Chapter 3: Regulation of Banking Business (CAIIB – Paper 4)
1. Under which provision does the Reserve Bank of India have the power to issue directions to banks?
A. Companies Act, 2013
B. Banking Companies Act, 1949
C. Banking Regulation Act, 1949
D. Negotiable Instruments Act, 1881
RBI derives its power to issue directions to banking companies under the Banking Regulation Act, 1949, to ensure proper functioning, solvency, and compliance of banks.
2. Which section of the Banking Regulation Act, 1949 governs the acceptance of deposits by banking companies?
A. Section 5
B. Section 11
C. Section 45
D. Section 36
Section 11 of the Banking Regulation Act, 1949 lays down the rules regarding the acceptance of deposits by banking companies and conditions attached thereto.
3. Nomination facility in a bank account allows a depositor to:
A. Appoint a person to receive the amount in case of the depositor’s death
B. Transfer the account to another bank without RBI approval
C. Withdraw funds beyond the authorized limit
D. Convert the deposit into a loan automatically
Nomination allows a depositor to designate a person who can receive the funds in the account in the event of the depositor’s death, ensuring smooth transfer of funds.
4. Which of the following is true about the powers of RBI to issue directions to banks?
A. RBI can only advise banks but cannot issue mandatory directions
B. RBI needs government approval for every direction
C. Directions are limited only to foreign banks
D. Directions are binding on banks and failure to comply can attract penalties
RBI can issue binding directions to banks under the Banking Regulation Act, 1949. Non-compliance with such directions can attract penalties as prescribed under the Act.
5. When can a bank refuse to accept deposits from the public?
A. When the depositor requests special interest rates
B. When the depositor is a minor
C. When it violates RBI directions or statutory provisions
D. When the deposit amount is more than ₹1 lakh
Banks can refuse deposits if accepting them would contravene RBI directives, violate the Banking Regulation Act, or pose a risk to the bank’s financial stability.
6. Under the Banking Regulation Act, 1949, which of the following is true regarding loans and advances by a bank?
A. Banks can grant loans only against gold and government securities
B. Banks can grant loans and advances against approved securities, guarantees, or realisable assets
C. Banks can grant unlimited loans without any security
D. Loans and advances cannot exceed the bank’s total deposits
Banks can grant loans and advances against approved securities, guarantees, or other realizable assets as per RBI and Banking Regulation Act guidelines to manage risk and ensure repayment.
7. What is the primary objective of regulating interest rates by the Reserve Bank of India?
A. To increase bank profits only
B. To reduce the number of bank customers
C. To control inflation, ensure financial stability, and influence credit flow
D. To fix salaries of bank employees
RBI regulates interest rates primarily to manage inflation, stabilize the financial system, and influence lending and borrowing in the economy.
8. Which of the following best describes a bank’s “advances”?
A. All forms of lending provided to customers, including loans, cash credits, and overdrafts
B. Only short-term loans given to corporates
C. Only term loans for agriculture
D. Deposits received from customers
Advances include all forms of lending like term loans, cash credits, overdrafts, and bills purchased or discounted by banks for their customers.
9. Which section empowers the Reserve Bank of India to regulate the interest rates charged by banks on loans and advances?
A. Section 10 of Companies Act, 2013
B. Section 45 of Negotiable Instruments Act
C. Section 11 of Banking Regulation Act
D. Section 35A of Banking Regulation Act, 1949
Section 35A of the Banking Regulation Act empowers RBI to regulate the interest rates on deposits and advances to ensure uniformity and control excessive lending rates.
10. What is “Base Rate” in the context of lending by banks?
A. The minimum deposit rate offered by banks to small depositors
B. The minimum rate of interest a bank can charge for loans, set based on its cost of funds
C. The interest rate fixed by government for agricultural loans only
D. The maximum lending rate for loans above ₹1 crore
Base Rate is the minimum rate of interest a bank can charge for loans, calculated using the bank’s cost of funds and other operational expenses, ensuring transparency and fairness in lending.
11. Which act empowers the Reserve Bank of India to regulate payment systems in India?
A. Negotiable Instruments Act, 1881
B. Companies Act, 2013
C. Payment and Settlement Systems Act, 2007
D. Banking Regulation Act, 1949
The Payment and Settlement Systems Act, 2007 empowers RBI to regulate and oversee all payment systems in India, including digital and electronic modes of payment.
12. Which of the following is a key objective of RBI’s regulation of payment systems?
A. Ensuring safe, secure, efficient, and reliable payment and settlement mechanisms
B. Controlling bank profits
C. Limiting the number of banking customers
D. Monitoring employee performance in banks
RBI regulates payment systems to ensure that transactions are safe, secure, efficient, and reliable, protecting both banks and customers.
13. Which of the following is included under the term “payment system” as per RBI guidelines?
A. Bank’s internal accounting system only
B. Electronic funds transfer, NEFT, RTGS, and card payment systems
C. Only cash transactions at bank counters
D. Government budget payments only
Payment systems include electronic funds transfer mechanisms like NEFT, RTGS, IMPS, card payment systems, and other digital modes regulated by RBI.
14. Which of the following is a primary guideline for internet banking issued by RBI?
A. Banks can operate internet banking without authentication
B. RBI approval is not required for any internet banking services
C. Banks should not offer mobile banking services
D. Banks must ensure proper customer authentication and risk management for internet banking
RBI guidelines require banks to have secure customer authentication methods, proper risk management, and grievance redressal mechanisms for internet banking.
15. What is the purpose of Two-Factor Authentication (2FA) in internet banking?
A. To enhance security by requiring two forms of identity verification
B. To reduce transaction limits
C. To allow multiple users to access the same account simultaneously
D. To avoid RBI regulations
Two-Factor Authentication is implemented to ensure that users verify their identity using two independent credentials, reducing the risk of fraud in internet banking.
16. Which authority regulates money market instruments in India?
A. Securities and Exchange Board of India (SEBI)
B. Ministry of Finance
C. Reserve Bank of India (RBI)
D. Indian Banks’ Association (IBA)
RBI regulates money market instruments, such as treasury bills, commercial papers, certificates of deposit, and repo/reverse repo transactions, to maintain liquidity and stability in the financial system.
17. Which of the following is a short-term money market instrument?
A. Treasury Bills (T-Bills)
B. Government Bonds (10-year tenure)
C. Equity shares
D. Preference shares
Treasury Bills are short-term debt instruments issued by the government with maturities of less than one year, widely used in the money market.
18. Certificates of Deposit (CDs) are primarily issued by:
A. Government only
B. Scheduled Commercial Banks
C. RBI directly to public
D. Mutual Funds
Certificates of Deposit are unsecured short-term money market instruments issued by scheduled commercial banks to raise funds from the public for a fixed period.
19. Which of the following statements is true about Commercial Papers (CPs)?
A. CPs are long-term instruments issued by the government
B. CPs can be issued by individuals
C. CPs are regulated by the Companies Act only
D. CPs are unsecured short-term promissory notes issued by corporates
Commercial Papers are unsecured, short-term debt instruments issued by corporates to meet working capital requirements, and are regulated by RBI and SEBI guidelines.
20. The Repo Rate in the money market refers to:
A. The rate at which banks borrow funds from RBI against government securities
B. The rate at which banks lend to customers for housing loans
C. The rate at which corporates issue Commercial Papers
D. The fixed interest rate on Treasury Bills
Repo Rate is the rate at which commercial banks borrow short-term funds from RBI by selling government securities with an agreement to repurchase them on a future date.
21. Who can approach the Banking Ombudsman for resolving complaints against banks?
A. Any customer of the bank or their legal heirs
B. Only bank employees
C. Only corporate clients of banks
D. Only RBI officials
The Banking Ombudsman scheme allows any bank customer, including individuals and legal heirs, to lodge complaints regarding deficiency in banking services.
22. Which of the following is true about the Banking Ombudsman?
A. The Ombudsman can make laws for banks
B. The Ombudsman can resolve complaints and award compensation up to a specified limit
C. The Ombudsman supervises RBI operations
D. The Ombudsman issues banking licenses
The Banking Ombudsman can investigate complaints against banks and award compensation to aggrieved customers, subject to limits defined in the scheme.
23. Which regulatory measure is primarily aimed at strengthening financial stability in banks?
A. Increasing salaries of bank employees
B. Limiting the number of bank branches
C. Implementation of Basel III norms and capital adequacy requirements
D. Providing free banking services to all customers
Basel III norms, including capital adequacy, leverage ratio, and liquidity requirements, are aimed at ensuring financial stability and resilience of banks during economic stress.
24. What is the primary purpose of the Prompt Corrective Action (PCA) framework by RBI?
A. To increase bank profits aggressively
B. To allow unlimited lending to stressed sectors
C. To monitor customer complaints
D. To identify weak banks and restrict risky operations to maintain financial stability
PCA framework helps RBI monitor banks with weak financials and impose restrictions on lending, branch expansion, and management compensation to protect financial stability.
25. Which of the following measures is used by RBI to strengthen the liquidity position of banks?
A. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements
B. Reducing interest rates for deposits only
C. Increasing bank holidays
D. Freezing all bank loans
RBI regulates CRR and SLR to ensure that banks maintain adequate liquidity to meet obligations and strengthen the overall stability of the banking system.
