Money and Banking Flashcards
(129 cards)
1
Q
Reasons for demand of money
A
2
Q
Initial price of the bond
A
Face value
3
Q
The difference between maturity value and issue price of any bond
A
Coupon value
4
Q
Why are bonds safest assets?
A
Because any default in bond will imply immediate bankruptcy
5
Q
What will happen if money supplier liquidity is high?
A
6
Q
What is the rate of written in bond called?
A
Yield
7
Q
What happens if money supplier liquidity is low?
A
Everybody is selling bond, hence bond price will fall as demand is less so yield on the bond will increase
8
Q
How bond yield reacts with interest rate
A
9
Q
Speculative demand for money means:
A
People hold on to cash instead of investing in bonds because they think interest rates might rise in the future, and bond prices might fall. So, they wait.
10
Q
When will the money demand for speculation will be high?
A
When interest rate is low
Imagine the interest rate is 1%.
Investors think, “1%? That’s nothing! It’s going to rise soon!”
So they don’t buy bonds and keep cash.
This increases speculative demand for money at low interest rates.
11
Q
Why Does the Bond Market Decide Liquidity in Reality?
A
- Central banks (like RBI or US Fed) control money supply, but…
- The bond market decides how much of that money is actually being used or circulated.
- If bond prices are attractive, people will buy bonds — money flows into the financial system.
- If bond prices fall, or people expect interest rate hikes, they stop buying — and money gets stuck in people’s hands (illiquid).
12
Q
Will you buy a bond if you are expecting interest rate to hike?
A
No, I will buy a bond only when it is already hiked by RBI because then the bond price will fall
13
Q
When were new monetary aggregates introduced? The?
A
2004 by YV Reddy committee, who gave its recommendations in 1998
14
Q
What are national saving certificates?
A
These are issued by post office. But they are not deposits. They are bonds that means they have to be returned at some point of time.
15
Q
What is Narrow money 1
A
M1= Currency in circulation + DD with commercial banks, + other deposits with RBI
16
Q
M1
A
17
Q
Nm2
A
18
Q
COD
A
19
Q
Nm3
A
20
Q
Why are Deposits Counted in Money Supply but Bonds Are Not?
A
Because of Liquidity & Spendability.
21
Q
Why Does RBI Impose CRR and SLR on Deposits But Not on Bonds?
A
Because deposits are:
• Public’s money — Banks are just custodians.
• Highly liquid — People can demand withdrawal anytime.
• Part of the money supply — Affect inflation, lending, liquidity.
22
Q
Are bonds issued by banks part of NDTL
A
No
23
Q
Who controls money supply in the market?
A
Central bank
24
Q
Five main functions of central bank
A
25
Who issues notes of denomination of one rupees and all the coins in India?
Ministry of finance
26
What is base money or high power money?
27
Formula for money supply
Money multiplier X base money
28
What is money multiplier?
29
Money multiplier formula
30
What is the part of RRR?
Only CRR and not SLR
31
Can banks use SLR to increase their liquidity?
Yes , but only to some extent
32
Some more points
33
How is RBI banker to the government?
34
How does RBI purchases government bonds through primary market?
Only through ways and means advances
35
What is WAMA
36
Can state government issued t bills
No
37
Is RBI allowed to purchase government bonds from secondary market?
Yes, but not from primary market. Exception is ways and means advance
38
Does government borrowing in phases money supply?
No, it may even lead to crowding out
39
Money Supply Increases First → Inflation Rises → Bond Yield….
Decreases
40
Inflation Rises First → Bond yield …..
Increases, as people do not have money to invest. The rise in the inflation can be due to war Covid or any other supply side inflation.
41
How does RBI give loan in WAMA
By pronting money
42
Banker to the bank
43
What is the Call Money Market?
Think of it as the WhatsApp group for banks, where they message each other, “Bro, lend me money just for one day.”
Yes, call money is money borrowed and repaid within 1 day. That’s why it’s also called the overnight money market.
44
How RBI regulates commericial bank through prompt corrective action?
45
what are scheduled commercial banks?
Those banks which are registered in schedule two of RBI. ICICI, HDFC, PNB.
46
Who is custodian of forex reserve
47
Quantitative tools of RBI to control money supply
Required as a ratio like cash reserve ratio and statutory liquidity ratio.
Bank rate , open market operation, marginal standing facility
48
CRR?
49
NDTL?
50
SLR ?
51
What is bank rate?
52
How are open market operations conducted by RBI?
Through liquidity adjustment facility introduced in 1997. Its components are repo rate. Reverse repo rate, marginal standing facility.
53
What is OMO
54
Nowadays OMO are taken over by LAF ?
Yes
55
Repo rate?
56
What is reverse repo rate?
57
In Reverse Repo, Does RBI Actually Give Bonds to Banks?
NO.
RBI does not hand over bonds to banks in a reverse repo.
Banks park their excess funds with RBI, and RBI gives them interest at the reverse repo rate.
However, the transaction is backed by government securities, but those bonds stay with RBI—they are not physically transferred to banks.
58
Policy rate
Repo rate
59
New floor rate
Standing deposit facility
60
SDF
61
Marginal standing facility?
62
Ceiling rate, policy rate, floor rate
63
What are qualitative tools of money, supply or credit control of RBI?
Margin requirements,
Priority sector lending.
Credit rating.
Moral suation
64
What is margin requirement
65
PSL
66
Credit rationing
67
Inflation targetting
Started in India on August 2016 on recommendations of Urjit Patel committee
68
Inflation target
2 to 6 %
69
Should ind increase inflation target?
Yes
70
Number of members in Monetary policy committee
6
71
How are members of MPC appointed?
Three are appointed by government for period of four years and 10 years is not extended.
Other 3 RBI members, including RBI, governor. RBI governor has casting vote all decisions through voting.
72
Three types of RBI policy stands
Dovish/accommodating: liquidity will be provided such that it controls inflation and is supportive towards growth.
Neutral: RBI target inflation control without promoting or restricting growth.
Restrictive/hawkish policy: Central Bank provides liquidity to control inflation, even if it means reducing the growth
73
Can RBI control supply side inflation?
No
74
What is emergency credit line guarantee scheme?
Introduced by RBI on behalf of government under which banks were given freedom to provide collateral free loans up to ₹2,00,00,000 to MSME, who did not have a record of default in the past. The scheme continue till March 2023 and loans worth more than five lakh crore by distributed in it.
75
What is sterilisation?
76
Lead bank scheme
Under this a PSB adopt a district plans, its development projects does assessment of resources and finance projects
77
RRB
50% ownership of central government, 35% ownership of sponsoring public sector bank
78
What do you mean by provisioning of NPA?
Banks will use its new deposits or sell the part of their assets to show them in liquid form in the balance sheet to convince the deposits that even though the default has happened, still, I have enough money to pay back for the deposits
79
What effect does provisioning have on liquidity and lending capacity of bank?
80
What is transmission mechanism?
The rate and amount by which change in repo rate is transferred by the bank to the market
81
What is ACLR?
Average cost of lending rate equals total cost of landing/total loans given
82
What is MCLR introduced by RBI in 2017?
It is a criteria for banks now to change interest rate
83
What has Reliance done to transmission mechanism after 2019?
84
How does bank use external benchmark rate to decide its lending rate?
The lending rate =
External Benchmark + Spread (margin decided by bank)
85
Why transmission mechanism is weak in India?
+ informal lending. As per financial stability report, January 2024, 47% of informal landing is there.
86
How are non-performing assets characterised in India?
87
Bad loans
88
Provisioning for bad loans
89
Writing off loan
90
How banks recover the loan?
Three methods
91
What is twin balance sheet deficit?
92
What was the outcome of the asset quality review?
93
Reasons for rise of NPA
94
What are commercial paper?
95
Steps taken by government to remove the problems of NPA
96
What is NARCL and IDRCL established by government to remove the problem of NPA?
97
Who owns majority of share of NARCL?
Public sector banks which have 51% share in it
98
How much share do public banks have in IDDRCL?
49%
99
Full form of NARCL
National asset reconstruction company Limited
100
What is IDRCL?
India debt resolution company Limited
101
What are security receipts?
NARCL will be responsible for purchasing bad loans from the market by paying 15% cash and 85% in terms of security receipts which can be encased after recovery.
The security receipts are ready and supported by government guarantee fund of ₹30600 crore
102
Tell about BIFR
103
Resolution defintiin
104
SARFARSI act?
105
Time taken for resolution,
Which committee suggested on bankruptcy and resolution law?
106
Explain IB act
107
What does insolvency resolution professional do?
108
Do owners lose the control of all the assets as soon as bankruptcy is declared?
109
What options does MSME has once declared itself bankrupt
110
What is cross-border insolvency resolution?
111
Benefits of IBA
112
Challenges of IBC
113
Full form of CAR/CRAR
Capital adequacy ratio/capital to risk weighted assets ratio
114
What is tier 1 capital?
115
What is equity share capital
Those who have ownership rights
116
What is preference, share capital?
Shareholders, but do not have voting rights
117
In case of bankruptcy, how is the money distributed?
118
Tier 2 capital
119
If value of CRAR increases, then the trustworthiness of the bank decreases or increases
Increases
120
Reason why NPA are written off
121
What is the minimum CRAR as per RBI and as per basil 1 norms?
122
Which bank collapsed despite maintaining CRAR of 8%?
123
What is pro cyclical provisioning as per basal 2 norms?
124
Which bank crisis led to basal three norms?
2001, Argentina bank crisis,
2003, Bolivia bank crisis,
2007, Bassil3 norms
125
What are some of the clauses of bail three norms?
126
What is the risk buffer ratio that one has to maintain apart from CRAR of 8% as per basin three norms?
127
Which banks are domestic systemically important banks?
ICICI, SBI and HDFC
128
What do domestic systemically important banks have to do?
129
What is the insurance coverage of deposits?
Five lakh ₹
98.2 percent deposits are protected and 74% deposits are protected
