Banking Terms — Set 3

Correct Answer: C. Treasury Bill

• **Treasury Bill** = called a Zero Coupon bond because it pays no periodic interest; the return is the difference between discount price and face value. • **Issued at discount** — investors buy T-Bills below face value and receive full face value at maturity, making the difference their profit. • 💡 Wrong-option analysis: [Commercial Bill]: a trade finance instrument that may carry a coupon; [Certificate of Deposit]: usually earns interest, not a zero-coupon instrument; [Commercial Paper]: also a discount instrument, but T-Bill is the most classic zero-coupon money market instrument.

Correct Answer: B. Rs. 5 Lakhs

• **Rs. 5 Lakhs** = the minimum amount for which Commercial Paper can be issued; higher amounts must be in multiples of Rs. 5 lakhs. • **Institutional access only** — the high minimum ensures only institutional or high-net-worth investors participate, protecting retail investors from default risk. • 💡 Wrong-option analysis: [Rs. 2 Lakhs]: below the prescribed minimum of Rs. 5 lakhs; [Rs. 1 Lakh]: far below the minimum; [Rs. 10 Lakhs]: a valid multiple but not the minimum.

Correct Answer: D. Repo Rate

• **Repo Rate** = the base or policy rate determined by RBI's Monetary Policy Committee, anchoring all other interest rates. • **MPC sets it** — changes in the Repo rate cascade to lending and deposit rates across banks, making it the most important rate in the economy. • 💡 Wrong-option analysis: [Savings Rate]: decided by individual banks, not a policy anchor; [Lending Rate]: a derived rate, set by banks based on the Repo rate; [Fixed Deposit Rate]: a commercial decision by banks, not a policy rate.

Correct Answer: A. Loan for 15 days to 1 year

• **15 days to 1 year** = Term Money refers to inter-bank borrowing and lending for periods exceeding 14 days and up to one year. • **Structural liquidity** — term money helps banks manage longer-term liquidity mismatches beyond the overnight or notice money segments. • 💡 Wrong-option analysis: [1 day]: that is Call Money; [5 years]: far beyond the money market ceiling of one year; [2–14 days]: that is Notice Money, not Term Money.

Correct Answer: D. Regional Rural Banks

• **Regional Rural Banks** = RRBs are not permitted to issue Certificates of Deposit; only scheduled commercial banks and select All-India FIs can. • **Credit quality** — the restriction ensures that only financially sound institutions with regulatory backing issue CDs to the market. • 💡 Wrong-option analysis: [Scheduled Commercial Banks]: authorised issuers of CDs; [Small Finance Banks]: eligible scheduled banks that can issue CDs; [All India Financial Institutions]: certain AIFIs are permitted to issue CDs within specified guidelines.

Correct Answer: B. Daily liquidity management

• **Daily liquidity management** = LAF (Liquidity Adjustment Facility) is the RBI's primary tool to manage day-to-day liquidity via Repo and Reverse Repo. • **LAF corridor** — the Repo rate forms the ceiling and Reverse Repo rate the floor of the LAF corridor, keeping overnight rates aligned with policy. • 💡 Wrong-option analysis: [Foreign exchange control]: handled separately through forex interventions and the FEMA framework; [Auditing banks]: done by RBI's Department of Supervision; [Printing money]: currency issuance is a separate RBI function unrelated to LAF.

Correct Answer: D. Money Market

• **Money Market** = DFHI (Discount and Finance House of India) was established in 1988 to provide liquidity and stimulate activity in the money market. • **1988** — set up by RBI to act as a specialised intermediary; it was later merged to form STCI Primary Dealer Limited. • 💡 Wrong-option analysis: [Commodity Market]: regulated separately by SEBI after the FMC merger; [Real Estate Market]: not part of RBI's direct mandate; [Stock Market]: regulated by SEBI through stock exchanges.

Correct Answer: A. Margin on the collateral value

• **Margin on the collateral value** = a Haircut is the difference between the market value of securities pledged and the loan amount given. • **Safety buffer** — if a 5% haircut is applied, a bank pledging Rs. 100 worth of securities receives only Rs. 95, protecting the lender from price drops. • 💡 Wrong-option analysis: [Bank's service fee]: that is a transaction charge, unrelated to collateral valuation; [Staff salary deduction]: completely unrelated to financial markets; [Interest rate discount]: refers to a rate concession, not a collateral margin.

Correct Answer: B. Corporates and Financial Institutions

• **Corporates and Financial Institutions** = companies, Primary Dealers, and All-India FIs are eligible to issue Commercial Paper in India. • **Minimum net worth** — the issuer must have a minimum net worth and a valid SEBI-approved credit rating to access the CP market. • 💡 Wrong-option analysis: [Only Retailers]: retail businesses lack the credit rating and scale required; [Only RBI]: RBI issues T-Bills for the government, not CP; [Only Government]: government uses T-Bills, not Commercial Paper.

Correct Answer: A. 0.01% of interest

• **0.01%** = one Basis Point (bps) equals 1/100th of 1 percent, the standard unit for expressing interest rate changes. • **50 bps = 0.5%** — a 50-basis-point increase in the Repo rate means rates rise by exactly half a percentage point. • 💡 Wrong-option analysis: [10% of interest]: 10% would be 1000 basis points, far too large; [0.1% of interest]: 0.1% equals 10 basis points, not one; [1% of interest]: 1% equals 100 basis points, not one.