Banking Terms — Set 5

Correct Answer: C. Instrument to share credit risk and liquidity among banks

• **Instrument to share credit risk and liquidity among banks** = IBPC (Inter-bank Participation Certificate) lets banks buy or sell loan assets without transferring the actual account. • **91 to 180 days** — IBPCs are typically issued for tenures of 91 to 180 days to help banks manage their credit portfolio and liquidity. • 💡 Wrong-option analysis: [Customer deposit slip]: a deposit receipt is proof of savings, not a credit-sharing instrument; [Staff training degree]: entirely unrelated to banking instruments; [Bank share certificate]: equity certificates represent ownership, not inter-bank credit sharing.

Correct Answer: B. Cash Management Bill

• **Cash Management Bill** = specifically designed for government borrowing for periods less than 91 days, unlike standard T-Bills. • **Flexible tenure below 91 days** — CMBs allow the government to raise funds for irregular short periods; they were introduced in 2010. • 💡 Wrong-option analysis: [Commercial Paper]: used by corporates, not the government; [Dated Security]: long-term government bond maturing in years, not days; [T-Bill]: standard T-Bills have fixed tenures of 91, 182, or 364 days, not flexible sub-91-day periods.

Correct Answer: B. Rs. 4 Crores

• **Rs. 4 Crores** = the minimum tangible net worth a company must have to be eligible to issue Commercial Paper. • **Standard Asset condition** — besides net worth, the company's bank account must be classified as a Standard Asset, confirming financial health. • 💡 Wrong-option analysis: [Rs. 100 Crores]: far above the prescribed minimum of Rs. 4 crores; [Rs. 1 Crore]: below the RBI-specified threshold; [Rs. 10 Crores]: also above the minimum; the correct figure is Rs. 4 crores.

Correct Answer: B. Liquidity decreases

• **Liquidity decreases** = an increase in Repo Rate makes borrowing more expensive for banks, which then raise lending rates, reducing credit demand. • **Tightening effect** — higher Repo Rate reduces borrowing by banks from RBI, contracting money supply and cooling inflation. • 💡 Wrong-option analysis: [Liquidity increases]: the opposite effect; lower Repo Rate increases liquidity; [No impact]: Repo Rate is the primary tool for liquidity control; it always has an effect; [Liquidity remains volatile]: this is not a predictable outcome; rate hikes consistently reduce liquidity.

Correct Answer: B. Issued by the government

• **Issued by the government** = this is NOT a characteristic of a Certificate of Deposit; CDs are issued by banks and financial institutions, not the government. • **Negotiable and discounted** — CDs are negotiable, tradable in the secondary market, and typically issued at a discount to face value. • 💡 Wrong-option analysis: [Negotiable]: correct characteristic; CDs can be transferred in the secondary market; [Discounted instrument]: also correct; CDs are issued below face value; [Unsecured]: CDs are unsecured deposits backed only by the issuing bank's creditworthiness.

Correct Answer: A. Money in transit between banks

• **Money in transit between banks** = Float is the amount temporarily counted in both sender and receiver accounts due to the time lag in clearing. • **Clearing lag** — during a payment, float can inflate liquidity estimates; it shrinks as real-time settlement systems replace cheque clearing. • 💡 Wrong-option analysis: [Stock market listing]: the term 'float' in equity refers to freely tradable shares, an entirely different context; [Interest rate change]: changes in rates are unrelated to float; [Exchange rate fluctuation]: a forex concept, not a money market settlement concept.

Correct Answer: A. 1917

• **1917** = Treasury Bills were first issued in India in 1917 during the British colonial era, making them over a century old. • **Evolved tenures** — from the original single tenure, T-Bills have evolved into three standard maturities: 91, 182, and 364 days. • 💡 Wrong-option analysis: [1991]: the year of economic liberalisation, not the year T-Bills were introduced; [1935]: the year RBI was established, but T-Bills predate it by nearly two decades; [1950]: India's Constitution came into effect; T-Bills were already in use by then.

Correct Answer: B. Call Money Market

• **Call Money Market** = the most RBI policy-sensitive segment because overnight rates directly reflect daily liquidity supply and demand. • **Rates track Repo** — call money rates stay close to the Repo rate; any RBI policy signal immediately appears as a movement in overnight call rates. • 💡 Wrong-option analysis: [Certificate of Deposit]: CD rates are negotiated over weeks, not instant policy reflections; [Commercial Paper]: CP rates respond more slowly as they depend on corporate credit ratings; [Commercial Bills]: linked to trade cycles, not directly to daily RBI policy signals.

Correct Answer: B. Money borrowed without collateral

• **Money borrowed without collateral** = Clean Call is inter-bank call money borrowing based entirely on the borrowing bank's creditworthiness, with no security pledged. • **Trust-based lending** — most call money transactions between scheduled commercial banks are clean calls, relying on mutual bank creditworthiness. • 💡 Wrong-option analysis: [Legal way to borrow]: all inter-bank borrowing is legal; 'clean' refers to absence of collateral; [Loan with gold collateral]: a collateralised loan is the opposite of a clean call; [Money borrowed for cleaning banks]: a nonsensical distractor with no financial meaning.

Correct Answer: C. Bill of exchange without an underlying trade transaction

• **Bill of exchange without an underlying trade transaction** = an Accommodation Bill is drawn purely to obtain funds, with no actual goods being traded. • **Wind bill** — accommodation bills are also called 'wind bills'; they are discouraged in formal markets as they inflate credit without real economic activity. • 💡 Wrong-option analysis: [Government treasury bill]: a T-Bill is a sovereign debt instrument, not related to accommodation; [Bill for staying in a hotel]: 'accommodation' here refers to credit accommodation, not lodging; [Corporate debt]: corporate bonds are long-term capital market instruments.