Module 3: Law of Banking Regulations

(A) Regulation of Banking Operations / Social Control / Nationalization

1. The primary law governing banking regulation in India is:

o a) Companies Act, 2013
o b) Banking Regulation Act, 1949
o c) Reserve Bank of India Act, 1934
o d) Negotiable Instruments Act, 1881
2. Under the Banking Regulation Act, the main regulator for banking operations in India
is:
o a) SEBI
o b) IRDAI
o c) Reserve Bank of India (RBI)
o d) Ministry of Finance
3. Which of the following was the main purpose of social control over banks before
nationalization?
o a) Allowing monopoly powers to big industries
o b) Checking concentration of economic power
o c) Promoting liberal foreign bank entry
o d) Abolishing rural branches entirely
4. In 1969, the Indian government nationalized how many major banks?
o a) 10
o b) 14
o c) 6
o d) 20
5. The second phase of bank nationalization in 1980 covered:
o a) 8 banks
o b) 5 banks
o c) 6 banks
o d) 4 banks
6. The “social control” policy introduced just before nationalization aimed to:
o a) Reduce government involvement in banking
o b) Improve equitable distribution of credit
o c) Create more private banks
o d) Increase industrial house control over banks
7. Which year did the government enact the Banking Companies (Acquisition and
Transfer of Undertakings) Act for the first set of nationalized banks?
o a) 1955
o b) 1970
o c) 1980
o d) 1991
8. “Social control” on banks essentially connotes:
o a) Public regulation to align banking with social objectives
o b) Restricting bank expansions overseas
o c) Privatization of state-run banks
o d) Only controlling interest rates
9. One key impact of social control was:
o a) Abolishing priority sector lending
 o b) Promoting credit to underserved segments
o c) Greater focus on large corporate loans
o d) Halting new branch licensing
10. Which one of the following is not a reason for introducing social control in banking?

 a) Preventing misuse of bank funds by industrial houses

 b) Professionalizing bank management
 c) Encouraging excessive competition from foreign banks
 d) Ensuring banks align with economic policies

(B) Licensing of Banking Activities (Section 22 and RBI Guidelines)

11. Which section of the Banking Regulation Act deals with licensing of banks?

 a) Section 10A
 b) Section 22
 c) Section 44A
 d) Section 19

12. Before granting a banking license, RBI primarily checks:

 a) Applicant’s marketing strategies

 b) Capital adequacy and public interest
 c) Presence of foreign directors
 d) Central Government’s approval

13. RBI can refuse a banking license if:

 a) The proposed name is too short

 b) The head office is in a rural area
 c) The company does not have sufficient capital or is not in public interest
 d) The promoters are from the finance industry

14. Entry of new private sector banks is regulated through:

 a) Specific RBI guidelines prescribing minimum capital, promoter criteria, etc.

 b) Only the Companies Act
 c) NCLT orders
 d) Government circulars alone

15. Under the RBI guidelines, new private banks must:

 a) Operate exclusively in metropolitan areas

 b) Have only government representatives on their board
 c) Maintain adequate capital and satisfy ‘fit and proper’ promoter criteria
 d) Provide no priority sector lending

16. Which statement about licensing is incorrect?

  a) No company can carry on banking business without an RBI license
 b) The RBI can revoke a license if conditions are violated
 c) License is mandatory for both private and public sector banks
 d) License can only be issued by the Central Government

17. The concept of a ‘non-operative financial holding company’ (NOFHC) is introduced

to:

 a) Ring-fence banking operations from other group entities

 b) Encourage foreign stake in Indian banks
 c) Create new NBFCs
 d) Lower the reserve requirements

18. RBI’s guidelines for new private banks typically specify a minimum paid-up capital
of:

 a) No minimum requirement
 b) Rs. 10 lakh
 c) A sum determined per the latest notifications (often around Rs. 500 crore or
more)
 d) Rs. 1000 only

19. One major rationale for licensing banks is:

 a) Generating government revenues through license fees

 b) Ensuring only financially sound entities offer banking services
 c) Restricting foreign participation entirely
 d) Privatizing the entire sector

20. If a bank carries on business without an RBI license, it is:

 a) Acting illegally under Section 22 of the Banking Regulation Act

 b) Operating as a legitimate NBFC
 c) Allowed only in rural areas
 d) Exempt under certain provisions

(C) Capital Adequacy and Liquid Asset Requirements

21. The purpose of prescribing capital adequacy norms is:

 a) To discourage small banks

 b) To protect depositors and maintain stability
 c) To reduce competition among banks
 d) To limit government regulation

22. The international framework standardizing capital adequacy is known as:

 a) WTO guidelines
 b) Basel Accord
 c) Kyoto Protocol
 d) SWIFT norms

23. Basel norms classify bank capital primarily as:

 a) Fixed capital and intangible assets

 b) Gold reserves and share capital
 c) Tier I (core) and Tier II (supplementary) capital
 d) Customer deposits and RBI support

24. The minimum capital ratio under Basel III is often referred to as:

 a) SLR
 b) CRAR (Capital to Risk-Weighted Assets Ratio)
 c) Repo rate
 d) Reverse repo

25. A higher capital adequacy ratio indicates that the bank:

 a) Has lower liquidity

 b) Is less capable of absorbing losses
 c) Is more resilient to financial shocks
 d) Has unlimited lending capacity

26. A bank’s statutory liquidity ratio (SLR) refers to:

 a) A percentage of net demand and time liabilities to be maintained in liquid

assets
 b) The ratio of foreign reserves to total assets
 c) Minimum intangible assets
 d) CRR plus NDTL ratio

27. Which of the following is not included in Tier I capital?

 a) Revaluation reserves
 b) Equity share capital
 c) Disclosed free reserves
 d) Paid-up capital from promoters

28. Liquidity asset requirements help:

 a) Expand bank branches

 b) Banks honor deposit withdrawals and maintain trust
 c) Provide unlimited loans to corporate borrowers
 d) Abolish credit risk

29. Under the Banking Regulation Act, Section 19 imposes restrictions on:

 a) Lending to priority sectors

  b) Holding shares in other companies
 c) Opening rural branches
 d) Borrowing from RBI

30. CRR (Cash Reserve Ratio) is the portion of a bank’s total deposits that must be:

 a) Invested in gold
 b) Lent to small-scale industries
 c) Kept in reserve with the RBI
 d) Given to the government as tax

(D) Managerial Organs & Board of Directors

31. Section 10A of the Banking Regulation Act deals with:

 a) Licensing of banks
 b) Composition of Board of Directors
 c) Priority sector lending
 d) Shareholding pattern

32. One major requirement for Board composition under Section 10A is:

 a) Inclusion of persons with professional experience

 b) 100% government nominees only
 c) Mandatory foreign directors
 d) Shareholders cannot be directors

33. RBI can remove managerial personnel of a bank under which condition?

 a) For personal disagreements

 b) If they are deemed unfit or improper for bank’s management
 c) If the manager is close to retirement
 d) If the manager has less than 2 years of experience

34. The Chairman of a banking company is appointed under directions laid out by:

 a) SEBI guidelines
 b) RBI and Banking Regulation Act
 c) Union Budget
 d) The Companies Act alone

35. A key reason for RBI’s power to appoint additional directors is:

 a) Protect depositor interests and ensure sound management

 b) Increase the bank’s share value
 c) Merge the bank with another
 d) Remove minority shareholders
 36. The board of directors in a banking company ideally should:

 a) Have experts in finance, law, and accountancy

 b) Include only family members of the promoter
 c) Be restricted to government officials
 d) Consist solely of marketing experts

37. When RBI appoints additional directors in a bank, their tenure:

 a) Is specified by RBI but cannot exceed a particular time limit

 b) Is indefinite
 c) Must be ratified by the shareholders in an EGM
 d) Expires only on resignation

38. Under the Act, “whole-time chairman” means:

 a) A part-time official of the bank

 b) An individual exclusively engaged to manage the bank
 c) A consultant for multiple banks
 d) A minor director on the board

39. Provisions relating to management aim primarily to:

 a) Ensure professional and experienced leadership

 b) Encourage nepotism
 c) Reduce accountability to RBI
 d) Limit the scope of board decisions

40. If the board does not comply with RBI’s fit-and-proper norms:

 a) RBI can take steps including removal or reconstitution of the board

 b) The bank can ignore it
 c) Only the company law tribunal can intervene
 d) Depositors must move court

(E) Amalgamation and Reconstruction (Section 44-A)

41. Section 44-A of the Banking Regulation Act deals with:

 a) Licensing
 b) Amalgamation of banking companies
 c) Priority sector lending
 d) Imposition of penalty on directors

42. Which body generally approves amalgamation schemes of banks in India?

 a) Supreme Court
 b) Reserve Bank of India
 c) SEBI
 d) National Company Law Appellate Tribunal

43. Bank amalgamation is often pursued for:

 a) Excluding rural customers

 b) Evading RBI regulations
 c) Enhancing financial strength & synergy
 d) Eliminating deposit insurance

44. Under Section 44-A, an amalgamation scheme must typically be approved by:

 a) A two-thirds majority of shareholders of each amalgamating bank

 b) At least 51% of depositors
 c) The board only, no further approval required
 d) The finance ministry alone

45. The prime objective behind bank amalgamation includes:

 a) Sidelining RBI
 b) Stability and efficiency in banking
 c) Abolishing priority sector lending norms
 d) Eliminating competition entirely

46. After the scheme is sanctioned by RBI:

 a) It still needs a Supreme Court order

 b) It becomes binding on all parties
 c) It requires consent of all depositors individually
 d) It has to be published in the official gazette for 2 years

47. “Reconstruction of a bank” under Section 44-A means:

 a) Physical renovation of bank buildings

 b) Organizing the bank’s business/assets in a new form
 c) Dismissing entire management
 d) Replacing all loans with fresh credit

48. A typical example of an amalgamation in recent years:

 a) Inclusion of foreign banks in the sector

 b) Vijaya Bank and Dena Bank merging with Bank of Baroda
 c) Introduction of small finance banks
 d) Setting up specialized agriculture banks

49. One benefit of amalgamation is:

 a) Greater capital base and operational synergy

 b) Reduced obligations to regulators
 c) No priority sector lending
  d) Decrease in managerial accountability

50. In the event of an amalgamation scheme, depositors’ interests are:

 a) Set aside
 b) Protected under RBI’s approval process
 c) No longer protected by DICGC
 d) Subject to a referendum

(F) Accounts and Audit (Pages 135-138)

51. Auditing of bank accounts under the Banking Regulation Act requires:

 a) Audit by qualified professionals/approved auditors

 b) Internal branch-level checks only
 c) No mandatory annual audit
 d) Only random checks by depositors

52. Banks must submit their balance sheet and profit & loss account to RBI:

 a) Annually, within the prescribed time

 b) Only once in five years
 c) At RBI’s discretion
 d) Not mandatory if privately held

53. Under Section 30 of the Act, the auditor’s report must:

 a) Be kept confidential from shareholders

 b) Be included in the bank’s annual accounts
 c) Exclude compliance with RBI norms
 d) Contain only details of director remuneration

54. If the auditor discovers a serious irregularity in the bank’s books:

 a) They must immediately report it as per RBI guidelines

 b) They should remain silent unless it affects profits
 c) They only inform the board of directors
 d) They wait until after the final accounts are published

55. The primary reason for statutory audit in banks is:

 a) To reward loyal shareholders

 b) Ensure accuracy, transparency, and trust in financial statements
 c) Shift liability to the auditor
 d) Increase bank’s capital automatically

56. The final authority to appoint a bank’s auditor in certain cases is:
  a) RBI
 b) Board of Directors alone
 c) Finance Ministry
 d) SEBI

57. Audited statements must reflect compliance with:

 a) RBI directives, the Banking Regulation Act, and applicable laws

 b) Only the board’s policy
 c) Random guidelines from the public
 d) Private codes of the management

58. “True and fair view” in audit context implies:

 a) Correct depiction of the bank’s financial position

 b) Minimum profit reporting
 c) Excluding liabilities from the balance sheet
 d) Overstating the capital reserves

59. Banks are required to maintain books of accounts at:

 a) Their head office and major branches

 b) The statutory auditor’s home
 c) The local municipality
 d) Government archives

60. Non-compliance with accounting and auditing provisions can lead to:

 a) No consequences
 b) Penalties/fines under the Act
 c) Voluntary guidelines only
 d) Debtors deciding the penalty

Module 4: Negotiable Instruments – Law and Procedure

(A) Meaning, Need & Types of Negotiable Instruments

61. A negotiable instrument can be defined as:

 a) A certified government document

 b) A written, signed unconditional order or promise to pay
 c) A bearer share certificate
 d) A non-transferable ownership deed

62. The main feature that distinguishes a negotiable instrument is:

 a) It is only for internal bank use

  b) It is freely transferable and confers good title
 c) Transfer always requires court approval
 d) It cannot be endorsed

63. The typical forms of negotiable instruments under the NI Act are:

 a) Promissory Note, Bill of Exchange, Cheque

 b) Gift deed, sale deed, power of attorney
 c) Bill of lading, trust receipt, letter of credit
 d) Bank guarantee, indemnity bond

64. Negotiation of an instrument means:

 a) Discussion between drawer and payee

 b) Transfer of ownership by endorsement/delivery
 c) Payment of stamp duty
 d) Court order to repay

65. Which statement about endorsement is correct?

 a) It is the act of signing on the instrument or an allonge to negotiate it

 b) It invalidates the instrument
 c) Only bankers can endorse
 d) Endorsement is a verbal process

(B) Promissory Note

66. A promissory note is characterized by:

 a) Three parties: drawer, drawee, payee

 b) An unconditional promise by the maker to pay a certain sum
 c) Must be addressed to the bank
 d) Must be payable to bearer only

67. The maker of a promissory note is the:

 a) Person who promises to pay

 b) Person entitled to receive payment
 c) Bank official
 d) Holder in due course

68. For a promissory note to be valid, it must:

 a) Be in writing and signed by the maker

 b) Contain a demand for acceptance by the payee
 c) Require an acceptance by the drawee
 d) Carry interest at a fixed rate
 69. Which is not an essential ingredient of a promissory note?

 a) It must require acceptance from drawee

 b) A specific sum of money must be promised
 c) It must be in writing
 d) Signed by the maker

70. Parties to a promissory note do not include:

 a) Maker
 b) Drawee
 c) Payee
 d) Holder

(C) Bill of Exchange

71. A bill of exchange is best described as:

 a) An order from a drawer to a drawee to pay a certain sum to the payee

 b) A promise to pay by the maker
 c) A deposit receipt
 d) A money order issued by the post office

72. Which of these is an essential element of a bill of exchange?

 a) Promise to pay on demand

 b) Unconditional order in writing
 c) Must be drawn only by a bank
 d) Payable only on a future uncertain event

73. In a bill of exchange, acceptance is done by:

 a) The drawee
 b) The payee
 c) The holder in due course
 d) The payee’s bank

74. The difference between a bill of exchange and a promissory note is that the bill of
exchange:

 a) Is always payable on demand

 b) Involves three parties: drawer, drawee, and payee
 c) Requires only two parties
 d) Needs no acceptance

75. “Retiring a bill of exchange” means:

 a) Dishonour of the bill

  b) Paying it off before maturity
 c) Presenting it for noting
 d) Canceling the acceptance

(D) Cheques

76. A cheque differs from a bill of exchange because a cheque:

 a) Requires acceptance from the bank

 b) Is always drawn on a banker and payable on demand
 c) Must have three days of grace
 d) Cannot be crossed

77. Which of the following is not a crossing type?

 a) General crossing
 b) Special crossing
 c) Indefinite crossing
 d) Non-negotiable crossing

78. “Drawer” in the context of a cheque refers to:

 a) The person who issues/writes the cheque

 b) The bank on whom it is drawn
 c) The payee of the cheque
 d) An endorser

79. When a cheque is dishonored for “insufficient funds,” it can lead to:

 a) No legal remedy
 b) Civil liability only
 c) Criminal proceedings under Section 138 NI Act
 d) Automatic revalidation of the cheque

80. For a cheque to be valid, it must:

 a) Be payable on a future event

 b) Be payable on demand
 c) Be accepted by the bank explicitly
 d) Bear three signatures

(E) Negotiable Instruments – General Concepts

81. A ‘holder in due course’ obtains the instrument:

 a) Without good faith

 b) Only after maturity
 c) For consideration, in good faith, and before maturity
 d) As a gift from the drawer

82. “Ambiguous Instrument” under the NI Act is one which:

 a) Can be treated as a note or a bill

 b) Lacks an endorsement
 c) Lacks the drawer’s signature
 d) Is invalid under all circumstances

83. Inchoate instruments are those that:

 a) Cannot be transferred
 b) Are incomplete but signed, giving authority to complete
 c) Are fully invalid
 d) Are only valid if drawn in a foreign language

84. If amount in words and figures differ in a negotiable instrument:

 a) The amount in words prevails

 b) The instrument becomes void
 c) The lesser amount prevails
 d) The bank decides which to follow

85. “Countermanding” a cheque payment means:

 a) The drawer instructing the bank to stop payment

 b) Endorsing it to another person
 c) Converting it into a promissory note
 d) Presenting the cheque after maturity

86. Notice, noting, and protest are required primarily for:

 a) Cheques only
 b) Dishonour of bills of exchange
 c) Negotiation to holder in due course
 d) None of the above

87. “Noting” on a dishonoured bill involves:

 a) Noting by the drawer to pay the debt

 b) A notary public recording the fact of dishonour
 c) The payee writing remarks on the bill
 d) The drawee announcing interest charges

88. Offences under NI Act Sections 138-147 are basically:

 a) Offences related to cheque dishonour

 b) Offences related to e-payments
  c) Offences about forging currency notes
 d) Civil liability for bounced drafts

89. Interim compensation for cheque dishonour was introduced in the NI Act by:

 a) The 2018 Amendment

 b) The original 1881 enactment
 c) A 1949 bank directive
 d) Basel norms

90. Section 21A of the Banking Regulation Act states:

 a) Cheque must be accepted only during banking hours

 b) Courts shall not scrutinize interest rates charged by banks
 c) RBI has full power to fix deposit rates
 d) No interest can be charged above 10%

Module 6: SARFAESI Act, 2002

91. The SARFAESI Act enables secured creditors to:

 a) Increase interest arbitrarily

 b) Dispose unencumbered property
 c) Enforce security interests without court intervention
 d) Sell gold only with RBI permission

92. Asset Reconstruction Companies (ARCs) must register with:

 a) SEBI
 b) Reserve Bank of India
 c) Company Law Board
 d) IRDA

93. Securitization refers to:

 a) Bundling of financial assets for sale to ARC or investors

 b) Issuing equity shares in a bank
 c) Buying gold for statutory reserves
 d) Merging two banks

94. Under SARFAESI, a defaulting borrower must receive a demand notice giving how
many days to pay?

 a) 30 days
 b) 60 days
 c) 45 days
 d) 90 days
95. If the borrower fails to comply with the demand notice, the secured creditor may:

 a) Approach SEBI
 b) File directly in Supreme Court
 c) Take possession of secured assets under Section 13
 d) Do nothing further

96. Appeals against measures taken under SARFAESI lie before:

 a) High Court
 b) Debt Recovery Tribunal (DRT)
 c) Competition Commission
 d) Company Law Tribunal

97. Which one is not a function of ARCs under SARFAESI?

 a) Acquiring financial assets from banks

 b) Resolving NPAs
 c) Issuing security receipts
 d) Auditing all commercial banks

98. Central Registry for SARFAESI (CERSAI) was set up to:

 a) Keep track of all bank employees

 b) Register security interests to prevent multiple claims
 c) Maintain shareholders’ data
 d) Evaluate the interest rates

99. The Constitutional validity of SARFAESI Act was upheld in:

 a) ICICI Bank v. APS Star Industries

 b) Mardia Chemicals v. Union of India
 c) S. Rangarajan v. P. Jagjivan Ram
 d) Swastik Gases v. Indian Bank

100. Under SARFAESI Act, the primary objective is to:

 a) Facilitate faster recovery of NPAs and strengthen the banking system

 b) Enable unlimited foreign direct investment in banking
 c) Replace the DRT system
 d) Abolish secured lending in India