2 MARKS

1. Key Functions of a Superintendency Bank/Central Bank:

o Monetary Policy: The central bank controls inflation and stimulates or
restrains economic growth by adjusting interest rates and regulating money
supply.
o Issuer of Currency: It is the sole authority to issue and regulate the
circulation of the national currency to maintain stability in the financial
system.
o Regulation of Banks: The central bank supervises commercial banks to
ensure their soundness, stability, and adherence to laws, preventing financial
crises.
o Foreign Exchange Management: It manages the country’s foreign reserves,
intervenes in the forex market, and stabilizes the national currency against
international fluctuations.
2. Difference Between NBFC and Commercial Bank:
o NBFC (Non-Banking Financial Company) provides financial services like
loans, leasing, asset management, and microfinancing but cannot accept
demand deposits or issue checks, limiting its scope compared to banks.
o Commercial Banks provide a full spectrum of financial services, including
accepting demand deposits, offering savings/checking accounts, and
processing payments, with stricter regulatory oversight by central banks.
3. Rationale Behind Opening Insurance Sector to Private Players (2000):
o The Malhotra Committee advocated for privatization to introduce
competition, thereby improving customer service, increasing product
innovation, and providing a wider range of insurance options to consumers.
o The opening also aimed at foreign investment to infuse capital into the sector,
promoting growth, and expanding the reach of insurance coverage across
India’s diverse population.
4. Who is an Actuary and What Do They Do?
o An actuary is a professional who applies statistical and mathematical models
to assess financial risks, particularly in areas like life insurance, pensions, and
healthcare.
o They help businesses design policies and set premiums by analyzing historical
data, future risks, and economic conditions, ensuring financial products remain
viable and profitable.
5. Difference Between Fixed Deposits and Recurring Deposits:
o Fixed Deposit (FD) involves investing a lump sum amount for a specific
tenure at a predetermined interest rate, and the principal and interest are paid
at maturity.
o Recurring Deposit (RD) allows individuals to invest fixed monthly amounts
for a predetermined period, offering the benefit of building savings over time
with interest paid at the end of the term.
6. Institutions Involved in a Credit Card Transaction:
o Merchant: The retailer or business where the transaction occurs, providing
goods or services.
o Cardholder: The individual using the credit card to make the payment for
goods or services.
o Issuer Bank: The bank that issues the credit card to the customer, responsible
for credit limits, payments, and statement generation.
 o Acquirer Bank: The bank that processes payments for the merchant, ensuring
funds are transferred from the cardholder’s bank to the merchant’s account.
o Card Network (Visa/MasterCard): The intermediary network facilitating
the transaction by transmitting payment details between the cardholder and
merchant.
7. Difference Between Overdraft/Cash Credit Facility and Term Loan:
o Overdraft/Cash Credit Facility: This is a short-term credit provided by
banks to businesses, allowing them to withdraw funds exceeding their account
balance, typically used for daily operational needs.
o Term Loan: A long-term loan provided to a business or individual, repaid in
fixed installments over a specified period, typically used for capital
expenditures, infrastructure, or expansion projects.
8. What is CASA and Its Importance in ALM:
o CASA (Current Account and Savings Account) represents low-interest-
bearing deposits from customers, which are highly liquid and a cost-effective
source of funds for banks.
o In ALM (Asset-Liability Management), CASA is important because it
provides stable funding at a lower cost, enhancing a bank’s profitability and
ensuring liquidity management without reliance on expensive borrowings.
9. Factoring Service and Its Importance:
o Factoring involves a business selling its receivables (invoices) to a third party
(the factor) at a discounted rate in exchange for immediate cash, improving
working capital.
o Firms opt for factoring to reduce the burden of collecting payments, manage
cash flow efficiently, and avoid delays, allowing them to focus on growth and
operations rather than chasing payments.
10. ALM (Asset-Liability Management) and Key Risks Involved:

 ALM refers to managing a bank's assets (loans, investments) and liabilities (deposits,
borrowings) to ensure liquidity, profitability, and risk reduction.
 Key risks include interest rate risk, where rate changes impact profitability,
liquidity risk, where the bank may not meet obligations due to cash flow issues, and
currency risk, affecting assets and liabilities in foreign currencies.

11. Importance of NPA in Bank’s Functioning and Management Strategies:

 NPA (Non-Performing Assets) are loans or advances where the borrower has failed
to make timely payments, adversely affecting the bank's financial health and
profitability.
 To manage NPAs, banks adopt strategies such as loan restructuring, setting aside
provisions, enforcing legal recovery procedures, and improving credit assessment
methods to minimize defaults.

12. How Foreign Exchange Risk Affects ALM of a Bank:

 Foreign Exchange Risk arises from changes in currency exchange rates, impacting
the value of foreign currency-denominated assets and liabilities.
 This risk can create mismatches in a bank’s balance sheet, leading to volatility in
profits and affecting liquidity management, especially for international transactions
and foreign investments.
13. Rationale Behind RBI/Govt Regulation on UPI Market Share:

 The RBI and NPCI set a cap on a single UPI platform's market share to encourage
competition among players, preventing dominance by one platform and ensuring a
diverse and robust digital payments ecosystem.
 Limiting the market share ensures that no single platform can control the system,
promoting innovation and better consumer experiences, while maintaining system
security and fairness in the payments sector.

14. Blockchain Technology and Its Uses in the Financial Sector:

 Blockchain is a decentralized, secure digital ledger technology that records

transactions across multiple systems, making it nearly impossible to alter or tamper
with.
 In finance, blockchain is used for secure, transparent transactions, cross-border
payments, smart contracts, and reducing fraud in areas such as payments, loans,
and asset management, ensuring efficiency and trust in financial systems.