Chapter 2: Control over the Organisation of Banks (CAIIB – Paper 4)
1. Under which section of the Banking Regulation Act, 1949, is a license required for commencing banking business in India?
A. Section 11
B. Section 17
C. Section 22
D. Section 35
As per Section 22 of the Banking Regulation Act, 1949, no company shall carry on banking business in India without obtaining a license from RBI.
2. Which authority grants licenses to Universal Banks in India?
A. Reserve Bank of India
B. Ministry of Finance
C. SEBI
D. Indian Banks’ Association
RBI is the sole authority empowered to grant licenses for Universal Banks in India under Section 22 of the Banking Regulation Act, 1949.
3. What is the minimum paid-up capital required for Small Finance Banks as per RBI guidelines?
A. ₹500 crore
B. ₹200 crore
C. ₹100 crore
D. ₹200 crore (revised from ₹100 crore in 2021)
Initially, RBI prescribed a minimum paid-up capital of ₹100 crore for SFBs. In December 2019, it was revised to ₹200 crore to strengthen financial stability.
4. Branch licensing policy of RBI primarily ensures:
A. Control over banks’ advertisement and promotions
B. Equitable distribution of banking services, especially in unbanked areas
C. Monitoring of CRR and SLR compliance
D. Approval of banks’ board composition
RBI’s branch licensing policy ensures financial inclusion by mandating that banks open a certain percentage of branches in unbanked rural centers.
5. Universal Banks in India are allowed to:
A. Carry out only retail banking
B. Provide only priority sector lending
C. Undertake commercial as well as investment banking activities
D. Engage in NBFC operations only
Universal Banks are permitted to conduct both commercial banking and investment banking activities, thus offering a wide range of financial services.
6. What is the minimum paid-up capital and reserves required for a new private sector bank in India as per RBI guidelines?
A. ₹500 crore
B. ₹200 crore
C. ₹100 crore
D. ₹50 crore
RBI mandates that new private sector banks must have a minimum paid-up capital of ₹500 crore to ensure stability and investor confidence.
7. As per the Banking Regulation Act, 1949, a banking company incorporated in India must have minimum paid-up capital and reserves of:
A. ₹1 crore if it has branches in more than one state
B. ₹5 lakh if it operates in one state only
C. ₹5 lakh if it operates in one state and ₹10 lakh if it has branches in multiple states
D. ₹50 lakh for metro cities
Section 11 of the Banking Regulation Act, 1949 prescribes minimum paid-up capital and reserves of ₹5 lakh for banks in a single state and ₹10 lakh for multi-state operations.
8. What is the maximum voting rights a shareholder can exercise in a private sector bank as per RBI guidelines (2023)?
A. 10%
B. 26%
C. 49%
D. 74%
In 2021, RBI increased the cap on voting rights of shareholders in private sector banks from 15% to 26% of paid-up voting equity capital.
9. What is the maximum foreign shareholding allowed in private sector banks under the automatic route in India?
A. 26%
B. 49%
C. 74%
D. 74% (automatic route), subject to sectoral caps
As per FDI policy, foreign investment in private sector banks is allowed up to 74% of the paid-up capital under the automatic route, with safeguards.
10. In public sector banks, what is the minimum shareholding the Government of India is required to maintain?
A. 51%
B. 26%
C. 74%
D. 100%
The Banking Companies (Acquisition and Transfer of Undertakings) Acts mandate that the Government of India must hold at least 51% stake in public sector banks.
11. Under which section of the Banking Regulation Act, 1949, can a banking company form a subsidiary company?
A. Section 19(2)
B. Section 20
C. Section 19(1)
D. Section 24
Section 19(1) of the Banking Regulation Act allows a banking company to form a subsidiary for undertaking activities such as banking, foreign exchange, or other business permitted by RBI.
12. Which of the following activities is not permitted to be carried out by a subsidiary of a banking company?
A. Undertaking foreign exchange business
B. Engaging in manufacturing activities
C. Carrying out trustee services
D. Conducting mutual fund business
Subsidiaries of banks can perform financial services like foreign exchange, mutual funds, trustee business, etc., but they are not allowed to engage in core manufacturing activities.
13. As per RBI norms, what is the minimum number of whole-time directors required for a banking company (other than small banks)?
A. One
B. Two
C. Three
D. At least two, with RBI approval
Banking companies must have at least two whole-time directors, and their appointment requires prior approval from the Reserve Bank of India.
14. What is the maximum tenure of a banking company’s whole-time director or CEO as per RBI guidelines (2021)?
A. 15 years (with a maximum of 12 years continuous tenure and cooling-off requirement)
B. 5 years only
C. 10 years maximum
D. No limit, subject to Board approval
RBI capped the tenure of MD/CEO and whole-time directors at 15 years, but an individual cannot serve more than 12 continuous years without a 3-year cooling-off period.
15. Who has the power to approve the appointment or re-appointment of a bank’s Chairman, CEO, or Managing Director?
A. Ministry of Finance
B. SEBI
C. Reserve Bank of India
D. Board of Directors of the bank alone
As per Section 35B of the Banking Regulation Act, any appointment, re-appointment, or termination of the Chairman, CEO, or MD of a banking company requires prior approval of RBI.
16. Under which section of the Banking Regulation Act, 1949, is the appointment of a Chairman of a banking company governed?
A. Section 20
B. Section 10B
C. Section 12
D. Section 17
Section 10B of the Banking Regulation Act deals with the appointment of Chairman and full-time Chairman of banking companies, subject to RBI approval.
17. Who has the power to appoint additional directors on the board of a banking company in the interest of public or banking policy?
A. Ministry of Finance
B. SEBI
C. Board of Directors
D. Reserve Bank of India
As per Section 36AB of the Banking Regulation Act, the RBI may appoint one or more additional directors on the board of a banking company in the interest of depositors, banking policy, or public interest.
18. The appointment of additional directors by RBI in a banking company is valid for a maximum period of:
A. 3 years, subject to extension
B. 5 years fixed
C. 1 year only
D. Until the next Annual General Meeting
RBI can appoint additional directors for up to 3 years at a time, and may extend this period further if deemed necessary.
19. Which of the following categories of persons are restricted from employment in a banking company under Section 10 of the Banking Regulation Act?
A. Persons engaged in trading of goods
B. Persons engaged in money lending
C. Both A and B
D. Only professional consultants
Section 10 prohibits banking companies from employing persons engaged in trading, money lending, or speculative activities, as these create conflicts of interest.
20. What restriction does Section 10A of the Banking Regulation Act place on the composition of a bank’s Board of Directors?
A. At least 25% of directors must be women
B. At least 51% of directors should have special knowledge or practical experience in areas like accountancy, agriculture, banking, finance, law, etc.
C. Directors cannot hold office beyond 5 years
D. At least 2 directors must be nominated by RBI
Section 10A ensures professional competence on the Board by mandating that a majority (at least 51%) of directors must have special knowledge or experience in relevant fields such as banking, finance, economics, or law.
21. Under the Banking Regulation Act, 1949, RBI has the power to exercise control over management to ensure:
A. Profit maximization of the bank
B. Expansion of branches
C. Proper functioning in public interest and protection of depositors
D. Appointment of auditors only
RBI can intervene in the management of banks to ensure that they operate in the interest of the public and protect the interests of depositors, under Sections 35A–35C.
22. Which of the following measures can RBI take under its powers of management control?
A. Appoint auditors
B. Approve mergers only
C. Decide dividend declaration
D. Remove or supersede board of directors in the public interest
RBI has the authority to supersede the Board of Directors of a banking company or remove managerial personnel if the bank is not being managed in the interest of depositors or public policy.
23. What is the maximum period for which RBI can supersede the Board of a banking company?
A. 6 months
B. 1 year, extendable with approval
C. 2 years fixed
D. Until the next Annual General Meeting
RBI can supersede a bank’s Board for up to 1 year, and this period may be extended with the approval of the central government, ensuring continuity in management oversight.
24. Which of the following is a key principle of corporate governance in banks?
A. Maximizing shareholder profits at any cost
B. Limiting disclosure to protect competitive advantage
C. Transparency, accountability, and fairness in management
D. Avoiding regulatory compliance to reduce costs
Corporate governance in banks emphasizes transparency, accountability, responsibility, and fairness in decision-making to protect depositors and stakeholders.
25. As per RBI guidelines, independent directors in banks are expected to:
A. Represent the government only
B. Focus solely on profit maximization
C. Manage daily operations of the bank
D. Provide unbiased oversight and ensure adherence to governance norms
Independent directors provide objective supervision, help prevent conflicts of interest, and ensure compliance with corporate governance standards in banks.
26. A newly incorporated Small Finance Bank (SFB) plans to open 15 branches in its first year. RBI mandates that a certain percentage of branches must be in unbanked rural centers. If the SFB opens 15 branches, how many must be in unbanked rural areas as per RBI guidelines?
A. 1 branch
B. 5 branches
C. 10 branches
D. 15 branches
RBI guidelines require at least 25% of new branches of SFBs to be in unbanked rural centers. For 15 branches, 25% equals 3.75, rounded up to 5 branches.
27. A private sector bank received RBI approval to open a new branch in a Tier-3 city. The bank has 60% of branches in urban areas and 40% in rural areas. Which of the following best reflects RBI’s objective behind branch licensing policy?
A. Maximizing profits by opening branches only in urban areas
B. Limiting the bank’s expansion in rural areas
C. Ensuring financial inclusion and equitable distribution of banking services
D. Reducing operational costs
RBI’s branch licensing policy aims at equitable banking development by encouraging banks to expand into underbanked or unbanked rural and semi-urban areas.
28. An applicant company wants to start a Universal Bank in India. The company submits a business plan, promoter details, and capital adequacy plans to RBI. Which of the following is not a factor considered by RBI before granting the license?
A. Promoters’ track record and integrity
B. Expected dividend payout in the first 2 years
C. Capital adequacy and financial projections
D. Risk management framework and compliance policies
RBI considers promoters’ background, financial soundness, capital adequacy, risk management, and compliance frameworks. Expected dividend payout is not a licensing criterion.
29. A Small Finance Bank plans to raise additional capital for opening new branches. RBI allows capital raising from private investors up to 74% of paid-up capital. Which of the following types of investors can participate under the automatic route?
A. Government-owned banks only
B. Resident individuals only
C. Foreign institutional investors and NRIs, subject to FDI policy
D. Only domestic corporates
RBI allows foreign investment in SFBs up to 74% under the automatic route, including FII, FDI, and NRIs, following the FDI policy limits.
30. A bank opens a branch in an unbanked rural area but fails to meet RBI’s minimum infrastructure and staffing requirements. What action can RBI take?
A. Levy additional taxes on the branch
B. Approve expansion to more rural areas
C. Reduce the bank’s paid-up capital
D. Take corrective measures including warning, restricting operations, or branch closure
RBI monitors compliance with branch licensing norms. Non-compliance can lead to corrective actions like warnings, operational restrictions, or even closure of the branch.
31. A company wants to start a new private sector bank in India. Which of the following is a key criterion for promoters as per RBI guidelines?
A. Must have served as CEO in any company for at least 10 years
B. Must have a track record of integrity, financial soundness, and professional competence
C. Must have political affiliations in the state of incorporation
D. Must be a resident of India for more than 20 years
RBI considers promoters’ integrity, financial soundness, and experience in banking or related fields before granting a banking license. Political affiliation is not a criterion.
32. An applicant company plans to start a Universal Bank with ₹600 crore paid-up capital. RBI observes that the capital structure includes 30% promoter contribution and 70% from institutional investors. What is the likely RBI response?
A. Reject the application for insufficient promoter contribution
B. Approve the application without conditions
C. Approve subject to minimum promoter contribution of 40% and compliance with governance norms
D. Convert the application to Small Finance Bank licensing
RBI requires a minimum promoter contribution (usually 40% for Universal Banks) to ensure promoters have a significant stake and responsibility in management.
33. A Small Finance Bank has a plan to expand its branch network from 20 to 30 branches in Year 2. RBI mandates that at least 25% of new branches must be in unbanked rural centers. How many branches must comply?
A. 3 branches
B. 5 branches
C. 7 branches
D. 10 branches
The number of new branches = 30 − 20 = 10. 25% of 10 = 2.5, rounded up to 3 branches must be in unbanked rural areas.
34. Which of the following types of companies is not eligible to apply for a banking license in India?
A. Public limited company incorporated in India
B. Private limited company with RBI-approved promoters
C. Non-banking financial company converting to a bank
D. Partnership firm incorporated under LLP Act
Only companies incorporated under the Companies Act as private or public limited companies are eligible for a banking license. LLPs or partnerships cannot directly apply.
35. An applicant wants to start a Small Finance Bank and proposes a promoter holding of 30% and the rest from institutional investors. RBI may:
A. Approve immediately
B. Ask for minimum promoter contribution of 40% to ensure skin in the game
C. Convert the license to a Universal Bank
D. Reject for exceeding institutional shareholding limit
RBI emphasizes promoter accountability and usually requires a minimum promoter holding of 40% in SFBs for effective governance and risk alignment.
36. A bank applies to open a branch in a newly classified Tier-3 town. RBI observes that no banking services exist there. Which of the following applies?
A. Bank can open branch without RBI permission
B. Bank must pay additional fees to RBI
C. RBI encourages opening the branch to promote financial inclusion
D. Bank cannot open branch until Tier-2 classification
RBI’s branch licensing policy promotes financial inclusion by encouraging banks to open branches in unbanked and underserved areas, including Tier-3 towns.
37. Which of the following is a key consideration for RBI when granting a license to a new bank?
A. Proposed logo and branding
B. Promoter integrity, financial soundness, business plan, and risk management framework
C. Number of ATMs planned in urban areas only
D. Dividend distribution policy
RBI evaluates promoters, capital adequacy, business plan viability, governance, and risk management practices before granting a banking license.
38. A Small Finance Bank has been operational for 2 years and plans to expand its branches. RBI requires the bank to maintain a minimum CRAR (Capital to Risk-weighted Assets Ratio) of:
A. 8%
B. 9%
C. 10%
D. 15%
RBI mandates that Small Finance Banks maintain a minimum CRAR of 15% at all times to ensure financial stability and buffer for risk-weighted assets.
39. An applicant proposes a business plan for a new bank which includes high-risk speculative investments. RBI may:
A. Approve without modification
B. Convert into a cooperative bank license
C. Ask for revisions to ensure low-risk and prudent banking operations
D. Reject solely based on branch location
RBI evaluates business plans to ensure prudential banking, risk management, and depositor protection. High-risk speculative strategies are not approved without revision.
40. A bank received RBI approval to open 10 new branches. It plans 3 in urban areas and 7 in rural unbanked centers. Is this allocation compliant with RBI policy?
A. No, too many branches in rural areas
B. Yes, at least 25% of branches are in unbanked rural centers
C. No, all branches must be in urban areas
D. No, compliance depends on capital adequacy only
RBI requires at least 25% of new branches to be in unbanked rural areas. 7 out of 10 branches (70%) meet and exceed this requirement, ensuring compliance.
