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Paisa Inc
- Unravel the world of banking

Conceptualized by Madhu Prasad S ∣∣ Jagadeesh Balu ∣∣ ∣∣ Krishna Kanth G

Ram Kishan Agrawal

Santosh Selvam

iface You would need to have Javascript enabled in your browser.  The link for playing Paisa Inc is http://virtuoso.  The game consists of 8 rounds spread across 2 days (4 rounds each day) and begins at 2130 hrs on 19th and 20th January  For any issues .  The winner is decided based on the maximum ROE calculated at the end of all the 8 rounds. please contact us at any of the following Email: paisainc@iimlmanfest.  Two trial rounds will be played on 18th January 2010 starting 2200 you shall be able to log in only in the next season/round. please keep checking the Paisa Inc blog : http://paisainc.blogspot.General Instructions  A team can have a maximum of 3 members.  To view the interim results and any other important announcements of all the Mobile: Madhu Prasad +91 9794586858 Jagadeesh +91 9794952713 Aniruddh Jain +91 9198220082 . The link would be disabled after that.  Team members must be from the same institute.  Teams must login and submit in each and every round. All teams are advised to play the trial rounds so as to get familiarize with the game.  One student cannot be part of more than one team. If the team is not able to submit for any round it shall get disqualified.  Any number of teams can participate from an institute.iimlmanfest.  Once you submit the decisions. Each round lasts for 20 mins with a break of 15 minutes in between two consecutive rounds.

. The Game Paisa Inc is a realistic simulation of the core operations of a commercial bank in India. Efficiency of a bank depends on their ability to satisfy their investors by offering comparatively a better interest rate to depositors and at the same time offering credit to their borrowers comparatively at cheaper interest rates. the interest rates of the variable rate loans and deposits. . The crux of the game is to reshuffle portfolios and make decisions on financial management in every round so as to maximize the ROE (Return on Equity) The game consists of 8 rounds. Traditionally banking is defined as the process of accepting deposits from surplus units in the economic system (lenders) with the objective of lending these funds to the deficit units in the economic system (borrowers). each team is required to build a balance sheet of Rs. Though modern banks offer a wide range of services like financial advisory services. The difference between the interest rate earned on these loans and the interest payable on deposits is the bank’s income (known as the Spread). security brokerage investment services. each round representing 3 months in the real scenario. The teams should decipher the economic cues and allocate funds to various items keeping in mind their unique characteristics and satisfying the constraints. 1000 crores and would be provided with cues for economic outlook for the next period along with the prevailing policy rates. etc. The banking industry is both very challenging and extremely demanding as it operates in a highly competitive environment both locally and globally. the success of a bank depends on its core activity of asset and liability management (ALM). Teams have to make decisions on ALM based on their strategic objective and the prevailing and predicted economic circumstances. default rates and caps/floors for various balance sheet items.Introduction Banking is one of the most important services in financial sector fuelling the economic growth of a country. The results of the game depend on the decisions made by the teams and the market developments that affect the industry as a whole. To begin with. The given economic cues would impact the policy rates.

Regulatory requirements Banks in India need to adhere to certain regulatory requirements set by RBI. Sum total of CASA. Cash Reserve Ratio (CRR): As per the RBI guidelines every bank needs to hold a specified percent of their deposits as cash or balance with RBI. The teams are advised to hold the capital adequately more than the specified CAR rate since negative profits would bring down the equity capital (sum of “Reserves & Surplus” and “Capital”) and if it falls below the CAR. Teams should remember that the reshuffling of the balance sheet isn’t just a mechanical activity but demands sound knowledge of macroeconomics and should be able to apply them to predict impact on business scenario in India. all the banks should hold a minimum level of capital to protect its depositors and promote the stability and efficiency of the financial system. gold and un-encumbered approved securities. floating rate deposit and fixed rate deposit is used for calculating minimum CRR requirement. In every round the CAR applicable is displayed next to the “Reserves & Surplus” and “Capital” liability items. floating rate deposit and fixed rate deposit is used for calculating minimum SLR requirement Capital Adequacy Ratio (CAR): As per the Basel Accord. The ratio is the bank’s capital as a percentage of risk weighted assets. The limit for a particular round is displayed as the ‘Cap’ next to the “Investments in G-Secs” asset item and teams will not be able to submit if the allocation to the item is less than the limit. The limit is not fixed but changes from period to period as per the policy decisions.To maximize the profits. RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. However. teams should balance the total amount of assets and liabilities in every round to continue in the game. teams can reshuffle their portfolios in subsequent rounds based on the economic cues provided in that round. Teams need to adhere to similar requirements (explained below) so as to continue in the game. Sum total of CASA. a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash. Statutory Liquidity Ratio (SLR): Every bank is required to maintain at the close of business every day. the team would be disqualified. . The limit for a particular round is displayed as the ‘Cap’ next to the “Cash & Balances with RBI” asset item and teams will not be able to submit if the allocation to the item is less than the limit.

keeping in mind that allocations cannot be changed drastically in subsequent rounds.CAR calculation will be done as per the following formula Amount (In Rs Crore) A1 A2 A3 A4 Risk Weight (%) RW1 RW2 RW3 RW4 Short Term . In each round. the profit/loss incurred in the previous round will be updated in the Reserves and Surplus item.Floating Rate loans Fixed Rate loans 𝐶𝐴𝑅 = 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 ∗ 100 𝐴1 ∗ 𝑅𝑊1 + 𝐴2 ∗ 𝑅𝑊2 + 𝐴3 ∗ 𝑅𝑊3 + 𝐴4 ∗ 𝑅𝑊4 Balance Sheet The items in the balance sheet are representative of the major components of a typical commercial bank’s balance sheet and are fixed for all the rounds. Reshuffling of the portfolio would attract charges and is restricted to a specified limit. . Hence. teams should be careful while allocating funds in the first round.Floating rate loans Medium Term -Floating Rate loans Long Term . Each item has a cap rate which specifies the upper/lower limit as banks would not be able to have skewed portfolios in the real life. The interest rates displayed next to each item are applicable for the previous period and the rates applicable for allocations made will be displayed in the next round. Teams should allocate the same on the asset side so as to balance.

nonearning . held for trade  Limited availability  Cap in absolute amount  Infrastructure.The following is the list of all the items along with their characteristics for the assets and liabilities. Assets Item Type of Cap Lower Cash and Balances with RBI cap Lower Investments in cap G-Secs Short Term Floating rate loans Medium Term Floating Rate loans Long Term Floating Rate loans Upper cap  Highly volatile risk characteristics Combined upper cap Characteristics      CRR requirement Lowest interest rate SLR requirement Risk free interest rate High discount over PLR Special comments  Zero risk weight. no defaults  Held to Maturity  Zero risk weight. no defaults  Default rates resulting in loan loss  Low risk weight for CAR calculation  Default rates resulting in loan loss  High risk weight for CAR calculation  Default rates resulting in loan loss  Highest risk weight for CAR calculation  Default rates resulting in loan loss  Risk weight for CAR calculation  Marked-to-market (MTM) gains/losses  Risk weight for CAR calculation  Interest rate between short and long term floating rate loans  Slight discount over PLR Fixed Rate loans Other Investments Fixed Assets Upper cap Lower cap  Investment in corporate bonds.

CRR and SLR requirements Allocation based on MIBOR bidding Limited corpus available in the market Borrowings from other agencies in the market Unlimited availability. teams would be provided a set of cues to assess the economic situation and predict the major policy rates (caps. cannot be modified further Additional equity cannot be raised Cushion against losses Economic cues In every round.Liabilities Item Current and Savings Accounts (CASA) Floating rate deposits Fixed rate deposits Inter-bank borrowings Floating rate borrowings No limit Fixed rate borrowings Reserves and Surplus Capital Type of Cap Upper cap Upper cap Upper cap Upper cap No limit Characteristics  Cheapest source of funds and highly liquid  CRR and SLR requirements            Lower cap (CAR requirement)    Variable rate deposits CRR and SLR requirements Illiquid. interest rates and rate premiums) and the default rates for the loans. higher rate than deposits Automatically updated in each round to reflect the profit/loss of previous round. . Allocated only in the first round. The cues would ultimately impact the profits for the current round (that will add up to the “Reserves & Surplus” in the next round). These cues would primarily guide the teams in making the decisions on allocations to various asset and liability items. always at a premium over MIBOR Borrowings from other agencies in the market Unlimited availability.

SLR. Teams would be allocated funds at the rate equal to Max (MIBOR.Inter-bank borrowings In India. Based on the corpus available.  CAR.555555556 Additional information provided in each round  Corpus. PLR. CRR.555555556 9 11 Mibor = (6800/900) = 7. Available corpus of funds: Rs. bids would be evaluated and the amounts allocated to the teams along with the rate would be displayed at the start of the round.555555556 7. 500 Crores (This would not be known to the teams while bidding) Allocated Amount 0 100 250 150 500 Unallocated Amount 300 100 0 0 Bid Rate Bid Amount Team 1 5 Team 2 7 Team 3 9 Team 4 11 Total 300 200 250 150 900 Weighted sum Allotted Rate 1500 1400 2250 1650 6800 7. banks borrow from the inter-bank market at MIBOR (Mumbai Inter Bank Offer Rate) which is weighted average of the bids of all the banks. The following example depicts the MIBOR calculation and bid evaluation processes. MIBOR of the previous round. On the same lines. team’s bid rate). interest rates . Default rates. teams have to bid for the next round’s “Inter-bank borrowings”. Reshuffling limit of the current round  Changes in cap rates. Lowest and highest successful bids. Risk weights. with the amount to be borrowed and the rate at which they would like to borrow.

Portfolio reshuffling charges Interest income = sum of (amount allocated * interest rate/4) for each of the asset components Interest Expense = sum of (amount allocated * interest rate/4) for each of the liability components except equity capital Actual Loan Loss = sum of (amount allocated * default rates/4) for all the loan components Service Charges = 0.... ROE =[(En+1 / En-1)* (En-1 / En-2)*.1 En+1 ..Winning criteria Every round profit for the team is calculated as shown below and would be reflected in the balance sheet of the next round.invested amount in corporate bonds Occurs due to fluctuations in the bond prices based on the changes in interest and yield rates Portfolio reshuffling charges = 0. RSn = RSn-1 + profit gained in nth round The final winner would be decided based on the compounded ROE of all the 8 rounds which is calculated as below. *(E2 / E1)](1/n) .Interest Expense . borrowings and deposit components Net MTM gains = market value .equity capital allocated in the first round Teams should decide upon the optimum equity capital in the first round as having less equity capital will increase the ROE but would increase the risk of disqualification if it falls below the ... Profit = Interest Income .25% of each of all the loans.Service Charges + Net MTM gains . equity capital gets modified automatically based on profit / loss in previous round..equity capital at the end of n rounds E1 .Actual Loan loss .25 % of increase in all the asset and liability components except equity capital and fixed assets In every round.

 The teams should adhere to the reshuffle limit that is provided in each round failing which they would not be able to submit.CAR requirement.  It is mandatory for every team to login in each and every round and submit their balance sheet so as to continue in the game. The teams should therefore ensure enough allocation of the capital in the round 1 so as to make up for the losses if any. Rules of the game  A team will be disqualified if the equity capital (sum of reserves & surplus and capital) falls below the specified CAR limit (mentioned as cap in the balance sheet) in any round. They would be able to submit only when the two items match. In subsequent rounds. .  In each round.  Teams should ensure that the total of all the items should match the figure mentioned in the “Total” head at the bottom left of both the liabilities and assets. A warning message is displayed if the equity capital value is nearing the specified CAR limit. teams would not be allowed to raise any additional equity. teams should ensure that they adhere to the various cap/floor rates failing which they would not be able to submit.