Banking Terms — Set 12

Correct Answer: C. 7 days to 1 year

• **7 days to 1 year** = the maturity range for Certificates of Deposit issued by banks; the minimum is 7 days and the maximum is one year. • **FI exception** — for All-India Financial Institutions, the CD tenure can extend up to three years, unlike banks which are capped at one year. • 💡 Wrong-option analysis: [1 to 7 days]: below the minimum; the floor is 7 days, not 1 day; [10 to 20 years]: far beyond the one-year ceiling for bank-issued CDs; [1 to 5 years]: exceeds the one-year maximum for bank CDs.

Correct Answer: A. RBI

• **RBI** = the Reserve Bank of India is the primary regulator that sets the rules for Commercial Paper issuance in India. • **RBI guidelines** — RBI prescribes eligibility criteria (net worth, credit rating), denominations, and tenures for CP; SEBI also monitors secondary market trading. • 💡 Wrong-option analysis: [SEBI]: regulates CP in secondary market trading, but RBI sets the primary issuance guidelines; [Ministry of Commerce]: handles international trade policy, not domestic money market instruments; [IRDAI]: regulates the insurance sector, with no role in CP regulation.

Correct Answer: A. Total return on an investment expressed as a percentage

• **Total return on an investment expressed as a percentage** = Yield is the annualised rate of return, accounting for income and any price change of the instrument. • **Key comparison metric** — in the money market, yield is used to compare T-Bills, CDs, and CP to determine the best short-term investment. • 💡 Wrong-option analysis: [Branch count]: the number of bank branches is an outreach metric, not a return measure; [Loss on a loan]: a loss is negative return; yield typically implies a positive return; [Amount of crop produced]: agricultural 'yield' is a farming concept; financial yield means investment return.

Correct Answer: D. Regulating the money supply and interest rates

• **Regulating the money supply and interest rates** = the main goal of Open Market Operations is to inject or absorb liquidity to align money supply with policy targets. • **Permanent vs. temporary** — OMOs have a more lasting liquidity effect compared to Repo operations, which are temporary and reversed the next day. • 💡 Wrong-option analysis: [Building a new RBI office]: infrastructure construction is an administrative decision, not a monetary policy tool; [Opening new ATMs]: ATM network expansion is a banking services decision by individual banks; [Promoting digital payments]: handled through NPCI and payment system policy, not OMOs.

Correct Answer: D. Standard rate used as a reference for other rates

• **Standard rate used as a reference for other rates** = a Benchmark Rate is the reference point from which loan rates, derivative rates, and other financial products are priced. • **MIBOR and Repo** — MIBOR and the Repo Rate are India's key benchmarks; a loan may be priced as 'MIBOR + 50 bps' to reflect risk above the benchmark. • 💡 Wrong-option analysis: [Maximum interest rate]: benchmarks are reference points, not regulatory caps; [Tax rate on banks]: bank taxes are set by the government, not derived from a benchmark; [Monthly profit rate]: profit rate is an accounting measure; benchmarks are forward-looking pricing references.

Correct Answer: A. An asset pledged by a borrower to secure a loan

• **An asset pledged by a borrower to secure a loan** = Collateral gives the lender a legal claim on an asset if the borrower defaults. • **Repo uses securities** — in Repo transactions, government securities act as collateral, making the borrowing 'secured' unlike call money. • 💡 Wrong-option analysis: [A type of bank staff]: bank employees are human resources, not collateral; [A legal contract]: the loan agreement is the contract; collateral is the asset backing it; [A bank branch]: a branch is a service location, not a pledged asset.

Correct Answer: D. Lack of uniformity in interest rates

• **Lack of uniformity in interest rates** = the unorganised money market charges widely varying rates since moneylenders are not bound by RBI guidelines. • **Regional disparity** — different moneylenders in different regions set their own rates, making monetary policy transmission uneven across the country. • 💡 Wrong-option analysis: [Rigid rules]: rigid standardised rules are a feature of the organised market; the unorganised market is characterised by flexibility and informality; [RBI oversight]: direct RBI oversight is a feature of the organised banking sector; [Online trading]: digital infrastructure is associated with the formal organised market.

Correct Answer: A. No periodic interest payments

• **No periodic interest payments** = Zero Coupon instruments pay no interest during their life; the entire return is earned at maturity through the price discount. • **Discount = return** — investors buy zero-coupon instruments below face value and receive the full face value at maturity; no interim payments. • 💡 Wrong-option analysis: [No discount]: the opposite is true; zero coupon instruments are always issued at a discount to provide a return; [Free of cost]: instruments still have a purchase price; they are not free; [Zero value]: zero-coupon refers to the absence of coupon payments, not zero monetary value.

Correct Answer: C. Balancing short-term surplus and deficit of funds

• **Balancing short-term surplus and deficit of funds** = the primary purpose of the Money Market is to channel idle short-term funds from surplus entities to deficit entities. • **Efficient allocation** — by matching short-term lenders and borrowers, the money market ensures funds are used productively and not idle. • 💡 Wrong-option analysis: [Managing the stock exchange]: stock exchanges are part of the capital market, managed by SEBI; [Long term capital formation]: that is the capital market's purpose; the money market is strictly for short-term needs; [Buying and selling gold]: gold trading occurs in commodity and spot markets, not the money market.

Correct Answer: A. Know Your Customer

• **Know Your Customer** = KYC is the mandatory process by which banks verify the identity and address of customers before opening an account or offering services. • **RBI mandate** — RBI has made KYC compulsory for all financial institutions to prevent money laundering, fraud, and terrorist financing. • 💡 Wrong-option analysis: [Keep Your Cash]: a fabricated expansion with no regulatory meaning; [Know Your Currency]: currency identification is not what KYC refers to; [Key Yearly Credit]: another invented phrase unrelated to the banking compliance process.