to perform these transactions. ATMs are available around the clock, allowing debit and credit cardholders to access cash as needed.

ii. Credit Card Facility: Credit cards have replaced paper money and act as credit instruments. Cardholders can make purchases at authorized dealers and withdraw cash from ATMs within specified limits. Banks charge service fees and interest on outstanding balances.

iii. SWIFT Message Facility: SWIFT (Society for Worldwide Inter-bank Financial Telecommunication) messages enable the transfer of funds between countries efficiently and cost-effectively. This method provides a swift and secure way to remit funds.

iv. Mail and Telegraphic Transfer: Customers have the option to transfer money from one place to another through mail or telegraphic transfers. Customers instruct the bank to transfer a portion of their balance to a payee's account located in a different place, usually for a nominal commission. The bank then sends an advice via mail or telegram to credit the payee's account according to the customer's instructions.

v. Telebanking Services: Telebanking offers non-cash banking services delivered over the phone, providing convenience and accessibility to customers. Automatic Voice Recorders (AVR) and ID numbers are utilized to deliver these services.

vi. S.M.S (Short Messaging Service): S.M.5 banking is a mobile application-based service. Banks send standard text messages to account holders immediately after a banking transaction, using the mobile number registered with the account, for a nominal annual fee.

vii. Internet Banking: Internet banking is an electronic platform for delivering a range of banking services to customers. It allows customers to access banking services from anywhere at any time. Some services offered through internet banking include

(a) Retail and Corporate Internet Banking: This provides online access to bank accounts for personal and corporate customers, enabling various transactions and fund management.

(b) Electronic Clearing and Electronic Fund Transfer (EFT): Internet banking supports electronic clearing services for paperless fund transfers and Electronic Fund Transfers (EFT) via electronic media.

(c) RTGS/NEFT Service: Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) allow instant customer-initiated fund transfers between banks in different locations on the same day, typically with modest charges.

(d) Online Shopping and Bill Payment: Customers can make online purchases and pay various bills, such as telephone, mobile, electricity, and insurance premiums, from the convenience of their computers.


CHAPTER-6- OTHER BANKS


1. What is meant by Exchange banks? What are its functions?

Ans: Exchange banks, also known as foreign banks, are financial institutions with their headquarters located outside the country where they operate. Their primary focus is on foreign exchange transactionsand international trade financing.

These banks serve a vital role/functions in facilitating global trade and offer various services, such as:

1. Promoting Foreign Investment: Exchange banks encourage foreign investment in the host country, helping attract capital from abroad.

ii. Discounting Foreign Bills: Exchange banks engage in the practice of discounting foreign bills of exchange, making it easier for businesses to receive payments for their international transactions.

iii. Foreign Remittances: These banks provide services for the transfer of funds across borders, facilitating international transactions and money transfers.

iv. Gold and Silver Trading: Exchange banks are involved in the purchase and sale of precious metals like gold and silver, which are often used in international trade transactions.

v. Letter of Credit Issuance: They issue letters of credit, a crucial instrument in international trade, which assures payment to the seller upon fulfilling the terms of the contract.

vi. Facilitating and Financing International Trade: Exchange banks play a significant role in enabling international trade by providing financial support and facilitating transactions between parties in different countries

vii. Assisting with Clearances: They offer assistance in obtaining various clearances and approvals required for transactions involving foreign currencies, helping businesses navigate complex regulatory environments.


2. What are RRBs? How and when was RRBs formed?

Ans: Regional Rural Banks (RRBs) were established in 1975 based on the recommendations of the M. Narasimham Committee, which aimed to improve the flow of institutional credit to the rural sector of the economy. RRBs are state-sponsored, regionally focused, and oriented toward rural areas.

Here are some important points about RRBs:

i. Origin: RRBs were created in 1975 through an ordinance passed on 26th September, with the first five RRBs commencing operations on October 2, 1975. In 1976, the Regional Rural Banks Act was enacted to provide a legal framework for these institutions.

ii. Ownership: RRBs are rural-based public sector commercial banks. Their share capital is subscribed by the Central government, State government, and a sponsored bank in the ratie of 50:15:35, respectively.

iii. Capital Structure: Initially, the authorized and issued capital of RRBs was set at Rs. One crore and Rs. 25 lakhs, respectively. In 1988, the RRBs Act was amended to increase the authorized and issued capital to Rs. 5 crores and 1 crore, respectively.

iv. Support from Sponsored Banks: As sponsored banks, they receive necessary funds, guidance, and directions from commercial banks to ensure their smooth functioning. These sponsored banks play a crucial role in supporting RRBs.

v. Resource Mobilization: RRBs raise their necessary resources through various means, including, owned capital, deposits from the public, borrowings from sponsored banks, and refinance from the National Bank for Agriculture and Rural Development (NABARD).


3. What are the primary objectives of RRBs?

Ans: The primary objectives of RRBs are as follows:

i. Fill Credit Gap: RRBs aim to address the credit gap that exists in rural areas by providing institutional credit to rural populations.

ii. Alternative to Moneylenders: They act as an alternative credit source, liberating rural people from the exploitation of village moneylenders.

iii. Rural Development: RRBs play a crucial role in the development of the rural economy by providing credit and other financial services to various segments, including small and marginal farmers, agricultural laborers, small entrepreneurs, artisans, cottage industries and weavers.

iv. Entrepreneurship and Employment: RRBs contribute to creating a new class of entrepreneurs in rural areas, promoting employment generation and economic growth in these regions.

v. Thus, RRBs are an important part of the financial landscape in India, with a specific focus on supporting rural development and improving financial inclusion in rural communities.


4. What are the different functions of RRBs?

Ans: Functions of RRBs are discussed below:

i. Deposit Services: RRBs offer a range of deposit accounts, including Savings Deposits, Current Deposits, Recurring Deposits, and Fixed Deposits, allowing them to accept money from the public.

ii. Loans and Advances: RRBs provide loans and advances to individuals, with a special focus on small and marginal farmers, as well as artisans in rural and semi-urban areas.

iii. Government Payments: RRBs disburse government program wages, such as under MGNEGA, and handle pension distribution.

iv. Agency and Public Utility Services: They offer various agency services, including bill collection, fund remittances, and locker facilities. RRBs also play a role in providing public utility services.

v. Modern Banking Facilities: RRBs provide modern banking services, such as Debit and Credit cards, mobile banking and internet banking, ensuring access to contemporary financial tools.


Special Business Priorities:


a. Agricultural and Cooperative Societies: RRBs prioritise granting loans and advances to small and marginal a farmers, agricultural laborers and different cooperative societies, including marketing societies, agricultural processing societies and primary agricultural credit societies (PACS).

b. Supporting Small Entrepreneurs: RRBs also focus on providing loans to small artisans, small entrepreneurs, and individuals engaged in trade, commerce, industries, and other productive activities within their operational areas.


5. What is meant by Investment Bank / Industrial Bank? Give some examples. Also discuss its functions.

Ans: Investment banks, also known as industrial banks, support industrial development by investing in shares, debentures, and underwriting capital issues of businesses. They arrange medium and long-term financing for industries, acting as financiers and underwriters. In their financing role, they provide long-term funds, while as underwriters, they facilitate the sale of securities to the public, taking on any unsubscribed portions if necessary.

Some examples of investment/industrial banks in India are IFCI, SBI Capital Markets Ltd., IDBI Capital Market Services Ltd. and ICICI Securities Ltd. etc.


Functions of Investment Banks

i. Long-Term Deposits: Investment banks accept long-term deposits from the public to provide essential long- term financing for industries' fixed capital requirements.

ii. Provision of Loans: They offer long-term loans for purchasing land, buildings, and other fixed assets, as well as medium-term loans to fulfill working capital needs of industries

iii. Underwriting Services: Investment banks play a vital role in underwriting securities for large industrial organizations, facilitating their issue to the public.

iv. Ownership and Control: They contribute to the management and control of companies by subscribing to their shares and debentures.

v. Advisory and Guidance: Investment banks provide advisory and technical guidance to help industries efficiently manage their operations.

vi. Merger and Acquisition Consultation: They act as advisors or consultants in matters related to mergers and acquisitions involving various industrial houses.

vii. Risk Management: Investment banks assist companies in managing financial risks, including those related to currency, loans and liquidity etc.

viii. Research Services: They conduct research in areas like equity and debt management, fixed income, macroeconomic factors, and provide valuable insights to benefit their clients.


6. What is a development Bank? What are its characteristics?

Ans: A development bank is a specialised multipurpose financial institution that offers various forms of financial support, including medium and long-term loans, underwriting, investments, guarantees, and promotional activities, to businesses. It focuses on fostering development and does not accept public deposits. Development banks support both public and private sector enterprises, with a special emphasis on promoting new and small entrepreneurs and achieving balanced regional growth.

William Diamond and Shirley Boskey consider industrial finance and development corporations as "development banks"

Characteristics or Features of Development Banks

a. Multipurpose Institution: Development banks serve as multipurpose financial institutions, offering development finance along with other functions.

b. Development-Oriented: These banks have a primary focus on promoting economic development by fostering investment and entrepreneurial activities in developing economies.

c. Public and National Interest: Their core motive is to serve public and national interests, prioritizing these over profit.

d. Non-Deposit Institutions: Development banks do not accept demand deposits from the public, distinguishing them from commercial banks.

e. Medium and Long-Term Finance: They specialize in providing medium and long-term financial support to industrial units.

f. Specialization in Industrial Development: These banks are specialized financial institutions that primarily offer loans for industrial development.

g. Promotion of Backward Areas: Development banks actively encourage industrial development in economically backward regions by supporting new entrepreneurs and small-scale enterprises.

h. Support for Public and Private Sectors: They provide financial assistance to both public and private sector enterprises.

i. Promotion of Investment and Savings: Development banks play a role in promoting investment and encouraging saving habits among the populace.


7. 'Development banks are the kingpin in the process of economic development of a country'. - explain

Ans: The concept of development banking gained prominence after World War II, when it provided crucial financing to rebuild the buildings and industries devastated by the war. In India, development banking became a priority immediately after gaining independence.

After independence, India established its first development bank, the Industrial Finance Corporation of India, in 1948. Subsequently, a series of development banks emerged, dedicated to supporting the development of large, medium, and small industries through financial assistance and various other promotional activities. These banks played a central role in shaping India's economic progress.

Role/Functions of Development Bank

i. Provide Development Assistance: The primary role of development banks is to offer development assistance for various sectors, including industries, agriculture, trade and transport etc.

ii. Balance Regional Development: Development banks prioritize providing financial support to businesses established in economically disadvantaged and forested areas to promote balanced regional development.

iii. Assistance to Small Entrepreneurs: They extend financial assistance to small entrepreneurs, aiming to prevent the concentration of economic power in a few hands.

iv. Promote New Entrepreneurs: Development banks actively promote new entrepreneurs and small-scale units by offering priority assistance.

V. Accepts Deposits of Money: They accept long-term deposits, repayable after a fixed period, differentiating them from commercial banks, which deal with demand deposits.

vi. Medium and Long-Term Credit: These banks provide medium and long-term credit to industries, covering expenses related to land, buildings, plant and machinery, expansions, renovations, and modernization.

vii. Help in Raising Capital: Development banks serve as underwriters and guarantors, assisting the corporate sector in raising capital from the market through the issuance of shares, debentures, bonds, and other financial instruments.

viii. Offers Multipurpose Services: They provide promotional, technical, managerial, and consultancy services to support the growth and efficient operation of industrial units.

ix. Discover Investment Projects: Development banks actively seek out various investment projects that contribute to the economy's development.

x. Preparation of Project Reports: They undertake the preparation of project reports for various developmental projects.

xi. Raise Foreign Capital: Development banks secure foreign capital from different sources and allocate it according to the priority of various sectors in the economy.

xii. Undertake Market and Investment Research: These banks engage in market and investment research to facilitate the development of industrial and other sectors within the country.


8. Write a brief note on Export Import Bank of India (EXIM Bank) and its objectives and functions.

Ans: There was no specialized financial institution for foreign trade in India, until 1982. The Industrial Development Bank of India (IDBI) provided financial assistance for export-import business. Following the recommendations of the Alexander Committee (1977) and Tendon Committee (1980), EXIM Bank was established on January 1, 1982, under the Export-Import Bank of India Act, 1981. It is a statutory corporation operating under a special act of parliament (Act, 28 of 1981) and serves as the apex institution for financing India's foreign trade.

EXIM Bank plays a important role in promoting the growth and development of foreign trade in India. It offers financial assistance to exporters and importers and fosters coordination among various agencies involved in financing the export and import of goods and services to facilitate international trade. This institution took over the entire export-import financing business from IDBI after its establishment.

Objectives of EXIM Bank

i. Financial Assistance: The primary objective of EXIM Bank is to provide financial assistance to both exporters and importers.

ii. Apex Financial Institution: It serves as the apex financial institution, coordinating the activities of institutions involved in financing the export and import of goods and services to promote international trade.

iii. Problem Solving: EXIM Bank aims to assist the various stakeholders in foreign trade in resolving complex issues related to international trade.

Functions of EXIM Bank

i. Supporting Financial Institutions: EXIM Bank works as an apex institution that assists and supports the development of financial institutions engaged in export and import financing.

ii. Financing Export and Import: It provides financing for the export and import of goods and services, both domestically and internationally.

iii. Finance for Joint Ventures: EXIM Bank offers financial support for joint ventures in foreign countries.

IV. Coordinating Financial Institutions: The bank fosters coordination among various financial institutions and parties involved in export-import activities.

V. Underwriting Services: It serves as an underwriter for the issuance of shares, debentures, bonds, and other financial instruments by companies engaged in foreign trade.

vi. Technical and Managerial Support: EXIM Bank provides technical, financial, managerial, and administrative services to entities involved in export-import activities.

vii. Refinance Facilities: The bank offers refinance facilities to commercial banks and other financial institutions engaged in export and import financing.

viii. Funded and Non-Funded Assistance: EXIM Bank provides both funded and non-funded assistance for export bids and ongoing foreign trade projects.

ix. Advance Information and Counseling: The bank offers advance information and counseling services to Indian exporters regarding multilaterally funded projects overseas.


9. What do you mean by Cooperative Bank? Write its features.

Ans: Cooperative banks are financial institutions that operate on cooperative principles, emphasizing voluntary association, equality, and a common purpose. The fundamental cooperative principle is "each for all and all for each." These banks are established and managed based on these principles and are regulated by special legislative provisions. Their primary role is to provide institutional credit to rural areas, focusing on the development of agriculture and related activities. Cooperative banks are a crucial component of the Indian financial system and play an integral role in the overall banking and credit system in India.

Important Points:

➤ Cooperative banking in India began after "The Co-operative Societies Act, 1904."

➤ Two types of cooperatives: credit and non-credit.

➤ Credit cooperatives formed under the 1904 Act, while non-credit cooperatives emerged after the Co- operative Law of 1912.

➤ Cooperative banks in India are regulated by the RBI and governed by the Banking Regulation Act, 1949 (1965 amendment).

➤ They accept deposits from the public and grant loans to members and non-members.

➤State-level cooperative banks compete with commercial banks and hold scheduled bank status.


Features of Cooperative Banks

i. Principles of Cooperation: Cooperative banks are organized and managed based on the principles of cooperation, self-help, and mutual assistance.

ii. Equal Voting Rights: They follow the motto "One member one vote," regardless of the number of shares held by a member.

iii. Government Support: Cooperative banks are government-sponsored, supported, and subsidized financial institutions.

iv. Promotional Role of RBI: RBI plays a promotional role, rather than a regulatory one, when it comes to cooperative banks. Certain relaxations are provided to these banks, particularly in maintaining Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

V. Profit and Loss Principle: Cooperative banks operate on the principle of "No profit, no loss."

vi. Three-Tier Structure: Cooperative banking in India follows a three-tier structure: Primary Cooperative Society at the village level, Central Cooperative Bank at the district level, and State Cooperative Bank at the state level.

vii. Unlimited Member Liabilities: Members' liabilities are unlimited, particularly in the case of village-level Primary Cooperative Societies.

viii. Short-Term and Long-Term Loans: Cooperative banks provide both short-term and long-term loans. While cooperative banks are primarily for short-term loans, Land Development Banks cater to long-term financing.

ix. Diverse Sources of Funds: Sources of funds for cooperative banks include central and state governments, RBI, NABARD, membership fees, deposits from the public, and more.

x. Scheduled and Non-Scheduled Cooperative Banks: Cooperative banks can be categorized into scheduled and non-scheduled entities. Primary Cooperative banks are non-scheduled, while State Cooperative banks are scheduled.


10. What is an Agricultural Bank? What are its functions?

Ans: Agricultural banks are specialized financial institutions that offer a range of credit facilities to support agriculture and its related activities. Farmers require short-term funds for immediate expenses like seeds, fertilizers, and wages, as well as long-term loans for tasks such as land acquisition and the purchase of heavy machinery. Recognizing the unique needs of the agricultural sector, the importance of dedicated agricultural banks has become apparent.

Functions of Agricultural Banks

1. Loan Provision: Agricultural banks offer short, medium, and long-term loans to the agricultural sector to meet its financial needs.

ii. Assisting in Machinery Acquisition: They assist and facilitate the purchase of heavy farm machinery and equipment.

iii. NABARD- Refinancing: Agricultural banks receive refinancing from NABARD and extend refinance facilities to both short-term and long-term agricultural banks.

iv. Coordination and Supervision: They play a coordinating and supervisory role in allocating credit from public funds for agricultural purposes.

V. Mobilization of Deposits: Agricultural banks mobilize demand and time deposits from the public, directing these funds towards productive use in the agricultural sector.

vi. Supplying Inputs and Marketing: Particularly in the case of PACS (Primary Agricultural Credit Societies), these banks supply agricultural inputs and provide marketing facilities for agro products.

vii. Linkage in Rural Areas: PACS, functioning as agricultural banks in rural areas, act as a crucial link between ultimate borrowers and higher financing agencies like NABARD.

viii. Government Scheme Support: Agricultural banks offer financial aid through grants and subsidies under various government schemes. These funds are typically meant to protect farmers in case of crop damage or loss due to various reasons.


11. What is a Land Development Bank? What are its objectives?

Ans: Land Development Banks (LDBs) in India are cooperative institutions. They provide both short-term and long- term loans to farmers. LDBs primarily offer long-term loans to farmers for purchasing tools, equipment, cattle, and making permanent land improvements.

Initially, these institutions were known as Land Mortgage Banks (LMBs). They provided long-term loans against the mortgage of agricultural land. However, this practice posed challenges when borrowers couldn't use their agricultural land as collateral for loans. Consequently, LMBs transitioned to offering long-term loans without the need for agricultural land mortgage. As a result of this shift, the name changed from Land Mortgage Bank to Land Development Bank.

Objectives of Land Development Banks (LDBs)

i. Agricultural Development: The primary objective of LDBs is to contribute to the development of agriculture and related activities by offering long-term loans to agriculturists.

ii. Cooperative Structure and Inclusive Membership: LDBs are registered as cooperative organizations under the Co-operative Societies Act. They function as associations that include both borrowers and non- borrowers, ensuring inclusivity.

iii. Limited Liability: LDBs operate with limited liability principles, safeguarding their members from excessive financial risk.

iv. Fundraising Mechanism: These banks raise funds through the issuance of debentures and long-term securities.

V. Utilization of Funds: The funds collected by LDBs are primarily used to provide long-term loans to farmers, supporting agricultural and rural development.


12. Write a short note on savings bank.

Ans: A savings bank is a specialized financial institution primarily focused on receiving savings deposits and paying interest on these deposits. It serves as a crucial channel for encouraging individuals, particularly those with lower incomes, to save money and gain access to essential banking services. The primary objective of savings banks is to cultivate habits of thrift and savings among people with limited incomes. Depositors can withdraw their deposited funds as needed, although there are typically restrictions on the number of withdrawals allowed in a month. Savings banks provide interest on deposits, motivating depositors to save money and foster a savings habit.

In various countries, separate savings banks are organized to fulfill this purpose. In India, the government- operated savings banks are managed by the postal department and are popularly known as the Post Office Savings Bank (POSB). An advantage of POSB is its extensive network, with operations at most post offices and sub-post offices across the country. Furthermore, it offers the added security of the central government's direct guarantee to depositors in the event of payment failure.


13. Write a short note on International Bank

Ans: International banks are financial institutions that extend their banking operations beyond their home country's borders, engaging in a worldwide scope of banking activities. They play a crucial role in addressing international finance issues and serve individual customers as well as corporate entities. The operations of international banks are governed by international rules and regulations, and they establish their own business policies for selecting customers from different parts of the globe. In many cases, the respective customer's government is required to provide a guarantee for loan repayment.

International banks actively participate in the foreign exchange market, assisting their clients with foreign exchange transactions. Additionally, they provide advisory services to customers on critical international issues. Typically, international banks offer long-term loans to customers at favorable interest rates.

Some examples of International Banks are: International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank, International Monetary Fund (IMF), Bank for International Settlements (BIS), International Finance Corporation (IFC), International Development Association (IDA), Multilateral Investment Guarantee Agency (MIGA) etc.


14. Discuss the Distinguish between Commercial Bank and Non-commercial Bank.

Answer:- 

Distinction between Commercial Bank and Non-Commercial Bank

Basis of Difference

Commercial Bank

Non-Commercial Bank

Purpose

Focuses on profit-making through financial services.

Established to serve specific social or non-profit goals.

Functions

Accepts deposits, provides loans, and offers financial products.

Offers limited or specific services like agricultural credit or savings schemes.

Ownership

Privately owned or government-owned.

Usually government-owned or operated by non-profit organizations.

Target Audience

General public, businesses, and industries.

Specific groups like farmers, low-income individuals, etc.

Examples

State Bank of India, HDFC Bank.

Regional Rural Banks (RRBs), Agricultural Banks.


15. Discuss the Distinguish between Central Bank and Commercial Bank.

Answer:-

Distinction between Central Bank and Commercial Bank

Basis of Difference

Central Bank

Commercial Bank

Purpose

Manages monetary policy and controls the economy.

Provides financial services like loans and deposits.

Ownership

Owned by the government.

Owned by shareholders or government (in case of public banks).

Role

Acts as a regulatory authority for all banks.

Operates to serve customers and earn profits.

Issuance of Currency

Sole authority to issue currency.

Does not have the power to issue currency.

Customer Interaction

Does not deal directly with the public.

Deals directly with the public and businesses.

Examples

Reserve Bank of India (RBI).

Punjab National Bank, Kotak Mahindra Bank.


16. Write Difference between Commercial Bank and Co-Operative Bank

Answer:- 

Difference between Commercial Bank and Co-Operative Bank

Basis of Difference

Commercial Bank

Co-Operative Bank

Ownership

Owned by shareholders or the government.

Owned and operated by its members.

Objective

Focuses on earning profits.

Aims at providing services to its members.

Target Audience

General public, businesses, and industries.

Members of the cooperative society, mainly small borrowers.

Regulation

Regulated by RBI.

Regulated by RBI and respective state cooperative acts.

Capital Sources

Raised through public deposits and investments.

Raised through members’ contributions and deposits.

Examples

ICICI Bank, Axis Bank.

Urban Cooperative Bank, Primary Agricultural Credit Societies.

 

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Access All Unit's AnswersAssam Board Class 11 Finance Notes (Updated) 

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