CAIIB BRBL Module A UNIT 1 MCQ – Legal Framework of Regulation of Banks

Correct Answer: B. The Banking Regulation Act, 1949 and The Reserve Bank of India Act, 1934. These two Acts form the core legal framework for regulating banking activities in India.

Correct Answer: C. The Government of India. Both the Reserve Bank of India and the Government of India share regulatory control over the banking sector.

Correct Answer: C. It influences the specific regulations that apply to the bank. The legal form under which a bank is constituted determines the specific set of regulations that govern its operations.

Correct Answer: B. Accepting deposits from the public for lending or investment. The core function of banking, as defined in the Banking Regulation Act, is receiving money deposits from the public with the purpose of using those funds for providing loans or making investments.

Correct Answer: B. Repayable on demand or otherwise, and withdrawable by instruments like cheque. A key characteristic of banking deposits is their flexibility in repayment (on demand or later) and the ability to withdraw using instruments such as cheques, as outlined in the Banking Regulation Act.

Correct Answer: C. Acceptance of deposits from the public. Accepting money deposits from the general public is a fundamental element that defines the business of banking.

Correct Answer: C. For lending or investment purposes. Deposits accepted by banks are intended to be utilised for extending credit through loans or making investments in various financial instruments.

Correct Answer: C. After a specified period. Banking deposits can be structured for repayment either immediately upon request or after a predetermined time duration.

Correct Answer: C. Money only. The definition of banking specifies the acceptance of money as deposits.

Correct Answer: B. Government-run savings bank schemes. While generally restricted, government-run savings bank schemes are allowed to accept deposits withdrawable by cheque as an exemption.

Correct Answer: D. A private individual or a business not licensed as a bank. The authority to accept deposits that can be withdrawn by cheque is legally limited to regulated banking entities and specific exceptions.

Correct Answer: C. The Reserve Bank of India. The RBI has regulatory authority over non-banking entities that accept deposits from the public.

Correct Answer: B. Obtaining a licence from the RBI. As per the Banking Regulation Act, a licence from the Reserve Bank of India is compulsory to carry out banking business.

Correct Answer: C. Licensed banking companies. Generally, only entities that hold a valid banking licence are permitted to use the word “bank” in their name, as specified in the Banking Regulation Act.

Correct Answer: C. Dealing in bills of exchange. Activities such as dealing in bills of exchange are among the types of business that banks are permitted to conduct, as listed in the Banking Regulation Act.

Correct Answer: C. Direct or indirect trading activities in goods. Banks are prohibited from engaging in the business of buying and selling goods, either directly or indirectly, under the Banking Regulation Act.

Correct Answer: C. Actionable claims, stocks, shares, money, bullion, and specified instruments. These financial and legal items are specifically excluded from the definition of “goods” when determining business activities prohibited for banks.

Correct Answer: C. It must be disposed of within a specified period. Immovable property acquired by a bank in satisfaction of claims, if not for its own use, must be sold off within a timeframe stipulated by the Banking Regulation Act.

Correct Answer: C. Seven years. Under the Banking Regulation Act, a bank must generally dispose of immovable property acquired (not for its own use) within seven years.

Correct Answer: C. Up to five years. The Reserve Bank of India has the authority to extend the seven-year period for disposing of non-banking immovable assets by a maximum of five additional years.

Correct Answer: C. Customer identification and verification procedures. KYC, or Know Your Customer, refers to the standard process banks use to confirm the identity of their customers, crucial for security and compliance.

Correct Answer: B. To comply with anti-money laundering and counter-terrorism financing regulations. Implementing KYC procedures helps banks identify customers and prevent their services from being used for illegal activities like money laundering and terrorist financing.

Correct Answer: C. Licensing, regulation, and supervision of banks. The RBI is empowered to issue licences to banks, set rules for their operation, and oversee their activities to ensure the stability of the banking system.

Correct Answer: C. Mandatory instructions and rules. Directives and guidelines issued by the Reserve Bank of India are binding instructions that licensed banks must comply with.

Correct Answer: C. A body corporate created under a special statute. Some banks are formed as distinct corporate entities specifically established by an Act of Parliament or a State Legislature.

Correct Answer: B. The Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980. These Acts were instrumental in the nationalisation and establishment of several public sector banks as statutory bodies.

Correct Answer: C. The State Bank of India Act, 1955. The State Bank of India was constituted under its dedicated legislative Act.

Correct Answer: C. The Regional Rural Banks Act, 1976. Regional Rural Banks were established under this specific Act to cater to rural financial needs.

Correct Answer: C. The Companies Act. Private sector banks are generally incorporated and governed as companies under the provisions of the Companies Act.

Correct Answer: C. As foreign companies. Banks from other countries operating in India are typically structured as companies according to the laws of their country of origin.

Correct Answer: C. A co-operative basis focused on thrift, self-help, and co-operation. Co-operative banks operate based on principles of mutual assistance and shared goals among members, promoting saving and co-operation.

Correct Answer: B. The Multi-State Co-operative Societies Act. Co-operative societies, including banks, with operations extending beyond a single state are regulated under this specific Act.

Correct Answer: B. The Banking Regulation Act and The Reserve Bank of India Act. This Act brought co-operative banks under the regulatory purview of the main laws governing banking and the central bank in India.

Correct Answer: C. The Reserve Bank of India. The Banking Regulation (Amendment) Act, 2020 increased the Reserve Bank of India’s powers regarding the regulation and supervision of co-operative banks.

Correct Answer: B. To regulate bank note issuance, maintain monetary stability, and operate the currency and credit system. The Reserve Bank of India Act, 1934 was enacted with the core aims of managing the nation’s currency, ensuring stability of the monetary system, and controlling the credit and currency mechanisms.

Correct Answer: B. March 6, 1934. The Reserve Bank of India Act came into force on this date, establishing the legal framework for the central bank.

Correct Answer: B. No, it focuses on the central bank’s role, while other laws like the Banking Regulation Act cover broader aspects of banking. The RBI Act primarily deals with the constitution and core functions of the central bank, while wider regulation of the banking system falls under other legislation like the Banking Regulation Act.

Correct Answer: B. Maintaining cash reserves with the RBI. As mandated by the Reserve Bank of India Act, Scheduled Banks are required to hold a certain portion of their deposits as cash reserves with the central bank.

Correct Answer: C. To aid in credit system regulation and monetary stability. The requirement for banks to maintain cash reserves with the RBI is a tool used by the central bank to manage liquidity in the banking system and influence monetary policy for stability.

Correct Answer: B. To regulate credit in the interests of trade, industry, and agriculture. This power under the Reserve Bank of India Act allows the central bank to influence the availability of credit to support key sectors of the economy.

Correct Answer: C. The Central Board of Directors. The management and overall direction of the Reserve Bank of India are vested in its Central Board of Directors.

Correct Answer: B. Two. The central government nominates two government officials to be members of the Reserve Bank of India’s Central Board.

Correct Answer: C. Four. There are four directors on the Central Board of the Reserve Bank of India who are nominated from the local boards.

Correct Answer: B. Being a bank listed in the Second Schedule of the RBI Act, 1934. Banks that meet specific criteria and are included in the Second Schedule of the Reserve Bank of India Act are designated as Scheduled Banks.

Correct Answer: C. Maintaining a minimum paid-up capital and reserves. The Reserve Bank of India Act sets requirements regarding minimum paid-up capital and reserves that banks must meet to be eligible for classification as a Scheduled Bank.

Correct Answer: C. Section 22. This section of the Reserve Bank of India Act confers upon the RBI the sole authority for issuing currency notes in the country.

Correct Answer: C. Section 30. This section of the Reserve Bank of India Act provides the Central Government with the legal power to take control of the functions of the RBI’s Central Board under certain circumstances.

Correct Answer: C. Providing emergency funds to financial institutions facing liquidity problems. The function of a Lender of Last Resort is to step in and provide temporary funding to banks or other financial institutions that are unable to obtain funds elsewhere, preventing a potential financial crisis.

Correct Answer: C. Sections 17 and 18. These sections of the Reserve Bank of India Act provide the legal basis for the RBI’s role as the Lender of Last Resort, allowing it to provide financial assistance to eligible entities.

Correct Answer: C. An entity that provides emergency funds to financial institutions. A Lender of Last Resort is an institution, typically the central bank, that provides temporary liquidity to banks and other financial institutions when they are in distress and cannot access funds from the market.

Correct Answer: C. The Banking Companies Act. The legislation regulating banking in India was initially enacted as The Banking Companies Act, 1949.

Correct Answer: B. March 1, 1966. The Act was renamed from The Banking Companies Act to The Banking Regulation Act on March 1, 1966.

Correct Answer: C. 1956. The Banking Regulation Act, 1949, was extended to apply to Jammu and Kashmir starting from 1956.

Correct Answer: D. 1965. The Banking Regulation Act, 1949, was extended to include Co-operative Banks in 1965.

Correct Answer: B. To provide specific legislation for the business of banking. A primary objective of the Banking Regulation Act, 1949, is to provide specific legal framework for the banking business in India.

Correct Answer: B. To prevent bank failures by prescribing minimum capital requirements. The Act aims to prevent bank failures by stipulating minimum capital requirements for banks.

Correct Answer: C. Balanced development and growth. The Act seeks to ensure balanced development and growth of banking companies.

Correct Answer: B. The Reserve Bank of India. The Act gives specific powers to the Reserve Bank of India regarding the regulation of banks.

Correct Answer: C. The interest of Depositors. Safeguarding the interest of depositors is a key objective of the Banking Regulation Act, 1949.

Correct Answer: C. Reserve Bank of India. The 2020 amendment increased the Reserve Bank of India’s regulatory control over Co-operative Banks.

Correct Answer: B. Management, capital, audit, and liquidation. The 2020 amendment enhanced RBI control over the management, capital, audit, and liquidation of Co-operative Banks.

Correct Answer: C. They must not use “bank” in their name and not act as drawees of cheques. The exemption for certain agricultural credit societies required them not to use the word “bank” in their name and not to function as drawees of cheques.

Correct Answer: B. Which cooperative societies are exempt from the Act. The amendment to Section 3 clarified which types of cooperative societies are exempt from the provisions of the Act.

Correct Answer: C. Sections 35AA and 35AB. Sections 35AA and 35AB were introduced into the Banking Regulation Act, 1949, by an amendment in 2017.

Correct Answer: C. To direct banks to initiate insolvency resolution. Sections 35AA and 35AB authorised the RBI to direct banks to start the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.

Correct Answer: B. The Depositor Education and Awareness Fund. The Depositor Education and Awareness Fund (DEAF) was established by a 2012 amendment to the Act.

Correct Answer: B. To manage unclaimed deposits. The DEAF is intended to manage deposits in banks that have remained unclaimed for a significant period.

Correct Answer: C. 10+ years. The DEAF handles deposits that have remained unclaimed for ten years or more.

Correct Answer: B. Licensing banks. The Act grants the RBI the authority to issue licenses for conducting banking business.

Correct Answer: B. Regulating shareholding and voting rights in banks. The RBI has the power to regulate the shareholding and voting rights in banking companies.

Correct Answer: B. Board and management. The RBI supervises appointments to the board and management of banks.

Correct Answer: C. Their operations. The RBI oversees the general operations of banks under the Act.

Correct Answer: B. It regulates bank audits by setting instructions. The RBI regulates bank audits by issuing instructions related to them.

Correct Answer: B. Moratoriums, mergers, and liquidations. The RBI has control over moratoriums, mergers, and liquidations of banks.

Correct Answer: B. Directives on public interest and banking policy. The RBI can issue directives to banks on matters related to public interest and banking policy.

Correct Answer: B. Penalties. The RBI can impose penalties on banks under the provisions of the Act.

Correct Answer: B. Annual Financial Inspections (AFI). Section 35 of the Act empowers the RBI to conduct Annual Financial Inspections of banks.

Correct Answer: C. Risk Based Supervision. The RBI uses Risk Based Supervision for conducting risk assessments of banks.

Correct Answer: B. Comprehensive risk assessment of banks. Risk Based Supervision refers to a comprehensive approach taken by the RBI to assess the risks within banking institutions.

Correct Answer: C. Supervisory Program on Assessment of Risk and Capital. SPARC stands for Supervisory Program on Assessment of Risk and Capital, which is used by the RBI.

Correct Answer: B. Conducting Annual Financial Inspection (AFI). Section 35 provides the RBI with the power to conduct Annual Financial Inspections.

Correct Answer: C. Sections 35AA and 35AB. Sections 35AA and 35AB grant the RBI the authority to initiate insolvency resolution proceedings.

Correct Answer: C. Application of the Act to Co-operative Banks. Section 56 details how the Banking Regulation Act, 1949, is applied to Co-operative Banks.

Correct Answer: B. Unclaimed deposits. The DEAF is a fund specifically created to manage deposits that have not been claimed for a specified period.

Correct Answer: C. A comprehensive risk assessment approach. Risk Based Supervision is characterised as a comprehensive method for assessing the risks within banks.

Correct Answer: C. Section 3. The Reserve Bank of India was established under Section 3 of the RBI Act, 1934.

Correct Answer: C. Regulating bank note issuance. A core original responsibility of the RBI was regulating the issuance of bank notes.

Correct Answer: B. Maintaining reserves. Maintaining reserves for monetary stability was an original responsibility of the RBI.

Correct Answer: B. To operate the currency and credit system effectively. Operating the currency and credit system effectively was among the initial responsibilities of the RBI.

Correct Answer: B. Regulating banks and financial institutions. A significant modern role of the RBI is that of regulator for banks and financial institutions.

Correct Answer: C. The Banking Regulation Act, 1949. The RBI derives its regulatory powers over banks from the Banking Regulation Act, 1949.

Correct Answer: C. A supervisor. The RBI acts as both a regulator and a supervisor of banks.

Correct Answer: C. Reserve Bank of India. The RBI has the key power of issuing licenses for banking operations.

Correct Answer: B. Banking boards/personnel. The RBI has powers regarding the appointment and removal of banking boards and personnel.

Correct Answer: C. Reserve Bank of India. The RBI holds the power to regulate the business operations of banks.

Correct Answer: A. Issuing mandatory directives. The RBI has the power to issue mandatory directives to banks.

Correct Answer: C. Their activities. The RBI has powers of inspection and supervision to oversee the activities of banks.

Correct Answer: C. Reserve Bank of India. The RBI has the power to regulate bank audits.

Correct Answer: B. Credit information. The RBI is empowered to collect, collate, and furnish credit information.

Correct Answer: C. Moratoriums, amalgamations, and winding up. The RBI has powers to manage moratoriums, amalgamations, and winding up processes for banks.

Correct Answer: C. Impose penalties. The RBI is empowered to impose penalties on banks for non-compliance with regulations.

Correct Answer: C. Department of Non-Banking Supervision. The Department of Non-Banking Supervision (DNBS) within the RBI is responsible for regulating and supervising NBFCs.

Correct Answer: C. The Reserve Bank of India Act, 1934. Chapter III B and C, and Chapter V of the RBI Act, 1934, form the legal basis for NBFC regulation by the RBI.

Correct Answer: D. Reserve Bank of India. Amendments in 2019 enhanced the RBI’s control over NBFCs.

Correct Answer: B. Replacing directors or superseding its board. The RBI can control NBFC management by replacing directors or superseding the board.

Correct Answer: B. Up to 3 years. The RBI has the power to remove or debar an auditor for up to 3 years for non-compliance.

Correct Answer: C. Amalgamation, reconstruction, or splitting. The RBI can frame schemes for amalgamation, reconstruction, or splitting of NBFCs.

Correct Answer: C. Information on group companies and conduct inspections/audits. The RBI can require NBFCs to provide information on their group companies and can conduct inspections or audits.

Correct Answer: C. The Reserve Bank of India. The RBI is identified as the primary regulator of banking in India.

Correct Answer: C. The Central Government. The Central Government also holds extensive regulatory powers over banks.

Correct Answer: C. Both direct and indirect. The Central Government’s powers in bank regulation can be direct or indirect.

Correct Answer: B. Appointing and removing the RBI Governor and Central Board members. The Central Government is involved in the appointment and removal of the RBI Governor and Central Board members.

Correct Answer: D. Central Government is the sole shareholder of the RBI. The Central Government is the sole shareholder of the Reserve Bank of India.

Correct Answer: D. Section 7(1). Section 7(1) of the RBI Act allows the Central Government to issue directives to the RBI in the public interest.

Correct Answer: B. Removal of bank managerial personnel. The Central Government handles appeals against the RBI’s decisions regarding the removal of bank managerial personnel.

Correct Answer: C. Central Government. The Central Government serves as an appellate authority for appeals against the cancellation of banking licenses by the RBI.

Correct Answer: C. Section 22. Section 22 of the BR Act pertains to appeals against the cancellation of banking licenses, which are handled by the Central Government.

Correct Answer: C. Floating charge. The Central Government handles appeals related to the refusal of a certificate regarding a floating charge on bank assets.

Correct Answer: B. Section 14A. Section 14A of the BR Act deals with appeals regarding the refusal of a certificate concerning a floating charge on assets, with the Central Government as the appellate authority.

Correct Answer: C. Sections 4 and 53. Sections 4 and 53 of the BR Act give the Central Government powers concerning the suspension of bank operations or granting exemptions from the Act’s provisions.

Correct Answer: B. The types of permissible non-banking business. Under Section 6(1) of the BR Act, the Central Government notifies what constitutes permissible non-banking business for banks.

Correct Answer: C. Central Government. The Central Government holds rule-making powers under the Banking Regulation Act, 1949.

Correct Answer: D. Sections 52 and 45Y. Sections 52 and 45Y of the BR Act grant rule-making powers to the Central Government, including provisions for record preservation.

Correct Answer: C. Central Government. Approval from the Central Government is required for the formation of a bank subsidiary.

Correct Answer: B. Section 19. Section 19 of the BR Act stipulates that Central Government approval is needed for bank subsidiary formation.

Correct Answer: C. Accounts and balance sheets. Under Section 29 of the BR Act, the Central Government is involved in notifications concerning the accounts and balance sheets of banks.

Correct Answer: C. Central Government. The Central Government can issue directives for bank inspections under Section 35 of the BR Act.

Correct Answer: C. Central Government. The Central Government has the powers to acquire bank undertakings under Section 36AE of the BR Act.

Correct Answer: D. Section 36AE. Section 36AE of the BR Act grants the Central Government powers for the acquisition of bank undertakings.

Correct Answer: C. Central Government. The Central Government holds the power for the appointment of court liquidators under Section 38A of the BR Act.

Correct Answer: C. A cooperative society engaged in banking. A cooperative bank is defined as a cooperative society that undertakes banking business.

Correct Answer: B. Primary Cooperative Bank. Primary Cooperative Bank is listed as a type of cooperative bank.

Correct Answer: B. District Central Cooperative Bank and State Cooperative Bank. District Central Cooperative Bank and State Cooperative Bank are identified as types of cooperative banks along with Primary Cooperative Bank.

Correct Answer: C. The respective State Cooperative Societies Act. Cooperative banks operating in a single state are usually registered under the Cooperative Societies Act of that particular state.

Correct Answer: C. The Multi-State Cooperative Societies Act, 2002. Cooperative banks functioning across multiple states are registered under the Multi-State Cooperative Societies Act, 2002.

Correct Answer: C. Dual Control. The system involving control by both the State Government and the Reserve Bank of India over cooperative banks is known as Dual Control.

Correct Answer: C. State Government. State Governments are responsible for the formation and management aspects of cooperative societies, including those engaged in banking.

Correct Answer: C. Registration to winding up. The Registrar of Cooperative Societies exercises extensive powers from the registration stage through to the winding up of cooperative societies.

Correct Answer: C. Reserve Bank of India. The Reserve Bank of India is responsible for the licensing and regulation of the banking activities performed by cooperative banks.

Correct Answer: B. The Banking Regulation Act, 1949, via Section 56, in 1965. The RBI’s control over the banking activities of cooperative banks was introduced through Section 56 of the Banking Regulation Act, 1949, in the year 1965.

Correct Answer: C. Enhanced RBI’s powers to restructure them. The 2020 amendment significantly increased the Reserve Bank of India’s powers related to the restructuring of cooperative banks.

Correct Answer: B. Their management, including supersession of the Board of Directors. The 2020 amendment provided the RBI with greater control over the management of cooperative banks, including the power of supersession of the Board of Directors.

Correct Answer: C. Section 36AAA. The power for the RBI to supersede the Board of Directors of a cooperative bank is associated with Section 36AAA.

Correct Answer: C. Depositors’ interests. The 2020 amendment aimed to enable the RBI to frame revival plans and safeguard the interests of depositors in cooperative banks.

Correct Answer: B. The application of the Act to cooperative banks with modifications. Section 56 of the Banking Regulation Act details how the Act applies to cooperative banks, including specific modifications.

Correct Answer: C. Through public/private issues, preferential shares, debentures, etc. Cooperative banks are allowed to raise capital through various means such as public or private issues, preferential shares, and debentures.

Correct Answer: C. The Deposit Insurance and Credit Guarantee Corporation (DICGC) Act. The RBI can order the winding up of cooperative banks that are registered under the DICGC Act.

Correct Answer: B. Section 13D. Section 13D of the DICGC Act specifies the RBI’s power to order the winding up of cooperative banks registered under that Act.

Correct Answer: C. Companies Act. The Companies Act governs company-related matters for cooperative banks.

Correct Answer: B. Labour Laws. Labour Laws are applicable for regulating the employment terms and conditions within cooperative banks.

Correct Answer: C. Securities and Exchange Board of India (SEBI). SEBI regulates dealings in securities, which is relevant for cooperative banks involved in security market activities.

Correct Answer: D. Insurance Regulatory and Development Authority of India (IRDAI). IRDAI is the regulatory authority for insurance business.

Correct Answer: C. RBI and SEBI. Mutual fund and merchant banking activities are regulated by both the RBI and SEBI.

Correct Answer: C. State Cooperative Societies Acts or Multi-State Cooperative Societies Act. The State Government’s control stems from the respective Cooperative Societies Acts under which the banks are registered.

Correct Answer: B. Banking Regulation Act, 1949. The RBI’s authority over the banking aspects of cooperative banks comes from the Banking Regulation Act, 1949.