Banking Operations and Terminology

Practice questions (17)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

1. Under the Banking Regulation Act, 1949, which activity is at the core of the definition of 'banking'?

   1. Issuing currency notes and managing the market borrowing programme of the Union and the State governments
   2. Accepting public deposits for lending or investment, repayable on demand or otherwise and withdrawable by cheque or draft
   3. Insuring depositors against the failure of a bank, up to a fixed sum for each depositor, from a fund built on premiums
   4. Fixing the minimum capital that banks must hold against their risk-weighted assets under Basel norms and supervising it
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   Answer: B — Accepting public deposits for lending or investment, repayable on demand or otherwise and withdrawable by cheque or draft

   Section 5(b) defines banking by deposit-taking for lending or investment, with deposits repayable on demand or otherwise and withdrawable by cheque, draft or order. Note issue and government debt management are RBI functions, deposit insurance is DICGC's and capital norms are RBI regulation, so they are not the defining activity of banking.

2. A resident-turned-NRI wants to park the monthly rent that his Indian flat earns in a rupee account in India. Which account is meant for income earned in India?

   1. NRE account, because it is the rupee account of a non-resident and is freely repatriable
   2. FCNR(B) account, because it is a term deposit that safely holds rupees earned in India
   3. NRO account, because it holds income earned in India and its repatriation is restricted
   4. BSBDA, because every non-resident Indian holds the no-frills account by default
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   Answer: C — NRO account, because it holds income earned in India and its repatriation is restricted

   Income earned in India, such as rent, belongs in an NRO account, whose balances can be repatriated abroad only within a limit and under conditions. NRE is the tempting choice but it is funded from foreign earnings and is freely repatriable; FCNR(B) holds foreign currency.

3. A customer is classified as high-risk and her KYC was last updated in March 2024. By the Master Direction's periodic-updation cycle (2, 8 and 10 years for high, medium and low risk), when is the next updation due at the latest?

   1. March 2032, because the cycle for a high-risk customer runs eight years
   2. March 2034, because every customer is refreshed once in ten years
   3. March 2025, because KYC must be refreshed every year for high-risk customers
   4. March 2026, because the gap for a high-risk customer is at most two years
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   Answer: D — March 2026, because the gap for a high-risk customer is at most two years

   High-risk customers are updated at least once in two years, so March 2024 plus two years gives March 2026. Eight years (March 2032) is the medium-risk gap and ten years (March 2034) the low-risk gap; no annual cycle is prescribed.

4. A cheque has two parallel lines drawn across its face and the words 'Account Payee' written between them. Which statement is correct?

   1. The paying bank will not pay cash at the counter and the collecting banker should credit only the payee
   2. The cheque can no longer be passed on to anyone and becomes invalid for every kind of presentation
   3. Any bearer may still encash it in cash at the drawee branch counter once he proves his identity
   4. It becomes a bearer cheque valid for six months from the date written on it
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   Answer: A — The paying bank will not pay cash at the counter and the collecting banker should credit only the payee

   Crossing generally means payment only through a bank account, and the 'account payee' words direct the collecting banker to credit only the payee. A bearer cannot encash it over the counter. Crossing restricts collection, not validity, and the validity period is three months, not six.

5. A cheque dated 10 June 2026 is presented to the drawee bank on 20 September 2026. Under RBI's validity rule for cheques, what is the position?

   1. It is payable, because a cheque stays valid for six months from its date
   2. It is stale and will not be paid, as it was presented after three months
   3. It is payable only if the drawer confirms the payment by telephone to the bank
   4. It is payable but the bank must first send it to the RBI for special clearance
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   Answer: B — It is stale and will not be paid, as it was presented after three months

   The three-month window from 10 June ended on 10 September, so a presentation on 20 September is stale and the bank will not pay. Six months was the earlier rule and is the tempting wrong answer. Nothing in the rule lets a telephone confirmation revive a stale cheque.

6. Which sequence of periods correctly describes the steps a payee must follow after a cheque is returned for insufficient funds, before a complaint under Section 138 of the Negotiable Instruments Act?

   1. Notice within 15 days of the return; the drawer gets 30 days to pay; a complaint may follow within six months
   2. Notice within 60 days of the return; the drawer gets 30 days to pay; a complaint may follow within 90 days
   3. Notice within 30 days of learning of the return; the drawer gets 15 days; complaint within one month after
   4. Notice within 7 days of the return; the drawer gets 15 days to pay; a complaint may follow within 15 days
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   Answer: C — Notice within 30 days of learning of the return; the drawer gets 15 days; complaint within one month after

   The sequence is: demand notice within 30 days of learning of the return, 15 days for the drawer to pay after receiving it, then a complaint within one month. Swapping 30 and 15, as the notice-in-15-days sequence does, is the usual trap.

7. Why is a demand draft regarded as safer for the payee than an ordinary personal cheque?

   1. Because the Negotiable Instruments Act does not apply to it, so Section 138 can never arise for it
   2. Because a demand draft can be encashed at any bank in India by anyone without any identification
   3. Because a demand draft never expires and may be presented to the bank after any number of years
   4. Because the bank issues it after receiving the money, so it cannot bounce for lack of funds in the buyer's account
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   Answer: D — Because the bank issues it after receiving the money, so it cannot bounce for lack of funds in the buyer's account

   A DD is issued by a bank against advance payment, so the payee relies on the bank, not on the buyer's balance. The other options are false: a DD is payable at a specified branch, is also subject to the three-month presentment rule, and is covered by the Negotiable Instruments Act.

8. Which description of the two bank-identification codes is correct?

   1. IFSC has 11 characters, the fifth being zero, and MICR has 9 digits for city, bank and branch
   2. IFSC has 9 digits for city, bank and branch, and MICR has 11 characters with a zero as its fifth character
   3. Both IFSC and MICR have 11 characters, with the first four letters standing for the bank in each
   4. Both IFSC and MICR have 9 digits, with the last three of each standing for the city or the bank
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   Answer: A — IFSC has 11 characters, the fifth being zero, and MICR has 9 digits for city, bank and branch

   IFSC is an 11-character code (four letters for the bank, a zero, six characters for the branch) used for NEFT and RTGS; MICR is a 9-digit code (city, bank, branch) printed on cheques for clearing. The option that gives IFSC nine digits swaps the two, which is the usual exam trap.

9. A ₹1,00,000 loan at 12% a year, reducing balance, is repaid in 12 monthly EMIs of ₹8,885. Month 1 interest is 1% of the loan. Which is closest to the interest part of the month-2 EMI?

   1. ₹1,000, because the interest is always charged at 1% of the original loan amount
   2. ₹921, as the balance after month 1 is ₹92,115
   3. ₹960, because interest falls by 4% each month
   4. ₹885, because the EMI minus the month-1 principal part is the interest
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   Answer: B — ₹921, as the balance after month 1 is ₹92,115

   Month 1: interest ₹1,000, principal ₹8,885 - ₹1,000 = ₹7,885, balance ₹1,00,000 - ₹7,885 = ₹92,115. Month 2 interest = 1% of ₹92,115, about ₹921. The ₹1,000 answer treats the loan as flat-rate, which it is not.

10. A lender quotes '10% flat' on ₹1,00,000 for 2 years, giving a monthly instalment of ₹5,000. How does this compare with a 10% reducing-balance loan of the same size and term?

    1. It is cheaper, because a flat rate is fixed for the whole term and cannot rise
    2. It is identical, because the percentage quoted is the same in both cases
    3. It is dearer, because interest stays on the full original amount throughout
    4. It is cheaper, because instalments of a round figure always carry less total interest
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    Answer: C — It is dearer, because interest stays on the full original amount throughout

    Under the flat quote the total interest is ₹20,000 regardless of repayments, which equals about 18% a year on a reducing balance. A reducing-balance loan charges interest only on what is still owed, so the same headline percentage costs less.

11. In a non-leap year a term-loan instalment due on 1 January is unpaid. How should the account be classified on 20 March (as of October 2026 norms, with SMA-1 for 31-60 and SMA-2 for 61-90 days overdue)?

    1. SMA-1, because 78 days is too short to be a serious delay
    2. Sub-standard NPA, because the instalment has been overdue for more than two months
    3. Doubtful asset, because more than 60 days have passed since the due date
    4. SMA-2, because it is 78 days overdue, which is within 61 to 90 days
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    Answer: D — SMA-2, because it is 78 days overdue, which is within 61 to 90 days

    From 1 January to 20 March in a non-leap year is 31 + 28 + 19 = 78 days overdue. That is within 61 to 90 days, so SMA-2. It is not NPA, which needs more than 90 days, and doubtful is a stage of an NPA only after 12 months as sub-standard.

12. A borrower's account has been a non-performing asset for 14 months, with no loss formally identified yet. Under RBI's asset classification it is a

    1. doubtful asset, as it has stayed sub-standard for the full 12 months
    2. special mention account, because the account is still being closely monitored for recovery
    3. loss asset, because any asset older than a year must be written off as a loss
    4. sub-standard asset, because the sub-standard stage covers the first 24 months of any NPA
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    Answer: A — doubtful asset, as it has stayed sub-standard for the full 12 months

    An NPA is sub-standard for 12 months or less; after 12 months in that category it is doubtful. Loss needs the loss to be identified by the bank, auditors or RBI inspection, not merely age. Special mention accounts are pre-NPA stages (up to 90 days overdue).

13. Which Basel accord, issued in 1988, first set a minimum capital requirement for banks against credit risk?

    1. Basel II, which introduced the three pillars
    2. Basel I
    3. Basel III, which added the leverage ratio and liquidity standards
    4. The liquidity coverage framework for short-term funding stress
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    Answer: B — Basel I

    Basel I (1988) was the first accord to set a minimum capital ratio for credit risk. Basel II (2004) added the three pillars and Basel III (after the 2008 crisis) tightened capital and added leverage and liquidity standards, so neither was issued in 1988.

14. A bank has ₹800 crore of exposures at 100% risk weight and ₹400 crore at 50% risk weight, and total eligible capital of ₹105 crore. Against Indian Basel III minimums (total 9%, plus 2.5% conservation buffer, as of October 2026), which statement is correct?

    1. CRAR is 10.5%, which is above 11.5% and so fully compliant with the buffer
    2. CRAR is 8.75%, below the 9% minimum, because risk weights are ignored in the standard test
    3. CRAR is 10.5%, above 9% but below 11.5%, so the buffer is being used
    4. CRAR is 13.1%, because capital is divided by the 50%-weighted exposure alone
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    Answer: C — CRAR is 10.5%, above 9% but below 11.5%, so the buffer is being used

    RWA = 800 × 100% + 400 × 50% = ₹1,000 crore, so CRAR = 105 ÷ 1,000 = 10.5%. That is above the 9% minimum but below 11.5%. Dividing by the unweighted 1,200 gives 8.75%, which wrongly suggests a breach of the minimum.

15. Anil holds, all in his own single name, ₹3 lakh in savings and ₹4 lakh in an FD at Bank X, and ₹2 lakh in an FD at Bank Y. Both are insured banks. If Bank X fails, how much of his Bank X money is insured, and what is his total insured across both banks if only X fails? (DICGC limit of ₹5 lakh per depositor per bank, as of October 2026.)

    1. ₹7 lakh at Bank X, and ₹9 lakh in total, because savings and FD are insured separately as accounts
    2. ₹3 lakh at Bank X, and ₹5 lakh in total, because only the savings account is insured under the scheme
    3. ₹5 lakh at Bank X, and ₹5 lakh in total, because the limit applies once across all banks
    4. ₹5 lakh at Bank X, and ₹7 lakh in total, as Bank Y is untouched
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    Answer: D — ₹5 lakh at Bank X, and ₹7 lakh in total, as Bank Y is untouched

    DICGC cover is ₹5 lakh per depositor per bank across account types, so Bank X's ₹7 lakh is insured only to ₹5 lakh. Bank Y did not fail, so its ₹2 lakh remains with Bank Y in full; the total secured is ₹5 lakh + ₹2 lakh = ₹7 lakh. The limit is per bank, not once overall.

16. A bank has not replied to a customer's written complaint for 30 days. Under the RBI Integrated Ombudsman Scheme, 2026 (in force from 1 July 2026), what may the customer do?

    1. Approach the Ombudsman directly through cms.rbi.org.in or the CRPC within 90 days
    2. Wait for a full year, because the Ombudsman accepts complaints only after twelve months have passed
    3. Approach the Ombudsman only through an advocate, who must be authorised in writing by the customer
    4. Pay the prescribed filing fee and then file the complaint at the nearest Ombudsman office
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    Answer: A — Approach the Ombudsman directly through cms.rbi.org.in or the CRPC within 90 days

    After the 30-day reply period, or on an unsatisfactory reply, the customer can file with the RBI Ombudsman within 90 days, online, by email or by post to the CRPC. The service is free and the complaint is addressed directly to the RBI Ombudsman. The filing fee, the one-year wait and the compulsory advocate in the other options are not part of the scheme.

17. The Lead Bank Scheme, introduced in December 1969 on the basis of the area approach recommended by the Gadgil Study Group, does which of the following?

    1. Makes the RBI Governor the lead banker for the government accounts of every district in the country
    2. Gives each district to one bank that prepares its credit plan and coordinates others
    3. Allots each state to one bank that alone may open branches in that state
    4. Lets the district collector fix the interest rates of all banks in the district
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    Answer: B — Gives each district to one bank that prepares its credit plan and coordinates others

    The scheme allots districts, not states, to lead banks, which survey credit gaps, prepare the district credit plan and coordinate through the DCC and SLBC. It does not fix interest rates or give anyone a monopoly on branches.