Sr. No.

Particulars

01 What is CASA Deposits ?

The share of current and saving accounts (CASA) deposits significantly influence the
cost structure of commercial banks. Current accounts are primarily meant for companies,
public enterprises and entrepreneurs having numerous banking transactions daily. On the
other hand, savings accounts are the most common operating account for individuals and
others for non-commercial transactions. Banks pay no interest on current accounts and an
interest rate of 3.5 per cent on savings accounts. Thus, as compared to other modes of
deposits, say fixed deposits, CASA deposits represent the cheapest mode of raising
money. Consequently, the higher the CASA component in total deposits of a bank, the
cheaper is its cost of deposits.
The CASA (current and savings account) ratio is the ratio of deposits in the current and
savings accounts of a bank to its total deposits. In the Indian context, the CASA deposits
constitute more than a third of the total deposits.
The declining share of CASA deposit in total deposits and the deceleration in their
growth may pose a challenge for the banking sector. This is because as mentioned above,
the CASA deposits constitute the cheapest source of funds for the banking sector. In case
of drying up of this source, alternate sources may be not only difficult but also prove
expensive. In the context of impending revival of economic growth, with commensurate
increase in the credit needs of the economy, the banking industry may require to take
initiatives to attract more CASA deposits.

02 What is ALCO Committee in Banks ? What is its Role ?

RBI has introduced the Asset- Liability Management (ALM) System, as a part of the
Risk Management and control Systems in banks. The ALCO committee is basically a
decision making unit responsible for balance sheet planning from risk-return perspective
including the strategic management of interest rate and liquidity risks.
The scope of ALM function can be described as follows:
- Liquidity risk management (i.e. observing a bank's ability to meet its liabilities as
they become due)

- Management of market risks (including Interest Rate Risk) (Interest rate risk is the
risk where changes in market interest rates might adversely affect a bank's financial
condition. Changes in interest rates affect both the current earnings (earnings
perspective) as also the net worth of the bank (economic value perspective).
- Funding and capital planning
- Profit planning and growth projection
- Trading risk management
03 What is SLR ? What is the difference between SLR & CRR ?

Statutory Liquidity Ratio is the amount of liquid assets, such as cash, precious metals or
other short-term securities, that a financial institution must maintain in its reserves.
The objectives of SLR are:

- To restrict the expansion of bank credit.

- To augment the investment of the banks in Government securities.
- To ensure solvency of banks.

The SLR is commonly used to contain inflation and fuel growth, by increasing or
decreasing it respectively. This counter acts by decreasing or increasing the money
supply in the system respectively.

SLR restricts the bank’s leverage in pumping more money into the economy. On the
other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to
maintain with the Central Bank.

The other difference is that to meet SLR, banks can use cash, gold or approved securities
whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI,
whereas SLR is maintained in liquid form with banks themselves.

In terms of Section 24 (2-A) of the B.R. Act, 1949 all Scheduled Commercial Banks, in
addition to the average daily balance which they are required to maintain under Section
42 of the RBI Act, 1934 (i.e CRR), are required to maintain in India,

a) in cash, or
b) in gold valued at a price not exceeding the current market price, or
c) in unencumbered approved securities valued at a price as specified
by the RBI from time to time. an amount of which shall not, at the close of the business
on any day, be less than 25 per cent or such other percentage not exceeding 40 per cent
as the RBI may from time to time, by notification in gazette of India, specify, of the total
of its demand and time liabilities in India as on the last Friday of the second preceding
fortnight,

04 What is CRR?

In terms of Section 42(1) of the RBI Act 1934, Scheduled Commercial Banks are
required to maintain with RBI an average cash balance, the amount of which shall not be
less than three per cent of the total of the Net Demand and Time Liabilities (NDTL) in
India, on a fortnightly basis and RBI is empowered to increase the said rate of CRR to
such higher rate not exceeding twenty percent of the Net Demand and Time Liabilities
(NDTL) under the RBI Act, 1934.

SLR restricts the bank’s leverage in pumping more money into the economy. On the
 other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to
maintain with the Central Bank.

The other difference is that to meet SLR, banks can use cash, gold or approved securities
whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI,
whereas SLR is maintained in liquid form with banks themselves.

05 What is KYC ?

Know your customer (KYC) is the due diligence and bank regulation that financial
institutions and other regulated companies must perform to identify their clients and
ascertain relevant information pertinent to doing financial business with them. RBI has
introduced KYC guidelines for all banks first time in 2002.

The objectives of the KYC framework should be two fold, -

- to ensure appropriate customer identification and

- to monitor transactions of a suspicious nature.

RBI has issued several guidelines relating to identification of depositors and advised the
banks to put in place systems and procedures to help control financial frauds, identify
money laundering and suspicious activities, and for scrutiny/monitoring of large value
cash transactions.

06 What is Money Laundering?

Money laundering is the practice of engaging in financial transactions to conceal the

identity, source, and/or destination of illegally gained money. More briefly it may be
defined as "taking any action with property of any form which is either wholly or in part
the proceeds of a crime that will disguise the fact that the property is the proceeds of a
crime or obscure the beneficial ownership of said property." In India, The Prevention of
Money-Laundering Act, 2004 came into effect on 1 July 2005.

Section 3 of the said Act makes the offense of money-laundering cover those persons or
entities who directly or indirectly attempt to indulge or knowingly assist or knowingly
are party or are actually involved in any process or activity connected with the proceeds
of crime and projecting it as untainted property, such person or entity shall be guilty of
offense of money-laundering.
07 What is NPA?

NPA is Non Performing Asset i.e an asset which has stopped yielding income. As per
RBI guidelines, A non-performing investment (NPI), similar to a non-performing
advance (NPA), is one where:

(i) Interest/ installment (including maturity proceeds) are due and remain unpaid for
more than 90 days.

(ii) This applies mutatis-mutandis to preference shares where the fixed dividend is not
paid.

(iii) In the case of equity shares, in the event the investment in the shares of any company
is valued at Re.1 per company on account of the non-availability of the latest balance
sheet in accordance with the Reserve Bank of India instructions, those equity shares are
also reckoned as NPI.

(iv) If any credit facility availed by the issuer is NPA in the books of the bank,
investment in any of the securities issued by the same issuer is treated as NPI and vice
versa.

(v) The investments in debentures / bonds which are deemed to be in the nature of
advance are subjected to NPI norms as applicable to investments.

08 What is Bank Guarantee? State its types.

Bank Guarantee
1. Bank Guarantee
Bank Guarantee-i is an irrevocable obligation in the form of written undertaking of a
Bank to pay an agreed sum, in case of default by a third party in fulfilling their
obligations under the terms of the Bank Guarantee-i.

Customer approaches the Bank for guaranteed surety. The Bank agrees to discharge the
customer's liability in case of defaults. The Bank gives the guarantee under the concept
of Kafalah. Bank Guarantee-i is not a financing instruments but merely a guarantee.
a) The concept of Al-Kafalah refers to guarantee in regard to two categories
i. Guarantee in regard to goods:

Refers to the guarantee provided by a person to the owner of a goods who had placed or
deposited his goods with a third person, whereby any subsequent claim by the owner for
his goods must be met by the guarantor and the third person.
ii. Guarantee on a person :

Refers to the guarantee provided by a person (1st party) to the 2nd Party whereby the 1st
Party guarantees joint-responsibility with the 3 rd Party.
b) Bank Guarantee may be issued in respect of ‘Performance of a task'.
 Types of guarantee:
1.1 Tender Guarantee/Bid Bond
This guarantee is issued to government, semi-government or private bodies in lieu a
certain sum to be deposited with them as ‘Earnest Money' when they call for tenders.
Tender Guarantee/Bid Bond is required as an indication of good faith that the tenderer is
serious in tendering for the contract.
1.2 Performance/Contract Guarantee
Sometimes called Security Guarantee. It is issued on behalf of the successful tenderer in
favour of the principal. The contract requires the contractor to provide the principal with
a deposit for a nominal sum of the contract value in lieu of which a performance
guarantee provided by the bank is acceptable. This will act as an assurance that the
contractor will fulfill his obligation.
1.3 Credit Guarantee/Supply Guarantee
This guarantee is issued to a supplier who extended his credit facility to our customer for
the purchase of goods on credit and therefore, it acts as a security deposit.
1.4 Custom Bond
This type of guarantee is only issued to the Custom Department. For instance, a
forwarding agent is required to furnish to the Custom Department a custom bond to
guarantee the good behaviour of its employees.
Also included under this category is the guarantee in respect of temporary importation of
goods into Malaysia . Certain goods are imported as samples or for temporary use.
1.5 Guarantee for Exemption of Custom Duties
This guarantee is used for import ation of goods into Malaysia on temporary basis goods
are exempted from import duties provided they are re-exported. The Custom Department
requires a bank guarantee to ensure that the goods are re-exported on time failing which
a claim will be made under the bank guarantee.
1.6 Advance Payment Guarantee
The Bank issues this guarantee to government bodies that have granted the contract to
the customer (the contractor). Advance Payment Guarantee allows the government to
gives advance payment to the contractor in order to carry out government projects
according to the terms and conditions of the contract.
1.7 Guarantee for Honouring of Cheque
This type of guarantee is issued to government departments to ensure that such issuance
cheque would be good for payment upon presentation.
09 What is Letter of Credit ? State its types.

A standard, commercial letter of credit (LC[1]) is a document issued mostly by a financial

institution, used primarily in trade finance, which usually provides an irrevocable
payment undertaking.
 Types of Letter of Credit

1. Revocable Letter of Credit L/c

A revocable letter of credit may be revoked or modified for any reason, at any time by
the issuing bank without notification.  It is rarely used in international trade and not
considered satisfactory for the exporters but has an advantage over that of the importers
and the issuing bank.

There is no provision for confirming revocable credits as per terms of UCPDC, Hence
they cannot be confirmed. It should be indicated in LC that the credit is revocable. if
there is no such indication the credit will be deemed as irrevocable.

2. Irrevocable Letter of CreditL/c

In this case it is not possible to revoked or amended a credit without the agreement of the
issuing bank, the confirming bank, and the beneficiary.  Form an exporters point of view
it is believed to be more beneficial. An irrevocable letter of credit from the issuing bank
insures the beneficiary that if the required documents are presented and the terms and
conditions are complied with, payment will be made.

3. Confirmed Letter of Credit  L/c

Confirmed Letter of Credit is a special type of L/c in which another bank apart from the
issuing bank has added its guarantee. Although,  the cost of confirming by two banks
makes it costlier, this type of  L/c is more beneficial for the beneficiary as it doubles the
guarantee.

4. Sight Credit and Usance Credit  L/c

Sight credit states that the payments would be made by the issuing bank at sight, on
demand or on presentation. In case of usance credit, draft are drawn on the issuing bank
or the correspondent bank at specified usance period. The credit will indicate whether the
usance draft are to be drawn on the issuing bank or in the case of confirmed credit on the
confirming bank.

5. Back to Back Letter of Credit  L/c

Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known
as backtoback credit when a L/c is opened with security of another L/c.

10 What is ADR & DGR ?

ADR stands for American Depository Receipt. Similarly, GDR stands for Global
Depository Receipt.

Every publicly traded company issues shares – and these shares are listed and traded on
various stock exchanges. Thus, companies in India issue shares which are traded on
Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock
Exchange), etc.
 These shares are sometimes also listed and traded on foreign stock exchanges like NYSE
(New York Stock Exchange) or NASDAQ (National Association of Securities Dealers
Automated Quotation).

But to list on a foreign stock exchange, the company has to comply with the policies of
those stock exchanges. Many times, the policies of these exchanges in US or Europe are
much more stringent than the policies of the exchanges in India. This deters these
companies from listing on foreign stock exchanges directly. But many good companies
get listed on these stock exchanges indirectly – using ADRs and GDRs.

The company deposits a large number of its shares with a bank located in the country
where it wants to list indirectly. The bank issues receipts against these shares, each
receipt having a fixed number of shares as an underlying (Usually 2 or 4).

These receipts are then sold to the people of this foreign country (and anyone who is
allowed to buy shares in that country). These receipts are listed on the stock exchanges.
They behave exactly like regular stocks – their prices fluctuate depending on their
demand and supply, and depending on the fundamentals of the underlying company.

These receipts, which are traded like ordinary stocks, are called Depository Receipts.
Each receipt amounts to a claim on the predefined number of shares of that company.
The issuing bank acts as a depository for these shares – that is, it stores the shares on
behalf of the receipt holders.

If the depository receipt is traded in the United States of America (USA), it is called an
American Depository Receipt, or an ADR.

If the depository receipt is traded in a country other than USA, it is called a Global
Depository Receipt, or a GDR.

11 What is Repo Rate & Reverse Repo Rate

Repo rate is the interest rate at which the reserve bank of India lends money to other
banks. Reverse repo rate is return banks earn on excess funds parked with the central
bank against Government securities.

If the reverse repo rate is increased, it means the RBI will borrow money from the bank
and offer them a lucrative rate of interest.

As a result, banks would prefer to keep their money with the RBI (which is absolutely
risk free) instead of lending it out (this option comes with a certain amount of risk)

Consequently, banks would have lesser funds to lend to their customers. This helps stem
the flow of excess money into the economy. Reverse repo rate signifies the rate at which
 the central bank absorbs liquidity from the banks, while repo signifies the rate at which
liquidity is injected.

12 State various Monetary tools available with RBI to control money flow in the country

The various tools available are –

CRR, SLR, Repo Rate & Reverse Repo rate all are explained above.