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Answers to Question No. 1 to 10 may be given in 50 to 100 words. Each question from No. 1 to 10 carries 2 marks. Q 1. How would economic transactions between suppliers of funds and ultimate users of funds occur in a world without FIs ? Explain with the help of a diagram. Q 2. Give three major reasons that suppliers of funds would not like to directly purchase securities issued by ultimate users of funds ? Q 3. Explain, with the help of a diagram, the financial intermediation process/role performed by an FI ? Q 4. What are the various kinds of financial intermediation roles performed by an FI ? Q 5. How can an FI reduce/overcome those problems faced by primary savers/suppliers of funds in direct transfer of funds to ultimate users of funds ? (4 marks) Q 6. What is meant by Maturity intermediation ? Q 7. What is meant by Denomination intermediation ? Q 8. What are the core/primary activities of a Commercial Bank ? Q 9. What are the differences between the Balance Sheets of a Depository Institution like a Commercial Bank and a Non-financial Firm like a Manufacturing Company ? Q 10. It is said that Commercial Banks are highly leveraged entities. Comment. Q 11. Mention the different items that appear in a Bank’s Balance Sheet in India.
Comment on the statement by explaining terms like Spread. Define Net Interest Income (NII) and Net Interest Margin (NIM). Q 11. It is said that Bank’s Profitability Management boils down to two components : Spread Management ( or Management of NIM) and Burden or Overhead Management. Q 17. Mention the different items that appear in a Bank’s Income Statement (Profit & Loss Account) in India. What is meant by an Off-Balance Sheet (OBS) activity ? What are some of the forces responsible for them ? Q 19. NIM and Burden and the strategies to improve profitability of a Bank. (1) Retail Deposits (2) Paid-up-capital (3) Loan Commitments (4) Consumer loans (5) Interest on Investment securities (6) Interest on Savings Bank Deposits (7) Current Deposits (8) Letter of Credit (9) Retained earnings (10) Provision on NPA Loans Q 14. How does one distinguish between an off-balance sheet asset and an off-balance sheet liability ? Q 20.Q 12. Q 16. Classify the following accounts into one of the following categories : (a) assets (b) liabilities (c) equity (d) revenue (e) expense (f) Off-Balance Sheet (OBS) activity. Q 18. It’s often said that Banks must rely less on Net Interest Income/ Core Income and more on the Non-Interest Income/Other Income. Q 15. Define Operating Profit and Net Profit/Net Income in a Bank’s Income Statement. Comment on the statement defining the terms like Core Income and explaining (a) the various sources of Non-interest Income and (b) the sources and strategies to control the Non-interest expenses. What are the main off-balance sheet activities undertaken by commercial banks ? . Q 13.
45.15. k.000/Occupancy expenses for the bank building Rs. e. n.33.000/- Q 24.000/Purchase of a new Computer system Rs. Interest paid on Term deposits Rs. place it in the appropriate category and determine the bank’s bottomline net income.22.000/Taxes of 34% of taxable income are paid Safe Deposit Locker rent receipt Rs.000/. f.50. (Figures are in Rs.41.1.000/Dividends paid to Shareholders of Rs.000/Interest received on GOI Securities Rs. Crores) Balance Sheet . What are the primary components of each ? Define Net Interest Income (NIM) and burden.0.44. o. Label each item.23.000 shares Provision for loan losses/NPA provision Rs.700/Interest paid on SB accounts Rs. i.(Depreciation for the current year Rs.50 per share for 5.60.89.000/Interest paid on Certificate of deposits Rs. Arrange the following items into an income statement. Should the efficiency ratio be low or high for increasing bank’s profitability ? Q 23.000/Interest and discount on loans Rs.Q 184.108.40.206.000/-) Service charge/commission receipts from customer accounts Rs.500/Fees received on selling of insurance and mutual funds Rs. m. b. a.1.500/Interest received on Corporate/PSU bonds Rs. j. M/s XYZ Bank Ltd.18.000/Employees salary and benefits Rs. g. h. What does a bank’s efficiency ratio measure ? Q 22. l. c. d. A bank’s efficiency ratio (ER) is defined as the ratio of Non-interest expense to the total of Net interest income and Non-interest income. Banks typically differentiate between interest and non-interest income and expense. has the following Balance Sheet & Income Statement.
000 20.000 Bal. with Banks/Money at call & short notice 42.000 9.000 9.000 Total Liabilities & Equity 183.000 Investment securities 23.Liabilities & Equity Assets Assets Demand Deposits 47.000 Total assets 183.000 11.000 Retained Earnings 12.000 2.000 Share Premium 4.000 Loans & advances 90.000 2.000 Cash & Bal.000 Income Statement Interest & discount on Loans Interest on Investment securities Interest on Money Market Securities Interest on deposits in banks Total Interest Income Interest on Deposits Interest on debentures Total Interest Expense Net Interest Income Non-interest/Other Income 9.000 Term Deposits 89.000 Paid up Equity Capital 12.000 6. with RBI 9.000 .000 Debentures 19.000 4.000 1.000 Total Liabilities 155.000 Fixed assets 15.000 Other assets 4.
what will be the impact on earnings of a decrease in the rate of interest ? An increase in the rate of interest ? Give Answer to Question Nos. what will be the impact on earnings of an increase in the rate of interest ? A decrease in the rate of interest ? Q 28. What is refinancing risk ? How is refinancing risk part of interest rate risk ? If an FI funds long-term assets with short-term liabilities.000 2. d. What is the process of asset transformation performed by a Bank ? Why does this process often lead to the creation of interest rate risk ? What is interest rate risk ? Q 27.000 3. Each question carries 1 mark. b.Non-interest/Other Expense Operating Profit Provision for loan losses/NPA Provision Profit before tax Tax paid Net Income/Net Profit (Profit after tax) For XYZ Bank. c. f. . What is the difference between firm-specific credit risk and systematic credit risk ? How can a Bank alleviate firm specific credit risk ? Q 26. 1 to 30 in a couple of words.000 8. What is reinvestment risk ? How is reinvestment risk part of interest rate risk ? If an FI funds short-term assets with long-term liabilities.000 10. calculate : a. e. ROE ROA EM (Equity Multiplier) ER (Efficiency Ratio) AU PM 1.000 Q 25.000 5.
All scheduled commercial banks are required to deposit a certain percentage of their Net Demand and Time Liabilities in the form of cash with RBI. and making long-term loans to borrowers who require a long-term commitment to funds known as ? Q 3. Name the right of the Banker to retain possession of the goods & securities owned by the debtor (borrower) until the debt due from the latter is paid ? Q 10. one with a credit balance and the other with a debit balance ? Q 9. Name the bill finance facility under which Buyer’s Bank discounts the bill for the account of the Buyer and remit the amount to the Drawer/Seller of the Bill and Buyer’s Bank recovers the amount paid on the bill along with interest and other charges. What is the limit/amount of deposit insurance available to a single individual depositor per bank ? Q 4. Expand SWIFT ? Q 6. . Name two non-fund based credit facilities commonly provided by a commercial bank ? Q 8.Q 1. who often cannot commit their funds over long periods. if any from the Buyer (his Customer) on the due date of the bill. What is the name of this and the current rate ? Q 5. What is the process of pooling small amounts of savings from individuals to be given as loans known as-----.? Q 2. What is the process of borrowing of relatively short-term funds from savers. This is a working capital facility to the buyer as an alternative to the Cash Credit facility against stocks. Name the right of a banker to combine/adjust two accounts of a customer. Expand RTGS ? Q 7.
What is the name of a bill which is payable after a specified period of time ? Q 12. Write the expression for Tangible Net Worth (TNW) ? Q 16. In loan syndication. What is the NPA provision rate for Loss Loan Asset ? . Name this Letter of Credit ? Q 14. This situation is known as -----.? Q 21. This situation is known as ------------. Define Net NPA to Net Credit Ratio ? Q 23. THIS IS A SIMPLE METHOD OF WORKING CAPITAL ASSESSMENT WHERE THE WORKING CAPITAL REQUIREMENT OF THE BUSINESS UNIT TO BE ASSESSED AT 25% OF THE PROJECTED ANNUAL GROSS SALES FOR THE NEXT YEAR. After loan is availed by the borrower. Write the expression for Working Capital Gap (WCG) ? Q 15. Name a credit facility which is a substitute of a Term loan and also a non-fund based credit facility ? Q 13. NAME THIS METHOD ? Q 18. In countries like USA and Japan. Q 19. Name this charge ? Q 20. Define Margin of Safety (MoS) in relative form which is used as tool in Term loan appraisal. a borrower is liable to pay a charge which is certain percentage on the undrawn/unutilized portion of the loan. find out the Net Working Capital (NWC) ? Q 17.? Q 22. Current ratio is 1. very often borrower indulges in irresponsible or problematic behavior which may lead to negative outcome. In a loan transaction. very often borrower has got better information than the banker. instead the banks there issue a specific type of Letter of Credit for this purpose. issue of bank guarantee is prohibited.Q 11.
What is the minimum Capital adequacy ratio (CAR) for Banks in India as per Basel II ? Q 27. Name this risk -----. Q 33.? Q 30. what will be the impact on earnings of an increase in the rate of interest ? this gives rise to a risk which is a particular form of interest rate risk.? Q 29. Sub-ordinated debt is a part of Tier I or Tier II capital ? Q 28. Who decides interest rate on Term Deposit account ? . What is the current interest rate on Savings Bank account ? Q 36. lending long). lending short).Q 24. If a Bank funds long-term assets with short-term liabilities. this gives rise to a risk which is a particular form of interest rate risk. Name the ratio used for assessing the repayment capacity of a borrower in case of a Term Loan ? Q 31. This risk is called as --------. When the asset of a bank is long funded (borrowing long. people and systems or from external events”. Who decides interest rate on Savings Bank account ? Q 35. Name the new risk recognized in Basel II ? Q 26. What is the maximum default period beyond which a loan account will be classified as NPA in the books of the bank ? Q 25. BCBS defines one risk as “the risk of direct or indirect loss resulting from inadequate or failed internal processes. If a Bank funds short-term assets with long-term liabilities.? Q 32. What is the interest rate payable on Current Deposit account ? Q 37. Name this risk -----. what will be the impact on earnings of a decrease in the rate of interest ? Q 34. When the asset of a bank is short funded (borrowing short.
1 to 6 carry 5 marks each. Q 7. What are three pillars of Basel II new Capital accord ? What is the new risk introduced as per Basel II ? Define Capital Adequacy Ratio. Q 44. What two methods do Banks/Financial Institutions use to manage the liquidity needs ? Q 46. What are the two reasons for Which banks need liquidity ? Q 45. Question Nos. 7 to 9 carry 10 marks each. What are the three pillars of Basel II new capital accord ? Q 42. What is the new risk introduced as per Basel II ? Q 43. RSL = 150 crore Question Nos. RSL = 50 crore Q 47. Calculate the re-pricing gap and impact on net interest income (NII) of a 1% increase in interest rates for the following position : RSA = 100 crore. also known as Capital to risk-weighted asset ratio (CRAR). Define the Rate Sensitivity Gap (RSG) also known as Re-pricing Gap or Funding Gap ? Q 41. Calculate the re-pricing gap and impact on net interest income (NII) of a 1% increase in interest rates for the following position : RSA = 50 crore. Mention the different items that appear in a Bank’s Income Statement (Profit & Loss Account) in India. Define Capital Adequacy Ratio (CAR). What is the minimum Capital adequacy ratio requirement for Banks in India ? . Q 1. Who decides the BPLR of a Bank ? Q 40. also known as Capital to risk-weighted asset ratio (CAR or CRAR). What is the full form of BPLR ? Q 39.Q 38. Show step by step calculation to derive Operating Profit and Net Profit after tax (Net Income).
000 Retained Earnings 12.000 233.000 Debentures 29.000 6.000 Term Deposits 99. : : 2 : : Q 9.000 Share Premium 14.000 4.000 Total Liabilities & Equity 233.000 Total Liabilities 185.000 Loans & advances Fixed assets Other assets Total assets 110. calculate : a.000 Income Statement Interest & discount on Loans Interest on Investment securities Interest on Money Market Securities Interest earned on deposits in banks Total Interest Income Interest paid on Deposits Interest paid on debentures Total Interest Expense Non-interest/Other Income Non-interest/Other Expense Operating Profit Provision for loan losses/NPA Provision Profit before tax Tax paid Net Income/Net Profit (Profit after tax) For XYZ Bank.000 Bal.000 31.000 Investment securities 33. with Banks/Money at call & short notice 52. c.000 6.000 Paid up Equity Capital 22. e.000 1. M/s XYZ Bank Ltd.000 15. What is Credit Default Swap (CDS) ? Explain with the help of a diagram. Crores) Assets Cash & Bal. Balance Sheet Liabilities & Equity Assets Demand Deposits 57.000 13.000 3.000 16.000 3.000 * Average earning assets = 200. has the following Balance Sheet & Income Statement.000 13. b.000 4.000 (Figures are in Rs. with RBI 19. d.000 10.000 10.000 .Q 8.000 5.000 3. NIM ROE ROA EM (Equity Multiplier) AU 19.
PM Q 10.Crore and Rs. the change in the Market Value of the Equity (MVE) of an FI is given as under : ∆ E = . (Where the symbols have usual meanings as under Change in E = . (b) If the market values of assets and liabilities are Rs. RSL = 150 crore c.f. 9 & 10 carry 10 marks each. RSA = 75 crore.Adjusted duration gap x Asset size x Interest rate shock) Derive the above formula and explain the effect of the above three factors on the market value of the FI’s equity due to interest rate volatility. RSA = 100 crore. Calculate the re-pricing gap and impact on net interest income (NII) of a 1% increase in interest rates for the following positions : a. Explain the Letter of Credit (LC) Mechanism by means of a diagram.DGAP x A x . What conclusions can you draw about the re-pricing model from the above results ? : : 2 : : Question Nos. Q 10. RSL = 70 crore d. RSL = 50 crore b. (a) As per the duration gap model of interest rate risk management.2.400/. compute the change in the market values of equity given the following information : Duration of Assets Duration of Assets 5 years 4 years . RSA = 50 crore.100/.2. Why banks need liquidity ? What two methods do Banks/Financial Institutions use to manage the liquidity needs ? Q 5.Crore respectively. -----------------End of Question Paper-------------- Q 4.
40% (ii) The proportion of security available for the doubtful assets is 65%. 7 to 15 carry 3 marks each.200 480 220 150 Additional information : (i) Standard asset carries a provision of 0.150 1. Calculate the provisioning requirement of the bank based on the above information. . The following information relates to the assets of a bank : Nature of Asset Standard Asset Sub-Standard Asset : Secured Exposure Unsecured Exposure Doubtful Asset : up to 1 year 1 – 3 years above 3 years Loss Asset Amount (Rs.Interest rate Change in Interest rate 11% + 1% -------------------END------------------------- Question Nos.000 1. 40% and 25% for the three categories respectively. in Crore) 5. Q 7. 1 to 6 carry 2 marks each. : : 2 : : Question Nos.600 2.
Service charge/commission receipts from customer accounts Rs. Interest paid on Certificate of deposits Rs. what will be the impact on earnings of an increase in the rate of interest ? A decrease in the rate of interest ? Q 17.101. Purchase of a new Computer system Rs. Label each item. Q 16. Arrange the following items into an income statement.500/s. What is reinvestment risk ? How is reinvestment risk part of interest rate risk ? If an FI funds short-term assets with long-term liabilities.0.000/cc. Employees salary and benefits Rs.000/- . Interest received on GOI Securities Rs. Interest and discount on loans Rs. Classify the following accounts into one of the following categories : (a) assets (b) liabilities (c) equity (d) revenue (e) expense (f) Off-Balance Sheet (OBS) activity. What is refinancing risk ? How is refinancing risk part of interest rate risk ? If an FI funds long-term assets with short-term liabilities.100. place it in the appropriate category as per the Bank’s Income Statement (P & L A/c) format and determine the bank’s bottom-line net income. what will be the impact on earnings of a decrease in the rate of interest ? An increase in the rate of interest ? Q 18. Interest received on Corporate/PSU bonds Rs.000/t.000/q.000/bb.000/.44. Occupancy expenses for the bank building Rs.Q 9.(Depreciation for the current year Rs. Fees received on selling of insurance and mutual funds Rs.1. p. Provision for loan losses/NPA provision Rs.1. Safe Deposit Locker rent receipt Rs.000/-) aa.000/y.000/r.000/v.23. 16 to 18 carry 5 marks each. Interest paid on Term deposits Rs.41. (1) Retail Deposits (2) Paid-up-capital (3) Loan Commitments (4) Consumer loans (5) Interest on Investment securities (6) Interest on Savings Bank Deposits (7) Current Deposits (8) Letter of Credit (9) Retained earnings (10) Provision on NPA Loans Question Nos.700/w.60. Taxes of 34% of taxable income are paid dd. Interest paid on SB accounts Rs.50 per share for 5.10. Dividends paid to Shareholders of Rs.15.18.000 shares u.22.000/z.89.45.500/x.33.50.
500/. Net Interest Margin (NIM) and Burden or Overhead.1. compute the contractual rate for the loan which is adjusted for loan defaults and losses. In fact. Probability of repayment – 0. Axis Bank has to control cost of funds improve bottomline (ET dtd. this is the most crucial aspect of the results. Comment on the statement “The amount provided under the head of provisions and contingencies fell by 34% Y-o-Y due to reversals of provisions on corporate and government bonds. What are the sources of other income for a bank ? Why it’s so important for the bank in the present environment ? Q 15.01.147 crore boosting its profit growth. ABC bank has 11. What do you mean by CASA deposits ? Why is it so important for a bank ? Q 12. where the profit growth is more on account of drop in provisions than the growth in net interest income (NII).5% and if the bank plans to maintain a 3% margin on the same. Q 13.9.” . Each Answer should be specific/to the point and not to exceed 4 to 5 lines.12.95.crore. Recovery rate for the principal and interest component – 0.75% as its average cost of funds. Q 11. amounting to Rs. If the transaction cost involved for credit accommodation is 0. Following additional information for the problem : Principal loan amount – Rs. What are the sources of other income for a bank ? Why it’s so important for the bank in the present environment ? Q 14. Case Study 1 Read the case let carefully and answer the following questions. Define Net Interest Income (NII).09) Q 10. Comment on the statement “Falling interest rates affect lending rates rather than the borrowing or deposit rates”.Q 8.
The performance at the operating level is satisfactory. though the change was substantial and it is extremely crucial for Axis Bank to control its rising cost of deposits. amounting to Rs. Going forward. Explain this statement. This was in line with the trend seen in the first half of the financial year 2009.4% against 70. Other income rose by 50% Y-o-Y on strong momentum in fee income which grew by 56. The positive aspect of the third quarter result is that the bank is still posting a very high growth on its loan book. this is the most crucial aspect of the results. AXIS Bank reported a 63. the cost of deposits is expected to come down that would ease the pressure on NIM”. “Going forward. where the profit growth is more on account of drop in provisions than the growth in net interest income (NII). Net interest margin (NIM) fell by close by close to 79 basis points (bps) to 3-12% for the December quarter. while CASA deposits grew by just 29%. Term deposits attract higher interest than CASA deposits. as it may affect its bottomline growth in coming quarters. In fact. And if this happens. The amount provided under the head of provisions and contingencies fell by 34% Y-o-Y due to reversals of provisions on corporate and government bonds. The bank has to control its cost of funds.2% growth in net profit for the quarter ended December 2008 on growing business and a sharp drop in provisions and contingencies. The key concern is high cost of deposits.Q 16. the . the cost of deposits is expected to come down that would ease the pressure on NIM.5% year-on-year (Y-o-Y). as term deposits posted a growth of 75%. Therefore. Falling interest rates affect lending rates rather than the borrowing or deposit rates. which stood at a mere 24. The bank also reduced interest rates after the RBI’s rate cuts.147 crore boosting its profit growth. Bank’s business as measured by the sum of deposits and advances grew by 54. it was expected that bank’s NIM could be affected.8% during the six months ended September 2008.7% and trading gains.
What is the difference between firm-specific credit risk and systematic credit risk ? How can a Bank alleviate firm specific credit risk ? Q 14. Define loan sales.01. Each Answer should be specific/to the point and not to exceed 4 to 5 lines. The company will float the product in next three months and the funds would be raised in phases on the basis of . is looking to float a USD600-million fund for investing in distressed bank assets.19. said managing director & CEO of the Company S Khasnobis.bank would continue to post high growth rates in profit as seen in the first nine months of the financial year 2009. the country’s first asset reconstruction company. What is the difference between loans sold with recourse and without recourse from the prospective of both sellers and buyers ? ARCIL. Case Study 2 Read the case let carefully and answer the following questions. Arcil has proposed to contribute 20% of the fund and the balance would be raised from International and Domestic investors. What do you mean by asset quality/credit quality ? How the asset quality of a bank is measured ? Q 13. Why the banks have voiced concerns over the impact on their asset quality in the present situations ? Q 13.09) Q 10. Arcil to float USD600-m fund to invest in NPAs (ET dtd.
08) Q 11. Arcil buys bad loans from banks and expedite recovery of the amounts locked in NPAs. its main focus continues to be buying the distressed corporate loans from banks. As job cuts have also become a regular affair now. Sectors like exports. Treasury loss : Rs. However. “The fund will be used for cash purchases of NPAs from banks”.1. Case Study 3 Read the case let carefully and answer the following questions. Mr. which would be used to finance its cash purchases.06. They expect NPAs to rise from the current levels.500 Crore PSU Banks to take a major hit due to rising yields (ET dtd. especially bad home loan assets.requirement. Each Answer should be specific/to the point and not to exceed 4 to 5 lines.28. banks may also face rise in NPAs in their housing loans. gems and jewellery. With the latest proposal to float a fund. What do you mean by mark-to-market (MTM) ? . Arcil is certainly positioning itself for a better business prospect next fiscal. textiles. This is an opportunity for Arcil to grow its business. every top banker has voiced concerns over the impact on their asset quality. Given the economic downturn. Arcil has recently started purchasing distressed assets. Khasnobis said here on Saturday on the sidelines of the 4th international convention of the Association of National Exchange Members of India. logistics have faced severe stress following the slowdown and these sectors are likely to contribute most in the rise of NPAs.
banks with a larger share of portfolios in the AFS category (non-HTM bucket).500 Crore on treasury operations. Thus. will be most affected.90% in March 2008 to over 8.e. bonds with a longer duration. private sector majors such as ICICI Bank. when bond yields rise sharply.24% bond maturing in 2018 (residual maturity of 10 years).. It may be recalled that the yield on the benchmark paper. for every 10-basis points rise in yields. bonds with a longer duration. banks have to mark-to-market (MTM) a portion of their G-sec book (i. banks have also to markto-market all their non-G-sec investments (like corporate bonds) every quarter.250 Crore.1. banks with a larger share of portfolios in the AFS category (non-HTM bucket). Recently. and that too. Bond prices fall when yields rise and banks have to mark-to-market the holdings in the AFS category based on the yield prevailing on the last day of the quarter. “Banks run into losses on their bond portfolios. has moved up from 7.85% in June 2008. Banks run into losses on their bond portfolios. As per RBI guidelines. when bond yields rise sharply. Q 13. Out of this which categories of investments are subjected to Markto-market (MTM) accounting ? And what is the frequency of MTM for such categories ? Q 6. In addition. and that too. in the current circumstances. Mention the three categories of investment securities held by banks based on the objectives of investments. Whatare objectives of an investment portfolio of a bank ? Q 13.Q 10. the 8. the RBI . Nationalised banks are more likely to bear the brunt of rising yields compared to their private sector peers since a few large PSU banks have perked as much as 50-60% of their bond portfolios in the available-for-sale (AFS) category. which is in the non-held-to-maturity (HTM) category. banks could incur a loss of up to Rs. HDFC Bank and Axis Bank have perked only 15-20% of their bond portfolios in the AFS bucket. As against this. in the current circumstances. Thus. will be most affected.” The first quarter of 2008-09 could see banks declare losses up to Rs. 26-30% of assets owing to high SLR). According to a recent report published by Merrill Lynch.
SBI. the largest PSU player. which alone has witnessed a fall of more than 400 paise rise in barely three months time.350 Crore this quarter. Given the PSU banks have large SLR requirements. This has caused yields to move up drastically in the past week of this quarter. but faces the risk of incurring a loss of more than Rs. seems to be the worst hit. given the significant exposure to varied class of securities.hiked repo rate – rate at which banks borrow from RBI – and the CRR by 50 bps each. most banks would have huge stocks of the benchmark bond. . The bank has parked up to 80% of its bond holdings in the HTM category.
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