Banking Terms — Set 4

Correct Answer: B. Indigenous Bankers

• **Indigenous Bankers** = they form the unorganised segment of the Indian money market, operating outside formal RBI regulation. • **Rural credit** — despite being unregulated, indigenous bankers and moneylenders still supply informal credit in rural and semi-urban areas. • 💡 Wrong-option analysis: [Commercial Banks]: part of the organised, regulated sector directly supervised by RBI; [Primary Dealers]: specialised entities in the formal government securities market; [Mutual Funds]: regulated by SEBI and part of the formal organised sector.

Correct Answer: D. To absorb excess liquidity from large capital inflows

• **Absorb excess liquidity from large capital inflows** = MSS (Market Stabilisation Scheme) was introduced in 2004 to drain excess liquidity caused by large foreign capital inflows. • **2004** — under MSS, the RBI issues T-Bills and keeps proceeds in a separate account so the money is sterilised and not spent by the government. • 💡 Wrong-option analysis: [To help banks with NPAs]: NPA resolution is handled through tools like IBC and restructuring schemes; [To stabilise stock prices]: SEBI regulates equity markets, not the RBI through MSS; [To stabilise the exchange rate of rupee]: forex intervention handles currency rates, though MSS indirectly helps.

Correct Answer: A. One year

• **One year** = the maximum period for a REPO transaction allowed by RBI; these are called Term Repos or Long-Term Repo Operations (LTRO). • **LTRO introduced** — Long-Term Repo Operations allow the RBI to inject liquidity for durations up to one year, supporting bank credit growth. • 💡 Wrong-option analysis: [7 days]: a common short-term repo tenor but not the maximum; [14 days]: another standard term repo duration, not the maximum; [Five years]: well beyond the one-year ceiling for money market repo operations.

Correct Answer: D. High Liquidity

• **High Liquidity** = the defining characteristic of money market instruments; they can be converted to cash quickly at minimal cost. • **Low default risk** — high liquidity combined with low credit risk makes money market instruments ideal for short-term institutional fund management. • 💡 Wrong-option analysis: [Long Maturity]: money market instruments mature in under one year; long maturity is a capital market feature; [Low Credit Rating]: money market instruments are issued only by high-rated entities; [High Risk]: the opposite is true; money market instruments are among the safest financial instruments.

Correct Answer: C. Collateralized Borrowing and Lending Obligation

• **Collateralised Borrowing and Lending Obligation** = CBLO was a money market instrument allowing secured borrowing against government securities, operated by CCIL. • **Replaced by TREPS** — CBLO was discontinued and replaced by Tri-party Repo (TREPS) to align India's money market with international standards. • 💡 Wrong-option analysis: [Central Bank Loan Offer]: a fabricated expansion; [Corporate Bond Lending Order]: incorrect; CBLO had nothing to do with corporate bonds; [Commercial Bank Liquidity Option]: a made-up term.

Correct Answer: D. A1

• **A1 rating** = the minimum credit rating required for a corporate to issue Commercial Paper, as per SEBI-approved agencies. • **High creditworthiness only** — only companies with a minimum A1 (or equivalent A3 under older symbols) rating can issue unsecured CP to protect market integrity. • 💡 Wrong-option analysis: [B1]: a mid-range rating indicating moderate risk, not acceptable for CP issuance; [C1]: a low rating indicating significant risk; far below the threshold; [D1]: indicates default or near-default; completely ineligible.

Correct Answer: A. Auctions

• **Auctions** = Treasury Bills are sold in the primary market through competitive auctions conducted by RBI every Wednesday. • **E-Kuber platform** — bids are submitted electronically through RBI's E-Kuber system; competitive bidding determines the final discount rate and yield. • 💡 Wrong-option analysis: [Direct sale]: T-Bills are not sold over the counter directly to the public; [Retail counters]: retail investors access T-Bills indirectly, not at a counter; [Fixed price offer]: T-Bill pricing is market-determined through auction, not a fixed price.

Correct Answer: D. Overnight window for banks to borrow from RBI

• **Overnight window for banks to borrow from RBI** = MSF allows banks to borrow emergency overnight funds from RBI by pledging SLR securities. • **MSF rate > Repo rate** — the MSF rate is typically 25 basis points above the Repo rate, making it a last-resort option rather than routine borrowing. • 💡 Wrong-option analysis: [Long term loan for infra]: infrastructure loans are provided by development banks like NaBFID, not through MSF; [Foreign exchange swap]: forex swaps involve currency exchange, unrelated to MSF; [Scheme for small farmers]: agricultural credit schemes are separate from MSF.

Correct Answer: B. Yield to Maturity

• **Yield to Maturity** = YTM is the total annualised return an investor earns if a debt instrument is held until it matures. • **All-in return** — YTM accounts for the purchase price, face value, coupon payments (if any), and time to maturity in a single figure. • 💡 Wrong-option analysis: [Yearly Tax Management]: a fabricated term; YTM has nothing to do with tax; [Yesterday's Total Margin]: completely invented; [Yield to Market]: not a standard financial term; the correct term is Yield to Maturity.

Correct Answer: B. Reserve Bank of India

• **Reserve Bank of India** = RBI is the Lender of Last Resort, providing emergency liquidity to banks facing a sudden cash crisis. • **MSF window** — the Marginal Standing Facility is RBI's primary instrument for fulfilling its lender-of-last-resort function. • 💡 Wrong-option analysis: [Finance Ministry]: a fiscal authority; it does not directly lend to distressed banks; [World Bank]: an international development institution, not a domestic lender of last resort; [State Bank of India]: a commercial bank that borrows from RBI, not the other way around.