Banking Terms — Set 11

Correct Answer: A. Up to 364 days

• **Up to 364 days** = Treasury Bills are short-term instruments with three standard maturities — 91, 182, or 364 days. • **Longer = Dated Securities** — government debt beyond 364 days is issued as 'Dated Securities' or government bonds, not T-Bills. • 💡 Wrong-option analysis: [Up to 10 years]: government bonds can have 10-year tenures; T-Bills are under one year; [Overnight]: overnight borrowing is Call Money; T-Bills have set auction-based tenures; [Up to 30 years]: very long-dated government bonds may run 30 years; T-Bills are strictly under one year.

Correct Answer: B. Commercial Banks

• **Commercial Banks** = the Repo Rate is the rate at which commercial banks borrow short-term funds from the RBI by pledging government securities. • **Key control lever** — a higher Repo Rate raises borrowing costs for banks, which then raise lending rates, cooling credit and inflation. • 💡 Wrong-option analysis: [General Public]: the public borrows from banks, not directly from the RBI; [Foreign Governments]: foreign governments borrow through bilateral/multilateral channels, not through the Repo mechanism; [Private Companies]: corporates borrow from banks or issue CP; they have no direct Repo access with RBI.

Correct Answer: D. Equity Share

• **Equity Share** = NOT a money market instrument; equity shares represent long-term ownership in a company and trade in the capital market. • **Capital market vs. money market** — equity, corporate bonds, and long-term debentures belong to the capital market; T-Bills, CP, and CDs belong to the money market. • 💡 Wrong-option analysis: [Commercial Paper]: a short-term unsecured money market instrument; [Certificate of Deposit]: a short-term money market instrument issued by banks; [Treasury Bill]: a short-term government money market instrument.

Correct Answer: C. Loan for 1 day

• **Loan for 1 day** = Overnight borrowing in the call money market means funds are borrowed today and repaid on the very next working day. • **CRR management** — banks use overnight borrowing to fill short-term gaps and maintain their mandatory daily Cash Reserve Ratio. • 💡 Wrong-option analysis: [Loan for 1 week]: seven-day borrowing falls under Term Money; [Loan for 1 year]: one-year borrowing is Term Money at the maximum ceiling; [Loan for 1 month]: 30-day borrowing is Term Money, not overnight call money.

Correct Answer: C. It does not require collateral

• **Does not require collateral** = 'Unsecured' means Commercial Paper is issued based solely on the company's creditworthiness, with no physical asset pledged. • **Rating as substitute** — because there is no collateral, only companies with high credit ratings (A1 minimum) are permitted to issue CP. • 💡 Wrong-option analysis: [It has no interest]: CP does earn returns via discount; it simply has no coupon payments; [It is illegal]: CP is a legitimate, RBI-regulated instrument; [It is not safe]: unsecured does not mean unsafe; high credit ratings ensure low default risk.

Correct Answer: D. Face Value

• **Face Value** = Par Value is simply another term for the face or nominal value of a bond, which is repaid at maturity. • **Premium vs. discount** — if a security trades above par, it is at a 'premium'; if below par, it is at a 'discount'; T-Bills always trade at a discount. • 💡 Wrong-option analysis: [Market Price]: market price fluctuates based on demand, supply, and interest rates; par value is fixed; [Discounted Price]: the discounted price is the issued price, which is below par; par value is the face value; [Tax Value]: there is no standard financial concept of 'tax value' for securities.

Correct Answer: A. Scheduled Commercial Banks

• **Scheduled Commercial Banks** = only scheduled commercial banks (and some financial institutions) can park surplus funds with RBI at the Reverse Repo rate. • **Safe earning** — banks earn a guaranteed overnight return by parking idle funds with RBI, reducing lending risk during uncertain market conditions. • 💡 Wrong-option analysis: [Small Farmers]: farmers have no access to the RBI's Reverse Repo window; [Schools]: educational institutions have no direct banking relationship with RBI's monetary operations; [Retail Stores]: commercial businesses cannot park funds with RBI.

Correct Answer: B. Ensuring an entity can meet its short-term obligations

• **Ensuring an entity can meet its short-term obligations** = Liquidity Management is the practice of balancing cash inflows and outflows to avoid a funding crisis. • **Systemic importance** — poor liquidity management at a bank can trigger panic and systemic risk; central banks use money market tools to maintain system-wide liquidity. • 💡 Wrong-option analysis: [Printing new currency]: currency issuance is a monetary function; liquidity management is a treasury/banking function; [Selling bank property]: asset disposal raises long-term capital; it is not a liquidity management tool in normal operations; [Managing water in a bank]: a literal misreading of the word 'liquidity'.

Correct Answer: A. 2 to 14 days

• **2 to 14 days** = Notice Money is inter-bank borrowing for more than one day up to 14 days; beyond 14 days it becomes Term Money. • **No collateral** — like Call Money, Notice Money is also an unsecured transaction between banks, relying on mutual creditworthiness. • 💡 Wrong-option analysis: [91 days]: that is the tenure of the shortest T-Bill, not Notice Money; [1 day]: one-day borrowing is Call Money; [More than 14 days]: exceeding 14 days makes it Term Money, not Notice Money.

Correct Answer: C. Treasury Bill

• **Treasury Bill** = the risk-free money market instrument in India, backed by the sovereign guarantee of the Government of India. • **Zero default risk** — because the government can always print domestic currency, T-Bills are considered to have virtually zero credit risk. • 💡 Wrong-option analysis: [Corporate Bond]: carries corporate credit risk; not risk-free; [Commercial Paper]: an unsecured corporate instrument with higher default risk than T-Bills; [Commercial Bill]: a trade finance instrument dependent on the creditworthiness of the acceptor.