Important Questions of Banking and Insurance

 Important Questions of Banking and Insurance

Q1. What do you mean by commercial bank? Discuss its functions in detail. 

Ans.1) The term commercial bank refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is where most people do their banking.

The functions of commercial banks are classified into two main divisions.

(a) Primary functions 

•  Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of the commercial transactions.

• Provides loan and advances : Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people, and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.
• Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows the bank to create money.

(b) Secondary functions 

• Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.
• Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.
•  Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.

• Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.
• Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of exchange.

Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans.

Q2. Explain managerial functions of any bank in detail. 

Bank management is characterized by the specific object of management – financial relations connected with banking activities and other relations, also connected with implementing management functions in banking.

A qualified professional charged with the responsibility of seeing that a banking system is properly coordinated is the bank manager.

This person performs several banking management functions among which are:

1. Planning: When management is reviewed as a process, planning is the first function performed by a manager. The work of a manager begins with the setting of objectives of the organisation and goals in each area of the business. This is done through planning. A plan is a predetermined course of action to accomplish the set objectives. It is today's projection for tomorrow's activity. Planning includes objectives, strategies, policies, procedures, programmes, etc. As it involves making choices, decision-making is the heart of planning.

2. Organising: Organising includes putting life into the plan by bringing together personnel, capital, machinery, materials etc., to execute the plans. While, planning decides what management wants to do, organising provides an effective machine for achieving the plans.

3. Staffing: Staffing involves filling the positions needed in the organisation structure by appointing competent and qualified persons for the job. This needs man power planning, scientific selection and training of personnel, suitable methods of remuneration and performance appraisal.

4. Directing: Direction involves managing managers, managing workers and the work through the means of motivation, proper leadership, effective communication as well as co-ordination. A manager must develop the ability to command and direct others.

5. Motivating: Motivation is a managerial function to inspire and encourage people to take required action. Motivation is the key to successful management of any enterprise. Motivation can set into motion a person to carry out certain activity.

6. Controlling: Control is the process of measuring actual results with some standard of performance, finding the reason for deviations of actual from desired result and taking corrective action when necessary. Thus, controlling enables the realization of plans. A manager must adopt the following steps in controlling:

   • Identify potential problems.
   • Select mode of control.
   • Evaluate performance in terms of planning.
   • Spot significant deviations.
   • Ascertain causes of deviations.
   • Take remedial measures.

7. Co-ordination: Co-ordination is concerned with harmonious and unified action directed toward a common objective. It ensures that all groups and persons work efficiently, economically and in harmony. Co-ordination requires effective channels of communication. Person-to-person communication is most effective for coordination.

8. Communication: It means transfer of information and under-standing from person to person. Communication also leads to sharing of information, ideas and knowledge.

Q3. What is Indian Banking System? Explain its classification. 

Banking is no new term to anyone be it homemakers, salaried people, businessmen, farmers, students or any other profession. Especially the Indian homes are well connected with banks and banking. The banking industry takes care of the finances of a country which includes credit and cash.

Banks are the backbone of the economy in a country and hence strict rules and regulations are imposed on the modus-operandi of banks. The major transactions that happen at banks are granting credits and accepting deposits from various entities.

RBI is the apex body that governs and monitors bank across India. It is responsible for regulating the monetary policy in the country.

BANK CLASSIFICATION IN INDIA

There are two broad categories under which banks are classified in India- SCHEDULED AND NON-SCHEDULED BANKS.

The scheduled banks include COMMERCIAL BANKS AND COOPERATIVE BANKS. The commercial banks include REGIONAL RURAL BANKS, SMALL FINANCE BANK, FOREIGN BANKS, PRIVATE SECTOR BANKS, and PUBLIC SECTOR BANKS. PAYMENTS BANK is a new introduction to the category.

Cooperative banks include URBAN AND RURAL BANKS.

Let us understand the nomenclature better;

SCHEDULED BANKS are the banks which are covered under the second schedule of the Reserve Bank of India Act, 1934. To qualify for being a scheduled bank, a minimum of 5 lakh paid-up capital is required on the bank’s behalf. The RBI lends loan to these banks at bank rate as and when required.

COMMERCIAL BANKS are regulated and managed under the Banking Regulation Act, 1949. These are profit making banks based on their business model. Granting loans to the government, general public, and corporate and accepting deposits counts as the primary function.

There are four types of commercial banks:

PUBLIC SECTOR BANKS

These banks for more than 75% of the total banking business in the nation. They are called nationalized banks. The government holds the majority stakes at these banks. Post-merger, SBI is the largest public sector banks by volume. It also ranks amongst the top 50 banks in the world.

PRIVATE SECTOR BANKS

Private shareholders hold majority stakes in private sector banks. Reserve Bank of India lays down all the rules and regulations. 

FOREIGN BANKS

A bank operating as a private entity in India but headquartered in a Foreign country is a foreign bank. They are governed by both the country they are located in as well the country they have headquarters in.

COOPERATIVE BANKS

Run by the elected members of a managing committee and registered under the Cooperative Societies Act, 1912 are the cooperative banks. These are no-profit, no-loss banks and mainly serve entrepreneurs, industries, small businesses, and self-employment.

Q4. Difference between commercial bank and Central bank 

Q5. Explain the function of RBI in Detail. 

Functions of Reserve Bank

1. Issue of Notes —The Reserve Bank has a monopoly for printing the currency notes in the country. It has the sole right to issue currency notes of various denominations except one rupee note (which is issued by the Ministry of Finance).

The Reserve Bank has adopted the Minimum Reserve System for issuing/printing the currency notes. Since 1957, it maintains gold and foreign exchange reserves of Rs. 200 Cr. of which at least Rs. 115 cr. should be in gold and remaining in the foreign currencies.

2. Banker to the Government–The second important function of the Reserve Bank is to act as the Banker, Agent and Adviser to the Government of India and states. It performs all the banking functions of the State and Central Government and it also tenders useful advice to the government on matters related to economic and monetary policy. It also manages the public debt of the government.

3. Banker’s Bank:- The Reserve Bank performs the same functions for the other commercial banks as the other banks ordinarily perform for their customers. RBI lends money to all the commercial banks of the country.  

Structure of Banking Sector in India

4. Controller of the Credit:- The RBI undertakes the responsibility of controlling credit created by commercial banks. RBI uses two methods to control the extra flow of money in the economy. These methods are quantitative and qualitative techniques to control and regulate the credit flow in the country.  When RBI observes that the economy has sufficient money supply and it may cause an inflationary situation in the country then it squeezes the money supply through its tight monetary policy and vice versa.

Where do Printing of Security Papers, Notes and Minting take Place in India?

5. Custodian of Foreign Reserves:-For the purpose of keeping the foreign exchange rates stable, the Reserve Bank buys and sells foreign currencies and also protects the country's foreign exchange funds. RBI sells the foreign currency in the foreign exchange market when its supply decreases in the economy and vice-versa. Currently, India has a Foreign Exchange Reserve of around US$ 487 bn.

6. Other Functions:-The Reserve Bank performs a number of other developmental works. These works include the function of clearinghouse arranging credit for agriculture (which has been transferred to NABARD) collecting and publishing the economic data, buying and selling of Government securities (gilt edge, treasury bills etc)and trade bills, giving loans to the Government buying and selling of valuable commodities etc. It also acts as the representative of the Government in the International Monetary Fund (I.M.F.) and represents the membership of India.

UNIT 2 

Q7. What are deposits? Discuss its types and how a bank helps in deposit money of public? 

A deposit is a financial term that means money held at a bank. A deposit is a transaction involving a transfer of money to another party for safekeeping. However, a deposit can refer to a portion of money used as security or collateral for the delivery of a good.

Types of Deposits 

There are two types of deposits: demand and time. A demand deposit is a conventional bank and savings account. You can withdraw the money anytime from a demand deposit account. 

Time deposits are those with a fixed time and usually pay a fixed interest rate, such as a certificate of deposit (CD). These interest-earning accounts offer higher rates than savings accounts. However, time deposit accounts require that money be kept in the account for a set period of time. 

1. Demand Deposit

   A demand deposit is a general deposit that you make into your bank account. It could simply be a transfer of money to any account – savings, current, salary account, etc. With demand deposits, you can withdraw money from your account at your discretion. For example, if you deposit to your savings account, you can freely withdraw money from the bank, its ATMs, or while paying for your expenses using the debit card provided by the bank, as and when you need.

2. Time Deposit

   A time deposit refers to money you put in the bank for set periods to earn interest. Unlike a demand deposit, you do not have the option of withdrawing money whenever you want to. Your deposit is locked away for a fixed term or time – a Fixed Deposit, for instance. Then there is the Recurring Deposit, wherein you have to deposit a fixed sum for a set period specified time intervals. The deposit period is a fixed long period, and the bank pays you cumulative or non-cumulative interest based on the type of time deposit you choose. The interest paid on time deposits is higher than what you would earn on your demand deposits like a Savings Account.