Scale II to Scale III Promotion Exam MCQs — 50 Questions with Answers (2026)

Answer: C) The overseas investor/lender bears the currency risk since the bond is INR-denominated

A Masala Bond is a rupee-denominated bond issued overseas. The investor converts dollars (or another currency) into rupees to subscribe and is repaid in rupees, so if the rupee weakens by maturity the investor gets back fewer dollars. The Indian issuer borrows and repays in rupees and carries no currency risk. That is the reverse of a foreign-currency ECB, where the Indian borrower bears the exchange risk.

Answer: A) Depreciation is a non-cash charge — it reduces reported profit but involves no actual cash outflow

DSCR measures the cash available to service a term loan. Depreciation reduces reported profit but involves no cash payment, so it is added back to convert accounting profit into a cash-flow figure, as in a cash-flow statement.

Answer: A) 1.00%

Under RBI’s current IRAC norms, standard advances to Commercial Real Estate carry a 1.00% provision, higher than the 0.40% for general standard advances, because of the sector’s cyclicality. For comparison: CRE–Residential Housing is 0.75%, and direct agricultural and SME advances are 0.25%.

Answer: B) 80% (loan amount falls in the ₹30 lakh to ₹75 lakh tier)

RBI’s LTV caps for housing loans depend on the loan amount: up to ₹30 lakh, 90%; above ₹30 lakh and up to ₹75 lakh, 80%; above ₹75 lakh, 75%. A ₹55 lakh loan falls in the middle tier, so the cap is 80%. Here the LTV is 55 ÷ 70 = 78.6%, which is within the cap.

Answer: D) ₹3 lakh (₹1 lakh Tier I + ₹2 lakh Tier II), at 5% interest

PM Vishwakarma gives collateral-free credit in two tranches at a concessional 5% interest rate: ₹1 lakh in the first tranche and ₹2 lakh in the second, which opens after the first is repaid satisfactorily. The maximum is therefore ₹3 lakh. The Government of India bears the interest subvention.

Answer: C) Partially valid — valid only up to the original ₹80 lakh debt

Under Section 179 of the Indian Contract Act, a person with only a limited interest in goods can pledge them only to the extent of that interest. The bank’s interest in the shares is its ₹80 lakh debt, so the sub-pledge is valid up to ₹80 lakh. The sub-pawnee can hold the shares as security for ₹80 lakh only; the remaining ₹15 lakh it lent is an unsecured claim against the bank. Out of the ₹1 crore sale proceeds, the surplus above the ₹80 lakh debt belongs to the original pledgor.

Answer: D) 6 months after repayment commencement date

Under RBI’s Master Direction on Securitisation of Standard Assets (2021), the Minimum Holding Period runs from the date of the first repayment, not from disbursement. It is 3 months for loans with a tenor of up to 2 years and 6 months for loans with a tenor above 2 years. A 20-year home loan therefore needs 6 months after repayment starts.

Answer: B) DSCR = 1.90; acceptable (comfortably above 1.25)

Numerator = PAT + depreciation + interest on term loan = 200 + 60 + 120 = ₹380 lakh. Denominator = interest on term loan + principal repayment = 120 + 80 = ₹200 lakh. DSCR = 380 ÷ 200 = 1.90, comfortably above the usual 1.25 benchmark. Working-capital interest is left out of both sides; DSCR covers term-debt service only.

Answer: B) ₹67,50,000

Method II: MPBF = 75% of Current Assets − Current Liabilities other than bank borrowings = (75% × 1,50,00,000) − 45,00,000 = 1,12,50,000 − 45,00,000 = ₹67,50,000. The borrower funds 25% of current assets from long-term sources.

Answer: D) NABARD’s Rural Infrastructure Development Fund (RIDF)

Banks that miss a priority-sector target or sub-target are allotted the shortfall for deposit in NABARD’s Rural Infrastructure Development Fund (RIDF) and similar funds, at interest rates below what the money could earn if lent. NABARD uses RIDF to fund rural infrastructure through state governments. The below-market return is the effective penalty for the shortfall.

Answer: C) ₹15,500/year (2.5% of ₹6.2 lakh); taxable as Income from Other Sources at slab rate

SGB interest is 2.5% a year on the initial issue price, not on the current gold price: 2.5% × ₹6.2 lakh = ₹15,500 a year, paid half-yearly. The interest is taxable as Income from Other Sources at the investor’s slab rate. The tax exemption applies to the capital gain when an individual redeems the bond at maturity, not to the interest.

Answer: A) No — filing needs approval from unrelated financial creditors holding at least 66% of the financial debt

Under Section 54A of the IBC, a corporate debtor (an MSME) can file for PPIRP only after financial creditors who are not its related parties, holding at least 66% in value of the financial debt, approve the filing and propose the resolution professional. With only 60% in favour, the threshold is not met and the application cannot be filed yet.

Answer: B) BEP = 40,000 units (67% of capacity); Margin of Safety = 33%

Contribution per unit = 500 − 350 = ₹150. BEP = fixed costs ÷ contribution = 60,00,000 ÷ 150 = 40,000 units, which is 40,000 ÷ 60,000 = 67% of the assumed level. Margin of Safety = (60,000 − 40,000) ÷ 60,000 = 33%, meaning sales can fall by a third before the project makes a loss.

Answer: C) 51%

Section 10A of the Banking Regulation Act requires at least 51% of the board to have special knowledge or practical experience in fields such as accountancy, agriculture, banking, economics, finance, law or small-scale industry.

Answer: A) Inland bill — drawn in India, on an India-resident, and payable in India

Section 11 of the NI Act: a bill is inland if it is drawn or made in India and is payable in, or drawn on a person resident in, India. All of that holds here. The fact that three Indian cities are involved does not matter.

Answer: D) Any goods or securities deposited by the customer in the course of banking business, as security for the general balance of the account

Section 171 gives bankers a general lien: they may retain any goods or securities bailed to them as security for the general balance of account, not only for a specific loan, unless there is an express contract to the contrary.

Answer: D) The first debit (oldest outstanding debt) is paid off first

Clayton’s Case set the first-in, first-out rule for running accounts: each credit is applied against the earliest outstanding debit, unless the parties agree otherwise. It matters for guarantors and for securities held against running accounts.

Answer: A) No — Section 15 requires all capitalised expenditure to be fully written off before any dividend can be declared

Section 15 of the BR Act bars a banking company from paying any dividend until all its capitalised expenses — including preliminary expenses, share-selling commission, brokerage and losses — have been completely written off. There is no materiality exception, so even ₹15 lakh outstanding blocks the dividend.

Answer: B) No — withdrawal from circulation is not the same as demonetisation; no Section 26(2) notification was issued

Demonetisation needs a Gazette notification under Section 26(2) of the RBI Act declaring a series of notes no longer legal tender. The ₹2000 withdrawal had no such notification, so the notes remain legal tender. Withdrawal from circulation is not demonetisation.

Answer: C) No — this is an agency coupled with interest under Section 202

Section 202 of the Contract Act: where the agent has an interest in the property that forms the subject-matter of the agency, the agency cannot be terminated to the prejudice of that interest. The bank holds the power of attorney as part of its security for the loan, so the company cannot revoke it.

Answer: A) June 1, 2026 — 3 years after Priya attains majority on June 1, 2023, per Section 6

Priya turns 18 on 1 June 2023. Because the cause of action arose while she was a minor, Section 6 of the Limitation Act lets her sue within the same period (3 years) counted from the date her disability ends: 1 June 2023 + 3 years = 1 June 2026.

Answer: B) The bank must not disclose that an STR has been filed — the tipping-off prohibition under PMLA applies

PMLA rules prohibit a reporting entity and its staff from disclosing to the customer or anyone else that an STR has been or is being filed (tipping off). This applies whoever is asking and at every level of the bank; the RTI Act does not override it.

Answer: C) The bank — the alteration was apparent, and paying despite it is negligence

Section 89 of the NI Act protects a paying banker only when a material alteration was not apparent. Here the alteration was visible (different ink, and the figures did not match the words), so paying it was negligent. The bank must re-credit the drawer’s account with the excess ₹4,50,000 and pursue the payee itself.

Answer: D) Automatically stayed by the IBC Section 14 moratorium from the CIRP admission date

The Section 14 moratorium applies from the date NCLT admits the CIRP. It bars the institution or continuation of proceedings and the execution of any order against the corporate debtor. A garnishee order still at the nisi stage is a pending proceeding, so it is stayed and the bank must not pay under it.

Answer: D) CPI inflation remains outside the 2% to 6% tolerance band for three consecutive quarters (9 months)

Under the inflation-targeting framework (RBI Act as amended in 2016, with the target notified by the Government), RBI fails its mandate if average CPI inflation stays above 6% or below 2% for three consecutive quarters. RBI must then report to the Government the reasons, the remedial action and the expected time to return to target. The target is CPI-based; WPI and GDP growth do not define failure.

Answer: A) Management — the quality of governance, compliance culture, board oversight, and leadership

In CAMELS, M stands for Management: the quality of governance, board oversight, compliance culture and leadership. The other letters are Capital adequacy, Asset quality, Earnings, Liquidity and Systems and controls.

Answer: C) The unsold portion of a G-sec auction (bids insufficient at acceptable yields) is forcibly allotted to Primary Dealers at the cut-off yield

Devolvement happens when a G-sec auction does not attract enough acceptable bids. The unsubscribed portion is allotted to Primary Dealers under their underwriting commitments, at the cut-off yield. PDs lose if market yields then rise above that cut-off.

Answer: B) Section 45 of the BR Act — the scheme, prepared by RBI and notified by the Central Government, binds all parties without court proceedings or shareholder approval from either bank

Section 45 of the BR Act lets RBI prepare a scheme of amalgamation for a bank under moratorium, which the Central Government sanctions. The scheme binds everyone from its effective date, with no court approval or shareholder vote needed. LVB’s moratorium began on 17 November 2020 and the amalgamation took effect on 27 November 2020.

Answer: A) RBI can require the bank to redo its ICAAP at 200 bps and, if capital is then inadequate, mandate a Pillar 2 Capital Add-on above the Pillar 1 minimum CRAR

Under Pillar 2, RBI reviews each bank’s ICAAP through its supervisory review (SREP) and can challenge it. If the stress tests are too mild, RBI can ask for them to be redone with a stiffer shock and, if that shows a shortfall, require capital above the Pillar 1 minimum as a bank-specific add-on.

Answer: B) Gap risk

Gap (repricing) risk comes from timing differences in when assets and liabilities reprice or mature, even if total volumes match. Basis risk is about different benchmark rates; options risk is about embedded options such as prepayment.

Answer: C) No — since the parent controls the subsidiary, they form a connected group; the bank must aggregate ₹200cr + ₹50cr = ₹250cr against the 25% Tier 1 ceiling

Under the Large Exposures Framework, counterparties linked by control (or by economic interdependence) form a group of connected counterparties, and exposures to them are added together. The parent controls the subsidiary, so the bank’s exposure is ₹200 crore + ₹50 crore = ₹250 crore, tested against the group limit as a share of Tier 1 capital.

Answer: D) CVC Act, 2003

The CVC was first set up in 1964 by executive resolution and became a statutory body under the Central Vigilance Commission Act, 2003. The Prevention of Corruption Act, 1988 defines the offences; it is not the CVC’s founding law.

Answer: B) Preventive tools, monitoring postings without a proven case

Both are preventive-vigilance tools. They work on suspicion and risk — for example, keeping officers off sensitive postings — without needing a proven case, unlike the disciplinary route with first- and second-stage advice.

Answer: D) Audi alteram partem applies — a borrower must get a hearing before fraud classification

In SBI v Rajesh Agarwal (March 2023), the Supreme Court held that the principles of natural justice apply: a borrower must be given notice and a chance to respond before the account is classified as fraud. RBI’s 2024 Master Directions on Fraud Risk Management build this hearing into the process.

Answer: A) NRO account — rental income is “Indian source income” and must go to NRO, not NRE

Income that arises in India — rent, dividends, pension, interest — must be credited to an NRO account. An NRE account takes only funds remitted from abroad or earned outside India. Current income in an NRO account, such as rent, can be repatriated after tax.

Answer: C) 90 days of the moratorium order — even while the bank is still in moratorium (not yet wound up)

Since the DICGC (Amendment) Act, 2021, when RBI places restrictions (a moratorium) on an insured bank, DICGC must pay each depositor up to ₹5 lakh within 90 days, without waiting for liquidation. The bank has 45 days to submit depositor claims and DICGC has the next 45 days to verify and pay.

Answer: C) Submit Form 10F and a Tax Residency Certificate to the bank before TDS is deducted, so the bank applies the 15% DTAA rate instead of 30%

DTAA rates apply to NRO interest. If the NRI gives the bank a Tax Residency Certificate from the UK and Form 10F before the interest is credited, the bank can deduct TDS at the treaty rate of 15% instead of 30%. If tax has already been deducted at the higher rate, the NRI must file an Indian income-tax return to claim the excess (₹1.5 lakh here) as a refund.

Answer: D) ₹5 lakh insured — post-merger, both deposits combine at Bank Y; the ₹5 lakh limit applies to the combined ₹7 lakh, assessed as of the merger date

After a merger, Bank X’s depositors become depositors of Bank Y, and DICGC cover applies per depositor per bank, in the same right and capacity. The combined ₹7 lakh is now held in one bank, so only ₹5 lakh is insured and ₹2 lakh is not. Depositors with balances in both merging banks should review their exposure.

Answer: B) No — courts do not stop payment merely because of a contract dispute; only established fraud or irretrievable injustice qualifies

An on-demand bank guarantee is independent of the underlying contract. The Supreme Court (for example in U.P. Cooperative Federation v Singh Consultants) has held that courts should not restrain its encashment because of a contractual dispute. The only exceptions are an established fraud of an egregious nature or irretrievable injustice. The contractor’s remedy is to claim damages from the beneficiary later.

Answer: A) The NBFC (Regulated Entity) — it is the lender; the fintech app is only a Lending Service Provider

In digital lending, the Regulated Entity (here the NBFC) is the lender: the loan is on its books, it bears the credit risk, and it is responsible for KYC, the Key Fact Statement and grievance redressal. The Lending Service Provider (the app) sources customers and provides technology but does not lend.

Answer: A) No — since 2024, lenders cannot levy penal interest added to the rate; a default can only attract a reasonable ‘penal charge’ that is not capitalised

RBI’s Fair Lending Practice – Penal Charges in Loan Accounts circular (18 August 2023, in force from 1 January 2024) bars penal interest — an extra rate added to the interest charged. A default may attract only a ‘penal charge’ that is reasonable, disclosed in the loan agreement and KFS, and not capitalised (no further interest on it). A flat 2% per month on the overdue amount is penal interest, so the policy does not comply.

Answer: C) No — RBI’s mandate requires replacing the PAN with a token; encrypted PAN is still PAN in disguise

RBI’s card-on-file rules bar merchants from storing card data at all; encrypted card numbers are still card data. Card-on-file transactions must use tokens issued through a card network or issuer token service, which cannot be reversed to the card number without the token vault.

Answer: B) TWO non-compliances: RTO breach (6h vs 4h) and RPO breach (4h lost vs 1h)

RTO is the maximum acceptable time to restore service; RPO is the maximum acceptable data loss, measured in time. Recovery took 6 hours against an RTO of 4, and 4 hours of data were lost against an RPO of 1, so both targets were breached. Both need root-cause analysis, board reporting and a remediation plan.

Answer: D) A companion to UCP 600 with guidance on examining LC documents

ISBP 821 (International Standard Banking Practice) is an ICC publication that works alongside UCP 600, not instead of it. UCP 600 sets the rules; ISBP 821 explains how banks should examine specific documents — invoices, transport documents, insurance, certificates — in practice.

Answer: C) 400% of net worth

Under the FEMA (Overseas Investment) Rules, 2022, an Indian entity’s total financial commitment abroad — equity, debt and guarantees — may go up to 400% of its net worth (per the last audited balance sheet) under the automatic route. Beyond that, RBI approval is required.

Answer: D) The Asian financial crisis erupted in 1997-98

The Tarapore Committee (1997) proposed a phased move to full capital account convertibility subject to preconditions on the fiscal deficit, inflation and banking-sector NPAs. The Asian financial crisis of 1997–98, with sudden capital flight from several open East Asian economies, made the case for caution and the plan was shelved.

Answer: B) Bank must crystallise on 1 July 2025 (30 days after due date) at the TT selling rate

Under FEDAI rules, an unpaid foreign-currency export bill is crystallised into a rupee liability of the exporter on the 30th day after the due date (the next working day if that is a holiday). The bank applies its spot TT selling rate on that date. If the bill is realised later, the bank converts the proceeds at the TT buying rate and settles any difference with the exporter. The ECGC claim is a separate track.

Answer: A) At the end of the 180-day usance period

Under a usance-payable-at-sight (UPAS) LC, the beneficiary is paid at sight by a financing bank, while the importer and the issuing bank pay only at the end of the usance period. The Indian issuing bank therefore reimburses the Dutch financing bank at the end of the 180 days.

Answer: B) INR has capital account controls, so overseas entities can’t easily hold or deliver it and use USD-settled NDFs instead

The rupee is not fully convertible on the capital account, so many non-residents cannot freely use the onshore forward market or hold and deliver rupees abroad. Offshore NDFs let them hedge rupee exposure through contracts settled in dollars on the difference, without delivering rupees.

Answer: C) Indirect foreign investment (downstream investment) — the company is owned by non-residents (over 50% foreign holding)

Under the FEMA (Non-Debt Instruments) Rules, 2019, an Indian company owned or controlled by non-residents is treated as foreign-owned, and its investment in another Indian company counts as indirect foreign investment (downstream investment). The target company must then meet the FDI conditions for its sector. This stops sectoral caps being sidestepped through Indian holding companies.