RBI GRADE B

EXAM
Finance & Management Model Test Paper

FOR RBI GRADE B EXAM

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RBI Grade B
Finance & Management Model Test Paper
Q.1) From the given options, the phenomenon Money Illusion is related to?

(Topic Inflation: Level: Moderate)

A) Inflation
B) High Unemployment
C) High/Low Interest Rate
D) Deflation
E) None of the above

Answer: Option A) Inflation

Explanation:

• Money illusion is an economic theory stating that people have a tendency to view
their wealth and income in nominal dollar terms, rather than in real terms.
• It is assumed that people do not take into account the level of inflation in an
economy, wrongly believing that a dollar is worth the same as it was the prior year.
• Economists cite factors such as a lack of financial education, and the price
stickiness seen in many goods and services as triggers of money illusion.

Q.2) According to the GST Act, states are guaranteed compensation for any
revenue shortfall below what percent in growth for the first five years ending
2022?

(Topic GST: Level Easy)

A) 10%
B) 12%
C) 13%
D) 15%
E) 14%

Answer: Option E) 14%

Explanation:
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• GST Compensation Cess or GST Cess was introduced by the government to

compensate for the possible revenue losses suffered by such manufacturing states.
• The compensation cess payable to states is calculated based on the methodology
specified in the GST (Compensation to States) Act, 2017.
• The compensation fund so collected is released to the states every 2 months.
• The GST (Compensation to States) Act, 2017, states are guaranteed compensation
for loss of revenue on account of implementation of GST for a transition period of
five years (2017-22).
• The compensation is calculated based on the difference between the states’
current GST revenue and the protected revenue after estimating an annualised
14% growth rate from the base year of 2015-16.
• If a state’s GST revenue grows slower than 14 percent, such ‘loss of revenue’ will
be taken care of by the Centre by providing GST compensation grants to the state.
• To provide these grants, the Centre levies a GST compensation cess on certain
luxury and sin goods such as cigarettes and tobacco products, pan masala,
caffeinated beverages, coal, and certain passenger vehicles.
• The Act requires the Centre to credit this cess revenue into a separate
Compensation Fund and all compensation grants to states are required to be paid
out of the money available in this Fund.

Q.3) Recently, the 15th Finance Commission has submitted its interim report.
The Commission recommended setting up National and State Disaster
Management Funds for the promotion of local-level mitigation activities.
According to the above commission, what will be the cost sharing ratio
between the centre and state for the fund allocated to the National and State
Disaster Management Funds?

(Topic: Finance Commission: Level Moderate)

A) 80:20 for all states

B) 75:25 for all states
C) 60:40 for all states
D) 50:50 for all states
E) 70:30 for all states

Answer: Option B) 75:25 for all states

Explanation:
• The Finance Commission is a constitutionally mandated body that is at the centre
of fiscal federalism.
• It was set up under Article 280 of the Constitution, its core responsibility is to
evaluate the state of finances of the Union and State Governments, recommend
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the sharing of taxes between them, lay down the principles determining the
distribution of these taxes among States.
• The Fifteenth Finance Commission was constituted on 27 November 2017 against
the backdrop of the abolition of Planning Commission (as also of the distinction
between Plan and non-Plan expenditure) and the introduction of the goods and
services tax (GST), which has fundamentally redefined federal fiscal relations.
• According to the latest report of the 15th Finance Commission, the share of states
in the centre’s taxes is recommended to be decreased from 42% during the 2015-
20 period to 41% for 2020-21. The 1% decrease is to provide for the newly formed
union territories of Jammu and Kashmir, and Ladakh from the resources of the
central government.
• The Commission recommended setting up National and State Disaster
Management Funds (NDMF and SDMF) for the promotion of local-level mitigation
activities. The Commission has recommended retaining the existing cost-sharing
patterns between the centre and states to fund the SDMF (new) and the SDRF
(existing). The cost-sharing pattern between centre and states is (i) 75:25 for all
states, and (ii) 90:10 for north-eastern and Himalayan states.

Q.4) __________ is a type of financing that helps exporters receives immediate

cash by selling their receivables at a discount through a third party.

(Topic: Alternate Source of Finance, Level Easy)

A) Leasing
B) Factoring
C) Forfeiting
D) Peer to Peer Lending
E) Franchising

Answer: Option C) Forfeiting

Explanation:
• Forfaiting is a type of financing that helps exporters receives immediate cash by
selling their receivables at a discount through a third party.
• The payment amount is typically guaranteed by an intermediary such as a bank,
which is the forfaiter.
• Forfaiting also protects against credit risk, transfer risk, and the risks posed by
foreign exchange rate or interest rate changes.
• The receivables convert into a debt instrument such as an unconditional bill of
exchange or a promissory note which can then be traded on a secondary market.
• While these debt instruments can have a range of maturities, most maturity dates
are between one and three years from the time of sale.
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Q.5) Which derivative/option gives the buyer the right, but not the obligation
to sell the given quantity of the underlying asset at a given price on or before
a given date?

(Topic: Derivative: Forwards, future, options, Level: Easy)

A) Future Contract
B) Forward Contract
C) Call options
D) Put options
E) None of the above

Answer: Option D) Put Option

Explanation:

Futures:
• Futures contracts are financial derivatives that oblige the buyer to purchase some
underlying asset (or the seller to sell that asset) at a predetermined future price
and date.
• A futures contract allows an investor to speculate on the direction of a security,
commodity, or a financial instrument, either long or short, using leverage.
• The parties involved in a futures contract not only possess the right but also are
under the obligation, to carry out the contract as agreed.
• The contracts are standardized, meaning they are traded on the exchange market.

Forwards:
• Forwards contracts are similar to futures contracts in the sense that the holder of
the contract possess not only the right but is also under the obligation to carry out
the contract as agreed.
• They are traded over the counter and not on the exchange market. As the contracts
are not bound by a regulatory body’s rules and regulations, they are customizable
to suit the requirements of both parties involved.

• A Call Option gives the buyer the right, but not the obligation to buy the underlying
security at the exercise price, at or within a specified time.

• A Put Option gives the buyer the right, but not the obligation to sell the underlying
security at the exercise price, at or within a specified time.

Q.6) Suppose you are working for a private company. Apart from the regular
salary, the company provides you with things such as tuition reimbursement,
medical insurance etc. These things are known as __________.
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(Topic: Basic Management; Level Easy)

A) Social benefits
B) Incentives
C) Benefits
D) Rewards
E) Compensation

Answer: Option C) Benefits:

Explanation:
• The term associated with things such as tuition reimbursement, medical insurance
etc. is benefits which are provided apart from the regular compensation. i.e. the
benefits are forms of supplementary compensation. They represent monetary and
non-monetary payments over and above the wages paid.
• Incentives represent special compensation opportunities that are usually tied to
performance.
• Rewards are given in recognition of specific achievements whereas social benefits
in the form of say club memberships are given to enhance the employee status.
• Compensation is the financial remuneration given by the organization to its
employers for their work.

Q.7) Which factor is satisfiers as per the Two-Factor Theory of Motivation?

(Topic: Motivation, Level Moderate)

A) Achievement
B) Interpersonal relations
C) Salary
D) Job Security
E) None of the above

Answer: Option A) Achievement

Explanation:
• Motivational factors- According to Herzberg, the hygiene factors cannot be
regarded as motivators. The motivational factors yield positive satisfaction. These
factors are inherent to work. These factors motivate the employees for a superior
performance. These factors are called satisfiers.
• These are: Achievement, Recognition, Advancement, Work itself, Possibility of
growth and responsibility etc.
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Q.8) Likert has given a continuum of various systems of management. In which

system, the managers have complete trust and confidence in subordinates,
subordinates feel completely free to discuss things about the job with the
superior and superior always asks for ideas and opinions and make
constructive use of them

(Topic: Leadership; Level Moderate)

A) System 1
B) System 2
C) System 3
D) System 4
E) System 5

Answer: Option D) System 4

Explanation:
• Likert has given a continuum of four systems of management.
• He has taken seven variables to differentiate one management system from
others: Leadership, Motivation, Communication, interaction-influence, Decision
making process, Goal setting and Control Process

System 1 - Exploitative Authoritative:

• Responsibility lies in the hands of the people at the upper echelons of the
hierarchy.
• The superior has no trust and confidence in subordinates.
• The decisions are imposed on subordinates and they do not feel free at all to
discuss things about the job with their superior.
• The teamwork or communication is very little, and the motivation is based on
threats.

System 2 - Benevolent Authoritative:

• The responsibility lies at the managerial levels but not at the lower levels of the
organizational hierarchy.
• The superior has condescending confidence and trust in subordinates
• The subordinates do not feel free to discuss things about the job with their
superior.
• The teamwork or communication is very little, and motivation is based on a system
of rewards.

System 3 - Consultative:
• Responsibility is spread widely through the organizational hierarchy.
• The superior has substantial but not complete confidence in subordinates.
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• Some amount of discussion about job related things takes place between the
superior and subordinates.
• There is a fair amount of teamwork, and communication takes place vertically and
horizontally.
• The motivation is based on rewards and involvement in the job.

System 4 - Participative:
• Responsibility for achieving the organizational goals is widespread throughout the
organizational hierarchy.
• There is a high level of confidence that the superior has in his subordinates.
• There is a high level of teamwork, communication, and participation.

Q.9) The flow of information among persons at different levels, who have no
direct reporting relationships, is known as __________.

(Topic: Communication; Level: Easy)

A) Horizontal communication
B) Diagonal communication
C) Upward communication
D) Downward communication
E) None of the above

Answer: Option B) Diagonal Communication

Explanation:

• Downward Flow of Communication: Communication that flows from a higher

level in an organization to a lower level is a downward communication.
Communication from superiors to subordinates in a chain of command is a
downward communication.
• Upward Flow of Communication: Communication that flows to a higher level in an
organization is called upward communication. It provides feedback on how well
the organization is functioning. The subordinates use upward communication to
convey their problems and performances to their superiors.
• Diagonal Communication: Communication that takes place between a manager
and employees of other workgroups is called diagonal communication. It generally
does not appear on organizational chart.
• Lateral / Horizontal Communication: Communication that takes place at same
levels of hierarchy in an organization is called lateral communication, i.e.,
communication between peers, between managers at same levels or between any
horizontally equivalent organizational member.
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Q.10) It deals with chalking out a future course of action & deciding in advance
the most appropriate course of actions for achievement of pre-determined
goals. This function of management is known as ________.

(Topic: Basic Management; Level Easy)

A) Organizing
B) Planning
C) Staffing
D) Directing
E) Controlling

Answer: Option B) Planning

Explanation:

Planning:
• It deals with chalking out a future course of action & deciding in advance the most
appropriate course of actions for achievement of pre-determined goals.
• According to KOONTZ, “Planning is deciding in advance - what to do, when to do &
how to do. It bridges the gap from where we are & where we want to be

Organising:
• It is the process of bringing together physical, financial, and human resources and
developing productive relationship amongst them for achievement of
organizational goals.
• According to Henry Fayol, “To organize a business is to provide it with everything
useful or its functioning i.e. raw material, tools, capital and personnel’s”.

Staffing:
• It is the function of manning the organization structure and keeping it manned.
• According to Kootz & O’Donell, “Managerial function of staffing involves manning
the organization structure through proper and effective selection, appraisal &
development of personnel to fill the roles designed un the structure”.

Directing:
• It is that part of managerial function which actuates the organizational methods to
work efficiently for achievement of organizational purposes.
• It is considered life-spark of the enterprise which sets it in motion the action of
people because planning, organizing, and staffing are the mere preparations for
doing the work.
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Controlling:
• It implies measurement of accomplishment against the standards and correction
of deviation if any to ensure achievement of organizational goals.
• The purpose of controlling is to ensure that everything occurs in conformities with
the standards.
• An efficient system of control helps to predict deviations before they occur.
• According to Theo Haimann, “Controlling is the process of checking whether or not
proper progress is being made towards the objectives and goals and acting if
necessary, to correct any deviation”.

Q.11) Different barriers of communication may be grouped in different

categories. Badly expressed message falls under which type of barrier
category.

(Topic Communication; Level Easy)

A) Semantic
B) Psychological
C) Personal
D) Organizational
E) None of the above

Answer: Option A) Semantic

Explanation:

• Semantic Barriers: Semantics is the science of meaning. All communications are

symbolic that suggest certain meanings. The following types of semantic barriers
are more common: Symbols with different meaning, Badly Expressed Message,
Technical Jargons

• Psychological Barriers: Examples are Premature Evaluation, Inattention, Loss of

attention and poor retention

• Personal Barrier: Examples are attitude of superior, Fear of challenge to authority,

Lack of confidence in subordinate

• Organizational Barriers: Status Relationship, Organizational rules and regulations,

organizational policy
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Q.12) According to Maslow, a person who is looking for Self- respect, Self
Confidence, Feeling of Worthwhile, recognition of good work etc. is at which
level?

(Topic Motivation: Level Moderate)

A) Physiological
B) Safety
C) Social
D) Esteem
E) Self-actualization.

Answer: Option D)

Explanation:

Maslow’s need hierarchy Theory:

• This theory is based on the assumption that there is a hierarchy of five needs within
each individual.
• According to Maslow, individuals are motivated by unsatisfied needs. As each of
these needs is significantly satisfied, it drives and forces the next need to emerge.
Maslow grouped the five needs into two categories – Higher- order needs and
Lower-order needs
• The physiological and the safety needs constituted the lower-order needs. These
lower-order needs are mainly satisfied externally.
• The social, esteem, and self-actualization needs constituted the higher-order
needs. These higher-order needs are generally satisfied internally, i.e., within an
individual.
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Q.13) Job description is a written statement showing details of the job. The job
description does not contain which information?

(Topic: HRD, Performance Appraisal; Level Easy)

A) Job title, code number, department/division

B) Job responsibilities
C) Working Conditions
D) Relationship with other Job
E) All of the above are associated with job description

Answer: E

Explanation:

Job Description:
• It is an organized factual statement of job contents in the form of duties and
responsibilities of a specific job.
• The preparation of job description is very important before a vacancy is advertised.
• It tells in brief the nature and type of job.
• This type of document is descriptive in nature and it constitutes all those facts
which are related to a job such as :
1. Title/ Designation of job and location in the concern.
2. The nature of duties and operations to be performed in that job.
3. The nature of authority- responsibility relationships.
4. Necessary qualifications that are required for job.
5. Relationship of that job with other jobs in a concern.
6. The provision of physical and working condition or the work environment
required in performance of that job.
7. Working Conditions specifying specific hazards

Q.14) The barriers to effective appraisal may be grouped in three categories

i.e. Faulty Assumptions, Psychological blocks, and Technical pitfalls. Which one
of the following is not a technical problem in effective appraisal?

(Topic Performance Appraisal; Level Easy)

A) Halo Effect
B) Central Tendency
C) Distortion
D) Constant Errors
E) Manager’s feeling of insecurity
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Answer: Option E) Manager’s feeling of insecurity

Explanation:

• The main technical difficulties in appraisal fall into two categories- the criterion
problem and distortions that reduce the validity of results.
• Distortions occur in the form of biases and errors in making the evaluation. Such
distortions may be introduced by evaluator consciously or unconsciously.
• Halo effect: This distortion exists where the rater is influenced by ratee’s one or
two outstandingly good (or bad) performances and he evaluates the entire
performance accordingly.
• Central Tendency: This error occurs when the rater marks all or almost all his
personnel as average. He fails to discriminate between superior and inferior
persons. This may arise from the rater’s lack of knowledge of individuals he is
rating, or from haste, indifference, or carelessness.
• Constant Errors: There are easy raters and tough raters in all phases of life. Some
raters habitually rate everyone high; others tend to rate low. Some rate on
potential rather than on recently observed performance. In such a situation, the
results of two raters are hardly comparable.

Q.15) According to the Trait Theory, an individual who has traits relevant to
leadership emerges as an effective leader. Which of the following traits is not
required to become the effective leader?

A) Knowledge
B) Objectivity
C) Communication Skills
D) Emotional Stability
E) All are required

Answer: Option E) All are required

Explanation:

• According to the Trait Theory, an individual who has traits relevant to leadership
emerges as an effective leader.
• A trait is a distinguishable and relatively enduring quality of an individual that
affects his behaviour.
• For being a successful leader, a leader should have the following traits
1. Knowledge: should have intimate knowledge of his field.
2. Objectivity: The decision taken by leaders should be based on facts and
information and not on his own biases.
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3. Communication Skills: more particularly persuasive communication skills

4. Emotional Stability: Should have high level of emotional stability. Stability
in behaviour, refraining from anger etc.
5. Adaptability and flexibility: Effective leaders don't get stuck in a rut. They
are able to think outside of the box and adapt quickly to changing
situations.
6. Courage and resolution: The best leaders are brave and committed to the
goals of the group. They do not hide from challenges.
7. Creativity: Perhaps most importantly, great leaders not only possess their
own creativity, but they are also able to foster creativity among members
of the group.
8. Decisiveness: A great leader is capable of making a decision and is confident
in his or her choices.

Q.16) For the first five years of commencement of establishment of payment

banks, the promoter must contribute at least _________ of the paid-up equity
capital.

(Topic Financial Inclusion; Level Easy)

A) 20%
B) 25%
C) 30%
D) 40%
E) 35%

Answer: Option D) 40%

Explanation:

• A payments bank is like any other bank but operating on a smaller or restricted
scale.
• The payments bank will be registered as a public limited company under the
Companies Act, 2013, and licensed under Section 22 of the Banking Regulation
Act, 1949,
• The minimum paid-up equity capital of the payments bank shall be Rs. 100
crores.
• The promoters of the payments bank should hold at least 40 per cent of its paid-
up equity capital for the first five years from the commencement of its business.
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Q.17) According to the Clause 49 of the Listing Agreement, Where the

chairman of the board is a non-executive director, at least __________ of the
board should comprise of independent directors.

(Topic: Corporate Governance; Level: Moderate)

A) One-third
B) Half
C) One-Fourth
D) One-fifth
E) None of the above

Answer: Option A) One-third

Explanation:
• Clause 49 of the Listing Agreement was introduced on the recommendations of
the Kumaramangalam Birla committee set up by SEBI.
• SEBI enshrined the Clause 49 in the Equity Listing Agreement (2000), which now
serves as a standard of corporate governance in India.
• According to the clause, where the chairman of the board is a non-executive
director, at least one-third of the board should comprise of independent directors.
In case the chairman is an executive director, at least half of the board should
comprise of independent directors.
• A qualified and independent audit committee shall be set up. The audit committee
shall have a minimum of three directors as members. Two-thirds of the members
of the audit committee shall be independent directors. The chairman of the audit
committee shall be an independent director.

Q.18) In view of the coronavirus pandemic, the implementation of Basel-III

norms for banking services has been deferred by a year till ___________.

(Topic Risk Management, Basel Norms; Level Easy)

A) January 1, 2022
B) January 1, 2023
C) March 1, 2023
D) April 1, 2022
E) April 1, 2023

Answer: Option B) January 1, 2023

Explanation:
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• In view of the coronavirus pandemic, the implementation of Basel-III norms for

banking services has been deferred by a year till January 1, 2023.
• The Basel Committee''s oversight body, the Group of Central BankGovernors and
Heads of Supervision (GHOS), has decided on deferring the implementation of the
norms which were scheduled to come into effect from January 1, 2022.
• The Group of Central Bank Governors and Heads of Supervision (GHOS), has
endorsed a set of measures to provide additional operational capacity for banks
and supervisors to respond to the immediate financial stability priorities resulting
from the impact of the coronavirus disease (Covid-19) on the global banking
system
• The implementation of the revised market risk framework and the revised Pillar-3
disclosure requirements have also been deferred by one year to January 1, 2023.

Q.19) When a bank is unable to conclude a large transaction in a particular

instrument near the current market price, then the bank is exposed to which
risk?

(Topic Risk Management; Level Easy)

A) Credit Risk
B) Operational Risk
C) Market Risk
D) Reputational Risk
E) None of the above

Answer: Option E) None of the above. The correct answer is Market Liquidity Risk

Explanation:

• Credit risk is the possibility of a loss resulting from a borrower's failure to repay a
loan or meet contractual obligations. It refers to the risk that a lender may not
receive the owed principal and interest, which results in an interruption of cash
flows and increased costs for collection.

• Operational Risk: It is the risk that arises due to failed internal processes, people
or systems or from external events. It includes a no. of risk such as fraud risk,
communication risk, documentation risk, competence risk, model risk, cultural risk,
external events risk, legal risk, regulatory risk, compliance risk, system risk etc. It
however does not include strategic risk or reputation risk.
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• Reputational Risk: Reputational risk is a threat or danger to the good name or

standing of a business or entity. Reputational risk can occur in the following ways:
Directly, as the result of the actions of the company itself. Indirectly, due to the
actions of an employee or employees.

• Market risk is the possibility of an investor experiencing losses due to factors that
affect the overall performance of the financial markets in which he or she is
involved. Market risk, also called systematic risk, cannot be eliminated through
diversification, though it can be hedged against in other ways.

• Market liquidity risk: When bank is not able to conclude a large transaction in a
particular instrument around the current market price (say bank could not sell a
share at a higher price which could have been done but for poor market liquidity
this could not be done), this is called, market liquidity risk.

Q.20) insolvency and bankruptcy board of India (IBBI) has proposed a cap on
the maximum number of ongoing insolvency or liquidation proceedings that
can be handled by insolvency professional. According to the guidelines, if the
insolvency professional is handling accounts with turnover of Rs 5000-10,000
crore he can handle maximum of _______cases.

(Topic: Changing Landscape of the Banking sector; Level Moderate)

A) 2
B) 3
C) 4
D) 5
E) 1

Answer: Option B) 3

Explanation:

• The Insolvency and Bankruptcy Board of India (IBBI) has proposed to limit the
number of corporate insolvency cases a single insolvency professional (IP) is
permitted to handle at any given time. Currently, there is no limit on the number
of assignments an IP is permitted to take.
• It is proposed to issue necessary guidelines to IPs advising them to limit the
maximum number of assignments handled by them to 5
• The proposed limit would be adjusted from five to one based on the turnover of
the corporate debtor the IP is appointed to.
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• An insolvency professional (IP) can handle a maximum of 5 assignments if he is

handling accounts with turnover of less than ₹1000 crore, 4 assignments in the
case of accounts with turnover of ₹1000-5000 crore, 3 cases if he is handling
₹5000-10,000 crore turnover accounts and 1 if its a large account of more than
₹50,000 crore.

Q.21) Under the Basel III Guidelines, total regulatory capital will consist of the
sum of the following categories: Tier 1 Capital which consists of Common
Equity Tier 1 and Additional Tier 1 and Tier 2 Capital. As per guidelines, the
minimum additional Tier 1 capital required as a percentage of RWA is
__________.

(Topic Risk Management; Basel Norms; Level Easy)

A) 2%
B) 2.5%
C) 1.5%
D) 5.5%
E) 1%

Answer: Option C) 1.5%

Explanation:
• According to the Basel III norms, the total regulatory capital will consist of the
sum of the following categories:
1. Tier 1 Capital (going-concern capital)
a) Common Equity Tier 1
b) Additional Tier 1
2. Tier 2 Capital (gone-concern capital)
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Q.22) In Compounding technique, the future value of the sum depends on

which factor?

(Topic Time Value of Money; Level Easy)

A) Number of years
B) Interest Rate
C) Compounding frequency
D) Only A and B
E) All A, B and C

Answer: Option E) All of the above

Explanation:

• The future value or compounded value of an investment after n years when the
interest rate is r percent is:
FVn = PV (1 + r) n
• In this equation (1 + r) n is called the future value interest factor or the future
value factor.
• The future value varies with the interest rate, the compounding frequency, and
the number of periods.

Q.23) Agri-commodity bourse NCDEX has increased the maximum

compensation limit from its investor protection fund to _________ lakh from
the present Rs 2.5 lakh.

(Topic Primary and Secondary Market (CA); Level Easy)

A) 3 lakh
B) 5 lakh
C) 7 lakh
D) 10 lakh
E) 7.5 lakh

Answer: Option B) 5 lakhs

Explanation:

• Agri-commodity bourse NCDEX has increased the maximum compensation limit

from its investor protection fund to Rs 5 lakh from Rs 2.5 lakh.
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• The objective of the protection fund, which is administered by way of registered

Trust, is to compensate investors in the event of defaulter's assets not being
sufficient to meet the admitted claims of investors, promoting investor education,
awareness, and research
• In the event of funds of a defaulter's member being insufficient, the Investor
Protection Fund Trust based on the recommendations of the relevant Committee,
compensates the admitted value of claims of an investor arising out of a defaulter
member subject to a compensation limit.

Q.24) Securities and Exchange Board of India (SEBI) has issued guidelines
curbing the practice of margin trading. According to the guidelines, the brokers
will be penalised if margin to clients is more than by what percent of the sum
of Value At Risk (VAR) and Extreme Loss Margin (ELM)?

(Topic: Financial System (RBI+ SEBI + SIDBI + NABARD + NHB); Level Moderate)
A) 10%
B) 15%
C) 20%
D) 25%
E) 30%

Answer: Option D) 25%

Explanation:

• The Securities and Exchange Board of India issued guidelines curbing the practice
of margin trading, which the broking community rued will put an end to leveraged
intraday trading and make a huge dent in turnover.
• SEBI has asked brokers to collect upfront so-called value at risk (VAR) margin and
extreme loss margin (ELM) even for trading in the equity cash segment.
• This will be implemented in three phases starting December 2020, where brokers
will be penalised if margin to clients is more than 25 per cent of the sum of VAR
and ELM.
• From March 2021 and June 2021, they will be penalised if the margin exceeds 50
per cent and 70 per cent of VAR+ELM, respectively. From August 2021 onwards,
brokers will be penalised if margin exceeds VAR+ELM.

Q.25) Which method determines the number of years required to recover

initial investment outlay?

(Topic: Capital Budgeting; Level Easy)

RBI Grade B F&M Model Test Paper Free e-book

A) Payback Method
B) NPV Method
C) Internal Rate of Return
D) Accounting Rate of Return
E) None of the above

Answer: Option A) Payback Method

Explanation:
Payback Method:
• The payback period refers to the amount of time it takes to recover the cost of an
investment.
• The payback period is the length of time an investment reaches a break-even point.
• The desirability of an investment is directly related to its payback period. Shorter
paybacks mean more attractive investments.

NPV Method:
• Net present value method (also known as discounted cash flow method) is a capital
budgeting technique that takes into account the time value of money.
• It uses net present value of the investment project as the base to accept or reject
a proposed investment in projects like purchase of new equipment, purchase of
inventory, expansion or addition of existing plant assets and the installation of new
plants etc.
• If present value of cash inflows is greater than the present value of the cash
outflows, the net present value is said to be positive and the investment proposal
is considered to be acceptable.

Internal Rate of Return

• IRR is the annual rate of growth an investment is expected to generate.
• IRR is calculated using the same concept as NPV, except it sets the NPV equal to
zero.
• IRR is ideal for analyzing capital budgeting projects to understand and compare
potential rates of annual return over time

Accounting Rate of Return

• Accounting Rate of Return (ARR) is the average net income an asset is expected to
generate divided by its average capital cost, expressed as an annual percentage.
• The ARR is a formula used to make capital budgeting decisions.

Q.26) The EBIT level at which the EPS is same for two alternative financial plans
is known as ___________.
RBI Grade B F&M Model Test Paper Free e-book

(Topic Leverages, Break Even Point, Level Moderate)

A) Break-even point Analysis

B) Indifference Point
C) EBIT-EPS Analysis
D) Cash Break-even point
E) Financial Break-Even Point

Answer: Option B) Indifference Point

Explanation:

• Indifference points refer to the EBIT level at which the EPS is same for two
alternative financial plans.
• According to J. C. Van Home, Indifference point refers to that EBIT level at which
EPS remains the same irrespective of debt equity mix.

Q.27) [A] is the difference between that company's total assets and total
liabilities. It reflects the total value of a company's assets that shareholders of
that company would receive if the company were to be liquidated. [A] is
known as?

(Topic: Bond Valuation; Level: Moderate)

A) Going Concern Value

B) Liquidation Value
C) Market Value
D) Book Value
E) None of the above

Answer: Option D) Book Value

Explanation:

• Liquidation value: It is the total worth of a company's physical assets if it were to

go out of business and the assets sold. The liquidation value is the value of
company real estate, fixtures, equipment, and inventory. Intangible assets are
excluded from a company's liquidation value.

• Going concern value: If a company is sold rather than liquidated, both the
liquidation value and intangible assets determine the company's going-concern
RBI Grade B F&M Model Test Paper Free e-book

value. Going-concern value is the idea that a company will continue to be in

business and be profitable.
• The book value: It is the difference between that company's total assets and total
liabilities. Book value reflects the total value of a company's assets that
shareholders of that company would receive if the company were to be liquidated.

• The market value of an asset is simply the market price at which the asset trades
in the marketplace. Often the market value is greater than the book value. Market
value provides the highest valuation of assets although the measure could be
lower than book value if the value of the assets has decreased due to market
demand rather than business use.

Q.28) The contract of buying or selling a commodity, security, or currency for

immediate settlement for cash is known as __________.

(Topic Derivatives Market; Level Easy)

A) Spot contract
B) Forward Contract
C) Swap Contract
D) Options Contract
E) Future Contract

Answer: Option A) Spot Contract

Explanation:
• A spot contract, spot transaction, or simply spot, is a contract of buying or selling
a commodity, security or currency for immediate settlement (payment and
delivery) on the spot date, which is normally two business days after the trade
date.
• It is effectively a ‘buy now, pay now’ deal. The contract is for the immediate
delivery of a commodity or currency. The settlement is called the spot price, as in
'on the spot', which is how much the asset will change hands for if it is sold straight
away.
• Spot contracts are commonly used in foreign exchanges. Commodities such as
crude oil are also frequently bought and sold on the spot market. It is sold for a
particular price per barrel and then delivered at the price it was purchased.
RBI Grade B F&M Model Test Paper Free e-book

Q.29) From the options given below, which Option can be exercised only at the
time of maturity?

(Topic Derivatives Market; Level Moderate)

A) European Option
B) American Option
C) Swaps
D) Call or Put Option
E) Shares and Stock Option

Answer: Option A) European Option

Explanation:
• American options can be exercised any time before the expiration date of the
option, while European options can only be exercised on the expiration date
(exercise date).

Q.30) A __________ bond is a multiple debt issue that matures at staggered

intervals before all segments finally mature.

(Topic: Bond; Level Easy)

A) Callable Bond
B) Puttable Bond
C) Non-Callable Bond
D) Serial Bond
E) Multiple Bond

Answer: Option D) Serial Bond

Explanation:
Serial Bond:
• A serial bond is a multiple debt issue that matures at staggered intervals before all
segments finally mature.
• Each maturation segment in the serial bond is issued concurrently, with the terms
of the repayment schedule spelled out in the offering prospectus.
• Serial bonds do not utilize sinking funds, and instead rely on the revenues
generated from the project that the bond is used to fund, making them popular
for certain municipal bonds.
RBI Grade B F&M Model Test Paper Free e-book

2 Markers:

Q.31) From the data given below, calculate the effective revenue deficit.

• Revenue deficit (RD) = 609219 crore

• Grants for capital asset = 206500 crore
• Primary deficit (PD) = 88134 crore
• Non-plan expenditure = 8956

(Topic Budget (Static); Level Moderate)

A) 411675
B) 402719
C) 323541
D) 521085
E) 512129

Answer: Option B) 402719

Explanation:
• Effective Revenue Deficit: It is the difference between revenue deficit and grants
for the creation of capital assets. The Effective Revenue Deficit excludes those
revenue expenditures which were done in the form of grants for the creation of
capital assets
• Effective Revenue Deficit = Revenue Deficit – Grants for capital for capital asset

Passage (Q32-34)

___________ [A] is the process concerned with the identification of sources from where
the personnel can be employed and motivating them to offer for employment. The
process is concerned with the identification of possible sources of human resource
supply and tapping those sources. __________ [B] is the process of choosing the most
suitable candidates out of the several candidates available. It is called a _________ [C]
process because there may be more candidates who are rejected than those who got
the offer.

(Topic: HRD, Performance Appraisal; Level Moderate)

Q.32) Which will replace the blank [A] and [B] respectively as mentioned in
the above passage?

A) Selection, Recruitment
RBI Grade B F&M Model Test Paper Free e-book

B) Placement, Recruitment
C) Recruitment, Selection
D) Placement, Selection
E) Job Analysis, Selection

Answer: Option C) Recruitment, Selection

Explanation:

• Recruitment refers to the process of identifying, attracting, interviewing, selecting,

hiring and on-boarding employees. It involves everything from the identification of
a staffing need to filling it.
• According to Edwin B. Flippo, Recruitment is the process of searching for
prospective employees and stimulating and encouraging them to apply for jobs in
an organisation.
• Selection: is the process of choosing the most suitable candidates out of the
several candidates available. It is called a negative [C] process because there may
be more candidates who are rejected than those who got the offer.
• Selection can also be defined as the process of interviewing the candidates and
evaluating their qualities, which are required for a specific job and then choosing
the suitable candidate for the position.
• The selection of a right applicant for a vacant position will be an asset to the
organization, which will be helping the organization in reaching its objectives.

___________ [A] is the process concerned with the identification of sources from where
the personnel can be employed and motivating them to offer for employment. The
process is concerned with the identification of possible sources of human resource
supply and tapping those sources. __________ [B] is the process of choosing the most
suitable candidates out of the several candidates available. It is called a _________ [C]
process because there may be more candidates who are rejected than those who got
the offer.

(Topic: HRD, Performance Appraisal; Level Moderate)

Q.33) Which of the following statements correctly explains the difference

between [A] and [B]?

A) The basic objective of [B] is to attract the maximum number of candidates so that more
options are available while that of [A] is to choose the best out of the available candidates.
B) [A] is known as the positive process while [B] is known as negative process.
C) [B] proceeds selection while [A] proceeds recruitment
RBI Grade B F&M Model Test Paper Free e-book

D) In [A] candidates must cross many hurdles while in [B] candidates have not to cross
many hurdles
E) [A] is a complex process while [B] is a simple process.

Answer: Option B) [A] is known as the positive process while [B] is known as negative
process.

Explanation:
• In the above passage [A] is replaced by Recruitment while [B] is replaced by
Selection.

Basis Recruitment Selection

Meaning It is an activity of establishing It is a process of picking up

contact between employers and more competent and suitable
applicants. employees.

Objective It encourages large number of It attempts at rejecting

Candidates for a job. unsuitable candidates.

Process It is a simple process. It is a complicated process.

Hurdles The candidates have not to cross Many hurdles have to be

over many hurdles. crossed.

Approach It is a positive approach. It is a negative approach.

Sequence It proceeds selection. It follows recruitment.

Economy It is an economical method. It is an expensive method.

Time Less time is required. More time is required.

Consuming

___________ [A] is the process concerned with the identification of sources from where
the personnel can be employed and motivating them to offer for employment. The
process is concerned with the identification of possible sources of human resource
supply and tapping those sources. __________ [B] is the process of choosing the most
suitable candidates out of the several candidates available. It is called a _________ [C]
process because there may be more candidates who are rejected than those who got
the offer.

(Topic: HRD, Performance Appraisal; Level Moderate)

RBI Grade B F&M Model Test Paper Free e-book

Q.34) 1) Advertisement
2) Casual Callers
3) Direct Recruitment
4) Transfer
5) Re-appointment of ex-employees.

From the options, given above, which of the following is/are the external
source of recruitment?

A) Only 1
B) 2, 3 and 5
C) 2 and 4
D) 1, 2 and 3
E) 1, 2 and 5

Answer: Option D) 1, 2 and 3

Explanation:
• Internal Recruitment - is a recruitment which takes place within the concern or
organization. Internal sources of recruitment are readily available to an
organization. Internal sources are primarily three - Transfers, promotions, and Re-
employment of ex-employees.
• External sources of recruitment must be solicited from outside the organization. It
involves lot of time and money. The external sources of recruitment include -
Employment at factory gate, advertisements, employment exchanges,
employment agencies, educational institutes, labour contractors,
recommendations, Casual callers, direct recruitment etc.

Q.35) Douglas McGregor formulated Theory X and Theory Y suggesting two

aspects of human behaviour at work. Which of the following is not correct
about his theory?

(Topic: Motivation; Level: Moderate)

A) Theory X employee intrinsically does not like work and tries to escape it whenever
possible.
B) Theory Y employees rank job security on top, and they have little or no aspiration/
ambition.
C) Theory X employees resist change.
D) Theory Y employees are happy to work on their own initiative.
E) Theory X employees Need to be supervised at every step.
RBI Grade B F&M Model Test Paper Free e-book

Answer: Option B) Theory Y employees rank job security on top, and they have little or
no aspiration/ ambition.

Explanation:
• Douglas McGregor formulated Theory X and Theory Y suggesting two aspects of
human behaviour at work, or two different views of individuals (employees): one
of which is negative, called as Theory X and the other is positive, so called as Theory
Y.
• According to McGregor, the perception of managers on the nature of individuals is
based on various assumptions.

Assumptions of Theory X
• An average employee intrinsically does not like work and tries to escape it
whenever possible.
• Since the employee does not want to work, he must be persuaded, compelled, or
warned with punishment so as to achieve organizational goals. A close supervision
is required on part of managers. The managers adopt a more dictatorial style.
• Many employees rank job security on top, and they have little or no aspiration/
ambition.
• Employees generally dislike responsibilities.
• Employees resist change.
• An average employee needs formal direction.

Assumptions of Theory Y
• Employees can perceive their job as relaxing and normal. They exercise their
physical and mental efforts in an inherent manner in their jobs.
• Employees may not require only threat, external control and coercion to work, but
they can use self-direction and self-control if they are dedicated and sincere to
achieve the organizational objectives.
• If the job is rewarding and satisfying, then it will result in employees’ loyalty and
commitment to organization.
• An average employee can learn to admit and recognize the responsibility. In fact,
he can even learn to obtain responsibility.
• The employees have skills and capabilities. Their logical capabilities should be fully
utilized. In other words, the creativity, resourcefulness and innovative potentiality
of the employees can be utilized to solve organizational problems.

Theory X presents a pessimistic view of employees’ nature and behaviour at work, while
Theory Y presents an optimistic view of the employees’ nature and behaviour at work
RBI Grade B F&M Model Test Paper Free e-book

Passage (Q36-Q37)

The ministry of corporate affairs (MCA) has launched a one-time amnesty scheme for
[A] companies that have failed to file the requisite statutory documents such as annual
statements, change in directors, etc. The move is aimed at promoting ease of doing
business as well as to cleanse the system. It provides these companies a one-time
relaxation in payment of additional fees and immunity from prosecution. It is aimed at
those LLPs whose paid-up capital is Rs ________ [B] but accumulated late fees have
reached Rs 5 lakh or more making compliance prohibitive. The scheme would permit
companies to submit their filings that were due till October 31, 2019. The concerned has
to pay a nominal additional fee of Rs __________[C] per day for the period of delay as
well as any fee that is to be paid for submitting a document. The additional fee per
document would be capped at Rs 5,000.

(Topic: Recent Development in Banking sector; Level Easy)

Q.36) Which will replace the blank [B] as mentioned in the above passage?

A) 50,000
B) 75, 000
C) 1 lakh
D) 2 lakh
E) 2.5 lakh

Answer: C) 1 Lakh

Explanation:
• The scheme mentioned in the above passage is Limited Liability Partnerships (LLP)
Settlement Scheme, 2020.
• It will allow a One-time condonation of delay in filing statutorily required
documents with the Registrar.
• LLPs are governed by the LLP Act, which is implemented by the Ministry of
Corporate Affairs.
• It is aimed at those LLPs whose paid-up capital is Rs 1 lakh but accumulated late
fees have reached Rs 5 lakh or more making compliance prohibitive.

The ministry of corporate affairs (MCA) has launched a one-time amnesty scheme for
[A] companies that have failed to file the requisite statutory documents such as annual
statements, change in directors, etc. The move is aimed at promoting ease of doing
business as well as to cleanse the system. It provides these companies a one-time
relaxation in payment of additional fees and immunity from prosecution. It is aimed at
those LLPs whose paid-up capital is Rs ________ [B] but accumulated late fees have
RBI Grade B F&M Model Test Paper Free e-book

reached Rs 5 lakh or more making compliance prohibitive. The scheme would permit
companies to submit their filings that were due till October 31, 2019. The concerned has
to pay a nominal additional fee of Rs __________[C] per day for the period of delay as
well as any fee that is to be paid for submitting a document. The additional fee per
document would be capped at Rs 5,000.

(Topic: Recent Development in Banking sector; Level Easy)

Q.37) Which will replace the blank [C] as mentioned in the above passage?

A) Rs. 10
B) Rs 5
C) Rs 25
D) Rs 50
E) Rs 100

Answer: Option A) Rs. 10

Explanation:

• The above scheme would be applicable to a defaulting LLP for filing overdue
documents, which were due for filing till 31st October 2019 on a payment of a
nominal additional fee of Rs 10/- per day for the period of delay.
• This is in addition to any fee as is payable for filing of such document or return,
subject to a maximum amount of Rs. 5,000/- as additional fee per document.

Passage (Q38-40)

Robert House and others have developed a model of leadership initially presented by
Evans. The Theory states that a good leader provides clear direction, sets high goals,
gets involved in goal achievement and supports his employees. The employees, as a
result, will be a more satisfied and productive team. It also states that employees will
accept a leader's direction if the employee believes that there will be an immediate or
future benefit that results from work.
(Topic: Leadership; Level: Moderate)

Q.38) Name the theory which was mentioned in the above passage?

A) Great Man Theory

B) Likert Theory
C) Situational Leadership Theory
RBI Grade B F&M Model Test Paper Free e-book

D) Path Goal Theory

E) Vroom’s Expectancy Theory

Answer: Option D) Path Goal Theory

Explanation:

• The theory mentioned in the above passage is Path Goal Theory.

• The theory was developed by Robert House and has its roots in the expectancy
theory of motivation. The theory is based on the premise that an employee’s
perception of expectancies between his effort and performance is greatly affected
by a leader’s behaviour.

Robert House and others have developed a model of leadership initially presented by
Evans. The Theory states that a good leader provides clear direction, sets high goals,
gets involved in goal achievement and supports his employees. The employees, as a
result, will be a more satisfied and productive team. It also states that employees will
accept a leader's direction if the employee believes that there will be an immediate or
future benefit that results from work.

(Topic: Leadership; Level: Moderate)

Q.39) The theory mentioned in the above passage is a combination of which

two theories?

A) Vroom’s Expectancy Theory of Motivation and Situational Leadership Theory

B) Situational Leadership and Hersey-Blanchard’s Situational model
C) Likert and Great man Theory
D) Vroom’s Expectancy Theory of Motivation and Goal Setting Theory
E) Goal Setting Theory and McClelland’s Need Theory

Answer: Option A) Vroom’s Expectancy Theory of Motivation and Situational Leadership

Theory

Explanation:

• The theory mentioned in the above passage is Path Goal Theory. It is basically a
combination of Vroom’s Expectancy Theory of Motivation and Situational
Leadership Theory.
• Path Goal Theory attempts to predict leadership effectiveness in different
situations.
RBI Grade B F&M Model Test Paper Free e-book

• According to the above theory, the main function of a leader is to clarify and set
goals with subordinates, to help them find the best path for achieving the goals,
and to remove the obstacles to their performance and need satisfaction.
• The path Goal leadership process is shown in the figure

Robert House and others have developed a model of leadership initially presented by
Evans. The Theory states that a good leader provides clear direction, sets high goals,
gets involved in goal achievement and supports his employees. The employees, as a
result, will be a more satisfied and productive team. It also states that employees will
accept a leader's direction if the employee believes that there will be an immediate or
future benefit that results from work.

(Topic: Leadership; Level: Moderate)

Q.40) According to the above theory, the leader may adopt one of the styles
depending on the situation. In which style the leader gives subordinates
specific orders and make it clear what is expected of them?

A) Directive
B) Supportive
RBI Grade B F&M Model Test Paper Free e-book

C) Participative
D) Achievement-oriented
E) None of the above

Answer: Option A) Directive

Explanation:

• According to the above theory, the four leadership styles are:

• Directive: The leader provides guidelines, lets subordinates know what is expected
of them, sets performance standards for them, and controls behaviour when
performance standards are not met. The style is the same as task-oriented one.
• Supportive: The leader is friendly towards subordinates and displays personal
concern for their needs, welfare, and well-being. This style is the same as people-
oriented leadership.
• Participative: The leader believes in group decision-making and shares information
with subordinates. He consults his subordinates on important decisions related to
work, task goals, and paths to resolve goals.
• Achievement-oriented: The leader sets challenging goals and encourages
employees to reach their peak performance. The leader believes that employees
are responsible enough to accomplish challenging goals. This is the same as goal-
setting theory.

Passage (Q41-43)

___________ [A] theory of motivation is based on the social exchange process. This
theory points out that people are motivated to maintain fair relationship between their
performance and reward in comparison to others. It is based in the idea that individuals
are motivated by fairness, and if they identify inequities in the input or output ratios of
themselves and their referent group, they will seek to adjust their input to reach their
perceived equity.

(Topic: Motivation; Level: Moderate)

Q.41) Name the theory which is mentioned in the above passage?

A) Goal Setting Theory

B) ERG Theory
C) Vroom’s Expectancy Theory
D) Herzberg’s Theory
E) None of the above

Answer: Option E) None of the above. The theory is Equity Theory

RBI Grade B F&M Model Test Paper Free e-book

Explanation:

• John Stacey Adams introduced the idea that fairness and equity are key
components of a motivated individual.
• Equity theory is based in the idea that individuals are motivated by fairness, and if
they identify inequities in the input or output ratios of themselves and their
referent group, they will seek to adjust their input to reach their perceived equity.
• Adams suggested that the higher an individual's perception of equity, the more
motivated they will be and vice versa: if someone perceives an unfair environment,
they will be de-motivated.

___________ [A] theory of motivation is based on the social exchange process. This
theory points out that people are motivated to maintain fair relationship between their
performance and reward in comparison to others. It is based in the idea that individuals
are motivated by fairness, and if they identify inequities in the input or output ratios of
themselves and their referent group, they will seek to adjust their input to reach their
perceived equity.

(Topic: Motivation; Level: Moderate)

Q.42) According to the above theory, exchange relationship between a person’s

inputs/outcomes in relation to those of other persons may be of many types. Under
which condition the person experience guilt feelings?

A) Overpaid Inequity
B) Underpaid Inequity
C) Equity
D) Both A and B
E) None of the above

Answer: Option A) Overpaid Equity

Explanation:

• According to the above theory, while evaluating fairness, employee compares the
job input (in terms of contribution) to outcome (in terms of compensation) and
compares the same with that of another peer of equal cadre/category. D/I ratio
(output-input ratio) is used to make such a comparison.
• In Positive equity or Overpaid equity, the person experiences Guilt feeling
• In Negative or Underpaid equity, the person experiences Dissonance
• In Equity, the person experiences Satisfaction
RBI Grade B F&M Model Test Paper Free e-book

___________ [A] theory of motivation is based on the social exchange process. This
theory points out that people are motivated to maintain fair relationship between their
performance and reward in comparison to others. It is based in the idea that individuals
are motivated by fairness, and if they identify inequities in the input or output ratios of
themselves and their referent group, they will seek to adjust their input to reach their
perceived equity.

(Topic: Motivation; Level: Moderate)

Q.43) According to Herzberg’s motivation-hygiene theory, which one of the

following is the motivating factor?

A) Company policy and administration

B) Interpersonal relationship with peers
C) Salary
D) Job Security
E) Achievement and Recognition

Answer: Option E) Achievement and Recognition

Explanation:

• Herzberg’s Motivation Theory model, or Two Factor Theory, argues that there are
two factors that an organization can adjust to influence motivation in the
workplace. These factors are:
1. Motivators: These encourages employees to work harder.
2. Hygiene factors: These will not encourage employees to work harder but
they will cause them to become unmotivated if they are not present.
• Hygiene factors- Hygiene factors are those job factors which are essential for
existence of motivation at workplace. These do not lead to positive satisfaction for
long-term. But if these factors are absent / if these factors are non-existent at
workplace, then they lead to dissatisfaction.
RBI Grade B F&M Model Test Paper Free e-book

• These are: Company policies, Pay, wages, Job Security, interpersonal relationships
etc.
• Motivational factors- According to Herzberg, the hygiene factors cannot be
regarded as motivators. The motivational factors yield positive satisfaction. These
factors are inherent to work. These factors motivate the employees for a superior
performance. These factors are called satisfiers.
• These are: Achievement, Recognition, Advancement, Work itself, Possibility of
growth and responsibility etc.

Q.44) Which of the following statements is/are correct about the Commercial
Paper?

1) A commercial paper is an secured short-term promissory note, negotiable and

transferable by endorsement and delivery with a fixed maturity period.
2) Commercial paper is usually issued at face value and reflects prevailing market
interest rates.
3) CPs have a minimum maturity of seven days and a maximum of up to one year from
the date of issue.
4) Foreign institutional investors (FIIs) are eligible to invest in commercial papers but
within the limits set for their investments by the RBI.

(Topic: Financial Market (Primary + Secondary); Level Moderate)

A) 1, 2 and 4
B) Only 1
C) Only 3
D) 2, 3 and 4
E) 3 and 4

Answer: Options C) Only 3

Explanation:

• Commercial paper is a short-term debt instrument issued by companies to raise

funds generally for a time period up to one year.
• It is an unsecured money market instrument issued in the form of a promissory
note and was introduced in India for the first time in 1990.
• Companies that enjoy high ratings from rating agencies often use CPs to diversify
their sources of short-term borrowings. This gives investors an additional
instrument.
• They are typically issued by large banks or corporations to cover short-term
receivables and meet short-term financial obligations, such as funding for a new
project.
RBI Grade B F&M Model Test Paper Free e-book

• CPs have a minimum maturity of seven days and a maximum of up to one year
from the date of issue.
• They can be issued in denominations of Rs 5 lakh or multiples thereof.
• Since such instruments are not backed by collateral, only firms with high ratings
from a recognised credit rating agency can sell such commercial papers at a
reasonable price.
• CPs are usually sold at a discount to their face value, and carry higher interest rates
than bonds.
• A commercial paper can be issued to individuals, banks, companies, and other
registered Indian corporate bodies and unincorporated bodies.
• Non-resident Indians can be issued a commercial paper only on a non-transferable
and non-repatriable basis.
• Banks are not allowed to underwrite or co-accept the issue of a commercial paper.
• Foreign institutional investors (FIIs) are eligible to invest in commercial papers but
within the limits set for their investments by the SEBI.

Q.45) The Reserve Bank of India has announced the guidelines for on-tap
licensing of private sector SFBs. According to the guidelines, which of the
following statements is/are correct?

1) Payments banks can apply for conversion into small finance banks (SFBs) after 5 years
of operation after satisfying the criteria.
2) A minimum Rs 100 crore net worth is needed for the license of small finance bank.
3) Primary (Urban) Co-operative Banks (UCBs), desirous of voluntarily transiting into
SFBs initial requirement of net worth shall be at Rs 100 crore, which will have to be
increased to Rs 200 crore within ten years from the date of commencement of business.
4) If the initial promoter shareholding in Small Finance Bank is above 40%, it should be
brought down to 40% within a period of 5 years, 30% within 10 years, and 15% in 15
years.

(Topic: Financial Inclusion; Level: Moderate)

A) 1, 2 and 4 are correct
B) 1, 3 and 4 are correct
C) 1 and 4 are correct
D) 1 and 3 are correct
E) All are correct

Answer: Option C) 1 and 4 are correct.

Explanation:
RBI Grade B F&M Model Test Paper Free e-book

• A payments bank is like any other bank but operating on a smaller scale without
involving any credit risk.
• In 2013, the Reserve Bank of India constituted a committee headed by Dr Nachiket
Mor to study 'Comprehensive financial services for small businesses and low-
income households'.
• The payments bank will be registered as a public limited company under the
Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act,
1949
• The payments bank will be given scheduled bank status once it commences
operations and is found suitable as per Section 42 (6) (a) of the Reserve Bank of
India Act, 1934.
• The payments bank will not have significant credit and market risks. However, it
will be exposed to operational risk.
• The minimum paid-up equity capital of the payments bank shall be Rs. 200 crores.
• The promoters of the payments bank should hold at least 40 per cent of its paid-
up equity capital for the first five years from the commencement of its business
• If the initial promoter shareholding is above 40%, it should be brought down to
40% within a period of 5 years, 30% within 10 years, and 15% in 15 years.

The Reserve Bank of India (RBI) recently announced the final guidelines for on-tap
licensing of private sector SFBs (small finance banks).

• Payments banks can apply for conversion into small finance banks (SFBs) after 5
years of operation after satisfying the criteria.
• Primary (Urban) Co-operative Banks (UCBs), desirous of voluntarily transiting into
SFBs initial requirement of net worth shall be at Rs 100 crore, which will have to
be increased to Rs 200 crore within five years from the date of commencement of
business.
• Net worth requirement of small finance bank is raised to 200 cr rupees from 100
cr.

Passage (Q46-47)

The Reserve Bank of India proposed to tighten the rules governing home financiers,
including putting restrictions on lending to builders and doubling the minimum net
owned funds criterion. The regulator’s proposal has also clearly defined home finance
firms and those that are systemically important among them. According to the draft
regulations, RBI also classified housing finance companies as systemically important and
non-systemically important. Non-deposit taking HFCs with asset size of _______ [A]
crore and above; and all deposit taking HFCs irrespective of asset size will be treated as
systemically important HFCs. RBI also said that to qualify as a housing finance company,
RBI Grade B F&M Model Test Paper Free e-book

_________[B] of net assets should be to real estate lending, of which at least 75% should
be towards individual housing loans.

(Topic: Financial System (RBI+ SEBI + SIDBI + NABARD + NHB); Level Moderate)

Q.46) Which will come in place in Blank [A] and Blank [B] as mentioned in the
above passage?

A) 100 crore, 50%

B) 200 crore, 25%
C) 500 crore, 50%
D) 500 crore, 25%
E) 1000 crore, 75%

Answer: Option C) 500 crores, 50%

Explanation:

According to the guidelines

• Non-deposit taking HFCs with asset size of ₹500 crore and above; and all deposit
taking HFCs irrespective of asset size will be treated as systemically important
HFCs.
• HFCs with asset size below ₹500 crore will be treated as non-systemically
important HFCs.
• To qualify as a housing finance company, 50% of net assets should be to real estate
lending, of which at least 75% should be towards individual housing loans.
• Those HFCs that do not fulfil the qualification will be treated as NBFC–investment
and credit companies (NBFC-ICCs) and will be required to approach RBI for
conversion of their certificate of registration from HFCs to NBFC-ICC.

The Reserve Bank of India proposed to tighten the rules governing home financiers,
including putting restrictions on lending to builders and doubling the minimum net
owned funds criterion. The regulator’s proposal has also clearly defined home finance
firms and those that are systemically important among them. According to the draft
regulations, RBI also classified housing finance companies as systemically important and
non-systemically important. Non-deposit taking HFCs with asset size of _______ [A]
crore and above; and all deposit taking HFCs irrespective of asset size will be treated as
systemically important HFCs. RBI also said that to qualify as a housing finance company,
RBI Grade B F&M Model Test Paper Free e-book

_________[B] of net assets should be to real estate lending, of which at least 75% should
be towards individual housing loans.

(Topic: Financial System (RBI+ SEBI + SIDBI + NABARD + NHB); Level Moderate)

Q.47) According to the above guidelines, which of the following statements

is/are correct?

A) The minimum net owned funds required for HFCs is ₹20 crore and align the capital
requirements of all HFCs with NBFCs over a period of five years.
B) For HFCs, minimum capital risk-weighted assets ratio (CRAR) is currently at 12%,
which will be increased to 14% by 31 March 2021 and 15% by 31 March 2022.
C) The NBFC-ICCs which want to continue as HFCs would have to follow a roadmap to
make 75% of their assets individual housing loans. This has to be achieved by March
2025.
D) Both A and C are correct
E) All are correct

Answer: Option B) For HFCs, minimum capital risk-weighted assets ratio (CRAR) is
currently at 12%, which will be increased to 14% by 31 March 2021 and 15% by 31
March 2022.

Explanation:

According to the guidelines:

• The minimum net owned funds required for HFCs is ₹20 crore and align the capital
requirements of all HFCs with NBFCs over a period of two years.
• For HFCs, minimum capital risk-weighted assets ratio (CRAR) is currently at 12%,
which will be increased to 14% by 31 March 2021 and 15% by 31 March 2022.
• The NBFC-ICCs which want to continue as HFCs would have to follow a roadmap to
make 75% of their assets individual housing loans. The target has been set at 60%
by March 31, 2022, 70% by March 31, 2023, and 75% by March 31, 2024.
• If the HFC decided to take any exposure in its group entities (lending and
investment), directly or indirectly, such an exposure could not be more than 15%
of owned fund for a single entity in the group and 25% of owned fund for all such
group entities.

Passage (Q48-49)

With the consumer price inflation at 6.9 per cent in July, the RBI needs to exercise caution
over increasing the supply of rupees as a fallout of its foreign exchange management. The
Reserve Bank of India had been trying to rein in rupee appreciation over the last couple
months, but the currency gained almost 5 per cent in this period. This was due to a host
RBI Grade B F&M Model Test Paper Free e-book

of factors. The Reserve Bank of India hinted that allowing the rupee to strengthen could
help India deal with imported inflation.

(Miscellaneous Current Affairs; Level Moderate)

Q.48) The passage talks about some host factors responsible for rupee
appreciation. They are ________.

1) Increase in Foreign capital that is coming in, in the form of FDI and FII
2) Increase in Crude oil Price
3) Increase in External Commercial Borrowing
4) Weakness in the dollar

A) Only 1
B) 1, 2 and 4
C) 1 and 4
D) 1, 3 and 4
E) Only 2
Answer: Option D) 1, 3 and 4

Explanation:

• The reason behind the rupee’s sudden appreciation is the extent of foreign capital
that is coming in, in the form of both institutional and direct investments (FIIs and
FDIs).
• Foreign investors have been keen to invest in the Indian market which has resulted
in huge dollar inflows.
• Other factors are declining crude oil prices, increase in external commercial
borrowing, and the weakness in the dollar.

With the consumer price inflation at 6.9 per cent in July, the RBI needs to exercise
caution over increasing the supply of rupees as a fallout of its foreign exchange
management. The Reserve Bank of India had been trying to rein in rupee appreciation
over the last couple months, but the currency gained almost 5 per cent in this period.
This was due to a host of factors. The Reserve Bank of India hinted that allowing the
rupee to strengthen could help India deal with imported inflation.

(Miscellaneous Current Affairs; Level Moderate)

Q.49) In a bid to improve ease of doing business, the Reserve Bank of India has
decided to liberalise external commercial borrowing (ECB) norms, allowing all
companies that are eligible for receiving foreign direct investment, to raise
funds through the ECB route. What is the minimum average maturity period
RBI Grade B F&M Model Test Paper Free e-book

(in years) for all ECBs, irrespective of the amount of borrowing, except for
borrowers specifically permitted to borrow for a shorter period?

A) 5 years
B) 3 years
C) 7 years
D) 10 years
E) None of the above

Answer: Option B) 3 years

Explanation:

• The RBI has decided to keep the minimum average maturity period at 3 years for
all ECBs, irrespective of the amount of borrowing, except for borrowers specifically
permitted to borrow for a shorter period. Earlier, the minimum average maturity
period was five years. The ceiling for borrowing remains at $750 million.
• RBI had capped funds raised via ECBs at 6.5% of GDP, at current market prices.
• ECBs with a minimum average maturity period of 10 years can now be used for
working capital purposes and general corporate purposes. Borrowing for on-
lending by NBFCs for the above maturity and end-uses is also permitted.
• The RBI will also allow corporates and NBFCs to use proceeds from ECBs with a
minimum average maturity period of 7 years for repayment of rupee loans raised
domestically for capital expenditure.

Q.50) Which of the following is/are the features of options contract?

(Derivative Market: Level Moderate)

1) Options are financial derivatives that give buyers the right, but not the obligation, to
only buy an underlying asset at an agreed-upon price and date.
2) The holder of this type of contract must pay a certain amount called the ‘premium’
for having the right to exercise an options trade
3) The strike price can be changed during the entire period of the validity of the contract
4) In the money call option, the strike price is greater than the current market price of
the security.

A) Only 1
B) Only 2
C) 1, 2 and 4
D) 2, 3 and 4
E) 2 and 4
RBI Grade B F&M Model Test Paper Free e-book

Answer: Option B) Only 2

Explanation:

• Options are financial derivatives that give buyers the right, but not the obligation,
to buy or sell an underlying asset at an agreed-upon price and date.
• The underlying instrument can be a stock, but it can also be an index, a currency,
a commodity, or any other security.
• The holder of this type of contract must pay a certain amount called the ‘premium’
for having the right to exercise an options trade. In case the holder does not
exercise it, s/he loses the premium amount. Usually, the premium is deducted
from the total payoff, and the investor receives the balance.
• Strike price: This refers to the rate at which the owner of the option can buy or sell
the underlying security if s/he decides to exercise the contract. The strike price is
fixed and does not change during the entire period of the validity of the contract.
• Intrinsic value: An intrinsic value is the strike price minus the current price of the
underlying security. Money call options have an intrinsic value.
• In the money call option: In this case, the strike price is less than the current
market price of the security.
• Out of the money call option: When the strike price is more than the current
market price of the security, a call option is considered as an out of the money call
option.

Q.51) Which of the following statement correctly explains the difference

between Forward and Future contract?

(Derivative Market: Level Moderate)

A) The counter party risk in future contract is high as compared to forward contract
B) Forward contract has high liquidity as compared to future contract
C) Both Forward and Future contract are regulated by stock exchange
D) Both Forward and Future contract are traded in Primary and Secondary Market
E) None of the above

Answer: Option E) None of the above

Explanation:

Basis for
Forward Contract Futures Contract
Comparison
Forward Contract is an agreement A contract in which the parties agree
Meaning
between parties to buy and sell to exchange the asset for cash at a
RBI Grade B F&M Model Test Paper Free e-book

Basis for
Forward Contract Futures Contract
Comparison
the underlying asset at a specified fixed price and at a future specified
date and agreed rate in future. date, is known as future contract.
What is it? It is a tailor-made contract. It is a standardized contract.
Over the counter, i.e. there is no
Traded on Organized stock exchange.
secondary market.
Settlement On maturity date. Daily.
Risk High counterparty risk Low counter party risk
As they are private agreement,
Default the chances of default are No such probability.
relatively high.
Size of
Depends on the contract terms. Fixed
contract
Collateral Not required Initial margin required.
Maturity As per the terms of contract. Predetermined date
Regulation Self-regulated By stock exchange
Liquidity Low High
Market Primary and Secondary Primary

Passage (Q52-53)

Corporate governance has been work-in-progress for some three decades now. The
leisurely pace of improvement may be affordable at non-bank companies. Not so in the
banking sector. The task of improving governance at banks has taken on a certain
urgency after the upheavals caused by the global financial crisis of 2007. The global crisis
highlighted failures at banks on the part of boards of directors, the top management,
the regulator and supervisor, lawmakers, and the government. Numerous committees
the world over have since proposed reforms in the banking sector, including governance
reforms. In India, the Reserve Bank of India (RBI) appointed a Committee to review the
governance of the board of banks in India, came up with several proposals for
governance reform in 2014. The committee focused mainly on public sector banks
(PSBs). There seemed to be a presumption under-lying the report that governance
problems belong overwhelmingly to the public sector.

(Topic: Corporate Governance in Banking Sector; Level Easy)

Q.52) Who was the head of the committee set up by the RBI as mentioned in
the passage?

A) P.J Nayak Committee

RBI Grade B F&M Model Test Paper Free e-book

B) Ganguly Committee
C) Raguram Rajan Committee
D) Urjit Patel Committee
E) None of the above

Answer: Option A) PJ Nayak Committee

Explanation:
• The P J Nayak Committee or officially the Committee to Review Governance of
Boards of Banks in India was set up by the Reserve Bank of India (RBI) to review
the governance of the board of banks in India.
• The Committee was set up in January 2014.
• The Committee was chaired by P J Nayak, the former CEO and Chairman of Axis
Bank.

Corporate governance has been work-in-progress for some three decades now. The
leisurely pace of improvement may be affordable at non-bank companies. Not so in the
banking sector. The task of improving governance at banks has taken on a certain
urgency after the upheavals caused by the global financial crisis of 2007. The global crisis
highlighted failures at banks on the part of boards of directors, the top management,
the regulator and supervisor, lawmakers, and the government. Numerous committees
the world over have since proposed reforms in the banking sector, including governance
reforms. In India, the Reserve Bank of India (RBI) appointed a Committee to review the
governance of the board of banks in India, came up with several proposals for
governance reform in 2014. The committee focused mainly on public sector banks
(PSBs). There seemed to be a presumption under-lying the report that governance
problems belong overwhelmingly to the public sector.

(Topic: Corporate Governance in Banking Sector; Level Easy)

Q.53) The above committee has recommended the formation of the Bank
Board Bureau (BBB), which of the following statements is/are correct about
BBB.

A) The government approved the constitution of the BBB as a body of eminent

professionals and officials to make recommendations for appointment of whole-time
directors as well as non-executive chairpersons of Public Sector Banks (PSBs) and state-
owned financial institutions.
B) The Banks Board Bureau is a public authority as defined in the Right to Information
Act, 2005.
C) It is an autonomous recommendatory body. The Ministry of Finance takes the final
decision on the appointments in consultation with the Prime Minister’s Office.
D) Only A and B
RBI Grade B F&M Model Test Paper Free e-book

E) All are correct

Answer: Option E) All are correct

Explanation:

• The government, in 2016, approved the constitution of the BBB as a body of

eminent professionals and officials to make recommendations for appointment of
whole-time directors as well as non-executive chairpersons of Public Sector Banks
(PSBs) and state-owned financial institutions.
• It is an autonomous recommendatory body.
• The Ministry of Finance takes the final decision on the appointments in
consultation with the Prime Minister’s Office.
• Apart from recommending personnel for the PSBs, the Bureau has also been
assigned with the task of recommending personnel for appointment as directors
in government-owned insurance companies.
• It engages with the board of directors of all the public sector banks to formulate
appropriate strategies for their growth and development.
• It is tasked with improving corporate governance at public sector banks, building
capacities, etc.
• The Banks Board Bureau is a public authority as defined in the Right to Information
Act, 2005.

Q.54) These types of funds do not have any constraint such as a specific period
or the number of units which can be traded. These funds allow investors to
trade funds at their convenience and exit when required at the prevailing NAV
(Net Asset Value).

(Topic: Financial Market; Mutual Funds; Level Easy)

The above type of fund is known as __________.

A) Hybrid Funds
B) Open-ended Funds
C) Closed-ended Funds
D) Interval Funds
E) Equity Funds

Answer: Option B) Open-Ended Funds

Explanation:
RBI Grade B F&M Model Test Paper Free e-book

• An equity fund is a mutual fund that invests principally in stocks. It can be actively
or passively (index fund) managed. Equity funds are also known as stock funds.
Stock mutual funds are principally categorized according to company size, the
investment style of the holdings in the portfolio and geography
• A hybrid fund is an investment fund that is characterized by diversification among
two or more asset classes. These funds typically invest in a mix of stocks and bonds.
They may also be known as asset allocation funds
• Interval Fund is a Mutual Fund wherein the fund house allows to purchase/sell the
units only during a particular pre-decided time period. These funds might invest in
both equities and debt securities, but they are mostly found to invest in debt
instruments.
• Open-ended Funds: These types of funds do not have any particular constraint
such as a specific period or the number of units which can be traded. These funds
allow investors to trade funds at their convenience and exit when required at the
prevailing NAV (Net Asset Value).
• Close-ended Funds: In closed-ended funds, the unit capital to invest is pre-defined.
Meaning the fund company cannot sell more than the pre-agreed number of units.
Some funds also come with a New Fund Offer (NFO) period; wherein there is a
deadline to buy units.

Q.55) The term masala bond was in news, which of the following statements
is/are correct about the above bond?

1) The money raised through such bonds cannot be used for real estate activities other
than for development of integrated township or affordable housing projects.
2) Masala Bonds can be used for investing in capital markets, purchase of land and on-
lending to other entities.
3) The rupee denominated bonds can only be issued in a country and subscribed by a
resident of such country that is a member of the financial action task force (FATF) and
whose securities market regulator is a member of the International Organisation of
Securities Commission.
4) Any corporate, body corporate and Indian bank is eligible to issue Rupee denominated
bonds overseas.

(Topic Bond; Level Easy)

A) 1, 2 and 3
B) 2 and 4
C) 1, 3 and 4
D) All are correct
E) Only 2

Answer: Option C) 1, 3 and 4

RBI Grade B F&M Model Test Paper Free e-book

Explanation:

• Masala Bonds are rupee-denominated bonds, i.e., the funds would be raised from
overseas market in Indian rupees.
• Any corporate and Indian bank is eligible to issue rupee denominated bonds
overseas.
• The money raised through such bonds cannot be used for real estate activities
other than for development of integrated township or affordable housing projects.
• It also cannot be used for investing in capital markets, purchase of land and on-
lending to other entities for such activities as stated above.
• The rupee denominated bonds can only be issued in a country and subscribed by
a resident of such country that is a member of the financial action task force (FATF)
and whose securities market regulator is a member of the International
Organisation of Securities Commission.
• While residents of such countries can subscribe to the bonds, it can also be
subscribed by multilateral and regional financial institutions where India is a
member country.
• The minimum maturity period for masala bonds raised up to rupee equivalent of
USD 50 million in a financial year should be 3 years and for bonds raised above USD
50 million equivalent in INR per financial year should be 5 years.

Passage (Q56-57)

Banks in the process of financial intermediation are confronted with various kinds of
financial and non-financial risks viz., credit, interest rate, foreign exchange rate,
liquidity, equity price, commodity price, legal, regulatory, reputational, operational, etc.
These risks are highly interdependent and events that affect one area of risk can have
ramifications for a range of other risk categories. The banking book for the purpose of
risk management includes all types of loans and deposits & borrowings, that emerge
from commercial and retail banking transactions. Thus, top management of banks
should attach considerable importance to improve the ability to identify measure,
monitor and control the overall level of risks undertaken.

(Topic Risk Management; Level Moderate)

Q.56) Banking book as mentioned in the above passage is mainly exposed to

which type of risk?

A) Operational Risk
B) Liquidity Risk
C) Credit Risk
RBI Grade B F&M Model Test Paper Free e-book

D) Interest rate risk

E) All of above risks
Answer: Option E) All of the above

Explanation:

• The banking book for the purpose of risk management includes all types of loans
and deposits & borrowings, that emerge from commercial and retail banking
transactions. These assets and liabilities have following features:
• These assets or liabilities are normally held till maturity. At times, the residual
maturity of these assets and liabilities does not match due to which there is
mismatch and results in Liquidity risk.
• Interest rate changes taking place during their holding period affects net interest
margin. Hence, there is interest rate risk also.
• In the asset side, there is possibility of default by the borrowing parties that gives
rise to credit risk.
• Certain loss possibilities also arise on account of human failures of omission and
commission, information deficiency etc. that leads to operational risk.

Banks in the process of financial intermediation are confronted with various kinds of
financial and non-financial risks viz., credit, interest rate, foreign exchange rate,
liquidity, equity price, commodity price, legal, regulatory, reputational, operational, etc.
These risks are highly interdependent and events that affect one area of risk can have
ramifications for a range of other risk categories. The banking book for the purpose of
risk management includes all types of loans and deposits & borrowings, that emerge
from commercial and retail banking transactions. Thus, top management of banks
should attach considerable importance to improve the ability to identify measure,
monitor and control the overall level of risks undertaken.

(Topic Risk Management; Level Moderate)

Q.57) This risk occurs when assets are sold before their stated maturities. The
risk is closely associated with the trading book, which is created for making
profit out of short-term movements in interest rates. The Risk is called
_________.

A) Yield Curve Risk

B) Price Risk
C) Basis Risk
D) Reinvestment Risk
E) None of the above
RBI Grade B F&M Model Test Paper Free e-book

Answer: Option B) Price Risk

Explanation:

Yield curve risk:

• In a floating interest rate situation, banks may adopt two or more benchmark rates
for different instruments.
• Different assets based on these different benchmark rates, may not yield a parallel
return (as there may be variations in the yield of the benchmark).
• Hence their yield curve would be different.

Basis risk:
• Basis risk is the potential risk that arises from mismatches in a hedged position.
• Basis risk occurs when a hedge is imperfect, so that losses in an investment are not
exactly offset by the hedge.
• Certain investments do not have good hedging instruments, making basis risk more
of a concern than with other assets.

Price Risk:
• Price risk occurs when assets are sold before their stated maturities. In the financial
market, bond prices and yields are inversely related.
• The price risk is closely associated with the trading book, which is created for
making profit out of short-term movements in interest rates.
• Banks which have an active trading book should, therefore, formulate policies to
limit the portfolio size, holding period, duration, defeasance period, stop loss
limits, marking to market, etc.

Reinvestment Risk:
• Reinvestment risk refers to the possibility that an investor will be unable to
reinvest cash flows (e.g., coupon payments) at a rate comparable to their current
rate of return.
• Zero-coupon bonds are the only fixed-income security to have no investment risk
since they issue no coupon payments.

Q.58) Basel I refer to a set of international banking regulations created by the

Basel Committee on Bank Supervision (BCBS). According to this, the Bank Asset
Classification System classifies a bank’s assets into five risk categories on the
basis of a risk percentage, In which category the cash, government debt,
central bank debt falls?

(Topic: Risk Management (Basel Norms); Level Easy)

A) 0%
B) 10%
RBI Grade B F&M Model Test Paper Free e-book

C) 20%
D) 50%
E) 100%

Answer: Options A) 0%

Explanation:

• Basel, I refer to a set of international banking regulations created by the Basel

Committee on Bank Supervision (BCBS), which is based in Basel, Switzerland.
• The committee defines the minimum capital requirements for financial
institutions, with the primary goal of minimizing credit risk.
• Basel I is the first set of regulations defined by the BCBS and is a part of what is
known as the Basel Accords, which now includes Basel II and Basel III.
• The Bank Asset Classification System classifies a bank’s assets into five risk
categories on the basis of a risk percentage: 0%, 10%, 20%, 50%, and 100%. The
assets are classified into different categories based on the nature of the debtor.
• 0 % for government or central bank claims
• 20 % for Organization for Economic Cooperation and Development (OECD) inter-
bank claims
• 50 % for residential mortgages
• 100% for all commercial and consumer loans

Q.59) Fiscal Responsibility and Budget Management Act (FRBMA) is related to

with which of the following?

1) Fiscal Deficit
2) Capital deficit
3) Revenue Deficit

(Topic; Budget Static; Level Easy)

A) Only 2
B) Only 1
C) Both 1 and 2
D) Both 1 and 3
E) All 1, 2, and 3

Answer: Option D) Both 1 and 3

Explanation:
RBI Grade B F&M Model Test Paper Free e-book

• Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) mandates the
Central Government to reduce the fiscal deficit as well as revenue deficit.
• The FRBM Bill was introduced by the former finance minister, Yashwant Sinha, in
2000. The Bill approved by the Union Cabinet in 2003.
• The FRBM Act aims to introduce transparency in India's fiscal management
systems.
• The Act’s long-term objective is for India to achieve fiscal stability and to give the
Reserve Bank of India (RBI) flexibility to deal with inflation in India.
• In May 2016, the government set up a committee under NK Singh to review the
FRBM Act.
• The committee recommended that the government should target a fiscal deficit of
3 per cent of the GDP in years up to March 31, 2020 cut it to 2.8 per cent in 2020-
21 and to 2.5 per cent by 2023.
• The Committee suggested using debt as the primary target for fiscal policy. A debt
to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20%
limit for the states. The targeted debt to GDP ratio should be achieved by 2023.

Q.60) Demand Pull inflation is caused by the overall increase in the demand
for goods and services which bids up their prices. The example of Demand-
Pull Inflation is/are

1) Tax breaks for mortgage interest rates leading to increased demand for housing.
2) Rise in financial support given under PM-KISAN
3) Rise in the price of oil due to instability in middle east
4) Increase in prices of inputs which are imported
(Topic: Inflation; Level: Easy)

A) 1, 2 and 4
B) 1, 2 and 3
C) 1 and 2
D) Only 2
E) 2 and 4

Answer: Option C) 1 and 2

Explanation:

• DEMAND PULL INFLATION is caused by the overall increase in the demand for
goods and services which bids up their prices.
• If demand is growing faster than supply, prices will increase. This usually occurs in
rapidly growing economics.
• This theory is often promoted by the Keynesian school of economics.
RBI Grade B F&M Model Test Paper Free e-book

• For Example: Tax breaks for mortgage interest rates leading to increased demand
for housing, Rise in financial support given under PM-KISAN
• Option 3 and 4 are examples of Cost Pull Inflation

Q.61) This method of performance appraisal was introduced by J.P. Guilford.

Under this approach, the HR manager, at first, prepares a set of positive as well
as negative statements. The statements are then forwarded to the rater,
following which the rater indicates which of the given statements suits the
employee. Once the rater finishes evaluating all employees, the report is sent
to the HR manager for final assessment. This method is known as
____________.

(Topic: HRD, Performance Appraisal; Level Easy)

A) Critical Incidence Method
B) Forced-Choice Method
C) Checklist Method
D) Paired Comparison Method
E) None of the above

Answer: Option B) Forced- Choice MEthod

Explanation:

• Critical Incidence Method: The critical incident method of performance appraisal

involved identifying and describing specific events (or incidents) where the
employee did something well or something that needs improvement.
•
Forced-Choice Method: Forced choice method of performance appraisal was
introduced by J.P. Guilford. Under this approach, the HR manager, at first, prepares
a set of positive as well as negative statements. The statements are then
forwarded to the rater, following which the rater indicates which of the given
statements suits the employee. Once the rater finishes evaluating all employees,
the report is sent to the HR manager for final assessment.

• Checklist Method: This method describes a performance appraisal method where

rater familiar with the jobs being evaluated prepared a large list of descriptive
statements about effective and ineffective behaviour on jobs.

• Paired Comparison Method: Under this method, the pairs of employees of same
job post or level are formed, following which they are evaluated on the basis of
performance of each other. Subjects like skills, experience, team player, behavior,
etc. are evaluated by the raters and picks the best performing employee.
RBI Grade B F&M Model Test Paper Free e-book

Q.62) Which one of the following roles does not constitute management roles
as proposed by Henry Mintzberg?

(Topic: Basic of Management; Level Moderate)

A) Interpersonal Roles
B) Training Roles
C) Decisional Roles
D) Informational Roles
E) Resource Allocator Roles

Answer: Option B) Training Roles

Explanation:
• Henry Mintzberg has identified roles of managers to describe what managers do
in an organization.
• According to him, there are three broad categories of roles that a managers
performs in an organization.
• They are shown in the below figure:

Q.63) Which of the following measures can be taken by the RBI to control the
inflation?

(Topic: Inflation; Level Easy)

1) Reducing the public expenditure

2) Increase the Statutory Liquidity Ratio
3) Increase personal or household taxes
RBI Grade B F&M Model Test Paper Free e-book

4) Increase the Reverse Repo Rate

A) 1 and 3
B) 1, 2 and 4
C) 2 and 4
D) 1 and 4
E) All are correct

Answer: Option C) 2 and 4

Explanation:

Statutory Liquidity Ratio:

• It is the share of net demand and time liabilities that banks must maintain in safe
and liquid assets, such as, government securities, cash and gold etc.
• To control the inflation, RBI increases the SLR. When SLR is increased, Banks are
required to maintain a higher amount with themselves in safe and liquid assets —
Thus Bank’s ability to lend to market decreases which in turn will increase the
lending rates and hence liquidity in the market decreases which in turn control the
inflation.

Reverse Repo Rate

• It is the rate at which banks park their surplus funds with RBI for short term.
• RBI provides collateral of government and other approved securities to banks
which park their surplus fund with RBI.
• To control the inflation, RBI increases reverse Repo rate. This will lead the banks
to deposit funds with the RBI rather than to lend to the private sector. It
thus reduces the liquidity in the market as banks will lend less. Thus inflation will
be controlled

Public Expenditure
• It is the spending made by the government of the country. Example, government
builds public infrastructure – roads, railways, houses etc.
• When inflation is high, the government reduces public expenditure.
• Decline in public expenditure affects private investment and results in decline of
aggregate demand.

Taxation policy
• To control the inflation government may increase personal or corporate taxes to
reduce household expenditure/ private investment.
• Rise in taxation leaves lesser money with the people for consumption (and private
players for investment). This led to decrease in aggregate demand and hence
inflation will be controlled.
RBI Grade B F&M Model Test Paper Free e-book

Q.64) Recently, the Reserve Bank of India (RBI) decided to examine the
buyback of the outstanding amount of Rs 84,574 crore in additional tier-1 (AT-
1) bonds issued by banks at par, and a ban on retail investments in them,
directly and through mutual funds. Which of the following statement is/are
correct about the AT-1 bonds?

(Topic: Financial Market CA; Level: Moderate)

1) These bonds are secured, perpetual bonds that banks issue to shore up their core
capital base to meet the Basel-III norms
2) These bonds don’t carry maturity date Instead; they carry call options that allow banks
to redeem them after five or 10 years.
3) Investors cannot return these bonds to the issuing bank and get the money.
4) AT-1 bonds are regulated by SEBI.

A) 1, 2 and 4
B) 2, 3 and 4
C) 1, 2 and 3
D) 2 and 3
E) All are correct

Answer: Option D) 2 and 3

Explanation:

• AT-1 bonds are a type of unsecured, perpetual bonds that banks issue to shore up
their core capital base to meet the Basel-III norms.
• AT-1 bonds are like any other bonds issued by banks and companies but pay a
slightly higher rate of interest compared to other bonds.
• These bonds are also listed and traded on the exchanges. So, if an AT-1 bondholder
needs money, he can sell it in the secondary market.
• Investors cannot return these bonds to the issuing bank and get the money. It
means there is no put option available to its holders.
• The issuing banks have the option to recall AT-1 bonds issued by them, termed call
options that allow banks to redeem them after 5 or 10 years.
• Banks issuing AT-1 bonds can skip interest payouts for a particular year or even
reduce the bonds’ face value.
• AT-1 bonds are regulated by RBI. If the RBI feels that a bank needs a rescue, it can
simply ask the bank to write off its outstanding AT-1 bonds without consulting its
investors.
RBI Grade B F&M Model Test Paper Free e-book

Q.65) McKinsey 7-S framework provides internal variables that affect an

organization’s effectiveness. Which one of the following is not a factor
identified by the McKinsey for organization effectiveness?

(Topic: Basic of Management; Level Moderate)

A) Sourcing
B) Staff
C) Strategy
D) Skills
E) Styles

Answer: Option A) Sourcing

Explanation:

• McKinsey 7s model is a tool that analyses firm’s organizational design by looking

at 7 key internal elements. They are strategy, structure, systems, shared values,
style, staff and skills, in order to identify if they are effectively aligned and allow
organization to achieve its objectives.
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