Chapter 44: Guidelines on Para Banking and Financial Services provided by Banks (JAIIB - MODULE D)

1. Which of the following activities is not permitted under Para Banking for commercial banks?

  • A. Distribution of mutual funds
  • B. Sale of insurance products
  • C. Undertaking agricultural farming directly
  • D. Issuing credit cards
Para banking covers financial services like mutual funds, insurance, credit cards, etc. Direct agricultural farming is not a permitted para banking activity for banks.

2. Banks generally carry out para banking activities through:

  • A. Subsidiaries or joint ventures
  • B. Direct agricultural branches
  • C. RBI’s rural development department
  • D. NABARD refinance schemes
For risk segregation and regulatory compliance, banks usually undertake para banking services through separate subsidiaries, joint ventures, or partnerships with other financial institutions.

3. Which of the following is an example of para banking service related to capital markets?

  • A. Accepting term deposits
  • B. Issuing demand drafts
  • C. Providing housing loans
  • D. Acting as a depository participant
Acting as a Depository Participant (DP) is a para banking activity linked to capital markets, enabling banks to offer demat account services.

4. A bank launches a subsidiary to distribute mutual funds and insurance products. This organizational structure ensures:

  • A. Direct agricultural lending
  • B. Risk segregation from core banking
  • C. Reduction in CRR and SLR obligations
  • D. Automatic tax exemption
Banks organize para banking through subsidiaries to separate risks from their core lending and deposit-taking operations, ensuring regulatory compliance.

5. Which regulatory body provides guidelines on para banking activities for Indian banks?

  • A. SEBI
  • B. IRDAI
  • C. RBI
  • D. Ministry of Finance
RBI issues comprehensive guidelines to banks on permissible para banking activities and organizational structures for offering such services.

6. Which of the following is a permitted para banking activity for banks?

  • A. Distribution of insurance products
  • B. Accepting deposits beyond prescribed limits
  • C. Conducting chit fund business
  • D. Direct trading in commodities
Banks are allowed to distribute insurance products as para banking activity under RBI and IRDAI guidelines, but cannot engage in chit funds or direct commodity trading.

7. Disclosure of income earned from para banking activities is mandated to ensure:

  • A. Faster credit appraisal
  • B. Lower CRR requirements
  • C. Automatic tax exemptions
  • D. Transparency and protection of customer interests
RBI requires banks to disclose commission/fees earned from para banking activities in their financial statements to promote transparency and protect depositors’ and customers’ interests.

8. A bank earns commission from selling mutual funds. As per RBI guidelines, this income should be:

  • A. Added to CRR reserves
  • B. Disclosed separately in the notes to accounts
  • C. Treated as interest income
  • D. Offset against provisioning requirements
RBI mandates that commissions and fees from para banking like mutual fund distribution must be disclosed separately in the financial statements for clarity.

9. Which of the following is NOT an example of para banking service?

  • A. Distribution of government bonds
  • B. Sale of gold coins
  • C. Issuing currency notes
  • D. Acting as a depository participant
Issuing of currency notes is a sovereign function carried out only by RBI, not a para banking service of commercial banks.

10. Why does RBI require banks to separately disclose commission income from para banking?

  • A. To increase statutory liquidity ratio
  • B. To allow higher dividend payouts
  • C. To prevent misrepresentation of core banking income
  • D. To help banks avoid provisioning norms
RBI wants banks to distinguish core banking income (like interest) from non-core income (like commissions), ensuring accurate financial reporting and risk assessment.

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