Chapter 20 - Indian Financial System - An Overview (JAIIB - MODULE C)

1. What is the primary role of a financial system in an economy?

• A. Controlling government expenditure
• B. Promoting only international trade
• C. Mobilizing savings and channelizing them into productive investments
• D. Issuing currency notes

A financial system helps in mobilizing savings from households and channelizing them into productive investments, ensuring economic growth.

2. Which of the following best describes the Indian financial system during the Pre-1951 period?

• A. Highly developed with specialized financial institutions
• B. Underdeveloped, fragmented, and dominated by moneylenders
• C. Fully regulated by the Reserve Bank of India
• D. Organized and integrated with global financial markets

Before 1951, India’s financial system was unorganized, heavily dependent on moneylenders and indigenous bankers, with very few formal institutions.

3. Which major financial institution was established in 1935 and played a key role in Phase I (Pre-1951)?

• A. State Bank of India
• B. NABARD
• C. IFCI
• D. Reserve Bank of India

The Reserve Bank of India (RBI) was established in 1935 and became the central authority regulating India’s financial system.

4. Which of the following developments took place during Phase II (1951 to mid-1980s)?

• A. Establishment of development financial institutions like IFCI, IDBI, ICICI
• B. Dominance of unorganized moneylenders
• C. Liberalization and globalization of financial markets
• D. Entry of private banks in a competitive market

Phase II saw the setting up of DFIs such as IFCI (1948), ICICI (1955), IDBI (1964), which provided long-term finance for industrial growth.

5. The nationalization of major commercial banks in 1969 falls under which phase of the Indian financial system?

• A. Phase I (Pre-1951)
• B. Post-1991 Reforms
• C. Phase II (1951 to mid-1980s)
• D. Phase III (Post-Liberalization)

The nationalization of 14 major commercial banks in 1969 was a landmark reform during Phase II, aimed at expanding banking to rural areas.

6. Which major economic reform in 1991 marked the beginning of Phase III of the Indian financial system?

• A. Nationalization of banks
• B. Liberalization, Privatization, and Globalization (LPG) reforms
• C. Establishment of NABARD
• D. Creation of the Planning Commission

The 1991 LPG reforms liberalized India’s economy and opened up the financial sector, marking Phase III of the financial system.

7. Which of the following changes occurred in the Indian banking system post-1991 reforms?

• A. Entry of private sector and foreign banks
• B. Introduction of prudential norms for NPAs
• C. Adoption of Basel norms
• D. All of the above

Post-1991, private and foreign banks were allowed entry, prudential norms for NPA classification were introduced, and Basel guidelines were adopted.

8. Which committee’s recommendations in 1991 played a key role in reforming the Indian banking system?

• A. Narasimham Committee
• B. Rangarajan Committee
• C. Kelkar Committee
• D. Narsimha Rao Committee

The Narasimham Committee (1991) provided a framework for banking reforms, focusing on efficiency, competition, and prudential regulation.

9. Which of the following was a key recommendation of the Narasimham Committee (1991)?

• A. Nationalization of more banks
• B. Increase in Statutory Liquidity Ratio (SLR)
• C. Reduction in CRR and SLR to improve liquidity
• D. Abolition of private sector banks

The Narasimham Committee recommended lowering CRR and SLR to free resources for lending and reduce the financial burden on banks.

10. As per Narasimham Committee (1991), which type of banking structure was recommended for India?

• A. One-tier structure with only public sector banks
• B. A three-tier structure with large international banks, national banks, and local banks
• C. Only foreign banks and cooperative banks
• D. Exclusive rural-focused banking system

The Committee suggested a three-tier banking structure to improve efficiency, competition, and global presence of Indian banks.

11. Which key reform measure was introduced in the Indian banking sector in 1994 to improve asset quality and transparency?

• A. Priority sector lending targets
• B. Nationalization of more banks
• C. Introduction of prudential norms for income recognition, asset classification, and provisioning (IRAC norms)
• D. Launch of Jan Dhan Yojana

In 1994, prudential norms (IRAC norms) were introduced, requiring banks to classify assets into standard, substandard, doubtful, and loss categories, ensuring better transparency in balance sheets.

12. Which institution was established in 2002 to deal with recovery of non-performing assets (NPAs) of banks?

• A. Asset Reconstruction Companies (ARCs)
• B. NABARD
• C. Exim Bank
• D. SIDBI

ARCs were set up under the SARFAESI Act, 2002 to acquire NPAs from banks and financial institutions for faster resolution of bad loans.

13. Which of the following was a major outcome of banking reforms during 1992–2008?

• A. Reduction in NPA levels
• B. Introduction of technology-based services like core banking
• C. Increased competition due to private and foreign banks
• D. All of the above

Banking reforms during 1992–2008 led to declining NPAs, technology adoption like CBS and ATMs, and greater competition with private/foreign banks entering the system.

14. In the present status of the Indian banking system, which category of banks has the largest share in total assets?

• A. Private sector banks
• B. Public sector banks
• C. Foreign banks
• D. Cooperative banks

Public sector banks still hold the largest share of assets in the Indian banking system, though private banks are rapidly increasing their market share.

15. Which recent initiative best represents the modernization of the Indian banking system?

• A. Unified Payments Interface (UPI)
• B. Lead Bank Scheme
• C. Establishment of IFCI
• D. Nationalization of 14 banks

UPI, launched in 2016, has revolutionized digital payments in India and is a symbol of the modernization of the present banking system.