Types of Banks Exercise Solutions | KalviGavani

Types of Banks: Exercise Solutions

How to Use This Page

1. Read the textbook chapter first — these solutions supplement, not replace, your textbook. 2. Attempt each question yourself before reading the answer. 3. Use the Key Concepts table for a last-minute revision before exams. 4. Review Common Mistakes and the Exam Checklist — these highlight where marks are commonly lost.

Key Concepts (Quick Recap)

I. Choose the Correct Answer (MCQ)

Q1. Which bank is not an Industrial Bank? (a) ICICI (b) HSBC ✓ (c) SIDBI (d) IDBI

Q2. The Local Area Banks are promoting ……… (a) Rural savings ✓ (b) Business savings (c) Industrial development (d) Agricultural development

Q3. Foreign banks are begun their operation since (a) 1978 (b) 1979 (c) 1980 ✓ (d) 1981

Q4 (Additional). Patru, Varavu, Selavu, Laabam, Nashtam which all collectively known as 'Iynthogai' is otherwise called ……… (a) Trial Balance ✓ (b) Ledger (c) Journal (d) Transaction

Q5 (Additional). In which year IDBI was transformed into a public sector commercial bank? (a) 1964 (b) 1694 (c) 2004 ✓ (d) 2000

Q6 (Additional). The General Bank of India was established in ……… (a) 1786 ✓ (b) 1796 (c) 1766 (d) 1787

Q7 (Additional). The first land Mortgage bank was established in the year ……… (a) 1920 ✓ (b) 1945 (c) 1930 (d) 1960

Q8 (Additional). World bank otherwise called ……… (a) IBRD ✓ (b) IMF (c) RBI (d) SBI

Q9 (Additional). The share capital contributed by the central government, state government and sponsor bank is in the ratio of ……… (a) 50:15:35 ✓ (b) 25:25:35 (c) 35:25:15 (d) Equal

Q10 (Additional). The state bank of India came into being in ……… (a) 1995 (b) 1945 (c) 1955 ✓ (d) 1965

Q11 (Additional). The bank which helps in promote housing finance institutions is known as ……… (a) EXIM Bank (b) RRB (c) NHB ✓ (d) SBI

Q12 (Additional). Which of the following is the example of a payment bank? (a) EXIM Bank (b) Indian Bank (c) NABARD (d) Paytm ✓

Q13 (Additional). ……… was established to serve exclusively for women members. (a) Dena Bank (b) Bharatiya Mahila Bank ✓ (c) Women Bank (d) SBI

II. Fill in the Blanks

1. Banks listed in the Second Schedule of the RBI Act 1934 are called Scheduled Banks. 2. Banks with reserve capital of less than ₹5 lakh are classified as Non-Scheduled Banks. 3. The share capital ratio for Regional Rural Banks is 50:15:35 (Centre:State:Sponsor). 4. The State Bank of India came into being in 1955. 5. Payment Banks cannot lend money or issue credit cards. 6. The World Bank is otherwise called IBRD. 7. Kandhuvatti is the Tamil term for usurious interest rates charged by moneylenders. 8. IDBI was transformed into a public sector commercial bank in 2004. 9. The General Bank of India was established in 1786. 10. Local Area Banks serve 2-3 adjoining districts in rural and semi-urban areas.

III. True or False (with corrections)

IV. Match the Following

Important Definitions

V. Answer Briefly (2-Mark Answers)

Q1. Give the meaning of Commercial Banks: Banks that accept deposits from the public and grant loans to traders, individuals, agriculture, industries, transport, etc., in order to earn a profit.

Q2. What do you mean by Industrial Banks? Industrial banks are financial institutions that derive funds from the sale of investment certificates and from deposits by individual savers, investing such funds in personal loans often secured by a mortgage. They are also called Development banks.

Q3. Briefly explain about Correspondent Banks: A bank in a country can appoint another bank in a foreign country to act as a correspondent bank.

Q4. What are Foreign Banks? Banks which have their registered office in a foreign country and branches in India are called foreign banks. In 2017 there were 42 foreign banks in India, all of which were scheduled banks.

Q5 (Additional). What do you mean by Cooperative banks? All cooperative banks in India are owned by their customers or members who are farmers, small traders, and others. They are either urban-based or rural-based.

Q6 (Additional). What do you mean by private sector banks? All banking companies owned by private people are called private sector commercial banks. E.g. Lakshmi Vilas Bank, Kotak Mahindra Bank.

Q7 (Additional). Explain Islamic banking: Islamic banking is a system of banking based on Islamic principles (Sharia). It is practiced in UAE, Qatar, Pakistan, Kuwait, Bahrain, etc.

Q8 (Additional). What are the two principles of Islamic Banking? 1. No interest is charged on loans 2. No interest is charged on deposits

Q1. Write a short note on Local Area Banks. Give two examples: The Local Area Bank (LAB) scheme was introduced by the RBI in August 1996. LABs are small private sector banks established in rural and semi-urban areas. Each bank serves two or three adjoining districts only. Their main objective is to mobilize rural savings and invest them in the same areas. Example 1: Coastal Local Area Bank, Vijayawada, Andhra Pradesh. Example 2: Subhadra Local Area Bank Limited, Kolhapur, Maharashtra.

Q2. What are the objectives involved in Regional Rural Banks? Regional Rural Banks were formed under the Regional Rural Bank Act 1976, jointly by the Central Government, State Government, and a sponsor bank in the ratio of 50:15:35. Objectives: To develop the rural economy; Play a supplementary role in cooperative societies; To mobilize deposits from the rural public; To provide finance to rural artisans, small entrepreneurs, and farmers; Try to avoid the public dependency on money lenders.

Q3. Mention the purposes of Agricultural and Co-operative banks: Their foremost objective is providing service to members for rural and agricultural development, not profit earning. They are set up in towns and villages rather than cities. Compared to commercial banks, they offer less variety of services.

Q4 (Additional). What is the meaning of Scheduled Banks? All banks that satisfied the norms and are included in the second schedule to the RBI Act, 1934 are called scheduled banks.

Q5 (Additional). What are non-scheduled Banks? Banks not listed in the second schedule of the RBI Act, 1934 are non-scheduled banks. Banks with reserve capital of less than 5 lakh rupees qualify as non-scheduled banks.

Q6 (Additional). Write a note on Moneylenders: Individuals and institutions that lend money in rural and urban areas. Community-based businessmen provided loans for interest. Reasons for their existence: they disburse loans at the doorstep at any time with or without security; provide the required amount at the required time; have very little documentation and procedures; and banks are unwilling to advance loans to farmers or labourers with less income.

Q7 (Additional). How is interest calculated by Moneylenders? Moneylenders charge exorbitant rates as high as 20 percent per day. It is called 'Kandhuvatti' in Tamil. The Usurious Loans Act 1918 and the Tamil Nadu Prohibition of Charging Exorbitant Interest Act 2003 prohibit such interest rates.

Q8 (Additional). Write a note on Nidhi Companies: Nidhi companies promote thrift and savings habit among members and are registered under the Companies Act, 2013. Only Nidhi companies fulfilling certain norms are registered and regulated by the RBI. Others are not regulated.

VI. Answer in Detail (5-Mark Answers)

Q1. Explain the various types of banks based on the organization with examples: 1. Unit Banking: A single, usually small bank providing financial services to its local community. Independent with no connecting banks or branches. E.g.: Chase bank in the U.S. 2. Branch Banking: A bank connected to one or more other banks in an area or outside of it. Provides all usual financial services but is backed and ultimately controlled by a larger financial institution. E.g.: Lloyds Bank in England.

Q2. Explain the types of banks based on ownership patterns: Any bank in which not less than 51% of shares are owned by the Government is called a Government bank or public sector commercial bank. All nationalized banks (19 banks as of 2017), SBI, and IDBI Ltd. are public sector commercial banks. All banking companies owned by private people are called private sector commercial banks. All cooperative banks are owned by members of the public. Examples: Nationalized banks: Indian Bank, IOB; Public sector banks: State Bank of India, IDBI Bank Ltd.; Private sector banks: Lakshmi Vilas Bank, Karur Vysya Bank.

Q3 (Additional). Explain the types of banks on the basis of their functions (Any 5): 1. Central Bank: According to the BIS, "A Central Bank is the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country." In India, the RBI is the central bank. 2. Commercial Bank: Banks that accept deposits from the public and grant loans to earn profit. E.g.: SBI, Karur Vysya Bank. 3. Development Banks: Grant huge finance for investment, expansion, and modernization of big industries. Also called industrial banks. E.g.: IFCI; MUDRA bank. 4. Cooperative Banks: Owned by customers and members who are farmers, small traders, and others. Either urban-based or rural-based. 5. Foreign Banks: Banks with a registered office in a foreign country and branches in India. E.g.: Bank of America – USA, Deutsche Bank – Germany.

Q4 (Additional). Write a note on Small Finance Banks: Small Finance Banks (SFBs) are private sector banks set up in unbanked and underbanked regions of the country to achieve financial inclusion. E.g.: Ujjivan SFB Limited, Bengaluru, Karnataka. Their objectives are mobilizing rural savings (accepting deposits) and providing credit to small and marginal farmers, micro and small industries, and other unorganized sector entities.

Q5 (Additional). What do you mean by Payment Bank? Payment Banks are formed to widen the spread of payment and financial services to small businesses, low-income households, and migrant labourers. These banks should be fully networked from the beginning. They issue ATM/Debit cards, Internet banking, and third-party fund transfers. However, they cannot lend money or issue credit cards. In August 2015, the RBI gave 'in principle' licenses to Payment Banks.

Q6 (Additional). Does India need large-sized banks? Yes. India is in need of large-sized banks. The Industrial and Commercial Bank of China is the first ranked bank globally with an asset size of USD 3,893.23 billion. Punjab National Bank, the largest nationalized bank in India, has an asset base of USD 100 billion (rank 717). SBI merged with its five associates and Bharatiya Mahila Bank from April 1, 2017, bringing its asset size to USD 573 billion, boosting it among the top 50 banks. To compete with large-sized banks globally, India needs more large-sized banks.

Additional Fill in the Blanks

11. The General Bank of India was established in 1786. 12. IDBI was transformed into a public sector commercial bank in 2004. 13. The first land mortgage bank was established in 1920. 14. Paytm is an example of a Payment Bank. 15. Bharatiya Mahila Bank was established to serve exclusively for women members.

Additional True or False

Common Mistakes to Avoid

1. HSBC is NOT an Industrial Bank — It's a foreign bank. ICICI, SIDBI, and IDBI are industrial/development banks. 2. RRB share capital ratio = 50:15:35 — Central Govt : State Govt : Sponsor Bank. Not equal shares. 3. SBI came into being in 1955 — Not 1945, 1965, or 1995. 4. Payment Banks cannot lend money — They can accept deposits and issue debit cards but cannot issue credit cards or give loans. 5. NHB = National Housing Bank — Promotes housing finance institutions, not EXIM, RRB, or SBI. 6. Scheduled vs Non-scheduled — Scheduled banks are listed in the Second Schedule of RBI Act 1934; non-scheduled banks have reserve capital below ₹5 lakh. 7. World Bank = IBRD — Not IMF, RBI, or SBI. 8. Iynthogai (Patru, Varavu, Selavu, Laabam, Nashtam) = Trial Balance — Not ledger, journal, or transaction. 9. Islamic Banking has 2 principles — No interest on loans and no interest on deposits. Both conditions must hold. 10. Local Area Banks serve 2-3 adjoining districts — They are small private sector banks established in rural and semi-urban areas.

Exam Checklist

• [ ] Can classify banks by function (central, commercial, development, cooperative, foreign)
• [ ] Can classify banks by organization (unit banking vs branch banking)
• [ ] Can classify banks by ownership (public sector, private sector, cooperative)
• [ ] Know the RRB share capital ratio (50:15:35)
• [ ] Can explain Payment Banks and Small Finance Banks
• [ ] Know scheduled vs non-scheduled banks
• [ ] Know key institutions: NABARD, NHB, EXIM Bank, SIDBI, MUDRA
• [ ] Can explain Islamic banking principles (no interest on loans/deposits)
• [ ] Know LABs serve 2-3 adjoining districts and promote rural savings
• [ ] Can define correspondent banks and moneylenders
• [ ] Know that Kandhuvatti is Tamil for usurious interest rates
• [ ] Can explain why India needs large-sized banks (SBI merger, global ranking)
• [ ] Know the year SBI came into being (1955) and IDBI transformation (2004)