SECTION “A” (MULTIPLE CHOICE QUESTIONS)
1. Choose the correct answer for each from the given options:
(i) Bank provides inexpensive media of exchange through
* Currency notes
* Credit instruments
* Bills of exchange
(ii) Bank acts as custodian of customers’:
* None of these
(iii) Central Banking System originated in this century:
(iv) The Central Bank does Its work for:
* making profit
* to facilitate commerce
* for the prosperity of country
* for the betterment of commercial activities
(v) A rise in Bank Rate discourages the:
* all of these
(vi) Banks which are not enlisted with the central bank, are called:
* commercial banks
* statutory banks
* non-scheduled banks
* specialized banks
(vii) Commercial banks transfer the funds from:
* one place to another place
* one bank to another bank
* one branch to another branch
* All of these
(viii) Credit creation is the most important function of:
* Co-operative bank
* Commercial bank
* Saving bank
* Central bank
(ix) Fixed deposit account holder can withdraw his amount:
* at any time
* on the expiry of the term
* after 2 years
* none of these
(x) To open an account the applicant must be introduced by:
* a businessman
* bank employee
* account holder
* None of these
(xi) Credit transaction is usually made through:
* a contract
* a simple agreement
* credit instrument
* a cheque
(xii) The number of parties involved.in a cheque is:
(xiii) The holder of this is given grace days after the due date:
* Bank draft
* Bill of exchange
* Pay order
(xiv) Bank’s fund is mainly comprised of money:
* borrowed from Central bank
* own capital
* customer’s deposits
* Bank profit
(xv) For the cash credit the borrower pays interest on:
* the whole amount
* high amount with lesser risk
* the actual amount drawn by him·
* all of these.
(xvi) A bank purchases securities which are:
SECTION B (SHORT-ANSWER QUESTIONS)
NOTE: Answer any 7 questions from this section. NO answer should exceed 8 to 10 line.
2.(i) Explain the primary functions of Commercial Bank.
ANSWER: Please see Q. 2(vii) of 2013 Regular
(ii) List the functions of Central Bank.
In every country, there is a principal bank that is responsible for guidance and regulation of the financial system in the country. Such type of bank is known as central bank. A central bank may be defined as
“The principal banking institution of a country operating under some degree of state control and entrusted with the special responsibility of maintaining economic equilibrium and stability in the price and in the overall interest of the country”. The Central Bank’s chief functions may be described as follows.
1. Monopoly of issuing notes.
2: Government’s Bank
3. Banker’s Bank.
4. Management of Gold Standard.
5. Credit Control.
6. Clearing House.
7. Foreign Exchange Control.
8.. Lender of the last Resort.
9. Custodian of National Reserve.
10. Miscellaneous Function:
(iii) Distinguish between Scheduled Bank and Non-scheduled Bank.
ANSWER: Please see Q.5 of 2014 Regular
(iv) Describe the kinds of cross cheque.
Cross cheque refers to those cheques, which bears a crossed its faced two parallel lines. Between these two lines the cheque may also contain some phrase.
A cheque may be crossed in the following two ways.
(a) General crossing
(b) Special crossing.
(a) General Crossing:
In general crossing two parallel lines are drawn across face with or without the phrase like “and Company”, “not negotiable”, etc. In these cases the amount of cheque will be paid through a bank only. The specimen of different types of general crossing and their significance given below:
The above three types of crossed cheque indicate the same meaning. These types of cheque can be deposited in the bank a/c of any person with any bank. If the holder of the cheque does not have any bank a/c, he can encash the same through any other bank a/c holder.
(b) Special Crossing:
In Special Crossing, the name of a special bank is written between the lines on the face of the cheque. The specimen of such crossing is given below:
1. Habib Bank Ltd. :
This cheque can be deposited with any bank of Habib Bank Ltd.
2. Habib Bank Ltd. a/c payee only:
The cheque having such crossing must be deposited in the bank a/c of the person whose name is written in the cheque as the payee with any branch of Habib Bank Ltd.
3. Unitect Bank Ltd. Saddar Branch:
This cheque can only be deposited in the bank a/c of any person with only United Bank Ltd. Saddar Branch.
4. A/c payee only United Bank Haidery Branch:
This cheque must be deposited in the bank a/c of the payee with only United Bank Ltd. Haidery Branch.
(v) How is unfavourable balance of payment converted into favourable balance of payment? Describe.
ANSWER: Please see Q. 2(ix) of 2013 Regular
(vi) Explain the importance of public savings in current era.
What people save, avoiding to consume all their income, is called “personal savlnqs”. These savings can remain on the bank accounts for future use or be actively invested in houses, real estate, bonds, shares and other financial instruments.
Savings left in bank accounts are an important part of money. To the extent the banks decide to finance business investment with respect to the amount of deposits they received, an increase of personal savings could foster investment by the established firms. If money deposited is converted in subscription to equity in one’s own firm, savings serve for personal careers and independence, again with a possible link to investment ill a macroeconomic sense.
(vii) List the profitable uses of bank funds and explain any two of them.
A bank can use its funds in the following ways.
1. Unsecured loans.
2. Secured loans.
3. Stock exchange security.
4. Goods and documents of title.
5. Life Policy.
Unsecured loans are secured only by the promissory notes signed by the customers and not secured by any other additional security. In granting personal loans, a banker first satisfies himself with regard to financial stability of the borrower by examining his balance sheet.
Where the personal security of the borrower is considered inadequate, a banker may require him to furnish some additional security. This may take the form of a guarantee by a third person.
Stock Exchange Security
Under these collateral we include securities issued by Government, Semi Government, and local authorities. Shares of industrial and commercial companies also come in these categories. The merits of such collateral’s are quick sale, no difficulty in transfer of ownership and stability in prices. Hence while expecting stock exchange securities as security, banks should always keep in view that they should be free from all defects of ownership, fluctuations in their prices should be limited, and they should be fully paid.
(viii) What are the different types of Bank accounts? Explain.
ANSWER: Please see Q.no. 2(i) of 2013 Regular
(ix) Define credit instruments.
Credit Instruments are the documents describing details of credit and debit. Credit Instruments provide a written means for future reference describing terms and conditions of-any debt and loan. Credit Instruments may be an order for payment of money to a specified person or it may be a promise to pay the loan. Credit Instruments generally in use are cheques, bills of exchanges, bank overdraft etc.
(x) How do commercial banks create credit money?
When banks give out loans, they do not give out money that they already have. They simply give the loan, which is a promise to pay the actual money, which they never really have to do. In the economy, 95% of the money is in the form of bank credit. There is no real currency backing it.
Whenever we borrow money, the bank creates new money. This process constantly (almost) expands the money supply. This dilutes the value of the existing money. This is because total debt has to keep expanding in order for people to be able to pay back what they owe; otherwise, there simply will not be enough money to earn to pay back what we owe. When that happens, we declare bankruptcy; there are foreclosures, unemployment and so on, Which causes the vicious cycle of deflation.
SECTION ‘C’ (DETAILED-ANSWER QUESTIONS)
NOTE: .Attempt any Two questions.
3. Define Exchange Rate. How is the exchange rate determined? Explain.
Rate of exchange may not fluctuate in the long term ·under Gold Standard or Purchasing Power Parity but during short period, there may -be various factors that may lead to fluctuations in the rate of exchange these factors are as under.
1. Trade Conditions:
Trade condition affects import and export and hence the demand for and supply. of foreign currency respectively. When our exports are greater than imports we receive more foreign exchange then payment. In the opposite situation, we may pay more foreign exchange then we receive and in this case, our currency may depreciate in foreign exchange markets.
2. Stock Exchange influences:
Stock exchange may also influence the rate of exchange. When loans are given by home country to foreign – country the demand for foreign currency increases and the value of home currency tends to fall. The same situation arises when home investors purchases foreign securities or foreign investors sell home ‘securities. The exchange moves in favor of a country when loans are being repaid or home securities are purchased by foreigners because such transactions create demand for home currency.
3. Movement of capital:
These included the purchases and sale of bank draft, traveler’s cheque and letter of credit buying and selling of foreign currencies to make profit out of different rate at different markets. The sale of a draft on foreign markets creates demand for foreign currency. In the same way a high bank rate attracts the foreign investment and creates the demand for home currency and hence its rate of exchange. In the opposite case its value false because funds move out of the country and the demand for foreign currency is raised.
4. Monetary Policy:
Monetary policy also influences the rate of exchange. If there is deficit financing over issue of currency, the value of currency will depreciate and price level il’l the country will be higher. Consequently_exports will be smaller than imports and exchange rate will be favorable.
Speculation activities in foreign exchange also influence the exchange rate. If there is an over issue of currency is expected, people will not much Interested to invest in such a country. If people expect a currency to appreciate, they will tend to purchase this currency for speculative gain. Consequently, the rate of exchange will tend to be favorable.
4. Under what circumstances is a cheque dishonored by a bank?
ANSWER: Please see Q.2 (ix) of 2014 Private
5. Describe the origin of modem Banking.
ANSWER: Please see Q. 3 of 2012 Regular