Banking Terms — Set 6

Correct Answer: D. Existence of unorganized sector

The existence of an unorganized sector makes it difficult for the RBI to control credit and interest rates fully. This leads to a lack of uniformity in the interest rates across the country. Integrating these sectors remains a challenge for financial development.

Correct Answer: B. Difference between borrowing and lending rates

The spread is the margin or difference between the rate at which an institution borrows and the rate at which it lends. A narrower spread usually indicates a more efficient and competitive market. Banks use this spread to cover their operational costs and generate profit.

Correct Answer: D. Hundi

Hundis are indigenous bills of exchange used in India for centuries. They are part of the unorganized money market and are used for trade and credit. They are written in vernacular languages and follow local customs.

Correct Answer: C. Banks park more money with RBI

An increase in the reverse repo rate makes it more attractive for banks to park their excess cash with the RBI instead of lending to risky borrowers. This reduces the money supply in the economy. It is a standard tool used by the RBI to control inflation.

Correct Answer: B. Commercial Paper

Commercial Paper (CP) is an unsecured short-term promissory note issued by corporates, primary dealers, and All-India Financial Institutions (AIFIs) to raise short-term funds. It is issued at a discount and redeemed at face value, with maturities ranging from 7 days to 1 year. Treasury Bills are issued by the Government, not corporates. Certificates of Deposit are issued by banks. Call Money is borrowing between banks. CP was introduced in India in 1990 to enable highly rated companies to diversify their short-term borrowing sources beyond bank credit.

Correct Answer: C. Up to 1 year

TREPS is a repo contract where a third party (CCIL) acts as an intermediary to settle the trade and manage collateral. It can have tenures ranging from overnight to one year. It is currently the most active segment of the Indian money market.

Correct Answer: C. Vaghul Committee

The Vaghul Working Group on the Money Market (1987) recommended introducing several new instruments, including CP. This was part of the efforts to modernize and deepen the Indian financial system. CP was subsequently introduced in 1990.

Correct Answer: B. T+0 or T+1

Money market transactions are settled very quickly, usually on the same day (T+0) or the next working day (T+1). This speed is necessary for effective short-term liquidity management. Capital market trades usually follow a T+1 cycle.

Correct Answer: D. Risk of government default

Sovereign risk is the risk that a national government will default on its debt obligations. Treasury Bills are said to have 'zero' sovereign risk in their domestic currency because the government can always print money to pay. This makes them the safest asset in a country.

Correct Answer: A. Call Money Market

The call money market is primarily restricted to commercial banks and primary dealers. Non-bank institutions have been phased out to ensure better control over liquidity by the RBI. It serves as the 'engine' of the banking system's daily operations.