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Commercial Banking System & Role of RBI
June 2024 Examination
1. Capital formation is important for economic growth of any country. It helps in making a
particular country self-sufficient in such a way that it does not have to be dependent on
other nations for foreign investments. Explain the different factors affecting capital
formation. (10 Marks)
Ans 1.
Introduction
Capital formation is a critical component of economic development, influencing a nation’s
ability to grow and sustain its economic activities. It represents the net addition of capital goods
such as machinery, tools, buildings, and other infrastructure that are necessary for producing
goods and services. By generating greater productive capacity, capital formation enhances a
nation’s self-sufficiency, reducing its reliance on foreign investment. The process of capital
formation not only bolsters domestic industries but also strengthens the financial system by
mobilizing savings and channeling them into productive investments. This, in turn, leads to job
creation, income generation, and overall economic prosperity. Several interrelated factors
influence the rate and effectiveness of capital formation, including savings rates, investment
channels, government policies, and economic conditions. Understanding these factors offers
2. Commercial banks are life-line of any economy. They play a very important role in
development of trade & commerce in the country. Describe different functions of
Commercial banks and do SWOT analysis of Commercial Banks. (10 Marks)
Ans 2.
Introduction
Commercial banks are fundamental to the economic framework of any country, serving as the
backbone of financial activity. They facilitate the flow of funds within the economy, making
capital accessible for consumers, businesses, and government entities. As primary conduits of
money, commercial banks play a pivotal role in the development of trade and commerce. They
not only manage deposits and provide loans but also extend various other services that aid in the
economic and financial stability of a country. Understanding the multifaceted functions of
commercial banks and evaluating their strengths, weaknesses, opportunities, and threats (SWOT
analysis) provides comprehensive insights into their critical role and the challenges they face in
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3. One of the critical source of income of commercial banks is interest income which bank
earns from interest on loans and advances to the customer. Advances may be classified as
fund based and non-fund based. In today’s scenario of increasing Non Performing Assets
(NPA) of the bank, banks are focusing more on non-fund based loans.
a. Discuss any three fund based loans and its advantages. (5 Marks)
Ans 3a.
Introduction
Commercial banks derive a substantial portion of their income from interest on various types of
loans extended to customers. These loans are generally classified into fund-based and non-fundbased
categories. With the growing concern over Non-Performing Assets (NPAs), many banks
are increasingly focusing on non-fund-based loans. However, fund-based loans remain crucial,
offering distinct advantages. Here, we will discuss three specific types of fund-based loans and
b. Discuss any three non-fund based loans and its advantages. (5 Marks)
Ans 3b.
Introduction
Non-fund based loans play a strategic role in modern banking, especially as a risk management
tool in light of the increasing Non-Performing Assets (NPAs). Unlike fund-based loans where
actual funds are disbursed, non-fund based loans involve the issuance of financial instruments by
banks as guarantees. These instruments facilitate business transactions and help manage
payment risks. We will explore three types of non-fund based loans—letters of credit, bank
guarantees, and documentary collections—and their distinct advantages.
Concept and Application
1. Letters of Credit (LCs): A Letter of Credit is a commitment by a bank on behalf of its