Essential Principles and Practices of Banking Key Concepts and 50 Review Questions
- Bankersrise
- Oct 21
- 11 min read
The world of banking is both complex and crucial for our economy. With numerous principles and practices driving financial institutions, understanding these concepts is key, especially for those preparing for the JAIIB Exam. This post offers a clear overview of essential banking principles and practices. Additionally, it includes 50 review questions to help reinforce your knowledge and improve your readiness.
Understanding Banking Principles
Banking principles are fundamental concepts that guide how banks operate. They ensure efficiency, maintain customer trust, and help institutions comply with important regulations.
1. Safety and Soundness
Safety and soundness refers to maintaining a stable financial environment. For example, according to the FDIC, the average capital ratio for banks is around 11.93%. This indicates that banks must manage risks effectively to protect depositors' funds and their own longevity. By ensuring sound financial practices, banks can prevent crises and maintain trust.
2. Liquidity
Liquidity is crucial for a bank's ability to meet short-term obligations. For instance, a bank needs sufficient liquid assets, like cash or easily sellable securities, to handle customer withdrawals. Studies show that banks with a liquidity coverage ratio above 100% are better positioned to manage unexpected demands, ensuring customer confidence remains high.
3. Profitability
Profitability is a key objective for all banks. Institutions earn income through interest on loans, fees, and other financial services. For example, in 2022, U.S. banks reported a collective net income of $306 billion. Effective expense management is also vital, as controlling costs can lead to sustained growth.
4. Capital Adequacy
Capital adequacy ensures that banks maintain enough capital to absorb losses. Regulations, such as Basel III, set these requirements, which can range from 4% to 8% depending on the type of bank. This principle not only protects depositors but also promotes stability in the financial system.
5. Regulatory Compliance
Adhering to regulations is essential for banks to maintain their reputations and avoid penalties. For example, non-compliance can lead to fines that can exceed millions of dollars, depending on the severity. Strong compliance programs help safeguard the interests of consumers and the overall integrity of the financial system.
Key Practices in Banking
Beyond principles, banks implement several key practices to ensure effective operations.
1. Risk Management
Risk management involves identifying and addressing potential threats to a bank's operations. For example, banks often employ stress testing to measure their ability to withstand economic downturns. Implementing these practices helps maintain financial stability and protects assets.
2. Customer Service
Excellent customer service is fundamental in banking. A study by J.D. Power found that 80% of customers consider the quality of service when choosing a bank. Training staff to efficiently address client concerns not only helps foster customer loyalty but also improves overall satisfaction.
3. Technology Integration
The integration of technology has revolutionized banking operations. For instance, as of 2023, over 70% of consumers prefer online banking due to its convenience. Banks now use advanced software for transactions and customer interactions, enhancing both efficiency and user experience.
4. Financial Analysis
Regular financial analysis allows banks to evaluate their performance based on metrics like return on assets and profitability ratios. By actively analyzing financial statements, banks can make informed decisions and strategic adjustments, boosting their financial health.
5. Marketing Strategies
To attract and retain customers, banks use various marketing strategies, including promotional offers and tailored products. For example, introducing a loyalty program can increase customer retention by up to 5%, making it a worthwhile investment.
50 Review Questions
To reinforce your understanding of banking principles and practices, here are 50 review questions:
What is the principle of safety and soundness in banking?
Why is liquidity important for banks?
How do banks generate profitability?
What is capital adequacy?
What are the consequences of non-compliance with banking regulations?
How does risk management benefit a bank?
What role does customer service play in banking?
How has technology changed banking practices?
What is the purpose of financial analysis in banking?
10. What marketing strategies do banks use to attract customers?
11. Define the term "deposit insurance."
12. What is the role of the Reserve Bank in banking?
13. Explain the concept of interest rate risk.
14. What are non-performing assets (NPAs)?
15. How do banks assess credit risk?
16. What is the significance of the Basel III framework?
17. Describe the process of loan underwriting.
18. What is the difference between retail and commercial banking?
19. How do banks manage operational risk?
20. What is the importance of financial literacy for customers?
21. Explain the term "asset-liability management."
22. What are different types of bank accounts?
23. How do banks ensure data security?
24. What is the role of a bank's board of directors?
25. Describe the process of money laundering and its impact on banking.
26. What is the significance of the Dodd-Frank Act?
27. How do banks determine interest rates for loans?
28. What is the role of credit rating agencies?
29. Explain the concept of securitization.
30. What are the advantages of online banking?
31. How do banks handle foreign exchange transactions?
32. What is the purpose of a bank's compliance department?
33. Describe the impact of economic cycles on banking.
34. What is the role of fintech in modern banking?
35. How do banks assess the financial health of a business?
36. What are the implications of a bank run?
37. Explain the term "financial inclusion."
38. What is the significance of customer feedback in banking?
39. How do banks manage liquidity risk?
40. What are the different types of loans offered by banks?
41. Describe the process of credit scoring.
42. What is the importance of transparency in banking?
43. How do banks promote sustainable finance?
44. What are the challenges faced by banks in the digital age?
45. Explain the concept of microfinance.
46. What is the role of a bank's internal audit?
47. How do banks support small businesses?
48. What are the ethical considerations in banking?
49. Describe the impact of globalization on banking.
50. What is the future of banking in a digital world?
The Principles & Practices of Banking (PPB) is the second paper in the JAIIB syllabus for 2025. It covers essential banking operations, functions, technology, and ethics. Here’s a concise overview:
Modules and Main Topics
Module A: General Banking Operations
Banker-Customer Relationship: Types, responsibilities, and customer service guidelines.
AML-KYC Guidelines: Money laundering risks, Know Your Customer (KYC) norms, and reporting procedures.
Account Opening & Account Operations: Rules, types, joint accounts, nominations, attachments.
Clearing & Cash Handling: Cheque truncation, RBI guidelines, ATM management.
Special Relationship & Forex Banking: Mandates, power of attorney, FEMA, NRI accounts.
Financial Inclusion: Banking access initiatives, literacy programs.
Customer Service & Grievance Redressal: Service standards, complaint handling.
Module B: Functions of Banks
Lending Principles: Loan types, credit assessment, collateral.
Credit & Loan Management: Appraisal, documentation, recovery.
Government Schemes: MUDRA, PMJDY, Kisan Credit Cards.
Retail & MSME Finance: Types of retail loans, MSME schemes.
Banking Laws & Acts: SARFAESI, IBC, NBFA regulations.
Module C: Banking Technology
Computerisation: Core banking, data management.
Digital Banking: ATMs, e-banking, digital payments.
Cybersecurity: Risks, fraud prevention, legal frameworks.
Emerging Tech: Fintech, regtech, open banking.
Module D: Ethics in Banking
Principles of Business Ethics: Integrity, transparency, trust.
Employee & Work Ethics: Handling conflicts, whistleblowing.
Data & Privacy Ethics: Customer data management and security.
Summary
This paper emphasizes understanding banking operations, technological adaptations, customer relations, and ethical conduct to ensure sound banking practices and compliance.
Which of the following is NOT a function of a commercial bank?
a) Accepting deposits
b) Providing loans
c) Printing currency
d) Offering remittance services
Answer: c) Printing currency
In banking, what does ‘KYC’ stand for?
a) Know Your Credit
b) Know Your Customer
c) Keep Your Credit
d) Know Your Corporation
Answer: b) Know Your Customer
Which of the following is a key function of the Reserve Bank of India (RBI)?
a) Issuing currency
b) Supervising banks
c) Managing inflation
d) All of the above
Answer: d) All of the above
What is the minimum period for a Fixed Deposit in a bank?
a) 7 days
b) 15 days
c) 30 days
d) 1 year
Answer: a) 7 days
What is the primary purpose of the SARFAESI Act?
a) Provide insurance
b) Debt recovery for banks
c) Regulate stock markets
d) Control inflation
Answer: b) Debt recovery for banks
Which form of banking allows customers to perform transactions via mobile phones?
a) Core Banking
b) Mobile Banking
c) Internet Banking
d) Branch Banking
Answer: b) Mobile Banking
What is the usual validity period of a cheque?
a) 1 month
b) 3 months
c) 6 months
d) 12 months
Answer: b) 3 months
Who regulates Non-Banking Financial Companies (NBFCs) in India?
a) SEBI
b) RBI
c) IRDA
d) Ministry of Finance
Answer: b) RBI
Which government scheme provides financial support to micro and small enterprises?
a) PMJDY
b) MUDRA
c) Jan Dhan Yojana
d) Atmanirbhar Bharat
Answer: b) MUDRA
Which committee recommended the introduction of 'Lead Bank Scheme'?
a) Narasimham Committee
b) Tandon Committee
c) Basle Committee
d) Kelkar Committee
Which of the following is NOT a type of deposit account in commercial banks?
a) Fixed Deposit
b) Recurring Deposit
c) Current Account
d) Debit Account
Answer: d) Debit Account
Which rate is the RBI charge to banks for short-term borrowing?
a) Bank rate
b) Repo rate
c) Reverse repo rate
d) Base rate
Answer: b) Repo rate
What is the main purpose of the Credit Information Bureau?
a) To track customer details
b) Monitor loan repayments and credit history
c) Issue credit cards
d) Provide loans
Answer: b) Monitor loan repayments and credit history
What is an NPA?
a) Non-Performing Asset
b) New Payment Agreement
c) Non-Processing Asset
d) None of the above
Answer: a) Non-Performing Asset
Which negotiable instrument can be issued by a bank for payment through a third party?
a) Cheque
b) Demand Draft
c) Promissory Note
d) Bills of Exchange
Answer: b) Demand Draft
Which government scheme promotes opening bank accounts for financial inclusion?
a) MUDRA
b) PMJDY
c) Pradhan Mantri Awas Yojana
d) Atma Nirbhar Bharat
Answer: b) PMJDY
Which document authorizes one person to operate another’s bank account?
a) Power of Attorney
b) KYC form
c) Loan agreement
d) Bank mandate
Answer: a) Power of Attorney
Which of the following is a time deposit?
a) Savings Account
b) Current Account
c) Fixed Deposit
d) Recurring Deposit
Answer: c) Fixed Deposit
What does RTGS stand for?
a) Real Time Gross Settlement
b) Real Time Gross Service
c) Rapid Transfer Gross System
d) None of the above
Answer: a) Real Time Gross Settlement
What is a key feature of a current account?
a) High interest
b) Unlimited withdrawals and deposits
c) No minimum balance
d) For salary payments only
Answer: b) Unlimited withdrawals and deposits
Which type of loan is secured against gold?
a) Personal Loan
b) Gold Loan
c) Home Loan
d) Education Loan
Answer: b) Gold Loan
Which act allows banks to seize and sell assets for recovery of loans?
a) SARFAESI Act
b) IBC
c) Companies Act
d) Banking Regulation Act
Answer: a) SARFAESI Act
Which of the following is NOT included in standard banking codes?
a) Customer confidentiality
b) Fair treatment of customers
c) Misusing customer data
d) Handling complaints efficiently
Answer: c) Misusing customer data
What is the normal validity period of a cheque in India?
a) 1 month
b) 3 months
c) 6 months
d) 12 months
Answer: b) 3 months
Which is NOT a core function of Commercial Banks?
a) Accepting deposits
b) Lending money
c) Printing currency
d) Remittance services
Answer: c) Printing currency
What is the liability of a bank?
a) Deposits from customers
b) Loans given to customers
c) Bank’s capital
d) All of the above
Answer: a) Deposits from customers
Which digital banking service uses voice calls for banking transactions?
a) Mobile banking
b) Internet banking
c) Telebanking
d) ATM services
Answer: c) Telebanking
The limit up to which RBI ensures deposits are insured is?
a) ₹1 lakh
b) ₹2 lakh
c) ₹5 lakh
d) ₹10 lakh
Answer: c) ₹5 lakh
Who is authorized to operate a joint bank account?
a) Account holder only
b) All jointly named holders
c) Any one of the holders (Either or Survivor)
d) None of these
Answer: c) Any one of the holders (Either or Survivor)
What is the purpose of Basel norms?
a) Regulate banking operations
b) Control credit risk and capital adequacy
c) Define banking holidays
d) None of the above
Answer: b) Control credit risk and capital adequacy
What is a ‘demand draft’?
a) A cheque payable on demand
b) An instrument payable on a fixed date
c) A prepaid negotiable instrument
d) None of the above
Answer: c) A prepaid negotiable instrument
Which of the following is a negotiable instrument?
a) Cheque
b) Bill of Exchange
c) Promissory Note
d) All of the above
Answer: d) All of the above
Which bank regulatory body supervises NBFCs in India?
a) SEBI
b) RBI
c) IRDAI
d) Ministry of Finance
Answer: b) RBI
Which scheme is launched for Jawaharlal Nehru National Urban Renewal Mission?
a) MUDRA
b) PMJDY
c) JNNURM
d) Atmanirbhar Bharat scheme
Answer: c) JNNURM
What is the CRR (Cash Reserve Ratio) prescribed by RBI?
a) A percentage of net demand and time liabilities
b) The total cash held in vaults
c) Money lent by RBI to banks
d) None of the above
Answer: a) A percentage of net demand and time liabilities
Banks give loans to individuals for purchase of property called?
a) Personal loan
b) Home loan
c) Car loan
d) Business loan
Answer: b) Home loan
Which is NOT a principle of sound lending?
a) Safety
b) Liquidity
c) Profitability
d) Risk ignoring
Answer: d) Risk ignoring
Which IT Act is essential for banking operations in India?
a) Right to Information Act
b) Information Technology Act
c) Companies Act
d) Banking Regulation Act
Answer: b) Information Technology Act
What does AML stand for?
a) Anti Money Laundering
b) Automated Money Lending
c) Asset Management Loan
d) None of the above
Answer: a) Anti Money Laundering
‘Customer Due Diligence’ is a part of which process?
a) Opening accounts
b) Loan sanction
c) KYC and AML compliance
d) Account closure
Answer: c) KYC and AML compliance
What is 'Cheque Truncation System' used for?
a) To stop cheque payments
b) To convert physical cheques into digital images for faster clearing
c) To issue new cheque books
d) None of the above
Answer: b) To convert physical cheques into digital images for faster clearing
Which is NOT a function of RBI?
a) Currency issuance
b) Issuing stock exchange licenses
c) Managing monetary policy
d) Banker to government
Answer: b) Issuing stock exchange licenses
Which account allows unlimited transactions with no interest?
a) Savings account
b) Current account
c) Fixed deposit
d) Recurring deposit
Answer: b) Current account
Under which act does the RBI regulate banks?
a) Negotiable Instruments Act
b) RBI Act, 1934
c) Companies Act
d) Banking Regulation Act
Answer: d) Banking Regulation Act
Which is a liability for banks?
a) Loans extended to customers
b) Customers’ deposits
c) Bank’s fixed assets
d) Bank’s capital
Answer: b) Customers’ deposits
Which government scheme promotes insurance for bank deposits?
a) DICGC
b) PMJJBY
c) MUDRA
d) PMJDY
Answer: a) DICGC (Deposit Insurance and Credit Guarantee Corporation)
What is the primary function of 'RTGS'?
a) Retail transactions
b) Transfer of large value funds in real-time
c) ATM withdrawals
d) Electronic clearing of cheques
Answer: b) Transfer of large value funds in real-time
CSRs stand for?
a) Customer Service Representatives
b) Corporate Social Responsibilities
c) Customer Satisfaction Reports
d) None of the above
Answer: b) Corporate Social Responsibilities
Banks are regulated by which of the following?
a) SEBI
b) RBI
c) IRDAI
d) Ministry of Finance
Answer: b) RBI
Which of the following is a function of bancassurance?
a) Selling mutual funds
b) Offering insurance products through banks
c) Lending to customers
d) Managing retail accounts
Answer: b) Offering insurance products through banks: b) Tandon Committee
Wrapping Up
Grasping the principles and practices of banking is vital for anyone preparing for the JAIIB Exam. This knowledge not only aids in passing the exam but also equips you with essential skills to navigate the banking industry effectively. By reviewing these concepts and answering the questions, you can deepen your understanding and be better prepared for future challenges.
As you proceed in your studies, keep in mind that the banking sector is always changing. Staying informed about new trends and regulations will be key to your success.
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