[4 marks Question-Answer]

Question 14 Marks

Briefly discuss any two quantitative measures adopted by the Reserve Bank of India to control credit.

Answer

self

Question 24 Marks

Explain the following functions of the Central Bank:
(i) Fiscal agent of the government.
(ii) Advisor to the government.

Answer

(i) As Fiscal Agent: As a fiscal agent, it performs the following functions:
(i) It manages the public borrowings.
(ii) It collects taxes and other payments on behalf of the government.
(iii) It represents the government in the international financial institutions (such as World Bank, International Monetary Fund, etc.) and conferences.
(ii) As Advisor : The central bank also acts as the financial Advisor to the government. It gives advice to the government on all financial and economic matters such as deficit financing, devaluation of currency, trade policy, foreign exchange policy, etc.

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Question 34 Marks

How is a commercial bank different from a central bank?###Write three differentiate between commercial and central bank.###Give five points of difference between Commercial and Central Bank.

Answer

Basis	Central Bank	Commercial Bank
(i) Meaning	Central bank is an apex institution of the monetary and banking structure of the country.	It just operates under the guidelines of the central bank
(ii) Object	Its main objective is to promote social welfare	Its main objective is to earn profit.
(iii) Ownership	Central bank is generally a government owned institution	Commercial banks may be both privately owned or government owned institutions.
(iv) Note-issue	It has got the monopoly right of note-issue	Commercial banks do not have such rights.
(v) Banker	It is a banker to the government and commercial banks.	Commercial bank is a banker to the general public only
(vi) Number	There can be only one central bank with a few offices in a country.	There are a number of commercial banks in every country with a large number of branches all over the country and also even abroad.
(vii) Credit	It controls credit	It creates credit.

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Question 44 Marks

Name the institution which enjoys the monopoly of note issue. Explain the following functions of this institution:
(i) Bankers Bank
(ii) Banker to the Government

Answer

(i) As a banker's bank: Under the banking law, commercial banks are required to deposit cash reserves with the Central Bank. It gives loans to commercial banks as a lender of the last resort.
(ii) As a supervisor: The central bank supervises, regulates and controls the commercial banks. The regulation may be related to their licensing, branch expansion, amalgamation etc. It also includes periodic inspection of banks.
(i) As the banker to the govt. central bank accepts receipts and makes payments for the govt. It provides short term loans to the govt. in times of difficulties.
(ii) As govt. agent, the central bank undertakes sale and purchase of the government securities and also manages the public debt (national debt) and foreign debt.
(iii) The central bank also acts advisor to the govt. especially on monetary, banking and financial matters.

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Question 54 Marks

With reference to the Central Bank, explain the following:
(i) Monopoly of note issue
(ii) Lender of the last resort

Answer

(a) Banker to the Goverment
(i) As the banker to the govt. central bank accepts receipts and makes payments for the govt. It provides short term loans to the govt. in times of difficulties
(ii) As govt. agent, the central bank undertakes sale and purchase of the government securities and also manages the public debt (national debt) and foreign debt.
(iii) The central bank also acts advisor to the govt. especially on monetary, banking and financial matters.
(b) Banker to the banks
(i) As a banker's bank: Under the banking law, commercial banks are required to deposit cash reserves with the Central Bank. It gives loans to commercial banks as a lender of the last resort.
(ii) As a supervisor: The central bank supervises, regulates and controls the commercial banks. The regulation may be related to their licensing, branch expansion, amalgamation etc. It also includes periodic inspection of banks.

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Question 64 Marks

Explain the following functions of a central bank:
(a) Banker to the Government
(b) Banker to the Banks

Answer

(a) Banker to the goverment : The central bank acts as a banker to the government both central as well as state governments in the following ways:
(i) As the banker to the govt. central bank accepts receipts and makes payments for the govt. It provides short term loans to the govt. in times of difficulties.
(ii) As govt. agent, the central bank undertakes sale and purchase of the government securities and also manages the public debt (national debt) and foreign debt.
(iii) The central bank also acts advisor to the govt. especially on monetary, banking and financial matters.
(b) Banker to the banks :
(i) As a banker's bank: Under the banking law, commercial banks are required to deposit cash reserves with the Central Bank. It gives loans to commercial banks as a lender of the last resort.
(ii) As a supervisor: The central bank supervises, regulates and controls the commercial banks. The regulation may be related to their licensing, branch expansion, amalgamation etc. It also includes periodic inspection of banks.

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Question 74 Marks

Explain the following measures adopted by the central bank to control inflation.
(a) Bank rate
(b) Open market operations###Explain how bank rate and open market operations can be used by the central bank to control credit.

Answer

(a) Bank Rate: The Central Bank (RBI) controls credit (or money supply) through changes in its bank rate. An increase in bank rate increases the cost of borrowing from the central bank. If forces the commercial banks to increase their lending rates which discourages people from taking loans from banks.
(b) Open Market Operations: The Central Bank (RBI) controls credit through its open market operations. Under it, the central bank buys or sells the government securities in the open market. Sale of securities by central bank reduces the reserves of commercial banks which adversely affects bank's ability to create credit. And purchase of securities from the open market increases the resources of banks and hence their lending capacity

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Question 84 Marks

Distinguish between qualitative and quantitative measures of credit control. Briefly explain the quantitative credit control policy of the central bank.

Answer

Basis	Quantitative Methods	Qualitative Methods
(i) Nature	These methods influence the total volume of credit.	Qualitative measures influence the selective or particular uses of credit.
(ii) Method	These methods are non-discriminatory in nature.	These are discriminatory in nature.
(iii) Effect	These methods affect the lenders.	These methods affect both the lenders as well as the borrowers.
(iv)	These are indirect and impersonal.	These are direct
(v) Methods	These methods include: (a) Bank Rate (b) Open Market Operations (c) Cash Reserve Ratio (d) Statutory Liquidity Ratio	These methods include: (a) Consumer's Credit (b) Margin Requirements (c) Rationing of Credit (d) Moral Suasion
(vi) Alternate name	These methods are also called general methods of credit control.	These are also called selective methods of credit control.

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Question 94 Marks

Explain any three methods of qualitative credit control.

Answer

Two Qualitative Methods of credit control: The methods used by the RBI to regulate the flow of credit into particular directions of the economy are called qualitative methods.
(i) Margin Requirements: A margin is the difference between the amount of the loan and market value of the security offered by the borrowers against the loan. By changing the margin requirement, the central bank can alter the amount of loans made against securities by the banks.
(ii) Rationing of Credit: Rationing of credit means fixation of credit quotas for different sectors of the economy.

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Question 104 Marks

Define demonetisation. State its objectives.

Answer

When a currency note or notes of particular demonetisation ceases to be a legal tender, it is termed as demonetisation. Under demonetisation, the status of legal tender currency is withdrawn by the government. Demonetised currency is no longer accepted as a medium of exchange. The old currency is replaced by new currency
Demonetisation of currency in India was done to achieve the following objectives:
1. Elimination of Black Money: Black money refers to unaccounted money. This kind of money is accumulated by people by not paying the due amount of tax and by indulging in illegal activities. The aim of the government was to eliminate black money from the economy.
2. To Curb Corruption Illegal transactions (e.g. bribery, smuggling etc.) are commonly carried out through high value notes. The government wanted to eliminate the root cause of corruption through demonetisation
3. To Eliminate Counterfeit Currency: Another objective of demonetisation was to eliminate counterfeit currency. There was a huge amount of fake currency in circulation. This counterfeit currency was causing inflationary pressure in the economy.
4. To Check Terror Funding Demonetisation was also aimed at elimination of terror funding. High denomination notes were being used for terror activities. Terror activities would automatically come to an end in the absence of finance.

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