![Indian Financial System Solved 2024 Question Paper [Gauhati University FYUGP BCom 1st Sem]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwby4AaIWDVDgCav-awSPMO_F3JA0bFsvk7leiR8TI1yb1kd9bF9GSut9V7GCGES-eCFMwreTG9doBJf29_sj21It5d5ZUX5Ku-d5mLRhndYYXP5mpUWShJf0LxYewvukuHgvGEtKIcGANpx43Q_Jz1dtaNzPGPgr3-iHR6LJwrZn2zHwI3FEoan_-XyqG/s16000-rw/1000360881.webp "Indian Financial System Solved 2024 Question Paper [Gauhati University FYUGP BCom 1st Sem]")
2024
COMMERCE
Paper: BCM0100304
(Indian Financial System)
Full Marks: 60
Time: 2½ hours
The figures in the margin indicate full marks for the questions.
1. Answer the following questions as directed: (1×8=8)
(a) Money market is dealing with the short-term fund. (True/False)
Answer: True
(b) Indian capital market is regulated by SEBI. (True/False)
Answer: True
(c) New issue market is also known as primary market. (True/False)
Answer: True
(d) Write the full form of PFRDA.
Answer: Pension Fund Regulatory and Development Authority
(e) In which year was the Reserve Bank of India established?
(i) 1935 (ii) 1949 (iii) 1955 (iv) 1969
Answer: (i) 1935
(f) Which of the following is the oldest stock exchange?
(i) Calcutta Stock Exchange (ii) Ahmadabad Stock Exchange (iii) Bombay Stock Exchange (iv) Gauhati Stock Exchange
Answer: (iii) Bombay Stock Exchange
(g) IRDAI regulates:
(i) Banking sector (ii) Insurance sector (iii) Both (iv) None
Answer: (ii) Insurance sector
(h) Write the full form of CRISIL.
Answer: Credit Rating Information Services of India Limited
2. Answer any six in about 50 words each: (2×6=12)
(a) State two distinguishing features of the money market.
Answer: Money market deals in short-term funds and instruments that mature within one year. It provides liquidity to banks, corporations, and the government by trading instruments like Treasury bills, commercial paper, and certificates of deposit. It ensures quick transfer of funds and helps in implementing monetary policy, making it a vital part of the financial system for short-term financing needs.
(b) What is the primary market?
Answer: The primary market is where new securities are issued and sold for the first time to investors. It enables corporations, governments, or public bodies to raise fresh capital through equity shares, debentures, or bonds. Funds go directly to the issuer. The market plays a key role in capital formation and economic development by facilitating the flow of savings into productive investment channels.
(c) Mention two features of financial services.
Answer: i) Financial services are intangible in nature and provide value through expertise, advice, and convenience rather than physical goods. ii) They facilitate financial transactions and intermediation between savers and borrowers, improving liquidity and efficiency. Financial services include activities like investment management, leasing, insurance, and fund transfers that promote economic growth and help individuals and firms manage financial risks.
(d) Write two objectives of IRDAI.
Answer: i) To protect the interests of policyholders by ensuring fair practices, transparency, and effective grievance redressal within the insurance industry. ii) To promote the orderly growth and regulation of the insurance sector through licensing, supervision, and framing of rules that encourage competition, financial soundness, and wider insurance penetration among different segments of society.
(e) What is a financial market?
Answer: A financial market is a system where buyers and sellers trade financial assets like shares, bonds, and currencies. It facilitates the flow of funds between savers and investors, helping in capital formation and economic development. Financial markets are classified into money and capital markets, providing liquidity, price discovery, and risk management through various instruments and intermediaries.
(f) Define venture capital.
Answer: Venture capital refers to long-term equity financing provided to new and innovative business ventures that have high growth potential but also involve high risk. Venture capitalists not only provide funds but also offer management expertise and guidance to help startups grow. The objective is to earn high returns through capital appreciation when the business succeeds and becomes profitable or goes public.
(g) What is a mutual fund?
Answer: A mutual fund is an investment vehicle that pools money from many investors to invest in diversified securities like shares, bonds, and money market instruments. It is managed by professional fund managers, providing small investors access to expert management and diversification. Mutual funds offer liquidity, safety, and the opportunity for steady returns depending on market performance and investment objectives.
(h) Write a note on Regional Rural Bank.
Answer: Regional Rural Banks (RRBs) are financial institutions established to provide credit and banking services in rural and semi-urban areas. They focus on financing agriculture, small-scale industries, and rural artisans. Sponsored by a public sector bank along with central and state governments, RRBs promote financial inclusion and rural development by offering affordable credit, deposit facilities, and government-backed schemes to weaker sections.
(i) State two functions of PFRDA.
Answer: i) PFRDA regulates and supervises pension schemes, ensuring transparency, accountability, and the protection of subscribers’ interests. ii) It promotes and develops the pension sector by formulating rules, approving intermediaries, and encouraging the expansion of the National Pension System (NPS) to provide retirement income security to employees across public, private, and unorganized sectors in India.
(j) Name two important banking legislations in India.
Answer: i) Reserve Bank of India Act, 1934 — This Act established the Reserve Bank of India and empowered it to regulate the issue of currency and control credit to ensure monetary stability. ii) Banking Regulation Act, 1949 — This Act provides the legal framework for the functioning, supervision, and regulation of commercial banks in India, ensuring their soundness and protecting depositors’ interests.
3. Answer any four in about 200 words each: (5×4=20)
(a) Give an account of new developments in the Indian financial system.
Answer: The Indian financial system has undergone several significant developments in recent years aimed at strengthening efficiency, transparency, and inclusiveness.
i) Digitalization and FinTech revolution: Digital payment systems such as UPI, BHIM, and mobile wallets have transformed financial transactions, promoting a cashless economy and financial inclusion.
ii) Development of capital and debt markets: Reforms by SEBI and RBI have deepened the corporate bond market and improved investor protection mechanisms.
iii) Expansion of non-banking financial companies (NBFCs): NBFCs have played an important role in extending credit to underserved sectors like MSMEs and rural markets.
iv) Growth of mutual funds and insurance sector: Awareness and participation in mutual funds, along with wider insurance coverage through IRDAI initiatives, have broadened investment and risk management options.
v) Pension reforms: The National Pension System (NPS) and the role of PFRDA have strengthened retirement planning for both organized and unorganized sectors.
vi) Introduction of financial inclusion schemes: Government initiatives like Jan Dhan Yojana, Aadhaar-linked banking, and Direct Benefit Transfer have brought millions into the formal banking system. These developments have made the Indian financial system more resilient, technology-driven, and globally competitive.
(b) Explain the structure of the Indian banking system.
Answer: The structure of the Indian banking system is organized into several tiers to meet the diverse financial needs of the economy.
i) Central Bank: The Reserve Bank of India (RBI) is the apex monetary authority responsible for regulating and supervising the entire banking system, issuing currency, and controlling credit and monetary policy.
ii) Commercial Banks: These include public sector banks, private sector banks, and foreign banks. They mobilize deposits, provide loans, and offer a variety of financial services to individuals and businesses.
iii) Regional Rural Banks (RRBs): Established to promote rural development by providing credit to farmers, artisans, and rural entrepreneurs.
iv) Cooperative Banks: They function on a cooperative basis to meet the credit needs of agriculture and small industries at the grassroots level through a three-tier structure—state, district, and village levels.
v) Development Banks and Financial Institutions: Institutions like NABARD, SIDBI, EXIM Bank, and IFCI provide long-term finance for agriculture, industry, and export sectors. This multi-layered structure ensures financial stability, inclusiveness, and the smooth flow of credit throughout the economy.
(c) State five differences between money market and capital market.
Answer:
i) Meaning: The money market deals in short-term funds and instruments with maturity up to one year, whereas the capital market deals in long-term securities with maturity exceeding one year.
ii) Instruments: Money market instruments include Treasury bills, commercial papers, and certificates of deposit, while capital market instruments include shares, debentures, and bonds.
iii) Purpose: The money market provides liquidity for meeting short-term financial needs, whereas the capital market is concerned with raising long-term capital for investment and expansion.
iv) Participants: Participants in the money market are mainly banks, financial institutions, and the government, while in the capital market, participants include individuals, corporations, and institutional investors.
v) Regulatory Authority: The money market is regulated by the Reserve Bank of India (RBI), while the capital market is regulated by the Securities and Exchange Board of India (SEBI). Thus, the two markets complement each other by fulfilling the short-term and long-term financial requirements of the economy.
(d) Explain the regulatory role of IRDAI.
Answer: The Insurance Regulatory and Development Authority of India (IRDAI) is the apex regulatory body responsible for the oversight and development of the insurance sector in India. Its regulatory role includes
i) Licensing and Supervision: IRDAI grants licenses to insurance companies, brokers, and agents and ensures they meet capital and solvency norms.
ii) Protection of Policyholders: It safeguards policyholders’ interests by enforcing fair practices, ensuring transparency in premium determination, claim settlement, and preventing mis-selling of policies.
iii) Formulation of Regulations: IRDAI frames rules governing product design, pricing, commissions, and investment norms to maintain financial stability and accountability.
iv) Promotion of Competition and Growth: It encourages healthy competition among insurers, supports innovation, and ensures wider insurance penetration across urban and rural areas.
v) Monitoring Financial Health: IRDAI conducts regular audits and inspections to assess the solvency and performance of insurance companies to ensure their financial soundness.
vi) Consumer Education and Grievance Redressal: It promotes awareness about insurance benefits and operates grievance mechanisms for consumer protection. Thus, IRDAI ensures that the insurance sector operates efficiently, fairly, and in the best interest of both policyholders and the economy.
(e) Discuss various institutions of the Indian money market.
Answer: The Indian money market consists of several institutions that facilitate short-term borrowing and lending of funds.
i) Reserve Bank of India (RBI): It is the central authority that regulates and controls the money market, maintains liquidity, and manages short-term interest rates.
ii) Commercial Banks: They are the major participants dealing in call money, Treasury bills, and commercial papers, ensuring liquidity and credit flow.
iii) Cooperative Banks: They cater to the short-term credit needs of the agricultural and rural sectors.
iv) Non-Banking Financial Companies (NBFCs): They provide short-term credit and participate in instruments like commercial papers and inter-corporate deposits.
v) Discount and Finance House of India (DFHI): Established to develop secondary markets for money market instruments, ensuring liquidity and efficient fund flow. These institutions together maintain stability and liquidity in India’s short-term financial system.
(f) Write the significance of factoring.
Answer: Factoring is a financial service that provides liquidity to businesses by converting their credit sales into immediate cash. Its significance lies in
i) Improved Cash Flow: It enables firms to maintain steady working capital without waiting for customer payments.
ii) Reduction of Credit Risk: The factor assumes responsibility for collecting receivables, reducing the seller’s risk of bad debts.
iii) Administrative Convenience: It relieves firms from maintaining debtor accounts and collection activities.
iv) Encouragement to Sales Expansion: Firms can extend credit to customers without worrying about liquidity problems.
v) Useful for Small Businesses: It provides easier access to finance without collateral. Thus, factoring enhances efficiency, credit management, and financial stability for growing enterprises.
(g) Explain different fund-based financial services.
Answer: Fund-based financial services involve direct deployment of funds by financial institutions or intermediaries to earn income.
i) Leasing: Providing the right to use an asset for a specified period in exchange for periodic payments.
ii) Hire Purchase: Financing the acquisition of assets where ownership transfers after full payment.
iii) Bill Discounting: Converting trade bills into cash before maturity at a discount to improve liquidity.
iv) Venture Capital: Investing in high-risk, high-potential startups or innovative projects in exchange for equity.
v) Mutual Funds: Pooling money from investors and investing in diversified securities.
vi) Housing Finance and Factoring: Providing long-term and short-term financial assistance respectively. These services promote industrial growth, liquidity, and capital formation in the economy.
(h) Discuss the functions of the stock exchange.
Answer: The stock exchange performs vital functions for the economy by providing a platform for buying and selling securities.
i) Providing Liquidity: It offers investors the opportunity to convert their securities into cash easily through regular trading.
ii) Price Determination: The continuous buying and selling help determine fair market prices of securities through demand and supply.
iii) Mobilization of Savings: It channels savings into productive investments, promoting capital formation.
iv) Ensuring Safety of Transactions: Through regulation and listing requirements, it ensures transparency and investor protection.
v) Providing Information: Stock exchanges publish prices, company reports, and market trends, aiding informed investment decisions.
vi) Economic Indicator: It reflects overall economic health and business confidence. Thus, stock exchanges play a crucial role in maintaining financial stability and encouraging investment.
4. Answer any two in about 600 words each: (10×2=20)
(a) "A well-developed financial system contributes significantly to economic development." Explain.
Answer: A well-developed financial system plays a vital role in the overall economic development of a country by ensuring the smooth flow of funds between savers and investors, promoting capital formation, and supporting industrial and infrastructural growth. The financial system consists of financial institutions, markets, instruments, and regulatory bodies that facilitate mobilization and allocation of resources efficiently.
i) Mobilization of Savings: A developed financial system encourages people to save by offering various saving instruments such as bank deposits, bonds, mutual funds, and insurance products. These savings are pooled and made available for productive investments in different sectors of the economy. Thus, the system transforms idle savings into active capital.
ii) Efficient Allocation of Resources: Financial intermediaries like banks, development finance institutions, and stock markets channel funds toward projects with higher returns and productivity. This ensures that scarce resources are used efficiently, supporting industrialization, entrepreneurship, and innovation.
iii) Promotion of Capital Formation: The financial system stimulates investment by providing credit and equity finance to businesses and industries. It encourages capital accumulation through instruments such as shares, debentures, and long-term loans. The capital market, in particular, helps in raising long-term funds for business expansion.
iv) Encouragement to Entrepreneurship: Financial institutions provide both financial and advisory support to entrepreneurs, especially small and medium enterprises (SMEs). Venture capital, microfinance, and start-up funding create a favorable environment for innovation and risk-taking, which leads to job creation and economic dynamism.
v) Development of Infrastructure: A well-functioning financial system provides long-term finance for infrastructure projects such as transport, energy, communication, and housing. Development banks like NABARD, SIDBI, and IFCI play a key role in funding infrastructural growth, which forms the backbone of economic progress.
vi) Employment Generation: The financial system supports economic activities across industries, leading to increased production, trade, and business expansion. This, in turn, creates direct and indirect employment opportunities, raising income levels and improving living standards.
vii) Facilitation of Monetary Policy: The financial system acts as an effective channel for implementing monetary policy. The Reserve Bank of India uses the banking system to regulate credit, control inflation, and maintain stability in the economy. A strong financial structure ensures efficient transmission of monetary policy measures.
viii) Promotion of Financial Inclusion: Through schemes like Jan Dhan Yojana, digital banking, and microfinance institutions, the financial system integrates the unbanked population into the formal economy. This helps in reducing poverty, increasing savings, and empowering rural populations.
ix) Stability and Economic Growth: Financial institutions and regulators maintain stability in the financial markets by ensuring transparency, risk management, and adherence to laws. A stable financial environment boosts investor confidence, attracts foreign investment, and sustains long-term economic growth.
x) Global Integration: A developed financial system connects the domestic economy with global markets through foreign investments, international trade finance, and currency exchange. It enhances competitiveness, technological advancement, and access to global capital.
In conclusion, a well-developed financial system serves as the backbone of economic progress by mobilizing savings, allocating capital efficiently, promoting entrepreneurship, and ensuring stability. It not only supports industrialization and infrastructure development but also helps in achieving inclusive and sustainable economic growth for the nation.
(b) Explain the advantages and disadvantages of mutual funds.
Answer: A mutual fund is a financial intermediary that pools money from numerous investors and invests it in a diversified portfolio of securities such as equities, bonds, and money market instruments, managed by professional fund managers. Mutual funds have become one of the most popular investment avenues due to their simplicity, diversification, and professional management. However, like any investment, they have both advantages and disadvantages.
Advantages of Mutual Funds:
i) Professional Management: Mutual funds are managed by qualified and experienced fund managers who analyze market trends, company performance, and economic conditions before making investment decisions. This ensures informed and strategic management of investors’ money, especially for those lacking expertise.
ii) Diversification of Risk: Mutual funds invest in a wide range of securities across industries and sectors, reducing the impact of poor performance of any single investment. This diversification minimizes risk and enhances the stability of returns compared to investing in individual stocks.
iii) Liquidity: Investors can easily buy or sell mutual fund units at the current Net Asset Value (NAV). Open-ended funds, in particular, provide high liquidity, allowing investors to redeem their investment whenever needed without heavy loss.
iv) Affordability and Accessibility: Mutual funds allow small investors to participate in the capital market with relatively small amounts. Systematic Investment Plans (SIPs) enable investors to invest small amounts regularly, promoting disciplined saving habits.
v) Transparency and Regulation: In India, mutual funds are regulated by SEBI, which ensures transparency in operations, disclosure of portfolio details, and fair pricing. Regular reports on NAV, performance, and holdings keep investors well-informed.
vi) Variety of Schemes: Mutual funds offer different types of schemes such as equity funds, debt funds, hybrid funds, index funds, and sectoral funds to suit various investment goals, time horizons, and risk profiles. This variety provides flexibility and choice to investors.
vii) Tax Benefits: Investments in certain mutual funds, such as Equity Linked Savings Schemes (ELSS), qualify for tax deductions under Section 80C of the Income Tax Act, providing both wealth creation and tax savings.
Disadvantages of Mutual Funds:
i) Market Risk: Mutual funds are subject to market fluctuations. If the overall market or specific sectors perform poorly, the value of investments may decline, affecting investor returns.
ii) Management Fees and Expenses: Mutual funds charge management fees, entry or exit loads, and other expenses that can reduce the overall return, particularly in actively managed funds.
iii) No Guaranteed Returns: Unlike fixed deposits or bonds, mutual funds do not guarantee a fixed rate of return. The performance depends on market conditions and fund manager decisions, which introduces uncertainty.
iv) Lack of Control: Investors do not have direct control over the fund’s portfolio. All investment decisions are made by fund managers, and investors must rely on their judgment and expertise.
v) Over-Diversification: Sometimes mutual funds invest in too many securities, leading to over-diversification, which may dilute potential returns and make the portfolio less focused.
vi) Short-Term Volatility: Equity-oriented mutual funds are highly sensitive to short-term market changes, making them unsuitable for investors seeking stable or quick returns.
vii) Misleading Performance Comparisons: Fund advertisements often highlight past performance, which may not reflect future results. Investors can be misled if they choose funds solely based on historical returns.
Conclusion: Mutual funds provide an excellent platform for investors to access professional management, diversification, and convenience, making them suitable for both beginners and experienced investors. However, investors should carefully consider the type of fund, associated risks, and expenses before investing. A balanced approach, combining awareness and long-term perspective, can help investors maximize the benefits of mutual fund investments while minimizing their drawbacks.
(c) Distinguish between Non-Bank Financial Institutions and Banks in Table
Answer:
(d) Discuss the important functions of the Reserve Bank of India.
Answer: The Reserve Bank of India (RBI), established in 1935, is the central bank and apex monetary authority of India. It performs several vital functions to ensure monetary stability, control inflation, and promote economic growth.
i) Issue of Currency: The RBI has the sole authority to issue banknotes in India (except one-rupee notes and coins issued by the Ministry of Finance). This function ensures uniformity and control over the currency supply, maintaining public confidence in the monetary system.
ii) Monetary Policy Formulation: The RBI formulates and implements monetary policy to regulate the supply of money and credit in the economy. By using instruments such as the repo rate, reverse repo rate, CRR, and SLR, it maintains price stability and promotes economic growth.
iii) Banker to the Government: The RBI acts as a banker, agent, and debt manager for both the central and state governments. It manages public debt, issues new loans, and provides temporary advances (Ways and Means Advances) to meet short-term needs.
iv) Banker’s Bank and Lender of Last Resort: The RBI maintains the accounts of all scheduled banks, provides refinancing facilities, and helps banks in times of liquidity crises. It ensures financial stability and confidence in the banking system by acting as the lender of last resort.
v) Regulation and Supervision of Banks: The RBI regulates and monitors the functioning of commercial banks, cooperative banks, and non-banking financial institutions under the Banking Regulation Act, 1949. It ensures sound banking practices, capital adequacy, and solvency.
vi) Foreign Exchange Management: The RBI manages India’s foreign exchange reserves and regulates foreign exchange transactions under the Foreign Exchange Management Act (FEMA), 1999. It stabilizes the exchange rate and facilitates international trade and investment.
vii) Control of Credit: To curb inflation or deflation, the RBI controls credit through quantitative measures (CRR, SLR, OMO) and qualitative measures (margin requirements, credit rationing). This ensures balanced growth and monetary discipline.
viii) Developmental and Promotional Functions: The RBI promotes financial inclusion, rural credit, and institutional development through NABARD and other agencies. It also supports research, financial literacy, and modernization of the banking sector.
ix) Maintaining Financial Stability: The RBI monitors systemic risks, prevents bank failures, and coordinates with SEBI, IRDAI, and PFRDA to maintain financial stability in the economy.
In summary, the RBI plays a central role in ensuring monetary stability, regulating the financial system, and promoting sustainable economic development in India.
(e) In which year did SEBI come into effect? Also, state the powers of SEBI.
Answer: The Securities and Exchange Board of India (SEBI) came into effect on 12th April 1992 as a statutory body under the SEBI Act, 1992. It was established to regulate and develop the securities market and to protect the interests of investors in India’s capital market.
Powers of SEBI:
i) Regulatory Powers: SEBI regulates stock exchanges, brokers, merchant bankers, and other market intermediaries. It frames guidelines for listing, trading, and operations of securities to ensure fair practices.
ii) Investigative Powers: SEBI can conduct inquiries and investigations into the affairs of stock exchanges, listed companies, and intermediaries in cases of fraud, insider trading, or market manipulation.
iii) Quasi-Judicial Powers: SEBI has the authority to pass rulings, issue orders, and impose penalties for violations of securities laws. Its decisions help maintain discipline and transparency in the securities market.
iv) Quasi-Legislative Powers: It has the power to draft regulations, guidelines, and codes of conduct related to issue of capital, mutual funds, takeover bids, and disclosure norms, ensuring orderly market functioning.
v) Developmental Powers: SEBI promotes investor education, training of intermediaries, and modernization of stock exchanges through electronic trading systems. It encourages innovation and transparency in the capital market.
vi) Protective Powers: It safeguards investor interests by controlling insider trading, prohibiting fraudulent practices, and ensuring timely disclosures by companies. It can suspend or cancel registration of defaulting market participants.
vii) Approval and Regulation of Collective Investment Schemes: SEBI regulates mutual funds, venture capital funds, and other investment schemes to protect investors against malpractices.
viii) Monitoring and Inspection: SEBI monitors the functioning of depositories, credit rating agencies, and custodians to ensure compliance with rules and investor protection norms.
In essence, SEBI acts as the watchdog of India’s securities market, ensuring transparency, efficiency, and fairness. Its establishment marked a major step in building investor confidence and strengthening the regulatory framework of India’s capital market.
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