Banking Terms — Set 5

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

IBPC is a short-term money market instrument used by banks to buy or sell their loan assets. It helps banks manage their credit portfolio and liquidity without transferring the actual loan account. They are usually issued for 91 to 180 days.

Correct Answer: B. Cash Management Bill

Cash Management Bills were introduced specifically to handle very short-term cash flow mismatches of the government. Unlike standard T-Bills, their tenures are flexible but always less than 91 days. They share the same generic character as T-Bills.

Correct Answer: B. Rs. 4 Crores

To be eligible to issue CP, a company's tangible net worth should not be less than Rs. 4 crores as per the latest audited balance sheet. Additionally, the company's account must be classified as a Standard Asset. These rules ensure that only financially sound companies borrow from the market.

Correct Answer: B. Liquidity decreases

When the repo rate increases, it becomes more expensive for banks to borrow from the RBI. Banks then increase their own lending rates, which reduces the demand for loans and credit in the economy. This effectively tightens or decreases liquidity.

Correct Answer: B. Issued by the government

Certificates of Deposit are issued by banks and financial institutions, not the government. They are negotiable instruments, meaning they can be traded in the secondary market. Like T-Bills, they are issued at a discount to the face value.

Correct Answer: A. Money in transit between banks

Float refers to the amount of money that is counted in the accounts of both the sender and the receiver during a payment process. It arises due to the time lag in clearing cheques or transfers. High float can temporarily impact liquidity estimates in the money market.

Correct Answer: A. 1917

Treasury Bills were first issued in India in 1917 during the British era. Since then, they have evolved into various tenures like 91-day and 364-day bills. They remain a primary tool for government short-term borrowing.

Correct Answer: B. Call Money Market

The call money market is the most sensitive because it reflects the immediate liquidity needs of banks. Overnight rates usually stay close to the Repo rate. Any signal from the RBI is first reflected in the fluctuations of the call money rates.

Correct Answer: B. Money borrowed without collateral

Clean call refers to inter-bank borrowing in the call money market where no collateral is provided. It relies entirely on the creditworthiness of the borrowing bank. Most call money transactions between scheduled commercial banks are clean calls.

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

An accommodation bill is drawn and accepted just to help one party get a loan, without any actual sale of goods. It is also known as a 'wind bill'. They are generally discouraged in the formal organized money market.