Chapter 3: Correspondent Banking and NRI Accounts (CAIIB – Paper 2)
1. In correspondent banking, a "Nostro Account" maintained by an Indian bank refers to:
A. An account of a foreign bank maintained with an Indian bank
B. An account that records only foreign exchange forward deals
C. An account maintained by an Indian bank in a foreign bank, in foreign currency
D. A mirror account showing balances of nostro accounts in INR
A Nostro account means "our account with you" — an account maintained by a domestic bank (e.g., Indian bank) in a foreign bank, denominated in that foreign country’s currency.
2. A "Vostro Account" is best described as:
A. An account of a foreign bank maintained with a domestic bank in local currency
B. An account maintained by a domestic bank abroad
C. An account showing the position of third-party balances
D. An inter-branch reconciliation account
Vostro means "your account with us" — it is an account of a foreign bank maintained with a domestic bank, usually in local currency (e.g., US bank maintaining an account in an Indian bank in INR).
3. A "Loro Account" refers to:
A. Nostro account converted into INR for reporting purposes
B. An account maintained by RBI on behalf of government
C. Mirror account maintained for Nostro reconciliation
D. "Their account with you" — a third-party account viewed from the perspective of a bank
Loro means "their account with you" — it represents a third-party account in correspondent banking. For example, Bank A referring to Bank B about Bank C’s account with Bank B.
4. Which of the following is NOT typically a service provided under Correspondent Banking arrangements?
A. International fund transfers
B. Issuance of government treasury bills
C. Trade finance and letter of credit services
D. Foreign currency clearing and settlement
Correspondent banking provides services like international payments, trade finance, LCs, clearing, and settlement. Government securities issuance is handled by central banks, not correspondent banks.
5. An NRI wishes to maintain an account in INR where both principal and interest are fully repatriable. The correct account type is:
A. NRO Account
B. FCNR(B) Account
C. NRE Account
D. Resident Foreign Currency (RFC) Account
NRE (Non-Resident External) accounts are maintained in INR, with full repatriation of both principal and interest, and interest is exempt from Indian income tax.
6. Which of the following statements about NRO Accounts is correct?
A. Both principal and interest are freely repatriable
B. They can be opened only in foreign currency
C. They cannot be used for local payments in India
D. Repatriation of principal is restricted; interest is repatriable after tax deduction
NRO (Non-Resident Ordinary) accounts are maintained in INR. Principal repatriation is subject to restrictions (up to USD 1 million per financial year), while interest is repatriable after applicable tax.
7. SWIFT primarily provides which of the following services?
A. Physical transfer of currency between banks
B. Secure messaging network for financial transactions
C. Clearing of cheques in local branches
D. Issuance of government bonds
SWIFT (Society for Worldwide Interbank Financial Telecommunication) provides a secure messaging network that enables banks and financial institutions to send and receive information about financial transactions safely and reliably.
8. CHAPS is best described as:
A. A UK-based high-value same-day payment system
B. An Indian retail payment system for small transactions
C. An international money transfer service for individuals
D. A US-based interbank clearinghouse for foreign exchange
CHAPS (Clearing House Automated Payment System) is a UK-based system for high-value, same-day sterling payments between banks, typically used for large corporate and interbank transactions.
9. In the US, CHIPS is used for:
A. Retail banking transactions in USD
B. Physical cash settlement between banks
C. High-value USD interbank payments
D. Domestic cheque clearing only
CHIPS (Clearing House Interbank Payments System) is a US-based electronic payments system for large-value USD transactions between banks, allowing net settlement at the end of the day.
10. RTGS in India is primarily used for:
A. Small retail payments between individuals
B. Clearing cheques within 2–3 days
C. Cross-border USD transfers
D. Real-time settlement of high-value interbank payments
RTGS (Real-Time Gross Settlement) is an Indian system for real-time, gross settlement of high-value interbank payments, ensuring immediate transfer of funds without netting.
11. Which of the following statements correctly differentiates RTGS and NEFT?
A. Both settle transactions in batches at the end of the day
B. RTGS is for small-value payments; NEFT is for high-value payments
C. RTGS provides real-time settlement; NEFT settles in hourly batches
D. NEFT is international; RTGS is domestic only
RTGS settles payments in real-time and is used for high-value transactions, whereas NEFT (National Electronic Funds Transfer) settles payments in batches (currently half-hourly), suitable for small to medium transactions.
12. Which of the following is a key advantage of electronic payment systems like SWIFT and RTGS?
A. Speed, security, and reduced settlement risk
B. They eliminate the need for bank branches
C. They guarantee foreign exchange profits
D. They remove the need for regulatory compliance
Electronic payment systems like SWIFT, CHIPS, CHAPS, and RTGS provide faster, secure, and efficient settlement of payments, significantly reducing settlement risk in interbank transactions.
13. Which of the following is a key feature of an NRE (Non-Resident External) Account?
A. Maintained in foreign currency and non-repatriable
B. Interest earned is taxable in India
C. Maintained in INR, fully repatriable, and interest is tax-free
D. Restricted to NRO deposits only
NRE accounts are maintained in Indian Rupees by NRIs. Both principal and interest are fully repatriable and the interest earned is exempt from Indian income tax.
14. NRO (Non-Resident Ordinary) Accounts are mainly used for:
A. Holding foreign currency deposits only
B. International trade settlements
C. Fully repatriable investments abroad
D. Managing income earned in India such as rent, dividends, or pension
NRO accounts are maintained in INR to manage income earned in India by NRIs, like rent, dividends, pension, etc. Principal repatriation is restricted (up to USD 1 million per financial year) and interest is subject to tax.
15. FCNR(B) Accounts allow NRIs to:
A. Maintain funds in INR only
B. Hold deposits in specified foreign currencies with full repatriation
C. Make only non-repatriable investments
D. Avoid interest taxation on INR deposits only
FCNR(B) (Foreign Currency Non-Resident Bank) accounts are maintained in specified foreign currencies (USD, GBP, EUR, etc.) by NRIs. Both principal and interest are fully repatriable and interest earned is tax-free in India.
16. Which of the following statements about RFC (Resident Foreign Currency) Accounts is correct?
A. They can only be opened by current NRIs
B. They are maintained in INR for overseas residents
C. They are maintained in foreign currency by returning residents from abroad
D. Principal and interest are non-repatriable
RFC accounts are opened by Indian residents returning from abroad. They can maintain their foreign currency earnings in India, in a repatriable account, without conversion to INR immediately.
17. Interest earned on NRO accounts is:
A. Exempt from Indian income tax
B. Fully repatriable without tax
C. Only partially taxable for residents
D. Taxable in India and subject to TDS
Interest earned on NRO accounts is taxable in India and banks deduct TDS (Tax Deducted at Source) before repatriation of interest or principal.
18. Which account type would an NRI use to invest in Indian mutual funds with full repatriation of principal and interest?
A. NRO Account
B. NRE Account
C. RFC Account
D. FCNR(B) Account
NRE accounts are suitable for NRIs to invest in Indian mutual funds while ensuring full repatriation of principal and interest, and tax-free interest earnings.
19. Which of the following facilities is typically available to NRIs from Indian banks?
A. Only term deposits in foreign currency
B. Credit card facilities in foreign banks only
C. NRI savings accounts, fixed deposits, loans, and remittance services
D. Government bond investment only
Indian banks offer NRIs a variety of facilities including NRE/NRO/FCNR(B) accounts, fixed deposits, home loans, personal loans, and remittance services to manage their income and investments.
20. Advances to NRIs against Non-Resident deposits can be granted under which condition?
A. The advance is secured by the NRI's own deposit with the bank
B. Only for deposits in INR and not in foreign currency
C. Without any security or collateral
D. Only for government-approved projects
Advances to NRIs can be granted against their own NRE/NRO/FCNR(B) deposits. The deposit acts as security for the loan, ensuring repayment.
21. Which of the following is NOT typically allowed as a purpose for advances to NRIs against deposits?
A. Personal loans for family maintenance
B. Investment in shares of an Indian company beyond regulatory limits
C. Purchase of property in India as per FEMA guidelines
D. Education or medical expenses in India
Advances against NRI deposits are allowed for personal, property, education, or medical purposes. Investment in shares is regulated by FEMA and RBI; exceeding limits is not allowed.
22. Which account type is typically used as collateral for advances to NRIs?
A. Resident Savings Account
B. Corporate Fixed Deposit Account
C. Loan Against Securities Account
D. NRE, NRO, or FCNR(B) deposit account of the NRI
Advances to NRIs are secured by their own deposits — NRE, NRO, or FCNR(B) — held with the bank. These deposits serve as collateral for the sanctioned loan amount.
23. Which regulatory framework governs advances to NRIs against their deposits in India?
A. Companies Act
B. Income Tax Act only
C. FEMA (Foreign Exchange Management Act) and RBI guidelines
D. Indian Contract Act only
Advances to NRIs against their deposits are regulated under FEMA and RBI circulars, which prescribe permissible limits, interest rates, and eligible purposes for such advances.
24. The maximum tenor of advances against NRE/FCNR(B) deposits is generally:
A. 1 year
B. Up to the maturity of the deposit
C. 5 years irrespective of deposit maturity
D. Unlimited
The advance against NRI deposits can be granted for a tenor up to the maturity period of the underlying deposit. The bank cannot extend it beyond the deposit tenure.
25. Under RBI guidelines, NRIs can avail housing loans in India for:
A. Purchase of agricultural land only
B. Only construction of commercial buildings
C. Purchase, construction, or renovation of residential property
D. Investment in stocks and mutual funds
NRIs can take housing loans for purchase, construction, or renovation of residential property in India as per FEMA and RBI guidelines. Loans for agricultural land or commercial buildings have restrictions.
26. Which of the following accounts can be used by an NRI to repay a housing loan in India?
A. Resident Savings Account only
B. Domestic NRO account only
C. Foreign bank account outside India only
D. NRE, NRO, or FCNR(B) accounts
NRIs can repay housing loans using their NRE, NRO, or FCNR(B) accounts. NRE/FCNR(B) accounts allow full repatriation, while NRO accounts are subject to repatriation limits and taxes.
27. What is the maximum loan amount an NRI can avail for housing in India?
A. INR 50 lakh only
B. As approved by the lending bank within RBI/FEMA guidelines
C. INR 1 crore fixed for all NRIs
D. No loan is allowed for NRIs
There is no fixed maximum limit. Housing loans to NRIs are sanctioned as per the lending bank's policy, subject to RBI/FEMA guidelines and the NRI’s repayment capacity.
28. Which of the following is not permitted under NRI housing loans?
A. Construction of residential property
B. Purchase of ready-built house
C. Purchase of agricultural land without prior RBI approval
D. Renovation of existing property
NRIs cannot purchase agricultural land or farmhouses in India without prior RBI approval. Residential property for personal use or investment is permitted.
29. Interest rates on housing loans to NRIs are typically:
A. Fixed by RBI for all banks
B. Same as personal loans in India
C. Nil for NRE accounts
D. Determined by the lending bank and may vary with type of account and tenure
Interest rates for NRI housing loans are set by the lending bank and may differ based on whether the repayment is through NRE, NRO, or FCNR(B) accounts, as well as loan tenure and amount.
30. Which regulatory framework governs housing loans to NRIs in India?
A. Companies Act
B. FEMA (Foreign Exchange Management Act) and RBI guidelines
C. Income Tax Act only
D. Negotiable Instruments Act
Housing loans to NRIs are regulated under FEMA and RBI guidelines. These prescribe eligible property types, repayment sources, permissible loan amounts, and other operational rules.
31. An NRI repaying a housing loan in India can use which of the following sources?
A. Only funds from a resident savings account
B. Funds from foreign credit cards
C. NRE, NRO, or FCNR(B) accounts maintained in India
D. Cash remittance from abroad only
Repayment of housing loans by NRIs is allowed through their NRE, NRO, or FCNR(B) accounts. NRE/FCNR(B) accounts allow full repatriation, while NRO accounts are subject to repatriation limits and tax deductions.
32. Repatriation of funds from NRO accounts used for housing loan repayment is:
A. Fully unrestricted
B. Not allowed under any circumstances
C. Only allowed after conversion to foreign currency at bank discretion
D. Restricted to USD 1 million per financial year after payment of applicable taxes
Repatriation of principal from NRO accounts is allowed up to USD 1 million per financial year, subject to tax compliance. Interest earned is repatriable after TDS.
33. Interest earned on housing loans taken by NRIs for property in India is:
A. Tax-exempt for all NRIs
B. Tax-deductible under Section 80C/24 of the Income Tax Act subject to limits
C. Always fully taxable in India
D. Not considered for tax purposes
NRIs can claim deductions on interest paid on housing loans under Section 24(b) and principal repayment under Section 80C of the Income Tax Act, subject to prescribed limits.
34. Which account is preferred by NRIs for repaying housing loans to ensure full repatriation of funds?
A. NRE or FCNR(B) accounts
B. NRO account
C. Resident savings account
D. Foreign credit card account
NRE and FCNR(B) accounts allow NRIs to repay housing loans while ensuring that both principal and interest remain fully repatriable, unlike NRO accounts which have restrictions.
35. If an NRI repays a housing loan from an NRO account, what is the tax implication on interest?
A. No tax deduction at source (TDS) is applicable
B. TDS is applicable only on principal repayment
C. TDS is applicable on interest earned in the account before repatriation
D. TDS is exempted for NRO accounts
Interest earned in NRO accounts is taxable and subject to TDS before any repatriation. Principal can be repatriated within limits after tax compliance.
36. Which of the following statements is true regarding repatriation of housing loan repayments by NRIs?
A. Repatriation of principal is unrestricted from NRO accounts
B. Repayment from resident savings account allows full repatriation
C. Interest on NRE accounts is taxable before repatriation
D. Repatriation is seamless from NRE/FCNR(B) accounts, limited from NRO accounts
NRE and FCNR(B) accounts allow seamless repatriation of principal and interest. NRO accounts have repatriation limits and TDS applies to interest before repatriation.
