CAIIB PAPER - 1 Short BOOK

CAIIB MADE EASY : PAPER - 1
ADVANCED BANK MANAGEMENT

( ONLY 24 HOUR BOOK - BEFORE CAIIB- 1 PAPER EXAM. )
[THIS BOOK IS MADE FOR LAST MINUTE FINAL

REVISION HAVING ALL FEATURES OF NORMAL BOOK
CONTAINS ALL TOPICS INCLUDING LATEST CHANGES
& RECALLED QUESTION– A ONLY 88 PAGE BOOKLET ]
INDEX
PARTICULARS PAGE NO.
SYLLABUS 02-02
MODULE – A ( ECONOMIC ANALYSIS ) 03-24
MODULE - B ( BUSINESS MATHEMATICS ) 24-39
MODULE - C ( HRM IN BANKS ) 40-48
MODULE –D ( CREDIT MANAGEMENT ) : 49-70
QUESTIONS BANK ( RECALLED QUESTIONS ) & PRACTICE TEST 70-88
Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

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SYLLABUS : PAPER - I : ADVANCED BANK MANAGEMENT
MODULE - A : Economic Analysis

The fundamentals of Economics : Scarcity and Efficiency - Microeconomics & Macroeconomics in
brief - Types of economies - Market, Command and Mixed Economies - Macroeconomics :
Business cycles - Money and banking - Unemployment & inflation - Interest rate determination
and various types of interest rates. Indian Economy (a) Overview of the Indian economy including
recent reforms (b)Interaction between fiscal, monetary & exchange rate policies in India -
Financial Markets (i) Money Market (ii) Capital Market (iii) Foreign Exchange Market -
globalisation and its impact - Challenges ahead - Banking & Finance - current issues
MODULE - B : Business Mathematics

Concept of time Value of Money - Net Present Value - Discounted Cash Flow - Sampling methods
- presentation of data - analysis and interpretation of sample data - hypothesis testing - Time
series analysis - mean / standard deviation - co-relation - Regression - covariance and volatility -
Probability distribution - Confidence interval analysis - estimating parameters of distribution - Bond
valuation - duration - modified duration. Linear programming - decision making-simulation -
Statistical analysis using spreadsheets. Features of Spread sheet - Macros, pivot table, statistical
and mathematical formulae.
MODULE - C : HRM in banks

Fundamentals of HRM, development of HRM in India, Relationship between HRM and HRD,
Structure and functions of HRD, Role of HR professional, Human implications of organizations;
training and development, attitude and soft skills development, role and impact of training, career
path planning and counseling, employee behaviour, theories of motivation and their practical
implications, role concepts and analysis, self development., Performance Management and
appraisal systems; Reward / punishment and compensation systems., HRM and Information
Technology, information and data management, knowledge management.
MODULE - D : Credit Management

Principles of Credit Management Credit Appraisal Analyzing Financial Performance - Relationship
between items in Balance Sheet and Profit and Loss Account. Trend Analysis, Comparative
Statement - Common size Statement, Preparation of projected Financial Statements. - Ratio
analysis - Interpretation and analysis of different Ratios, Limitation of the use of ratios. Statement
of Sources and Applications of Funds. Structuring a Credit Proposal - Working Capital Concept
and Management Appraisal techniques for different constituents - trade cycle - credit rating -
Technical and economic feasibility studies - Credit Rating - Rating Methodology - Objectives and
benefits of rating - Term Lending - Debt Service Coverage Ratio - Cash Flow Analysis - Cash
Budget - Bill Finance - Deferred Payment Guarantee - Credit Scoring - Credit Delivery System -
Documentation - Post sanction supervision, Control and monitoring of credit - Consortium finance,
Multiple banking, Syndication of loans. Infrastructure financing. Dealing with credit defaults,
Stressed assets, Corporate Debt restructuring, SARFAESI, NPAs, recovery options, write-off.
Disclosure of the list of defaulters : objectives and procedure. Appraisal methodology for different
type of clients / products.

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1.Fundamentals of Economics, Micro & Macro Economics and Economies
DEFINITIONS
Economics has been defined by various economists as a science of wealth or study of man in ordinary business of life or study of wealth or of
man or of human welfare etc. There are various sets of definitions of economics, as under:
Wealth definition : given by Adam Smith, David Recardo, J.V. Say and J.S. Mil.
Welfare definition : given by A Marshal.
Scarcity definition : given by L. Robbins.
Growth oriented definition : given by Henry Smith and Samuelson.
Definition of A. Smith : Economics is study of wealth.
Definition of A Marshal : Economics is a study of mankind in ordinary business of life.
Definition of L. Robbins : Economics is the science which studies human behaviour as a relationship between ends and scarce means which
have alternative uses. It can be concluded that:
Human wants are unlimited. Means to satisfy the wants are limited. All economic activities are undertaken to satisfy human wants.
Resources have alternative uses also. With Rs.loo with you, you can have food or you can see a movie and not both. 4 Consumers have to
make choice to make use of limited resources.
Micro and Macro Economics
The micro economics studies the basic or individual units, say a consumer or a household, in .the economy and includes:
Price determination of a commodity (demand theory and supply theory).
1)) Reward determination for factors of production i.e. land, labour, capital and enterprise (Distribution theory covering rent, wages,
interest profit respectively)
Micro economics - It is the study of individual units, small variables and individual pricing. But it is helpful in understanding the working of
whole economy and including of private sector. Micro economics studies :
r) how the firms and house holds take decisions to allocate resourceS how their decisions and behaviour affect the supply and demand for
goods/services, which determine price
how price determines the demand and supply.
Macro economics - The macro economics on the other hand, takes into account the entire economy. Accordingly, it deals with
employment theory, income theory, theory of price level,
theory of growth and theory of distribution. As a result, it studies national income, national output, national expenditure, the level of
savings and investment and level of employment.
Central Problems of Economy
There are 3 problems before economic organisation:
1) what to produce and when to produce 2) how to produce (what resources to be used, what technology to use)3)for whom to
produce (who will be consumer of these goods)
Types of economics
Each economic structure takes in to account, 3 basic parameters i.e. (0 what to produce (2) how to produce (3) for whom to produce.
The economies are organized in two different ways of organizing and economy i.e. Govt. managed 11(1 market managed. These economics
are:
1. Market economy or capitalistic economy: In many countries of the world the economic st,.‘11-. follow the market economy
system. In this system, the firms and individual decide about
production and consumption. Firms produced commodities that earn for them the highest amount profit. Consumption is decided by
individual decisions. A market economy, where the govt. does not interfere is'called LAISSEZ-FAIRE economy.
Socialistic or Command Economy: In a command economy, all decisions regarding production and distribution are taken by the govt. The
govt. owns most of the factors of production..
Mixed economy: In the present set up none of the above two economic systems actually function. Rather there is a mixed system. The
production and consumption decision are left to market but Govt. regulates the overall economic activities by enactment of rules, laws,
guidelines.
Mixed Economy
Market or Socialistic or
capitalistic Economy Command Economy
Who is to take decisions about Firms and individuals Govt. Firms and individuals
production and consumption
Whatis the level of Nil Complete Minimum. Overall
Govt. regulations of
Interference economy
2. Supply and Demand

Demand
The amount of a commodity that the consumers buy, depends on a no. of factors major being the price. Normally, higher the price of a
commodity, lower the quantity that consumers will buy. Hence, there is a relationship between the price of a commodity and quantity
demanded. This relationship can be expressed in the form of a demand schedule or demand curve.
Demand Schedule: It is a statement depicting the quantity demanded of a commodity at different prices. Demand can be drawn
based on demand schedule.
Law of demand (or Law of downward-sloping demand): As per this law, the quantity demanded of a commodity is related to its price
(other things remaining same). At a higher price, the quantity demanded is lower and at lower price, the quantity demanded is higher.
(There is inverse or negative relationship between two).
The quantity demanded may also be affected because of 2 other reasons (I) Substitution Effect, called Cross Demand (2) Income Effect
called income demand.
Cross demand relates to the effect on quantity demanded of a product, dueto~ehangein•price of-a related commodity. (Example : Effect on
demand for petrol, due to change in price of cars).
Income demand relates to the effect on quantity demanded of different-products, due to change in the income of the consumers.

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causes of movement of demand curve (or fortes being the demand curve) : The demand curve movement is affected by the following
reasons:
1. Change in average income of the consumer affects the demand for commodities (increase in income leading to high demand).
2. Size of the market also affects the quantity demanded. (Delhi market for a particular commodity is much larger than the Patna market)
3. Price and availability of related commodities (increase in price of its substitute commodity, increases the demand for a commodity).
4.Taste and preference of certain goods, also affect their demand.
5. Seasonal factors also affect demand (say demand for umbrella in rainy season). Shift in demand
When there is change in demand of commodities due to factors other than the price, it is called shift in demand. These factors can
be change in income of consumers or change in prices of related commodities. This has been shown in the diagram given below.
In this case, there is increase in average income of the consumers, leading to increase in quantity demanded.
Supply Schedule: It shows relationship between the market price of a commodity and the quantity supplied by producers /
suppliers. Higher the price of a commodity, higher the quantity, the suppliers would like to supply. Lower the price, the
producers will tend to supply lower quantity.
Factors behind Supply Curve movement : The following factors affect the movement of a supply curve:
Cost of production to the manufacturer.When cost is low compared to market price, there is high profit and producers tend to
supply more. When cost is high, profit is low and producers will switch over to other products.
Prices of inputs : When input prices are high, it leads to low profit. Hence low production. Technological advancements : Better
technology brings the cost low. Hence more profit and more production. Prices of related commodities : If production of onesubstitute
increases, the production of other will decrease. Govt. policy : Environment and health issues determine the technology to be used. Tax and
wages laws increase the cost of production.
Shift in supply : Whenever there is change in supply of a commodities due to factors other than the price of that commodity, this is
called shift in supply, as reflected below:
Equilibrium of supply and demand
Depending upon their prices, the consumers demand different quantity of goods and sellers offer different quantity of commodities.
But the demand and supply interact to produce an equilibrium price and quantity or market equilibrium. In other words, the
market equilibrium is a situation where the forces of demand and supply are in balance. At that point there is no reason for
change in price, other things remaining same.
3.Money Supply and Inflation

Money : Anything that performs one of the following functions, is money:
Medium of exchange i.e. all goods and services or physical assets are priced in terms of money and exchanged by using money. A measure of
value i.e. money is used to measure and record the value of goods and services A store of value of time i.e. money can be held for any time
and can be used in future 4. Standard for deferred payments i.e. ukoney is used as an agreed measure of future receipts and payments in
different contracts.
Money supply : It refers to stock of money in circulation in the economy at given point of time. This is decided by the Govt. and by the
Central Monetary Authority (RBI in India). Money stock measures were introduced by RBI during 1970 and the working group
under Y B Reddy suggested major changes in the money stock' measures, which gave its recommendations :during Dec
1997), implemented during June 1998. The current measures are monetary (M) and (L) aggregates.
MONEY SUPPLYMEASURES
Money Supply refers to amount of money in circulation. The working group under the chairmanship of Dr. V.V. Reddy, the thbn Deputy
Governor RBI, has suggested four new money measures (Mo, M1, Mz, M3) and three liquidity measures (Li, L2. L3). A ) MONETARY
AGGRECATES
 Mo = Currency in Circulation + Bankers Deposits with the RBI + 'Other' Deposits with the RBI;
 M1 = Currency with the Public + Demand Deposits with the Banking System + 'Other' Deposits with the RBI = Currency with the Public
+ Current Deposits with the Banking system + Demand Liabilities portion of Savings Deposits with the Banking System + 'Other'
Deposits with the RBI;
 M2 = M1 4- Time Liabilities portion of Savings Deposits with the Banking System + Certificates of Deposit issued by Banks + Term
Deposits (excluding FCNR (B) deposits) with a contractual maturity up to and including one year with the Banking System; and
 M3 = M2 + Term Deposits (excluding FCNR (B) Deposits) with a contractual maturity of over one year with the Banking System + Call
borrowings from 'Non-Depository' Financial Corporations by the Banking System.
M1 is known as Narrow Money ; M3 is known as Broad Money; Demand Deposits are those deposits which are payable on demand. It
includes current deposits, demand liabilities portion of liabilities, etc.
B) LIQUIDITY AGGREGATES
 M3 + all deposits with the Post Office Savings Banks (excluding National Savings Certificates).
 L2 = L1 + Term Deposits with Term Lending Institutions and Refinancing Institutions (Fls) + Term Borrowing by Fls + Certificates of
Deposit issued by Fls, and
L3 = L2 + Public Deposits of Non-Banking Financial Companies
Sources of money supply
Sources of money supply include net bank credit to the govt., net bank credit to commercial sector, net foreign exchange assets of banking
sector, Govt. currency liabilities to the"public,_net non monetary liabilities of RBI and the banks.
Inflation
Inflation refers to regular increase in the general price level of prices of goods and services, in an economy, over a period of time. Inflation
leads to fall in purchasing power,' because with rise in price of goods and services, the same amount of money, can purchase fewer goods and
services.
Inflation has positive as well as negative impact on the economy. Inflation helps in bringing an economy out of recession. The
negative effect is loss in real value of money.
Demand pull inflation: It is a general increase in prices of goods and services due to increasing aggregate demand for goods and services.
The increasing demand is the result of increased quantity of money in the hands of consumers. Demand --> Supply--> Shortage of goods &
Services--> Increase in Price
Cost-push inflation: It is caused by substantial increase in the prices of inputs used to produce goods and services. In such cases, the
producers adjust the production. Either they increase the price of the goods produced by them or they produce less that leads to shortage
and inflation.
Measures of inflation
The increase in general price level is measured by a price index. The price index is a weighted average of the prices of selected goods and
services, in comparison to the prices prevailing in the base year.
Inflation = (Price index in the current year – price index in the base year) / price index in the base year x 100
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Important price indices include the following:
Wholesale price index (WPI) – This reflects change in the level of prices of goods at the wholesale level. It relates to exchange of goods the
level of traders/suppliers and not at the level of consumers. WPI is also known as Headline Inflation. In India, WPI is the official inflation
Index. Food inflation index : Within the overall WPI, this is a separate index for a group of food and-fuel commodities.
Consumer price index : This index reflects the change in price level of goods and services when these are purchased by the
consumers/households. It measures, the prices at retail level. This is more relevant for the consumer. It is also called core inflation. It is
released by Labour Bureau, Ministry of Labour and Employment, Govt. of India.. The CPI can be different for different groups of consumers
which include consumer price index for agricultural labour (CPI-AL), consumer price index for industrial workers (CPI-.IW)„ consumer price
index for urban non-manual employees (CPI-UNME )and consumer price index for rural labour (CPI-RL).
GDP deflator : It is a measure of the level of prices of all new, Domestically produced, final goods and services in an economy. It is not based
on fixed basket of goods and services. The basket changes with consumption and investment pattern. Hence, new expenditure patters show
up in the deflator as people respond to changing price.
THEORIES Of INTEREST
INTEREST
As per Marshall, 'Interest is the price for the use of capital in a market'. In other words, interest is that part of national income which is paid
to capitalists as a reward of the services of capital. However, in Keynes opinion, interest is a reward for parting with liquidity for a specified
period.
Three distinct elements can be distinguished in interest:

a) Reward for the risk involved in making the loan;
b) Payment for the trouble involved;
c) Pure interest, i.e., price of the capital.
GROSS INTEREST = Net interest + reward for risk + reward for inconvenience + reward for pains + reward for management.
NET INTEREST = (Gross Interest) — (Reward for Risk + Reward for inconvenience + Reward for Pains +
reward for management).
FACTORS AFFECTING THE RATE OF INTEREST:

a) Difference is risk perception.
b) Difference on account of credit rating of borrower.
c) Difference in maturity period of loan.
d) Purpose and end use of the loan.
f) Nature of the primary and collateral security.
g) Quality of third party guarantee.
IMPORTANT THEORIES OF INTEREST
A) Prof. Senior: Abstinence. heory of Interest: "Interest is the reward for waiting and abstinence".
B) Fishers Time Preference Theory of Interest: Interest is the reward paid to induce people to postpone their present consumption and to
lend their money.
C) Keynes Liquidity Preference Theory of Interest: Prof J.M. Keynes in his book, the General Theory of Employment, Interest and Money, has
viewed rate of interest as a purely monetary phenomenon and is determined by demard for money and supply of money. According to this
theory, rate of interest is determined by liquidity preference, i.e., demand of money on one side and the supply of money on the other.
Demand of money means the demand for keeping money in liquid form. Thus, demand of money means liquidity preference. The term
liquidity preference means the habit cf persons to keep their money in liquid form. When a person gets his income, he has to take two
important decisions:
a) How much to spend and how much to save, and
b) How much to save in liquid form and how much to save in non-liquid form.
The term liquid form means to keep money in the form of ready purchasing power i.e. cash or gold or any such way as can readily be
converted into cash. The term non-liquid form means to invest money in iong term securities and capital goods
FACTORS AFFECTING LIQUIDITY PREFERENCE
Keynes explained interest in terms of purely monetary forces. Keynes assumed a simplified economy where there are two assets which
people can keep in their portfolio balance. These two assets are:
a) Money in the form of currency and current deposits in the banks which earn no interest,
b) According to Keynes, rate of interest and bond prices are inversely rlated. When bond prices go up, rate of interest rises and vice versa.
The demand for money by the people depends upon how they decide to balance their portfolios between money and
bonds. This decision about portfolio bal?nre ran he influenced by two factors.
First, the higher the level of nominal income in a two-asset economy, more the money people would want to hold in their portfolio balance.
This is because of transactions motive according to which at the higher level of nominal income, the purchases by the people of goods and
services in their daily life will be relatively larger, which require more money to be kept for transactions purposes.
Second, the higher the nominal rate of interest, the lower the demand for money for speculative motive. This is firstly because a higher
nominal rate of interest implies a higher opportunity cost for holding money. At higher rate of interest, holders of money can earn more
incomes by holding bonds instead of money. Secondly, if the current rate of interest is higher than what is expected in the future, the, people
would like to hold more bonds and less money in their portfolio. On the other hand, if the current rate of interest is low (in other words, if the
bond prices are currently high), the people will be reluctant to hold larger quantity of bonds (and instead they could hold more money in their
portfolio) because of the inherent fear that bond prices would ne fall in the future causing capital losses to them.
Prof. Keynes cites three motives to explain why people prefer to keep their money in liquid form. These motives are as under
1.Transactional Motives: People keep a part of their income in liquid form so that they can pay their regular expenses. Liquidity preference
for transactional motives will depend upon the size of income, time of receipt and number of transactions.
2.Precautionary Motives: People keep some part of income to provide for contingencies, such as illness, accident, unemployment etc.
Liquidity preference for such motives depends upon the level of income, size of family, living conditions and habit of individuals etc.
3.Speculative Motives: Some persons like to keep their money in liquid form for speculative purposes also so that they can get the advantage
of changes in the rate of interest.Thus, Demand of money = Transactional motive + Precautionary motive + Speculative motive.
Liquidity preference depends upon the income and rate of interest. There is an inverse relationship between rate of interest and demand for
money (liquidity preference). If the rate of interest is high, liquidity preference will be less because the people would like to invest more and
more amount. If the rate of interest is low, liquidity preference will be more because the people would like to keep the money with them
selves.
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SUPPLY OF MONEY
Supply of money, as assumed by Prof. Keynes, includes both types of money: currency notes and coins as well as bank credit. Since the
supply of money depends upon the monetary policy of government and Central Bank, it can be assumed to remain fixed, at least over a
short period. According to this theory, rate of interest is determined at the point at which the demand and supply 9f money are equal.
D) Modern Theory of Interest (Hicks & Hensen Theory):

Hicks and Hensen theory has bought the synthesis between Keynes and Classical theory of rate of interest. IS curve is derived from
Classical theory, whereas LM curve is derived from Keynes liquidity preference theory of interest. Rate of interest is determined at the
point at which IS curve and LM curve intersect each other.
 IS curve = Investment Saving Schedule
 LM curve = Liquidity preference and money supply equilibrium.
 IS curve is locus of different combination of rate of interest and income which shows equilibrium in goods market and also shows
the saving investments equality.
 LM curve shows the different combination of rate of interest and income, which shows equilibrium in money market.
 ' Equilibrium of Liquidity Preferences (L) and supply of money (M) of Keynesian theory produces LM curve, which implies money
market equilibrium.
 Equilibrium of Investment (I) and savings (S) of classical theory produces IS curve which implies goods market equilibri6m.
 IS curve slopes downward to the right — inverse relationship between the level of income and rate of interest.
 LM CURVE MOVES UPWARD TO THE RIGHT ( DIRECT RELATIONSHIP BETWEEN RATE OF INTEREST & LEVEL OF INCOME ).
5.Business Cycles
Business cycle or economic cycle
The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real
GDP and other macroeconomic variables. In other words, a business cycle or an economic cycle refers to economy-wide
fluctuations in economic activity (including production of goods and services), over several months or years. Such cycle pass
through phases of prosperity and depression. A business cycle is not predictable, regular or repetitive. Its timing is random and
unpredictable. The business cycles influence the business decisions and lead to impact on individual firms and the economy as a
whole. Characteristics of a business cycle: It is synchronic : The upward or downward movement tend to occur almost at the same
time, in all industries. Prosperity or depression in one industry will have impact in other industries, almost immediately. It shows a
wave-like movement : The period of boom and depression comes alternatively. Cyclical fluctuations are recurring in nature:
Various phases are repeated. A boom is followed by depression which is followed by prosperity again.
Downward movements are more sudden, than the upward movements There is no indefinite depression or boom period. Phases
of a business cycle A business cycle has 4 phases namely (i) Boom (2) Recession (3) Depression (4) recovery
1.Boom : Production capacity is fully used. Products fetch more than normal price giving higher profits. This attracts more
investors. Increasing use of factors of production leads to increased cost of production. The fixed income groups find it difficult to
cope with the increase in prices. They are forced to reduce their consumption which leads to lower demand, which results in
recession.
2.Recession : In economics, a recession is a business activity contraction, a general slowdown in economic activity over a period
of time. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic
Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall
during recessions; while bankruptcies and the unemployment rate rise.
Recessions are generally believed to be caused by a widespread drop in spending.
Govt. policy in recession : Governments usually respond to 'recessions by adopting expansionary macroeconomic policies, such
as increasing money supply, increasing government spending and decreasing taxation.
3.Depression : In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is
a more severe downturn than a recession. A rare and extreme form of recession, a depression is characterized by its length, and
by abnormally large increases in unemployment, falls in the availability of credit— quite often due to some kind of banking/financial
crisis, shrinking output and investment, numerous bankruptcies— including sovereign debt defaults, significantly reduced amounts
of trade and commerce— especially international, as well as highly volatile relative currency value fluctuations— most often due to
devaluations.Common elements of depression : Price deflation, financial crisis and bank failures.
4. Recovery : The depression phase does not continue indefinitely. The retrenched workers offer their services at lower wages.
Prices.are,at,the -lowest level. Hence consumers start purchasing. Banks having surplus funds, startiending at low interest rates.
With increase in demand, the piled up stock get exhaust. The economic activity starts again. Increased incomes lead to increasing
demand, increasing production, investment, employment.
Business Cycle or Trade Cycle
6. INDIAN ECONOMY
ECONOMIC SURVEY– 2013-14

The Union Minister for Finance Arun Jaitley presented the Economic Survey for 2013- 14 in Parliament on 9th July 2014. Highlights of the
Economic Survey are given below: State of the Economy and Prospects
1. Growth slowdown was broad based, affecting in particular the industry sector. Aided by favourable monsoons, agricultural and allied
sector registered a growth of 4.7 per cent in 2013-14.
2. Economy to grow 5.4-5.9% in 2014-15, overcoming the sub-5 percent growth of the last two years.
3. Growth rate of 7-8% can occur after 2015/16.
4. Poor monsoon, external factors pose risk to growth. Public Finance
1. Fiscal deficit for 2013-14 contained at 4.5 percent of the GDP compared to 4.9 percent in 2012-13.
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2. Primary deficit for fiscal 2014-14 estimated at 1.2% of the GDP; revenue deficit pegged at 3.2 percent.
3. Disinvestment programme had limited success due to subdued market conditions and yielded Rs.27,555 crore
4. Fiscal consolidation recommended through higher tax-GDP ratio then merely reducing the expenditure-GDP ratio.
5. Need subsidy reforms for fiscal consolidation.
6. Cutting capital expenditure not good for economy.
7. Changes in tax administration required.
8. Need sharp fiscal correction, new FRBM Act.
9. Government needs to move towards low and stable inflation through fiscal consolidation Prices and Monetary
Management
1. High inflation, particularly food inflation, was the result of structural as well as seasonal factors.
2. IMF projects most global commodity prices are expected to remain flat during 2014-15.
3. Wholesale Price Index inflation fell to three-year low of 5.98 percent during 2013-14. Consumer Price Inflation also showed signs of
moderation. Both Wholesale and Consumer Price Inflation expected to go downward
Financial Intermediation:
1. Passage of PFRDA Act, shift of commodity futures trading into the finance ministry and the presentation of the FSLRC report were the
three major milestones of 2013-14.
2. RBI has indentified five sectors -- infrastructure, iron and steel, textiles, aviation and mining as the stressed sectors. Public sector banks
(PSBs) have high exposures to the 'industry' sector in general and to such 'stressed' sectors in particular.
3. The New Pension System (NPS), now National Pension System, introduced for the new recruits who join government service on or after
January 2004, represents a major reform of Indian pension arrangements.
4. The next wave of infrastructure financing will require a capable bond market.
5. The speed of reforms in the financial sector has not kept pace with financial innovation.
6. As against the farm credit target of Rs 7,00,000 crore for the year 2013-14, an amount of Rs 7,30,766 crore was disbursed during the year.
Because of the slowdown and high levels of leverage, some industry and infrastructure sectors, namely textiles, chemicals, iron and steel,
food processing, construction, and telecommunication are experiencing a rise in NPAs. Overall NPAs of the banking sector increased from
2.36% of total credit advanced in March 2011 to 3.90% of total credit advanced in March 2014.
7. The increase in NPAs has been particularly sharp for the infrastructure sector, with NPAs as a percentage of credit advanced increasing
from 3.23 per cent in March 2011 to 8.22 per cent as in March 2014.
8. GNPAs of public-sector banks (PSBs) have shown a rising trend, increasing by almost four times from March 2010 (Rs 59,972 crore) to
March 2014 (Rs 2,04,249 crore). As a percentage of credit advanced, NPAs were at 4.4 per cent in March 2014 compared to 2.09 per cent
in 2008-09.
9. Increase in NPAs of banks is mainly accounted for by switchover to system-based identification of NPAs by PSBs, slowdown of economic
growth, and aggressive lending by banks in the past.
10. Some recent initiatives taken by the government to address the rising NPAs include – (a) Appointment of nodal officers in banks for
recovery at their head offices/zonal offices/for each Debts Recovery Tribunal; (b) Thrust on recovery of loss assets by banks and
designating asset reconstruction companies (ARC) resolution agents of banks; (c) Directing the state-level bankers’ committees to be
proactive in resolving issues with the state governments; (d) Sanction of fresh loans on the basis of information sharing amongst banks; (e)
Conducting sector / activity-wise analysis of NPAs; (f) Close watch on NPAs by picking up early warning signals and ensuring timely
corrective steps by banks including early detection of sign of distress, amendments in recovery laws, and strengthening of credit appraisal
and post credit monitoring.
11. Financial Sector Legislative Reforms Commission (FSLRC), in its report, has proposed Draft Indian Financial Code. The IFC articulates
clear objectives for financial regulation, where government intervention is required. These are: consumer protection, micro-prudential
regulation, resolution, systemic risk reduction, market abuse in organized financial trading, consumer redress, debt management, capital
controls, and monetary policy.
Financial Inclusion
1. The objective of financial inclusion is to extend financial services to the large hitherto unserved population of the country to unlock its
growth potential.
2. PSBs opened 7840 branches in 2013-14 as compared to 4432 in 2012-13. They had a total of 96,853 automated teller machines (ATMs) by
January 2014 as compared to 69,652 at the end of 2012-13.
Insurance penetration and density:
1. Insurance penetration is defined as the ratio of premium underwritten in a given year to the GDP. Likewise, insurance density is defined
as the ratio of premium underwritten in a given year to the total population. Insurance penetration has grown from 2.3 per cent (life 1.8
per cent and non-life 0.7 per cent) in 2000 to 3.96 per cent (life 3.17 per cent and non-life 0.78 per cent) in 2012
Pension sector
1. The New Pension System (NPS) now called National Pension System was introduced by replacing the existing defined benefit pension
system for the new recruits joining government service on or after January 2004. From May 2009, the NPS was opened up for all citizens
in India to join on a voluntary basis.
2. The Swavalamban Scheme for workers in the unorganized sector launched in 2010, extended to five years for the beneficiaries enrolled in
2010-11, 2011 12, and 2012-13 and the benefits of co-contribution under the Scheme would be available till 2016-17.
3. The Pension Fund Regulatory and Development Authority (PFRDA) Act 2013 made effective from 1 February 2014.
4. Till May 7, 2014 67.11 lakh members have been enrolled under the NPS with a corpus of Rs. 51,147 cr. Balance of Payments:
1. Balance-of-payments position improved dramatically in 2013-14 with the current account deficit (CAD) at $32.4 billion (1.7 percent of
GDP) as against $88.2 billion (4.7 percent of GDP) in 2012-13
2. Foreign exchange reserves increased from $292 billion at end-March 2013 to $304.2 billion at end-March, 2014. RBI intervention in
forex market behind accumulation of reserves "generally".
3. Long-term external debt accounts for 78.2 percent of total external debt at end-December 2013 against 76.1 percent at end-March 2013.
Long-term debt at end-December 2013 increased by $25.1 billion (8.1 percent) over the level at end-March 2013 while short-term debt
declined by $4 billion (4.1%), reflecting a fall in imports
4. CAD to be contained at 2.1% of GDP in 2014-15.
5. Annual average exchange rate of the rupee went up from 47.92 per dollar in 2011-12 to Rs.54.41 per dollar in 2012-13 and further to
Rs.60.50 per dollar in 2013 14. But now Rupee has stabilized, reflecting an overall sense of confidence in forex and capital markets.
International Trade:
1. Exports grew 4.1 percent over negative growth of 1.8 percent in 2012-13. Imports dropped by 8.3 percent after steep slowdown during FY
2012-13; trend continues in April-May, 2014 as imports fell by 13.2%.
2. Following government intervention, gold and silver imports fell by 40.1 percent to $33.4 billion in 2013-14
3. The sharp fall in imports and moderate export growth in 2013-14 resulted in a sharp fall in India's trade deficit by 27.8 per cent. In April-
May 2014, trade deficit declined by 42.4 per cent. Gold & silver imports dropped 40 percent to USD 33.4 bn in 2013/14
Agriculture and Food Management:
1. Record food grains and oilseeds production of 264.4 million tonnes (mt) and 32.4 mt estimated in 2013-14.
2. Horticulture production estimated at 265 mt in 2012-13 exceeded the production of foodgrains and oilseeds for the first time.
3. Due to higher procurement, foodgrain stocks in the Central Pool stood at 69.84 million tonnes as on June 1, 2014; India in anomalous
situation with large stocks of foodgrain with high food inflation
4. Agricultural exports grew by 5.1% in 2013-14 over 2012-13 to $37,292 million; exports of marine products alone increased by 44.8
percent in the same period
5. Since opening of rice exports in 2011, there has been a surge from $2,575 million in 2010-11 to $7,742 million in 2013-14. Exports of
total dairy, poultry, meat, and marine products doubled their share in agricultural exports between 2008-09 and 2013-14
6. During the five years ending 2012-13, food processing sector grew faster than the agriculture sector at an average annual rate of around
8.4 percent.
7. Agricultural credit flow achievement was Rs.730,765 cr against the target of Rs.700,000 crore in 2013-14.
Industrial Performance: Industry grew by just 1 per cent in 2012-13 and slowed further in 2013-14, posting a modest increase of 0.4%
Services Sector:
1. India ranked 12th in terms of services GDP in 2012 among the world's top 15 countries in terms of GDP (at current prices). India has the
second fastest growing services sector with its CAGR at 9.0 per cent, just below China's 10.9 per cent, during 2001 to 2012.
2. In 2013-14, FDI inflows to the services sector (top five sectors including construction) declined sharply by 37.6 percent to $6.4 billion
compared to an overall growth in FDI inflows at 6.1 percent.
3. Services constitute a 57 percent share in GDP at factor cost (at current prices) in 2013-14, an increase of 6 percent over 2000-01.
4. India's increase in share in world services exports from 0.6 percent in 1990 to 3.3 percent in 2013 faster than goods exports.
5. Despite deceleration, services GDP growth at 6.8% was above the 4.7 percent overall GDP in 2013/14.
Energy, Infrastructure and Communications: Major sector-wise performance of core industries and infrastructure services during 2013-14
shows a mixed trend. While the growth in production of power and fertilizers was comparatively higher than in 2012-13, coal, steel, cement,
and refinery production posted comparatively lower growth. Crude oil and natural gas production declined during 2013 14. From the
infrastructure development perspective, while important issues like delays in regulatory approvals, problems in land acquisition &
rehabilitation, environmental clearances, etc. need immediate attention, time overruns in the implementation of projects continue to be one of
7
the main reasons for underachievement in many of the infrastructure sectors.
Human Development: According to HDR 2013, India has slipped down in HDI with its overall global ranking at 136 (out of the 186 countries)
as against 134 (out of 187 countries) as per HDR 2012. The poverty ratio (based on the MPCE of 816 for rural areas and 1000 for urban areas in
2011-12 at all India level), has declined from 37.2 per cent in 2004-05 to 21.9 per cent in 2011-12. In absolute terms, the number of poor
declined from 407.1 million in 2004-05 to 269.3 million in 2011-12 with an average annual decline of 2.2 percentage points during 2004-05 to
2011-12.
Issues and Priorities
1. Reforms needed for long term-growth prospects on 3 fronts- low and stable inflation regime, tax and expenditure reform and regulatory
framework.
2. Survey suggests removal of restriction on farmers to buy, sell and store their produce to customers across the country and the world.
Rationalisation of subsidies on inputs such as fertilizer and food is essential. Government needs to eventually move towards income
support for farmers and poor households.
3. Policy focus now needs to target key growth drivers in the short term. Crucial drivers can be revival of private corporate sector investment,
pushing ahead with critical reforms and removing infrastructure bottlenecks
4. Indian legislation governing business need thorough revamp. Improve business environment by shifting important decision making from
inspectors to higher officers. Re-examine laws that empower govt to interfere in markets.
5. Capital controls under FEMA do not support rapidly globalising economy.
Salient features of Indian economy

Dominance of agriculture and heavy population pressure on agriculture: Per capita land availability is very low and per
hectare labour use is very high. Agriculture sector provides livelihood tc about . 65% of Indian population, while the share of
agriculture to GDP is around 17%.
Low per capita income : According to World Development Report 2007, India's per capita income was US $ 95o (as a result India
falls in Middle Economies). It is 1/5oth of US per capita income.
Disparities in income distribution : As per NSSO data, 39% of rural population possesses only 5% of all rural assets while, 8% top
households possess 46% of total rural assets. This shows high degree of disparity in income and wealth distribution.
Over-population : India is over-populated country, next only to China with total population of about 12o cr. To maintain 16.7% of
world's population, India holds only 2.42% of total land area of the world.
Unbalanced economic development : As per World Development Report 2007, 64% of total labour force depends on
agriculture, 16% on industry and about 2o% on trade, transport and other services.
6. Lack of capital : Due to low per capita income, the savings are low in India, though in the recent years, some improvement has been
observed.
Various sectors of Indian Economy
There are 3 major sectors of Indian economy i.e. agriculture, industry and services Agriculture :
The share of agriculture in GDP was 55% in 1950-51, 52% in 1960-61 and came down to around 17% in 2009-10. Still dependent on monsoon
rain. Agriculture provides raw material to various industrial activities. Agriculture sector provides employment to around 52% of India's
work force.
Issues in agriculture : India was dependant for food on other counties till 1960. Green revolution eliminated our dependence on other
countries as India became self-dependent in agriculture production.
Indian agriculture is dependent on monsoon. There is low level of public investment. Yield of crop is low. There is need for 2nd green
revolution. Steps to be undertaken, include:
Growth of irrigated area
Reclamation of degraded land. Improvement in water management, rain water harvesting.Extension services to reduce the knowledge
gap. Diversification into high value output such as fruits, vegetable, flowers, herbs etc.
Provision for adequate credit. Industry :
It accounts for about 19% share in GDP.
Central Statistical Organisation (CSO) classifies the industrial sector into 3 segments (1) Mining and quarrying (2) Manufacturing (3)
Electricity, Gas and Water Supply : Micro, Small and Medium Enterprises (MSME) sector is an important segment of industry.
Issues in industry : Indian industry was working in a closed environment till 1990s. After initiation of economic reforms, it was opened for
foreign investment which resulted into flow of FDI. This helped in technology upgradation.
Micro and Small enterprises (MSEs) : It is an important segment of industrial sector. As per Annual Report of Ministry of SME 2006-07, this
sector contributed 39% of industrial production, 34% of industrial exports and 35% of total employment.
Annual growth rate of value of output was 16.8%, of exports 20% and of employment 4.4%.
Problems faced by MSE include difficulty in getting bank finance, insistence on collateral securityAigh interest rates, lack of
supportingtusiness environment etc.
Steps taken to help MSE sector : Fixing of mandatory sub-limits for loans to MSEs by banks.
Relaxation of collateral security for loans up to Rs.to lac and provision for guarantee cover from Credit Guarantee Fund Trust for MSE up to
loan of Rs.100 lac as a substitute for collateral security. Enactment of MSME Development Act 2006Enactment of Interest on Delayed
Payment Act 1998
Services: It account for about 64% of GDP, This sector has gained at the expense of agriculture and industrial sector through the 1990s.
The major components of this sector are Information Technology Enabled Services (IETS), Banking and Insurance, Construction and
real estate, transportation and aviation etc. Issues in services sector : When services sector bypasses the industrial sector, economic
growth can get distorted. Hence this sector must be,supported by proportion growth of industrial sector; otherwise growth may not remain
sustainable.
Structural changes in Growth rates in various sectors of Indian Economy (in %age)
1900-50 1951-80 1980s 1990s 2000-09
Agriculture Not available 2.1 4.4 3.2 2.8
Industry Not available 5.4 6.4 5.7 6.5
l Not available 4.5 6.3 7.1 9.0
I Services
Total GDP 0.7% 3.5 5.6 5.7 7.2
Structural changes in share in GDP for various sectors of Indian Economy (in %age)
1950-51 1961-70 1970-71 1980-81 1990-91 2008-09
Agriculture 55 51 44 38 31 17
[ industry 11 13 15 17 20 19
Services 34 36 41 45 49 64
e
Total GDP 100 I 100 100 100 100 100

8
7. Economic Reforms
Transformation
Transformation of Indian economy has taken place in the era of economic reforms, with service sector share in GDP having gone to 64%, while
that of agricultuire shrinking to 17% (from 38%) and industry share remaining around 19%. Further, the domestic economy is far more
integrated with global economy, which is visible from increasing trade volumes, financial inflows etc. Timing of reforms: The economic
reforms introduced during 1991 have been outcome, mainly of fiscal crisis and external payment crisis.
Economic Transformation — Real Sector
Real sector: Initially, the real sector policy measures mainly focused on manufacturing sector which included:
a) deregulation of industry by way of removing licensing requirement, b) overhauling public enterprises,c) enhanced role for private
sector,d) abolition of MRTP Act,
e) automatic approval route for FDI, f) reduction in import tariffs, g) removal of quantitative restrictions on imports etc. Services sector:
Entry of private sector and FDI introduced competition and state of the 'at technology which brought sea change in the services sector. The
boom in Information Technology Enabled Services led to an era of services led growth and India emerged as global hub for BPO/KPO services
in the world. The boom in information technology (IT) and information technology and Enabled Services CITES) resulted in services-led
growth. India emerged as global hub for BPO / KPO services.
Agriculture sector : A series of measures were taken in agricultural sector also which include free movement of agriculture commodities,
APMC Act permitting farmers to bypass the mandatory requirement of sale in the regulated markets, relaxation of restrictions under
Essential Commodities Act 1955 introduction of future trading. (c) and (d) brought major changes in the pricing mechanism and national
level commodity futures markets discover price instead of manipulation by local traders.banks started allowing loans to farmers against
warehouse receipts. 0 large companies directly source agriculture produce from farmers.
With economic growth and rise in disposable incomes, the consumption basket has changed significantly.
Economic Transformation — Financial Sector
Financial sector reforms were carried as per recommendations of Narasimham Committee (1991 and 1998). Transformation of this sector
helped in improving the services sector growth in a big way. The segment that covered the financial sector reforms are:
Money market: The measures included a) freeing of interest rates in money market,
h) introduction of money market instruments like Cr) mnicrci al paper, certificate of deposits, collateralized lending and
borrowing obligations,
introduction of screen based trading, making call money, a pure inter-bank market etc.
Govt. securities market: Before reforms, the govt. was able to borrow at sub-market rates.
a) The concessionary financing to govt. was eliminated with introduction of market auction system and phasing out of automatic monetization
with ways and means advances.
b) Yield on g-securities provides a benchmark for pricing of securities in other markets.
Forex market : The reforms include,
a) introduction of market based exchange rate regime, b) adoption of current account convertibility and relaxation on capital account,
led to emergence ofactive and vibrant forex market. c) Exchange rates are market driven now.
Capital market:
a) The primary market witnessed a significant movement away from Controller of Capital Issue, b) introduction of free pricing and book
building system, c) mandatory disclosure,d) creation of SEBI,e) in the secondary market, the measures include corporatization of
exchanges, screen based
trading replacing the open outcry system, introduction of options and futures replacing the earlier Badla system, rolling settlement
replacing the 14 days settlement cycle,
dematerilisation of securities with Depositories etc.
Credit market: Prior to reforms, the banking operations on asset and liability side were broadly governed by RBI. In such situation
competition was almost absent. The broader approach of reforms to this sector was to :
bring more competition, allow operational autonomy to banks,
c) building of risk management capacities, d) introduction of prudent norms on capital adequacy, asset classification, income
recognition andprovisioning, in line with best international practices. These measures transformed the banking system and
brought soundness and operationalefficiency.
Payment system : The measures include a) enactment of Payment and Settlement Systems Act 2007 which empowered RBI to regulate
the payment and settlement system,
b) introduction of ECS, RIGS, NEVI% cheque truncation system, free access policy for ATM. This made the payment system robust and
sound.
Integration with the Global Economy
The economic reforms process facilitated integration of Indian economy with the global economy. This increased the participation in
international trade and capital inflows. India's share of world exports increased to 1.5%. The gross volume of capital inflows amount to $ 428
billion in 2007-08. The important measures taken, in this respect include:
Trade liberalization : De-licensing of intermediary inputs and capital goods, progressive reduction in tariff rates, acceptance of IMF Article VIII
obligations, thus making rupee convertible on current account.
Capital account ThP appro ach to move towards full convertibility on capital was a cautious one. Many recommendation of SS Tarapore
committee recommendations, have already been implemented.
Foreign Direct Investment: The policy to attract FDI started with introduction of automatic approval route, as per which RBI was
empowered to approve investment up to 51% in select 34 priority industries. Presently, under this route, :00% foreign investment is
permitted except for limited categories like atomic energy, lotteries business etc. (in retail this has been allowed in the year 2012).
Portfolio investment: Such investment through FII, was opened up in 1992. Around this time, the Indian companies were also
permitted to raise equity through GDR and ADR in Europe and American markets. The policy was liberalized by raising the 24% cap to
total sectoral cap for foreign investment.
External commercial borrowing: Access to ECB, by Indian companies, further integrated the Indian economy to the world economy.
Outward flows: Outward capital flows were also permitted progressively. This has resulted into emergence of Indian MNCs.
Issues and challenges

9
Though the structural transformation of Indian economy has brought improvement in terms of efficiency, competitiveness and
productivity, but there are a no. of issues, that remain to be addressed.
Poverty : Measured on the basis of consumption expenditure, there has been improvement in reducing the incidence of poverty. There
has been 7-8%age points decline in poverty ratio in 200405, compared to 1993-94. But Gini Coefficient, a standard measure of income
and expenditure inequality, has deteriorated to 36.2% in 2004 compared with 32.9% in 1993. This means, there is lot to be done, on this
issue.
Socio-economic development : Human Development Index, a widely used indicator of socioeconomic conditions has placed India at 128 out
of 18o countries of the world. Compared to other nations India needs to bring improvement in terms of health and education services.
Agricultural investment: While the structural transformation from agriculture to services has been a positive feature, but the
dependence of large population (about 65%) on agriculture, is keeping large majority of Indian population, in poverty. There is need
to integrate the rural sector with urban economy, by creating infrastructure such as roads in rural areas, provision for electricity, cold
storage chains to provide farm producers access to urban markets.
Labour reforms: There is need to review the labour laws so that these help in bringing market efficiency and productivity, promote
entrepreneurship, create positive investment environment. Further, the disparity between the organized and unorganized sectors in
terms of working conditions and protection of employees' rights also needs to be bridged.
Demographic dividend (share of working age group 15-64, around 65% in the population): To take advantage of this dividend, large
investment in human capital formation is required.
Financial inclusion : There is still a large portion of our population, which does not available banking facilities for various reasons including
cost, availability etc. There is need to offer banking facilities to this poor section of the society to provide banking facilities at reasonable cost.
8. Monetary Policy and Fiscal Policy
Monetary policy consists of measures aimed at altering the economy's money supply and in turn the interest rates for stabilizing the
aggregate output, employment and price level. In effect, monetary policies are tools to regulate the interest rate and money supply expansion
that prevail in the economy. Monetary policy controls supply of money, availability of money and cost of money. In India, RBI is vested with
the powers for formulating, supervising and controlling the monetary and banking system.
Objectives of Monetary Policy:
Monitoring of global and domestic economic conditions and respond quickly Ensuring availability of credit to productive sectors of the
economy and protect the credit quality. Maintain price stability and financial stability Emphasise interest rate management, inflation
management and liquidity management. Category of instruments of monetary policy : RBI uses 2 categories of instrument
namely.
1. General category, it has powers to conduct open market operations (OMO), change the reserve ratios and alter
the discount rates.
2. Special category it can have various credit direction program (priority sector, export credit, food credit etc.) and specifying
margins and level of credit in special categories (called selective credit control).
Bank rate : Bank rate is the rate of interest which RBI charges from banks while lending to Banks. When Bank rate is increased, it
increases the cost of borrowing by banks from RBI. Thus banks tend to reduce their borrowing from RBI, which lowers the lendable
resources of banks and consequent decline in money supply increases the interest rates. The opposite happens when RBI reduce bank
rate. Role of Bank rate has been very limited in affecting the lendable resources with banks.
CASH RESERVE RATIO

CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the bank's net demand and time liabilities to ensure the
liquidity and solvency of the scheduled banks.
Extent of CRR
Under RBI Act 1934 (Section 42(1) all scheduled banks are required to keep certain minimum cash reserves with RBI. Important features
are: Wef June 22, 2006 (as per RBI Amendment Act 2006), RBI has been empowered to fix CRR (without any floor or ceiling) at its discretion
(instead of earlier 3 to 2o% range by notification) of the net demand and time liabilities. It is to be maintained at fortnightly average basis
(Saturday to following Friday- 14 days) on reporting Friday (advised by RBI to banks at the commence of the year).on a Bail yhasi8 it should be
70% of the average balance wef Dec 23, 2002.
In order to check inflation, when RBI intends to reduce money supply with the banking system, it increases the CRR. On the other hand in
recessionary situation, when RBI wants to increase the liquidity, it reduces the CRR.
STATUTORY LIQUIDITY RATIO
Section 24 (2A) of Banking Regulation Act 1949 requires every banking company to maintain in India equivalent to an amount which shall not
at the close the business on any day be less than as prescribed by RBI (earlier 25%) as a percentage of the total of its net demand and time
liabilities (to be computed as in case of CRR) in India, which is known as SLR.
RBI powers - RBI can change SLR with minimum at its discretion and maximum 4o%).
SLR is to be maintained as at the close of business on every day i.e. on daily basis based on the NDTLs as obtaining on the last Friday of the
2nd preceding Fortnight.
Components of SLR : RBI issued the notification•dated Sept 08, 2009 giving the list of assets to be maintained by the banks (or Sec 24
of Banking Regulation Act, 1949, as under:
(a) Cash, or (b) Gold valued at a price not exceeding the current market price, or (c) Unencumbered investment in the following instruments
which will be referred to as "Statutory Liquidity Ratio (SLR) securities":
Objective of maintaining SLR :
1 It helps RBI to control the growth of bank credit. By changing SLR, RBI can impact the availability of funds with the banks for lending
purpose. Maintenance of SLR enhances the solvency position of the banks RBi can compel banks to meet the govt. borrowing program by
subscribing to Govt. securities. Open market operationsIt refers to buying and selling of govt. securities by RBI in the open market. By
its impact on the reserves of banks, OMO help control the money supply in the economy.When RBI sells Govt. securities to banks, the lendable
resources of4h&latter aze reduced and banks are forced to reduce or contain their lending, thus curbing the money supply. When money supply
is reduced, thaeonsequeattsiaerease=in,theinterest rates tends to limit spending and investment.

10
Repo and Reverse Repo
Under a Repo transaction RBI purchases_gqvt. securities from banks and thus inducts liquidity in the banking system. Repo transactions are
undertaken at Repo rate, which keeps on changing from time to time. By increasing repo rate, RBI increases the cost of borrowing by banks.
Under a Reverse Repo transaction, RBI sells govt. securities to banks and thus absorbs, liquidity in the banking system.
Sterilization Operation (Market Stabilization Scheme).Under this mechanism, RBI uses MSS Bonds, with a view to absorb liquidity
created by inflow of foreign exchange in to India. The MOS-instruments are in the form of treasury bills or dated securities which RBI
isstiet through ailetion. This is also knows as Sterilization operation.
FISAL POLICY
Govt. uses fiscal policy, to influence the level of aggregate demand in the economy, with a view to achieve economic objectives of price
stability, full employment and economic growth. Fiscal policy is the process of policy decision making in relation to the financial structure
of the govt. receipts and payment. It includes the actions and strategies on tax policy, revenue and expenditure, loans and borrowing,
deficit financing etc.
Primarily, it is the budgetary policy of the Govt. and is reflected through the annual budget formulation.
The objective of the policy are:
1 Moblisation of resources for meeting the financial requirements for economic growth. 2 Improve savings & investment rate to
improve the capital formation. 3 To initiate steps to remove poverty and unemployment and improve the standard of living of the people. 4
To reduce regional disparities.
FI$CAL RESPONSIBILITY & BUDGET MANAGEMENT ACT 2002
With a view to bring the Central finance under discipline, The Fiscal Responsibility & Budget Management Act (FRBM) notified on July 02,
2004 has come into fore w.e.f July 5, 2004 (recommendations of Dr. EAS Sarma Committee). The Act provides for an institutional framework
binding the Government to pursue a prudent fiscal policy. It casts responsibility on the Central Government to ensure fiscal management and
long-term macroeconomic stability by achieving sufficient revenue surplus, removing fiscal impediments in the conduct of monetary policy
and prudential debt management through limits on borrowings and deficits.
Targets :
The Act provides for the following targets for the Central Govt.:
Reduce the fiscal deficits to 3% of GDP. To eliminate revenue deficit by March 31, 2009 (to be reduced minimum by 0.5% point beginning
the financial year 2004-05 (Zero to be achieved by 31.3.2010 as per Budget 2008).To set a ceiling on guarantees - 0.5% of GDP.Total debt
increase capped at 9% of GDP during 2004-05.
Report to the Parliament: Government is required to place before the Parliament, 3 statements each year along with the Budget, covering
Medium Term Fiscal Policy, Fiscal Policy Strategy and Macro Economic Framework. The Parliament is also to be informed through quarterly
reviews on the implementation. No deviation permitted without approval of Parliament.
Borrowing from RBI : The Act prohibits the Centre from borrowing from RBI (i.e. restriction on deficit financing through money creation.
Temporary Ways and Means Advances to tide over cash.
flow problems are permitted till April, 2006.
9.GDP CONCEPTS
National income is the sum total of output of commodities and services produced by the economy as a whole during a given period of time
generally one year counted without duplication. In India, National Income estimates are related with the financial year i.e., 15t April to 31st
March. National Income is used as a measure of economic growth.
National Income includes the contribution of three sectors of the economy namely:
a) Primary Sector: Agriculture, Forestry, Fishery, Mining.
b) Secondary Sector: Industries, manufacturing, construction, electricity, gas, water.
c) Tertiary Sector: Trade, Banking, Insurance, Transport and Communication, Real Estate etc. The National Income is compiled by Central
Statistical Organisation (CSO) and presently is based on 1993-94 as base year. CONCEPTS OF NATIONAL INCOME
A) Gross Domestic Product (GDP) :
GDP is the market value of the final goods & services produced within the domestic territory of a country during one year.
B) Gross National Product (GNP): GNP = GDP + Net factor Income from abroad (X — M).
Where X = Income earned due to exports and money value of goods and services produced by nationals outside the country; M = Income
paid due to Imports and Income received by foreign nationals from within the country.
If Export minus imports = 0, Then GNP = GDP
C) Net Domestic Product (NDP): NDP = GDP - Depreciation
D) Net National Product (NNP): NNP = GNP - Depreciation
E) National Income: NNP is computed at factor cost. Further when we use a term national income we imply NNP at factor cost.
F) NNP at Factor cost
= NNP at Market Price — Indirect Taxes + Subsidies Or = NNP at Market Price - Net Indirect Taxes Where
Net Indirect taxes means (Indirect taxes - Subsidies)
Market Price is the economic price for which goods and services offered in the market.
G) Per Capital Income: It is ratio between national income of the country & population of that country Per Capita Income = National Income /
Population.
H) Green GDP : GDP which factors in cost of its environment degradation.
MEASUREMENT OF NATIONAL INCOME: There are three methods of measuring the national income
a) Product Method (Value Added Method) b) Income Method I Distribution Method
c) Expenditure Method (Consumption Method)
a) PRODUCT METHOD: Under this method, national income is equal to net national product at factor cost. This method
used fe'r agriculture and animal husbandry, forestry & mining & quarrying, registered manufacturing. In this method, net value o final goods
and services produced in a country during a year is obtained and the total obtained value is called total final product This represents GDP.
Real GDP or GDP at constant Price: Real GDP is calculated by tracking the volume or quantity of production after removing the influence of
changing prices or inflation. It reflects the real growth. It is the value of today's output at yesterday price.
Nominal GDP or GDP at current Prices: represents the total money value of final goods and services produced in a giver year, where the values
are expressed in terms of the market prices of each year. Simply it is the value of today's output a today's price.
b) INCOME METHOD: This method measures national income from the side of payment made to the factor of production lik
land, labour, capital and entrepreneur. This method is used to calculate gas, electricity & water supply banking & insurance transport,
communication and storage, unregistered manufacturing, trade, hotel, restaurants, public administration and defence In broad sense, by
Income method, national income is obtained by adding receipts of total rent, total wages, total interest an total profit.
c) EXPENDITURE METHOD: This method measure national income from the angle of expenditure of whole community. Thi method is basically
used for estimating income in construction activity. GDP = Consumption + Gross investment + Government spending + (Exports - Imports) and
the formula is GDP = C+I+G + (X-M)
The first compilation of national income in India was prepared by Dadabhai Narjii for year 1867-68. The first official estimates national income
11
for Indian union were prepared by the Ministry of commerce, govt. of India in year 1948-49. The Central Statistical Organisation (CSO) has been
entrusted with the work of estimating national income of India. CSO has introduced new series on national income with 1993-94 as the base
year In India methods combination of product method and income method is used for estimation of National income. Product method is
particularly used in primary sectors and in manufacturing sectors, and Income Method is used in territory sector or service sector.
10.Union Budget
The Union Budget is a statement of financial position for a future period, setting out proposed expenditure and means of financing it. It lays
down the statement of the estimated receipts and expenditure of the Govt. of India for the coming financial year. It sets out exactly how the
Govt. proposes to allocate the financial resources among the various agencies that make claim on it and how it proposes to raise the finances
for this. A no. of documents are annexed to the budget, which also include:
a Receipts budget - which details tax, non-tax revenues and capital receipts b Expenditure budget - details revenue and capital
expenditure Terms relating to receipts and expenditure
a Revenue receipts - Receipts by way of direct and indirect taxes, interest, dividends and profits from investments, fees and other receipts
from services rendered by the Govt. b Capital receipts - Receipts by way of loans raised from the market, borrowing from RBI, external
assistance from foreign Govts, recoveries of loans and advances. c Revenue expenditure - These are expenses incurred for the normal running
of the Govt. departments, interest charges on debt and subsidies.
d Capital expenditure - It is the expenditure incurred on acquisition of assets and investments, loans and advances to State Govts. e Plan
expenditure - It is the outlay on schemes and program formulated by various Ministries under the 5-year plan. f Non-plan
expenditure - It is the expenditure outside that incurred in keeping with the program formulated under the 5-year plan.
CONCEPTS OF BUDGET DEFICITS IN INDIA

REVENUE RECEIPTS
1. Tax Revenue : Direct- Corporate tax, Income tax, Wealth tax, Interest tax, Expenditure tax, Gift tax, Estate duty, VDIS,Indirect-
Customs, Union Excise duties Services tax, Taxes of UTs.
Less- States share - Income tax, Union excises duties.
Non- Tax Revenue: Dividends & Profits from PSUs, Interest receipts or loans,External grants, Other non-tax revenue, Receipts of Union
Territories,
REVENUE EXPENSES Expenses not resulting in asset creation
1. Plan Expenditures : Central plan, Central assistance for State /UT plans.
2) Non-Plan Expenditures: Interest payments, Defense spending, Subsidy payments, Grants to states and UTs, Pensions, Police, Postal
deficit, Economic, social & other services,Grants to Foreign Governments. i Expenditure of UT without legislature, etc.
RevenueDeficit Revenueexpenses –Revenuereceipts
,101=1•1/ CAPITAL RECEIPTS 1. Loan recoveries,Disinvestment of Equity shares,Borrowings,, Small Savings, State Provident funds,Special
Deposits,Market Borrowings, External Assistance, Draw down on cash balance, etc
Capital Deficit Capital expenses – Capital receipts
CAPITAL EXPENSES 1. Plan Expenditures, Central plan, C e n t r a l a s s i s t a n c e f o r S t a t e s & U T p l a n s . 2 ) N o n - P l a n
E x p e n d i t u r e s : Defense capital, Loans to Public Enterprises / States / UTs , Loans to Foreign Governments, Other non-plan Capital outlay
etc
Budgetary Deficit called Conventional Deficit = Total EXPENSES – Total receipts
Deficit Concepts :
Revenue deficit - It is the excess of Govt. revenue expenditure over revenue receipts. Gropsyiscal deficit : It is excess of total
expenditure over revenue receipts and capital reteipig-after excluding borrowing 3 Net fiscal deficit : Gross fiscal deficit — net
lending
Primary deficit - It is the fiscal deficit reduced by expenditure on interest ("ivppyrnent.!Primry deficit - It is the net fiscal
deficit reduced by expenditure on net interest 4/ 4 payment.
Net RBI credit to Central Govt. : It is total of increase in RBI holding of Treasury Bills, dated securities, rupee coins and loans &
advances from RBI to Central Govt. since 1.4.2007 adjusted for RBI's cash balances with RBI.
BUDGET 2014-15
The Finance Minister presented his maiden national budget for the government. He expressed concerns over economic slowdown
while promising steps to ensure a course correction with bold measures. The budget aims at 7-8 per cent growth over the next
three-four years, lower inflation, less fiscal deficit and a manageable current account deficit.
 The budget reflects the pragmatic outlook of the govt. which has taken initial steps for revival of sustainable economic growth. The
new Govt’s. first budget has tried to balance the objective of the growth revival and fiscal consolidation without trying to be too
ambitious. The budget reveals the govt. priority both near- term and over the medium term.
 While the budget is lacking in major policy announcement, it lays out a road map for reforms and policy priorities. The welcome
measure include a road map for fiscal consolidation of 3% of GDP by financial year 2016-17, GST road map by the end of the year,
controlling non plan expenditure and a stable and predictable tax regime.
OVERVIEW OF THE ECONOMY

 GROWTH ESTIMATES:
CHALLENGING SITUATION: Two years of sub five per cent growth in the Indian economy has resulted in a challenging situation. The task is very challenging
because the growth has to be revived, particularly in manufacturing and infrastructure to raise adequate resources for the developmental needs.
SUSTAINED GROWTH OF 7-8 PER CENT: The main aim of the budget is to lay down a broad policy indicator of the direction towards a sustained growth of 7-8 per
cent along with macro-economic stabilization that includes lower levels of inflation, lesser fiscal deficit and a manageable current account deficit.
GLOBAL OVERVIEW: The slowdown in India broadly reflects the trend in many economies. In contrast to the aftermath of the crisis of 2008-09 when restoration
of growth in advanced economies was the primary concern, the continuing slowdown being presently witnessed in many emerging economies has posed a threat
to a sustained global recovery.
GREEN SHOOTS & HEAD WINDS: There are green shoots of recovery being seen in the global economy. As per IMF, the world economy is projected to grow at 3.6%
in 2014 vis-à-vis 3.0% in 2013, with the Euro area expected to register a positive growth after the contraction witnessed in 2012 and 2013. However, the performance of
the US economy is pivotal to the fate of global recovery in the coming years. These are the head winds against which the Indian economy would have to maneuver its
 FISCAL DEFICITS:
 FISCAL PRUDENCE: Fiscal prudence is of paramount importance to generate more resources to fuel the economy. For this the tax to GDP ratio must be improved and
non-tax revenues increased. The decline in fiscal deficit from 5.7 per cent of GDP in 2011-12 to 4.8 per cent in 2012-13 and 4.5 per cent in 2013-14 was mainly achieved
by reduction in expenditure rather than by way of realization of higher revenue.
 ROAD MAP FOR FISCAL CONSOLIDATION: Following targets have been stipulated:
2014 -15 4.1%

12
2016 -17 3.6%
2016 -17 3.0%
The current year target is challenging especially in view of the situation in the middle-east which continues to be volatile and also monsoon this year appears more
unpredictable.
 CURRENT ACCOUNT DEFICIT (CAD):
 TURN-AROUND IN CAD: Although, the external sector witnessed a turn-around with the year ending with a Current Account Deficit of 1.7 per cent of the GDP against 4.7
per cent in 2012-13, this was mainly achieved through restriction on non-essential imports and slowdown in overall aggregate demand.
SECTORAL ANALYSIS:
AGRICULTURE:
 CONTRIBUTES NEARLY 1/6TH TO GDP: Farming as an activity contributes nearly 1/6th to the countries National GDP and a major portion of our population is
dependent on it for livelihood. It has risen to the challenge of making India largely self-sufficient in providing food for a growing population.
 GROWTH TARGET OF 4%: As per the Budget, the Govt. is committed to sustaining a growth of 4% in Agriculture and for technology driven second green revolution with
focus on higher productivity.
 AGRICULTURE CREDIT: Banks are providing strong credit support to the agriculture sector. A target of Rs.8 lakh crore has been set for agriculture credit during 2014-
15.
 INTEREST SUBVENTION SCHEME: Under the Interest Subvention Scheme for short term crop loans, the banks are extending loans to farmers at a concessional rate of
7%. The farmers get a further incentive of 3% for timely repayment. The Budget proposes to continue the Scheme in 2014-15.
 RIDF: NABARD operates the Rural Infrastructure Development Fund (RIDF), out of the priority sector lending shortfall of the banks, which helps in creation of
infrastructure in agriculture and rural sectors across the country. The Budget proposes to raise the corpus of RIDF by an additional Rs.5,000 crores from the target given
in Interim Budget to Rs.25,000 crores in the current financial year.
ACTION PLAN & INITIATIVES
AGRICULTURE: To make farming competitive and profitable, the Budget has highlighted need to step up investment, both public & private, in agro-technology development
& creation and modernization of existing agri-business infrastructure.
 Agricultural Research Institutions: Government will establish two more
Agricultural Research Institutions in Assam and Jharkhand on pattern of Agriculture Research Institute, Pusa. Rs.100 cr has been set aside for this.
 Agri-Tech Infrastructure Fund: An amount of Rs. 100 crores is being set aside for setting up an "Agri-Tech Infrastructure Fund".
 Agriculture Universities: Propose to establish Agriculture Universities in Andhra Pradesh and Rajasthan and Horticulture Universities in Telangana and Haryana. An
initial sum of Rs. 200 crores has been allocated for this purpose.
 Soil Health Card: To provide to every farmer a soil health card in a Mission mode. For this 100 Mobile Soil Testing Laboratories will be set up.
 National Adaptation Fund: Agriculture as an activity is most prone to the vagaries of climate change. To meet this challenge, the budget proposes "National Adaptation
Fund" for which Rs. 100 crore has been earmarked.
 Bhoomi Heen Kisan: As a very large number of landless farmers are unable to provide land title as guarantee, institutional finance is denied to them and they become
vulnerable to money lenders' usurious lending. The budget proposes to provide finance to 5 lakh joint farming groups of ‘Bhoomi Heen Kisan’ through
NABARD in the current financial year.
 Price Stabilization Fund: Price volatility in the agriculture produce creates uncertainties and hardship for the farmers. To mitigate this, the budget proposes to provide a
sum of Rs.500 crore for establishing a Price Stabilization Fund.
 National Market: The farmers and consumers' interest will be further served by increasing competition and integrating markets across the country. To accelerate setting
up of a National Market, the Central Government will work closely with the State Governments to re-orient their respective APMC Acts., to provide for establishment of private
market yards/ private markets.
 Warehouse Infrastructure Fund: Keeping in view the urgent need for availability of scientific warehousing infrastructure in the country, the budget proposes an allocation
of Rs. 5,000 crore for the fund for the year 2014-15.
 Long Term Rural Credit Fund: The share of long term investment credit in agriculture is going down as compared to short term crop loan. This is severely hampering
the asset creation in agriculture and allied activities. In order to give a boost to long term investment credit in agriculture, the budget propose to set up ‘Long Term Rural
Credit Fund’ in NABARD for the purpose of providing refinance support to Cooperative Banks and Regional Rural Banks with an initial corpus of Rs. 5,000 cr.
 Allocation of STCRC (Refinance) Fund: In order to ensure increased and uninterrupted credit flow to farmers and to avoid high cost market borrowings by NABARD,
the budget propose to allocate an amount of Rs.50,000 crore for Short Term Cooperative Rural Credit (STCRC)- Fund during 2014-15.
 PRODUCE: In view of increasing proportion of small and marginal farmers in the country, the budget propose to supplement NABARD's Producers'
organization development fund for Producer's development and upliftment called PRODUCE with a sum of Rs.200 crore which will be utilized for building 2,000
producers organizations across the country. INDUSTRY:
 eBiz: The eBiz platform aims to create a business and investor friendly ecosystem in India by making all business and investment related clearances and compliances
available on a 24x7 single portal, with an integrated payment gateway. All Central Government Departments and Ministries will integrate their services with the eBiz platform
on priority by 31 Dec, 2014.
 National Industrial Corridor Authority: A National Industrial Corridor Authority, with its headquarters in Pune, is being set up to coordinate the development of the
industrial corridors, with smart cities linked to transport connectivity to drive India's growth in manufacturing and urbanization.
 Industrial Smart Cities: The Amritsar-Kolkata Industrial master planning will be completed expeditiously for the establishment of industrial smart cities. The master
planning of 3 new smart cities will also be completed.
 Export Promotion Mission: To engage with the states to take India's exports to a higher growth trajectory, the budget propose to establish an Export promotion Mission
to bring all stakeholders under one umbrella.
 Special Economic Zones: To make SEZ effective instruments of industrial production, economic growth, export promotion and employment generation, Govt. proposes
to take effective steps to operationalize the Special Economic Zones, to revive the investors' interest to develop better infrastructure and to effectively and efficiently use the
available unutilized land.
 MICRO, SMALL AND MEDIUM ENTERPRISES SECTOR: SMEs account for a large portion of our industrial output and employment. The bulk of service sector
enterprises are also SMEs. There is need to examine the financial architecture for this sector, for which the budget propose to appoint a committee
with representatives from the Finance Ministry, Ministry of MSME and RBI.
a)Review of Investment Criteria: The definition of MSME is proposed to be reviewed to provide for a higher capital ceiling. A programme to facilitate forward and
backward linkages with multiple value chain of manufacturing and service delivery will also be put in place.
b)Venture Capital in the MSME sector: In order to create a conducive eco-system for the venture capital in the MSME sector, the budget propose to establish a Rs.
10,000 crore fund to act as a catalyst to attract private Capital by way of providing equity, quasi equity, soft loans and other risk capital for start-up companies.
c)Incubation and Accelerator Programme: A nationwide, District level Incubation and Accelerator Programme would be taken up for incubation of new ideas and
providing necessary support for accelerating entrepreneurship.
d)Technology Centre Network: To establish technology centre network to promote innovation, entrepreneurship and agroindustry.
e)Legal Bankruptcy Framework: Entrepreneur friendly legal bankruptcy framework will be developed for SMEs to enable easy exit.
Textiles: The budget proposes to set up:
a) Trade Facilitation Centre and a Crafts Museum with an outlay of Rs. 50 cr. to develop and promote handloom products Varanasi, where also a Textile mega-cluster
will be set-up. Six more Textile mega-clusters are proposed at different locations.
b) Hastkala Academy for the preservation, revival, and documentation of the handloom / handicraft sector in PPP mode in Delhi.
c) Pashmina Promotion Programme (P-3) and a programme for the development of other crafts of Jammu & Kashmir for which Rs.50 cr has been set aside.
INFRASTRUCTURE:
India has emerged as the largest PPP market in the world with over 900 projects in various stages of development. PPPs have delivered some of the iconic infrastructure like
airports, ports and highways which are seen as models for development globally. An institution to provide support to mainstreaming PPPs called 3P India will be set up with a
corpus of Rs.500 crores.
Shipping: Sixteen new port projects are proposed to be awarded this year with a focus on port connectivity.
Inland Navigation: A project on the river Ganga called 'Jal Marg Vikas' (National Waterways-I) will be developed between Allahabad and Haldia to cover a distance of
1620 kms, which will enable commercial navigation of at least 1500 tonne vessels. The project will be completed over a period of six years at an estimated cost of ` 4,200
crore.
New Airports: Despite increase in air connectivity air travel is still out of reach of a large number of aspirational Indians. Scheme for development of new airports in Tier I
and Tier II will be launched for implementation through Airport Authority of India or PPPs.
Roads sector: This sector needs huge amount of investment along with debottlenecking from maze of clearances. The budget propose investment in National Highways
Authority of India and State Roads of an amount of Rs.37,880 crores, which includes Rs. 3,000 crores for the North East. During current financial year target of NH
construction of 8500 km will be achieved.
Power: To promote cleaner and more efficient thermal power, the budget propose to allocate an initial sum of Rs. 100 crore for preparatory work for a new scheme ‘Ultra-
Modern Super Critical Coal Based Thermal Power Technology’.
FINANCIAL SECTOR:
BANK CAPITALIZATION: To be in line with Basel-III norms there is a requirement to infuse Rs. 2,40,000 crore as equity by 2018. While preserving the public ownership,
the capital of these banks will be raised by increasing the shareholding of the people in a phased manner through the sale of shares largely through retail to common
citizens of this country.

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CAPITAL MARKET:
 Financial sector is at the heart of the growth engine. Globalization helps channelize external savings to India to bridge the resource gap but also renders the financial
sector vulnerable to the vagaries of the global economy. Therefore it is essential to strengthen and modernize the legislative regulatory framework. Some of the important
recommendations of the Financial Sector Legislative Reforms Commission are:
a)Advise financial sector regulators to take early steps for a vibrant, deep and liquid corporate bond market and deepen the currency derivatives market by eliminating
unnecessary restrictions.
b)Extend a liberalized facility of 5% withholding tax to all bonds issued by Indian corporate abroad for all sectors and extend the validity of the scheme to 30-6-2017.
c)Liberalize the ADR/GDR regime to allow issuance of depository receipts on all permissible securities.
d)Allow international settlement of Indian debt securities.
e)Completely revamp the Indian Depository Receipt (IDR) and introduce a much more liberal and ambitious Bharat Depository Receipt (BhDR).
f) Clarify the tax treatment on income of foreign fund whose fund managers are located in India to resolve a long-standing problem.
 Single Demat A/c: Introduce one single operating demat account so that Indian financial sector consumers can access and transact all financial assets through this
one account.
 WD&RA: As part of strengthening the regulatory framework for commodity markets, the Warehouse Development and Regulatory Authority (WD&RA) has begun a
transformation plan to invigorate the warehousing sector and significantly improve post-harvest lending to farmers against negotiable warehouse receipts.
 International Financial Reporting Standards (IFRS): The budget proposes for adoption of the new Indian Accounting Standards (Ind AS) by the Indian companies
from the financial year 2015-16 voluntarily and from the financial year 2016-17 on a mandatory basis. Based on the international consensus, the regulators will separately
notify the date of implementation of AS Ind for the Banks, Insurance companies etc.
BANKING
 Consolidation of Public Sector Banks: There have been suggestions for consolidation of Public Sector Banks. Government, in principle, agrees to consider these
suggestions.
 Financial Inclusion Mission: To provide all households in the country with banking services, particularly focus to empower the weaker sections of the society,
including women, small and marginal farmers and labourers. Two bank accounts in each household are proposed to be opened which will also be eligible for credit.
Minimum Regulatory pre-emption such as CRR, SLR and Priority Sector Lending: Long term financing for infrastructure has been a major constraint in encouraging
larger private sector participation in this sector. On the asset side, banks will be encouraged to extend long term loans to infrastructure sector with flexible structuring to
absorb potential adverse contingencies, sometimes known as the 5/25 structure. On the liability side, banks will be permitted to raise long term. funds for lending to
infrastructure sector with minimum regulatory pre- emption such as CRR, SLR and Priority Sector Lending.
 After making suitable changes to current framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current
financial year. RBI will create a framework for licensing small banks and other differentiated banks.
 In view of rising Non Performing Assets of Public Sector Banks, six new Debt Recovery Tribunals would be set up at Chandigarh, Bengaluru, Ernakulum, Dehradun,
Siliguri and Hyderabad.
INSURANCE SECTOR: Both insurance penetration and density are very low. Govt. proposes to multi-pronged action which would include suitable incentives, using
banking correspondents, strengthening micro-offices opened by public sector insurance, legislative initiatives to bridge the regulatory gap under the Prize Chits and
Money Circulation Scheme (Banning) Act, 1978. This step is expected to facilitate effective regulation of companies and entities which have duped a large number of poor
and vulnerable people in this country.
SMALL SAVINGS: To address the concerns of decline in savings rate and improving returns for small savers, the budget propose to revitalize small savings. A special
small savings instrument to cater to the requirements of educating and marriage of the Girl Child will be introduced. A National Savings Certificate with insurance cover will
also be launched. In the PPF Scheme, annual ceiling will be enhanced to Rs.1.5 lakh p.a. from Rs. 1 lakh at present.
ENVIRONMENT:
PSU Capital Expenditure: To give a thrust to investment in the economy, PSUs will also play their part constructively. PSUs will invest through capital investment a total
sum of Rs. 2,47,941 cr in the current financial year to create a virtuous investment cycle. Smart Cities: As the fruits of development reach an increasingly large number of
people, the pace of migration from the rural areas to the cities is increasing. A neo middle class is emerging which has the aspiration of better living standards. Unless,
new cities are developed to accommodate the burgeoning number of people, the existing cities would soon become unlivable. The budget proposes developing 'one
hundred Smart Cities', as satellite towns of larger cities and by modernizing the existing mid-sized cities.
e-Visa: In order to boost to tourism in India, the facility of Electronic Travel Authorization (e-Visa) would be introduced in a phased manner at 9 airports in India where
necessary infrastructure would be put in place within the next 6 months. REITs & InvITs: Real Estate Investment Trusts (REITS) have been successfully used as
instruments for pooling of investment in several countries. The budget proposes to provide necessary incentives for REITS which will have pass through for the purpose of
taxation. As an innovation, a modified REITS type structure for infrastructure projects is also being announced as Infrastructure Investment Trusts (InvITs), which would
have a similar tax efficient pass through status, for PPP and other infrastructure projects.
 Kissan Vikas Patra: Kissan Vikas Patra (KVP) was a very popular instrument among small savers. The budget proposes to reintroduce the instrument to encourage
people, who may have banked and unbanked savings to invest in this instrument.
 Skill India: A national multi-skill programme called Skill India is proposed to be launched to skill the youth with an emphasis on employability and entrepreneur skills. It
will also provide training and support for traditional professions like welders, carpenters, cobblers, masons, blacksmiths, weavers etc.
BUDGET TERMS
BUDGET: It is the Annual Financial Statement by the Finance Ministry in accordance with provisions of Article 112 of the Indian Constitution, giving details of proposed govt expenditure and how money will be
raised. *CENTRAL PLAN: It consists of the Government’s budget support to the Plan and the internal and extra budgetary resources raised by public enterprises.
Plan Expenditure: It includes both revenue and capital expenditure of the government on the Central Plan, Central assistance to States and Union Territory plans.
Non-Plan Expenditure: It includes both revenue and capital expenditure on interest payments, the entire defence expenditure (both revenue and capital expenditure), subsidies, postal deficit, policy, pensions,
economic services, loans to public enterprises and loans as well as grants to State Govt., UT and foreign Govt.
BUDGET IS DIVIDED IN TO TWO PARTS: CAPITAL AND REVENUE:
CAPITAL BUDGET: It consists of capital receipts and payments. It also incorporates transactions in the Public Account. It has two components: Capital Receipt and Capital Expenditure.
Capital Receipt: Include loans raised by the government from public which are called market loans, borrowings from the RBI and other parties through sale of Treasury Bills, loans received from foreign
governments, recoveries of loans granted by Centre to State and UT governments and other parties.
Capital Expenditure: Payments for acquisition of assets like land, buildings, machinery, equipment, as also investments in shares etc, and loans by the Centre to States, Govt. companies, corporations and
other parties. *REVENUE BUDGET: Revenue receipts of the government (tax revenues plus other revenues) and the expenditure met from these revenues. It has two components: Revenue Receipt and
Revenue Expenditure. Revenue Receipt: It includes proceeds of taxes and other duties levied by the Centre, interest and dividend on investments made by the Govt. fees and other receipts for services
rendered by the government.
Revenue Expenditure: It is meant for the normal running of government departments and various services, interest charges on debt incurred by the government and subsidies. Broadly speaking, expenditure
which does not result in creation of assets is treated as revenue expenditure. All grants given to State Govt. and other parties are also treated as revenue expenditure even though some of the grants may be for
creation of assets.
* STEPS IN BUDGET PRESENTATION:
Budget Speech: It is the first step in presentation of budget. The Speech is presented every year by the Finance Minister in the Lok Sabha, usually on last working day of February.
Expenditure Budget: Contains expenditure estimates made for a scheme or programme under both revenue and capital heads.
Finance Bill: This contains the government’s proposals for levy of new taxes, modification of the existing taxstructure or continuance of the existing taxstructure beyond the period approved by Parliament.
Demands for Grants: It is a statement of estimates of expenditure from the Consolidated Fund and is required to be voted by the Lok Sabha. Generally, one Demand for Grant is presented by each
Ministry. Appropriation Bill: It is presented to Parliament for its approval, so that the government can withdraw from the Consolidated Fund the amounts required for meeting the expenditure charged on
the Consolidated Fund. No amount can be withdrawn from the Consolidated Fund till the Appropriation Bill is voted and enacted.
*TYPES OF DEFICIT: Excess of Expenditure over Receipts is known as Deficit.
Budgetary Deficit: It is the excess of total expenditure over total receipts.
Capital Deficit: It refers to the excess of capital expenditure over capital receipts.
Revenue Deficit: It refers to the excess of revenue expenditure over revenue receipts.
Fiscal Deficit: It is the difference between the revenue receipts plus certain non-debt capital receipts and the total expenditure including loans (net of repayments). This indicates the total borrowing
requirements of the government from all sources.
Primary Deficit: It is the difference between fiscal deficit and interest payments.
Monetised Deficit: It indicates the level of support extended by the RBI to the Govt’s borrowing programme.
VARIOUS GOVT ACCOUNTS:
Consolidated Fund: It is made up of all revenues received by the government, loans raised by it, and also its receipts from recoveries of loans granted by it. All expenditure of the government is incurred from the
Consolidated Fund and no amount can be withdrawn from the Fund without authorisation from Parliament.
Public Account: It is an account in which money received through transactions not relating to the Consolidated Fund is kept. Besides the normal receipts and expenditure of the government relating to the
Consolidated Fund, certain other transactions enter government accounts in respect of which the government acts more as a banker, for example, transactions relating to provident funds, small savings
collections, other deposits etc. Such money is kept in the Public Account and the connected disbursements.
Contingency Fund: It is an imprest placed at the disposal of the President and is used by the government to incur all its urgent and unforeseen expenditure. Parliamentary approval for such expenditure and for
withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained and the amount spent from the ContingencyFund is recouped to the Fund.

14
MODULE – A QUESTION BANK ON ECONOMIC ANALYSIS
TEST PRACTICE – 01
1) Micro-economic theory studies how an economy determines.
a) The price of goods
b) The price of services
c) The price of economic resources
d) All of the above.
2) A producer's positively sloped supply curve for a commodity represents.
a) In one sense a maximum and in another sense a minimum boundary of the.producer's intentions.
b) A maximum boundary of the producer's intentions.
c) A minimum boundary of the producer's intentions.
d) None of the above.
3) The theory of distribution refers to:
a) The distribution of income among various factors of the production.
b) The distribution of income among different individuals in the economy.
c) Both of the above
d) None of these
4) Interest is reward for parting with liquidity according to:
a) B. Ohlin b) Von Haberler
c) J.M. Keynes d) Alfred Marshall
5) Economics may be divided into macro-economics and micro-economics. Among the subject matter of micro economics may be found:
a) The nature of value in exchange.
b) The size of a country's national income
c) The allocation of resources among competing uses
d) The relative prices of specific services.
6) The statement that 'economics is positive and not normative' means:
a) That economics can be used to prove that capitalism is better than socialism.
b) That economics tells us what kind of economic behaviour or policy is wholesome and what evil
c) That economics tells policy makers which alternative to choose from among several efficient ones.
d) That economics can only indicate consequences of policies, choices, or conditions.
7) Which of the following statements is incorrect?
a) Micro-economics is primarily concerned with the problem of what, how and for whom to produce.
b) Micro-economics is primarily concerned with the behaviour of individual decision making units when at equilibrium.
c) MiCro-economics is primarily concerned with the time path and process by which one equilibrium position evolves into another
d) Micro-economics is primarily concerned with comparative static rather dynamics.
8) Economic laws may be described as:
a) Principles derived from an o;-.alysis of price am/ output determination.
b) Generations concerning the economic behaviour of individuals and institutions.
c) Forecasts in quantitative terms of the economic development of society.
d) Expression of the basic features of competition.
9) The main difference between positive economics and normative economics is that the former.
a) Discusses the ethical implications of its laws.
b) Concerns itself only with hypotheses which can generally be tested.
c) Is based on the value judgements of economists.
d) Considers carefully the political significance of its laws for a democratic society.
10) Adam Singh advocates:
a) Laissez-faire b) Division of Labour c) Both of the above d) None of the above
11) The term 'consumer goods' is used by economists to refer to:
a) Goods produced for consumers in a free market only.
b) Goods other than free goods, whose use directly satisfies consumers wants.
c) Goods produced by consumers in return for a wage.
d) Goods which are used by consumers in order to earn their living
12) The basic characteristic of a Capitalistic economy is:
a) Full employment
b) The private ownership of the means of production.
c) An absence of monopoly
d) Large-scale production in primary industries.
13) In a free capitalist society the allocation of the factors of production among the various productive activities is determined by:
a) The pattern of consumer's spendIng
b) The traditional employment of facl=
c) Decisions of the Government
d) The wealth of the entrepreneurs.
14) Who believed that an automatic equilibrating mechanism of the perfectly competitive market, known as 'invisible hand' tended to maximize national wealth:
a) Adam Smith b) Keynes c) J.B. Say d) None of the above
15) The fundamental economic problem being faced is one of:
a) Consumer's choice
b) Decision-making by the government
c) 'Multiplicity of wants and scarcity of resources.
d) Shortage of labour.
16) Which one of the following is not directly the concern of the economist?
a) Aid to underdeveloped countries
b) The effect of an increase in Bank rate
c) The choice between alternative sites for a factory
d) The use of taxation to discourage smoking of cigarettes.
17) The meaning of the word 'economic' is most closely connected with the word:
a) Free b) Scarcec) Unlimited d) Restricted
18) Which of the following is not an economic problem?
a) Deciding between extra paid work and extra leisure.
b) Deciding between different ways of spending leisure lime .
c) ;:eciding on the level and form of personal saving
d) Deciding between expenditure on one good and another.
19) Which one of the following statement is not true?
a) Exchange is one method of helping to solve the basic economic problem.
b) The basic ecolomic problem is one of choice.
c) Choice is necessary because of Limited wants.
d) The means to satisfy wants i.e., the factors of production, are limited.
20) Who gave scarcity definition of economics?
a) Adam Smith b) Robbins c) Keynes d) J.B. Say
21) Who is known as the Father of Economics?
a) Keynes b) Ricardo c) Adam Smith d) J.S. Mill
22) Many of the basic problems of economics emerge from:
a) Unlimited resources
b) Incompetent govt.
c) The use of limited resources to satisfy human wants
d) Unlimited wants
23) The utility may be defined as:
a) The power of a commodity to satisfy wants
b) The desire for a commodity
c) The usefulness of a commodity

15
d) The necessity of a commodity
24) The utility of a commodity is:
a) Its expected social value
b) Its relative scarcity
c) The extent of its practical use
d) The degree of its fashion
25) Marginal utility curve of a given consumer is also his:
a) Indifference curve b) Demand curve c) Supply curve d) Total utility curve
26) The total utility is maximum when:
a) MU is zero b) AU is the highest c) MU is the highest d) MU is equal to AU
27) The law of diminishing marginal utility states that:
a) As more of a commodity is consumed total satisfaction diminishes.
b) The more you have of a particular commodity the less you want more of it.
c) As more units of a commodity are produced the price of the commodity will fall
d) The consumption of further units of a commodity will bring a steady thcrease in the amount of satisfaction obtained.
28) The law of diminishing returns or increasing cost will operate at an earlier level, in agriculture than in industry because:
a) More mechanization is applicable to agriculture
b) Agriculture is an industry where land is used extensively
c) Less mechanization is applicable to agriculture.
d) More labour is used in agriculture.
29) Opportunity costs are also known as:
a) Spillover costs b) Alternative cost c) Social costs d) Money costs
30) An increase in the price‘of a commodity, other things remaining same, results in:
a) Increase in pricina b) Increases in quantity supplied c) Increase in demand d) Taxes
31) Supply remaining constant, if demand increases, price will
a) Rise b) Remains constant c) Fluctuate d) Fall
32) Perfect competition is said to exist if:
a) There are homogenous products
b) Each firm in the industry accepts the market price because it has to accept it.
c) Price is fixed not by a firm
d) All of the above
33) Consumer's surplus is highest in case of:
a) Luxuries b) Necessities c) Comforts d) Conventional necessities.
34) A "Giffen Goods" is one for which, in response to a small change in price.
a) A zero income effect is just outweighed by a positive substitution effect.
b) A negative income effect is just outweighed by a positive substitution effect.
c) A zero income effect is matched by a zero substitution effect.
d) A negative income effect outweighed any 'substitution effect.
35) Which is correct?
a) An "increase of demand" is not the soma thing as an "extension of demand".
b) An "increase of demand is the same thing as an "extension of demand".
c) An increase of demand is just equal to the extension of demand.
d) All the above statements are wrong
e) An increase of demand invariably reduces the extension of demand.
36) Demand means:
a) The desire and willingness of an individual for all goods and services for his standard of living.
b) The desire, ability and willingness of an individual to purchase goods and services at a given time and price
c) Both A and B
d) None of the above
37) The demand function for a commodity is defined as:
a) Quantity demanded as a function of the goods, own price, the price of the substitute and the buyer's income
b) Price of Substitutes as a functions of the goods own prices
c) Quantity demanded as a function of tne price of other goods
d) d) All the above
38) In the typical demand schedule, quantity demanded.
a) Varies directly with price.
b) Varies proportionately with price
c) Is independent of price
d) Varies inversely with price
39) Law of demand states that when:
a) Income rises demand rises.
b) Price rises demand rises.
c) Price falls demand falls.
d) Price falls demand rises
40) The law of demand indicates:
a) The relationship between income and quantity demanded
b) The relationship between price of a commodity and price of ifs cubstitutes
c) The relationship between price of two commodity.
d) The relationship between the price of commodity and the quantity demanded.
41) Which of the following conditions is required condition for the operation of law of demand?
a) Price of subStitute change
,,,b) Income and Taste of consumer remains constant
c) Production does not increase
d) Taste of the consumer change
42) Demand curve shows:
a) Inverse relationship between quiantitydemailed and its cost of production.
b) Inverse relationship between the rate of change of demand and price.
c) Inverse relationship between the rate of change in demand and cost of production at a given times.
d) Direct relationship between the demand and the price of a commodity at a given time.
43) When we say that a demand curve for a commodity slopes downwards to the right we mean:
a) More of the commodity will be demanded as income increase
b) More of the commodity will be demanded as the price of the substitutes falls.
c) More of the commodity will be demanded as population rise.
d) More of the commodity will be demanded as its own price falls.
44) A fall in the price of a commodity leads to:
a) A shift in demand
b) A fall in demand
c) A fall in the consumers real income
d) A rise in the consumers real income
45) An exceptional demand curve is one that slopes:
a) Upward to the lift
b) Upward to the right
c) DoWnward to the right
d) Horizontal
46) Which one is not an exception to the Law of Demand?
a) Ignorance b) Inferior good c) Normal good d) Articles of Distinction
47) Demand for a commodity is elastic when has:
a) Only one use
b) Many Use
c) Uses, which cannot be postponed
d) Uses very essential for the consumer
48) Which of the following pairs of commodities is an example of substitute:
a) Coffee and milk b) Mustard oil and coconut oil c) Diamond and cow d) Pen and ink
49) For most customers apples and oranges are substitute goods. Therefore, we would expect a rise in the price of apples to lead to:
16
a) A rightward shift in the supply curve of oranges
b) A leftward shift in the supply curve of oranges.
c) A fall in the price of oranges
d) An upward change in the demand curve of oranges.
50) A change in climate ,conditions resulting in hot weather, price remaining the same, would cause a consumer of cold drinks:
a) To move to a lower curve
b) To move lower down the demand curve
c) To move to a higher demand curve
d) To move up the same demand curve
51) When an individual's income falls (while everything else remains the same) his demand for an inferior goods:
a) Increase
b) Remaining unchanged
c) We cannot say without additional information
d) Decrease
52) A fall in the price of a commodity whose demand curve is a rectangular hyperbola causes total expenditure on the commodity to:
a) Remain unchanged b) Increasec) Decrease d) Any of the above
53) The relationship between demand for a commodity and price, ceteris paribus, is:
%a) Negative b) Positivec) Non-negative d) Non-positive
54) Other things being equal a decrease in the quantity supplied to the market at given prices leads to:
a) A higher price and a contraction of demand
b) A higher price and an expansion of demand.
c) A higher price and an expansion of demand
d) A lower price and a contraction of demand.
55) Law of demand explains:
a) Quantitative relationship between price and demand
b) Qualitative relationship between price and demand
c) Relationship between demand and supply
d) Rate of change in price and demand
56) We can say with certainty that when the demand for TVs increases in the long run, prices:
a) Will go down
b) Will go up
c) Change proportionately
d) Cannot be predicted with the knowledge of elasticity of demand
57) In the normal demand schedule, quantity demanded:
a) Varies directly with price
b) Is independent of price
c) Varies inversely with price
d) Varies proportionately with price
58) An example of derived demand is demand for:
a) Pen and ink b) Wool and mutton c) Petrol and Car d) None of the above
59) By increase in demand we mean:
a) Movement upwards on a demand curve
b) Movement downwards on demand curve
c) Shifting upwards of a demand curve
d) None of these
60) Law of demand operates because of
a) Price changes
b) The principle of different income
c) Changes in advertisement expenses
61) Multiple uses of a commodity will make the demand go up when:

a) Price increases b) Price remains the samec) Price falls down d) None of the above
62) Status symbol goods are:
a) Veblen goods
b) Exception to law of demand
c) Goods of conspicuous consumption
d) ALL OF THE ABOVE
63) Price - demand relationship in the case of Giffen goods is:
a) Inverse •b) Direct c) Absent d) None of the above
64) The downward sloping demand curve may be partly explained by the "income effect" which refers to:
a) People's tendency to save more as their real incomes fall in the short period.
b) An increase or decrease in the amount of a good purchased because of a price-induced change in the purchasing power of a fixed income.
c) Changes in the relative importance of good purchased because of changes in the con imunity's tastes resulting from adverting.
d) Changes in the distribution of income in a community.
64) The downward sloping demand curve may be partly explained by the "income effect" which refers to:
a) People's tendency to save more as their real incomes fall in the short period.
b) An increase or decrease in the amount of a good purchased because of a price-induced change in the purchasing power of a fixed income.
c) Changes in the relative importance of good purchased because of changes in the con imunity's tastes resulting from adverting.
d) Changes in the distribution of income in a community.
65) The demand curve for a commodity is generally drawn on the assumption that:
a) The commodity has no substitutes
b) Tastes, income and aii other prices remain constant.
c) The average household consist of two persons
d) Purchases of the commodity are made by a free market.
66) A fall in the price of a commodity leads to:
a) A shift in demand
b) A fall in demand
c) A rise in consumer's real income
d) A fall in the consumer's real income.
67) In the case of Giffin good like Bajra a fall in its price tends to:
a) Make the demand remain constant
b) Reduce the demand
c) Increase the demand
d) Li) Change demand in an abnormal way.
68) Which of the following pairs of commodities is an example of substitutes:
a) Coffee and milk b) Diamond and cow c) Pen and ink d) Mustard oil and coconut oil.
69) For most consumers apples and oranges are substitute goods. Therefore, we would expect a rise in the price of apples to lead to:
a) A rightward shift in the demand curve of oranges
b) A leftward shift in the supply curve of apples
c) A downward change in the demand curve of oranges
d) A fall in the price of oranges
70) A change in climatic conditions resulting in hot weather, price remaining the same, would cause a consumer of cold drink:
a) To move to a higher demand curve
b) To move up the same demand curve
c) 1 o move lower down the curve
d) To move to a lower demand curve.
71) If two goods are complementary, this means that a rise in the price of one commodity will induce:
a) An upward shift in demand for the other commodity
b) A rise in the price of the other commodity
c) A downward shift in demand for other commodity
d) No shift in demand for the other commodity.
72) If more is demanded at the same price or same quantity at a higher price, this fact of demand is known as:
17
a) Extension of demand b) Increase of demand c) Contraction of demand d) Decrease of demand.
73) Other things being equal a decrease in demand can be caused by:
a) A rise in the price of the commodity
b) A rise in the income of the consumer
c) A fall in the price of the commodity
d) A fall in the income of the consumer
74) An increase in demand can result from:
a) A decline in market price
b) An increase in income
c) A reduction in the price of substitutes
d) An increase in the price of complementary goods
e) All the above
75) Which of the following circumstances would be likoly to bring about a change in the demand schedule for a product?
a) A fall in the price of the product
b) An increase in the number of potential consumers
c) A new method of producing the product
d) An increase in the quantity produced.
e) Both a &b
76) If the price of good A affects the demand for good B, then:
a) A is a substitute for B
b) B is complement of A
c) Changes in the price of A will cause movement along the demand schedule for A
d) Changes in the price of B will not change the demand for A.
e) Changes in the price of A will shift or change the demand for B.
77) Cross demand is the change in the quantity demanded of a given commodity in response to the:
a) Change in the utility of another commodity
b) Change in the price of another commodity
c) Change in the nature of another commodity
d) Change in the size of another commodity.
78) The law of demand states that:
a) Demand increases with increase in income
b) When income and prices rise. the demand also rises
c) When income and prices rise. the demand also rises
d) When price increases, demand increases
79) A consumer's equilibrium choice or position is one at which:
a) His savings are maximised
b) His assets are maximised
c) His satisfaction is maximum
d) Price of goods is maximised
80) For most consumers, milk and tea are substitute goods. Ther-fore, we should expect a rise in price of milk to lead to:
a) A rightward shift in the supply curve of tea.
la) A leftward shift in the supply curve of tea.
c) A fall in the price of tea.
d) An upward shift in the demand curve for tea.
81) Other things being equal, a fall I contraction in demand can be caused by a:
a) Rise in prices of the substitute
a) Rise in prices of the substitute
b) Rise in prices of the substitute
c) Rise in the income of the consumer
d) Rise in the price of the commodity
82) The demand for a good is elastic if:
a) The demand for that good increases when price falls
b) A decrease in price results in a decrease in total expenditure
c) The quantity demanded increases less than proportionately with the decrease in price level
83) A rightwards shifts in supply schedule indicates:
a) A decrease in Supply
b) A decrease in quantity supply
c)An increase in quantity supply
d) An increase in supply.
84) A rightwards shift in supply curve indicates:
a) A decrease in supply
b) An increase in quantity supplied
c) An increase in supply
85) A supply curve will generally take an upwardsslopin9 form left to right because:
a) Market price is normally above total costs of production.
b) Consumers' income tend to increase in the long period.
c) Producers' costs tend 'to increase as their output expands
d) Supply of most goods is essentially a short-term phenomenon.
86) Other things being equal an increase in supply can cause by:
a) A rise in the price of the commodity
b) An improvement in the techniques of production
c) A rise in the income of the consumer
d) An increase in the income of the seller.
87) The shift of the supply curve for a commodity to the left may indicate, other things being equal, that:
a) Shares in the producing firms are in great demand on the Stock Exchange.
b) Producers of the commodity wish to make and sell less at same price.
c) Prices raw materials used in the production of the
commodity have fallen.
d) Wages paid to the producers' employees have fallen.
88) Ceteris paribus, a decrease in quantity supplied of a commodity can be caused by:
a) A fall in its price b) Fall in income
c) Rise in price d) Fall in raw material
89) The supply schedule for a commodity is usually assumed to be directly open to influence by all the following except:
a) The quantity demanded
b) The prices of the factors of production
c) The costs of production
d) The prices of other goods
90) Which of the following could explain why the supply curve for a commodity slopes downwards?
a) Producers do not like increasing production.
b) Producers have to lower price to induce consumers to buy more
c) Costs fall as production increases
d) Diminishing marginal utility is in operation
91) "Free Trade Area" denotes:
a) Pitlicy of Laissez faire
b) A group of countries which have decided to impose no duties of any kind on imports from other members of the group
c) Free Exports & Imports
d) All the above
92) Temporary control of inflation can be effected by:
a) Lowering Bank Rate
b) Purchasing of securities by RBI
c) Restraint on the growth of money supply
d) None of these
93) The term "hyper-inflation" is used to denote:
18
a) Creeping inflation
b) Step by step inflation
c) A "Runaway" or "galloping" inflationary situation where the monetary unit becomes almost worthless
d) None of these
. 94) In calculating a country's GNP at market prices one of the following is not included:
a) Depreciation b) Net factor income from abroad
c) Net indirect taxes d) Transfer Payment
95) Indian Economy can be best described as:
a) Developed economy
b) Undeveloped economy
c) Developing economy
d) Underdeveloped
96) The term "balance of trade" means:
a) Difference between exports & imports
b) Net Exports including merchandise
c) The difference between the cost of the imports and exports of a country.
d) a and c
97) The open market operations refer to the sale and purchase by the RBI of:
a) Foreign exchange
b) Gold
c) Government securities
d) All c' the above
98) At full employment level, which of the following would be most likely to lead to inflation?
a) A fall in taxation with no changes in gevemment expenditure
b) An increase in productivity without any increase in wages
c) A fall in investment with no change in prosperity to consumer
d) A rise in the prosperity to save with no change in investment
99) Deflation is:
a) Deficit budget
b) Reduction in taxation
c) Contraction in volume of money or credit that results in a decline of price level
d) Increase in public expenditure
100) Bank rate means:
a) Interest rate charged by moneylenders,
b) Interest rate charged by the scheduled banks
c) Rate of profit of the banking institution
d) The official rate of interest charged by the central bank of the country
TEST PRACTICE 1
1 A 3 A 4 C 5 D
D 2
C
6 D 7 A 8 B 9 B 10
C
11 B 12 B 13 A 14 C 15
16 C 17 C 18 B 19 C 20 B
21 C 22 C 23 A 24 B 25 B
26 A 27 B 28 B 29 B 30 B
A
31 32 D 33 B 34 B 35 A
36 B 37 A 38 D 39 D 40 D
41 B 42 B 43 D 44 D 45 B
46 C 47 B 48 B 49 D 50 C
B
51 D 52 A 53 A 54 0 55
56 D 57 C 58 D 59 C 60 A
61 C 62 D 63 B 64 B 65 B
66 C 67 B 68 D 69 A 70 A
C
71 72 B 73 D 74 B 75 E
76 E 77 B 78 C 79 C 80 D
81 D 82 C 83 D 84 C 85 C
86 D 87 B 88 A 89 A 90 C
91 B 92 C 93 C 94 D 95 C
96 D 97 D 98 A 99 C 100 D
TEST PRACTICE – 02
1) In the Keynes model above, which is independent:
,..4) Investment b) Consumption
c) National income d) Consumption and investment
2) How many motives for demanding money has been given by Keynes:
19
a) 1 b) 2 c) 3 d) 4
3) Recession is associated with fall in:
a) Demand b) Supply
c) Disinvestment d) Investment
4) Devaluation means:
a) Fall in Marginal utility of Money
b) Fall in printing of currency
c) Risk in black money
d) Fall in the value of money in terms of foreign currency
5) Acute inflationary situation:
a) Makes savings in the form of bank deposits less attractive
h) Makes savings more attractive
c) Arises due to liquidity trap
d) All the above
6) Inflation means:
a) Increase in price b) Decrease in value of money
c) Boom d) All of the above
7) The problem of unemployment in rural areas is mainly due to:
a) Seasonal and under employment
b) Frictional unemployment
c) Structural unemployment
d\ Technical Lriernpleyrnent
8) NNP for a given year can be defined as:
a) Market value of final goods only
b) The market value of all final goods and services
c) The market value of all final services only
9) LiqUidity preference is the term, which is used to refer to:
a) The Reserve Bank of India's shareholdings in other financial institutions
b) The extent to which investors prefer to keep their assets in money
c) The community's preference for a gold-backed currency
d) An inducement to save.
10) Which of the following are among the major determinants of the interest rate in the Keynesian theory?
a) People's desire to hold money and to keep their wealth in liquid form
b) The available stock of money
c) The intensity of speculation on the stock exchange
d) The value of gold and silver on the world's markets
11) The famous book written by J.M. Keynes is entitled:
a) Principles of Economics
b) Law of Markets
c) The General Theory of Employment, Interest and Money d)None of the above.
12) To's layman, investment means putting his money in a financial asset like bonds, fixed deposit etc. What does it mean to an economist:
a) Purchase of machines
b) Stock of durable goods
c) Purchase of real capital assets
d) All of the above
13) The liquidity preference arises due to:
a) Transaction Motive
b) Precautionary Motive
c) Speculative Motive
d) All of these
14) Liquidity trap is likely to result when:
a) Rate of Interest at its lowest
b) Rate of Interest at its highest
c) No change in supply of money
d) When an increase in the supply of money fails to reduce the rate of interest
15) Which theory is called the Neo-Classical theory of rate of interest?
a) Risk Theory b) Liquidity Preference Theory
c) a and b d) Loanable Funds Theory.
16) The agency estimating the National Income of India is:
a) Reserve Bank of India
b) Planning Commission
c) Ministry of Finance
d) Central Statistical Organisation
17) The goals of monetary policy do not include
a) Maximum output b) Full ernploymeot
c) Price stability ,d) Maximum tax revenue
18) Gross National Product (GNP) is:
a) The total output of goods and services produced by the country's economy
b) The total domestic and foreign output claimed by residents of the country
c) The sum of gross domestic product and investment
d) National income minus national expenditure
19) If an economy is in equilibrium at the point where plans to save and to invest are equal, then government expenditure must be:
a) Curtailed
b) Equal to government income
c) Increased
20) Which of the following is correct regarding the gross domestic savings in India?
a) Contribution of corporate sector is largest
b) Contribution of government sector is the largest
c) Contribution of household sector is the largest
d) None of these
21) NNP (Net National Product) or National Income is the money value of
a) Final goods and services produced annually in the economy
b) Annual service generation in the .00nomy
c) Tangible goods produced annually in the economy
d) Tangible goods available in the economy
22) Which of the following is included in the calculation of gross domestic product?
a) Personal consumption expenditure
b) Gross domestic investment
c) Purchase by the government
d) All of the above
23) Gross National Product is greater than gross domestic product when:
a) NFI (from abroad) > 0 b) NFI < 0
c) NFI = 0 d) NFI = -1
24) Which of the following is deducted from gross national product in order to estimate net national product?
a) Depreciation
b) compensation of employees
c) expenditure on buildings
d) expenditure on raw material
25) Changes in the standard of living in a country are best reflected in changes in the:
a) Social Welfare
b) Economic Welfare
c) Per capita income at current prices
d) Per capital income at constant prices
26) Whicl: is the primary indicator to recognise a country's rate of economic growth?
a) Increase inter per capita income
b) Setting of more industries
c) Rate of growth in national income
20
d) More exports
27) National Income is based on:
a) Total Production x prices
b) Rent + wages + Interest ,+ Profit
c) Domestic Income + NFI
d) The sum of all factor incomes
e) All the above
28) Net National Production excludes:
a) Gross Investment
b) Net investment
c) Foreign Investment
d) Replacement investment
29) Here are four statements about various national income / expenditure I product relationships. Which one of the following is true:
a) GNP less NIT = NNP
b) GNP less NFI = NNP
c) GNP plus depreciation = NNP
d) GNP less depreciation allowances = NNP
30) The term GDP incorporates the economic activity:
a) Taking place within the geographical boundary of the country
b) Within the land territorial
c)Within water territorial
d) Within air space
31) The term "Hindu rate of growth" refers to the 3.5% per annum growth rate achieved by the Indian economy over the first six Five-Year Plans. The
term was coined by
a) Chakravaty b) J.N. Bhagwati c) Raj Krishna d) K.N. Raj
32) Essential services owned and controlled by government is called:
a) Public monopoly b) Public utility c) Public Sector d) All of the above
33) Which of the following is not a fiscal monopoly?
a) Printing of currency b) Minting of coins c) Electricity supply d) None of the above
34) In a planned economy the economic problem of what shall be produced is determined primarily by:
a) Computers deciding what consumers want.
b) Direction by the oovernment.
c) The pattern of consumer's spending
d) The independent decisions of entrepreneurs.
35) Development means economic growth plus: a) Price stability b) Social change c) Inflation d) Deflation
36) Which Plan recommended Zero-Based Budgeting (ZBB) as a step to control public expenditure? a) Fifth Plan b) Sixth Plan
c) Seventh Plan d) Eighth plan
37) All revenues received, loans raised and money received in repayment of loans by the Union Government go into.
a) Public Account of India
b) Contingency Fund in India
c) Consolidated fund in India
d) none of the above
38) Which one of the following is not directly the concern of the economist?
.a) Choices relating to location of a steel plant
b) Bargaining between the workers' unions and the employers
c) Effects of a change in money supply.
d) Imposition of tax to discourage cigarette smoking
39) Customs duties, export duties, corporation taxes, taxes on capital value of assets (excluding agricultural land of individuals and companies) ate:
a) Taxes and duties levied by the Centre but wholly appropriated by the States
b) Taxes and duties levied by the Centre but collected by the States
c) Taxes and duties that accrue wholly to the Union Government
d) Taxes levied and collected by the Union but which are shared with the States.
40) "Funded debt" means:
a) All Government securities which are marketable on the stock exchange market
b) All private securities
c) Shares of Companies
d) KisanVikasPatras
41) "Annual Financial Statement" is another name of:
a) Balance of payment b) Fiscal Budget
,c) Budget d) Debt & Credit
42) "Multi-Currency Basket" means:
a) Relationship with world bank
b) Currency + coins
c) Number of major international currencies to which the external value of the Indian rupee is linked
43) Which of the following is not a seiective credit control measure?
a) Rationalizing of Credit
b) Open market observations
c) Changes in the statutory liquidity ratio
d) a and c
44) Public finance is said to be:
a) Science of taxes and pending
b) Science of demand and supply of money
c) Science of money and cost
d) Science of income and expenditure
45) One of the distinctions between public finance and private finance is that:
a) The State adjusts "income to expenditure' while an individual adjusts "expenditure to income"
b) The State maximizes the general welfare of the public while an individual maximizes his own satisfaction
c) The State has no coercive powers while the individual has
d) The State cannot borrow money while the individual can get loans
46) A tax takes away a higher proportion of one's income rise is termed is:
a) Proportional Tax b) Indirect Tax
c) Regressive Tax d) Progressive Tax
47) Corporate tax is imposed by: -
a) Local Government b) Central Government
c) State Government
d) Both Central and State Government
48) Which of the following are direct taxes?
a) Gift tax b) Income tax
c) Corporation tax d) All of the above
49) From the following, which is not a direct tax?
a) Tax on wealth b) Tax on entertainment
c) Tax income d) Tax on expenditure
50) An Direct tax is one where:
a) Tax is levied always on property
b) Points of impact and incidence are different
c) Tax is levied on wealth
d) Points of impact and incidence are the same
51) The name of Indirect tax is:
a) Income tax b) Sale tax
c) Corporate tax a) Wealth tax
52) A regressive tax will tend to redistribute income more:
a) Equally b) Equitably
c) Unequally d) Inequitably
53) Which of the following does not grant any tax rebate?
21
a) Indira VikasPatra b) Public Provident Fund
c) National Saving Scheme d) National SavingCertificate
54) The Indian Income tax is:
a) Direct and progressive u, , id re arid oevu;essive
c) Indirect and proportional d) Direct and proportional
55) Temporary tax levied to obtain additional revenue is called:
a) Fee b) Surcharge c) Cess d) Rate
56) Which of the following taxes is/are levied by the Central Govt. and collected appropriated by the States?
a) Estate Duty b) Stamp Duties
c) Passenger and goods tax d) Taxes on Newspaper
57) Taxes raised are credited into:
a) Consolidated Fund b) Public Accounts
c) Contingency Accounts , d) Private Accounts
58) Generally tax on production are:
a) Indirect taxes b) Both A and B
c) Direct taxes d) None of the above
59) Tax on incomes is:
a) Indirect b) Both A and B
c) Direct d) None of the above
60) Which of the following taxes is levied on services?
a) Personal tax b) Value added tax
c) Capital gains tax d) Corporate tax
61) Income tax is raised by:
a) Local Government b) Central Government
c) Municipality d) State Government
62) Sales tax is levied by:
a) Local government b) State government
c) Central government d) None of the above
63) Union Excise Duties are a part of Central Government's:
a) Tax revenue b) Capital receipts
c) Non-tax revenue d) None of the above
64) All taxes come under:
a) Capital receipts b) Revenue receipts
c) Public debt d) Both A and C
65) In India, the States gets maximum income from:
a) Sales tax b) State Excise duties
c) Land Revenue d) Agricultural Income tax
66) Progressive tax in India is:
a) Income tax b) Wealth tax
c) Corporate tax d) Sales tax
67) Which of the following is a direct tax?
a) Sales tax b) Entertainment tax
c) Excise duty d) Estate duty
68) Which of the most important source of revenue to the State Government of India ?
a) Land Revenue
b) Agriculture Income-tax
c) State excise duties
d) Sales tax
69) A budget is the summary of:
a) Proper allocation of resources
b) Income reallocation
c) Resource reallocation
d) Revenue and expenditure
70) The budget deficit refers to the difference between all-revenue and expenditure of:
a) Revenue account only
b) Increased government expenditure
c) Capital account only
d) Both revenue and capital accounts
71) Borrowing from capital market is a part of:
a) Revenue budget b) Capital budget
c) Both a and b d) None of these
72) Revenue deficit in India is:
a) Negative b) Positive
c) Zero d) None of 'he above
73) Capital deficit in India, is:
a) Positive b) Zer .3
c) Negative d) None of the above
74) Funds, which do not belong to the government, are?
a) Consolidated fund b) Contingency fund
c) Public accounts d) None of the above
75) Which budget in India is passed separately?
a) Airlines b) Railways
c) Defence d) Atomic energy
76) Which one of the following cannot be influenced by budgetary policy?
a) Power of private monopolies
b) Balance of trade
c) General level of prices
d) Regional distribution of employment
77) Which budget is measured in financial terms only?
a) Dominance budget
b) Programme performance budget
c) Zero-base budget
d) Central budget
78) Deficit Financing means:
a) Government spends in excess of revenue and capital receipt to that budget deficit in incurred which is financed by borrowing from the RBI.
h) niffpropra of total expenditureincome anti.. income
by revenue from all sources.
c) Difference in borrowing an internal and external resources
d) Capital expenditure on items of public construction, public enterprises and public borrowings.
79) The need for deficit financing in India arises due:
a) Failure of the government to mobilize the desired volume of surplus for the public sector plans.
b) The rapidly growing expenditure incurred by the government
c) Neither A nor B. ' d) Both A and B
80) Deficit financing leads to:
a) Inflation b) Capital formation
c) Neither A nor B d) Both A and B
81) Deficit financing means:
a) Difference in borrowing and internal and external resources
b) Capital expenditure on items of public construction, public enterprises and public borrowings
c) Government spends in excess of revenue and capital receipts so that budget deficit is incurred which is financed by borrowing from the RBI.
d) Difference of total expenditure and income by revenue from all sources
82) The effect of deficit financing is:
a) Never inflationary
b) Always inflationary
c) Sometimes inflationary and sometimes not so depending cn conditions of the economy and the dose of deficit financing.
d) None of these
83) The direct effect of deficit financing is:
a) Deficit financing leads to extra money supply which in turn pushes up prices

22
b) Demand and supply both increase
c) The price situation comes under complete control dj Deficit financing leads to extra money supply, which in turn makes market more & more
competitive.
84) Fiscal policy is related to:
a) Exports and Imports
b) Public revenue and expenditure
c) Issues and circulation of currencies
d) Monetary Control measures
85) A restrictive monetary-fiscal policy is a good way to deal with:
a) Demand — shift inflation
b) Any short of inflation that occurs when the economy falls below full employment
c) Demand — pull inflation
d) Cost — push inflation
86) Grants—in-aid given by the Centre to the states is meant:
a) To cover the gaps on revenue accounts.
b) For flood control
c) Po( boosting agriculture in the State.
d) For financing State plan projects
87) The finance commission is appointed every:
a) 7 years b) 6 years
'C) 5 years d) 3 years
88) The Narsimham Committee submitted its report to the government on:
a)- Depoliticising appointments in public sector undertakes Import and eYportrestrnrtliring
' 'd) Banking structure
89) "Interest is the reward for pure waiting." Which theory of interest explains it?
a)Time Preference Theory
b) Classical Theory
c) Liquidity Preference Theory
d) Loanable Funds Theory
90) What is not true for the Classical theory of interest?
a) Demand and Supply Theory
b) Saving-Investment Theory
c) Non-monetary Theory
d) Monetary Theory of Interest
91) The Loanable Funds Theory of interest is also known as:
a) The neo-classical theory of interest
b) The classical theory of interest
c) The real theory of interest
d) The modern theory of interest
92) Rate of interest is a function of I, S, M, r = f (I, S, M, L) is explained by which of the following theories?
a) Liquidity Preference Theory
b) Saving-Investment Theory
c) Loanable Funds Theory d) Modern Theory
93) For which of the following motives for liquidity preference, the demand for liquidity is determined by the rate of interest?
a) Transaction motive b) Precautionary motive
c) Speculative motive d) All the three motives.
94) Which of the following is known as monetary theory of interest?
a) Loanable Funds Theory ID) Modern Theory
c) Liquidity Pi eference Theory
d) Saving-Investment Theory
95) What is not true of the modern theory of interest?
a) Neo-Keynesian Theory
b) Hicks and Hansen's synthesis
c) Monetary Theory d) IS-LM Curves Analysis
96) Which of the following is not a c4Idracteristic of business cycles?
a) Recurrent in nature b) Periodicity
c) Regular d) Cumulative
97) Who gave innovation theory of business cycles ?
a) Pigou b) .1. A. Hobson
c) Schumpeter d) J. Tinbergen
98) Which of the following assumptions is not correct in relation to Hicks' theory of business cycle ?
a) The equilibrium of the economy is influenced by changes in consumption and investment
b) Fall employment is the ceiling of expansion
c) Autonomous investment increases at some constant rate even during depression
d) Accelerator remains operative in all phases of business cycle, but the multiplier stops operating during depression
99) Economic growth refers to :
a) An increase in per capita income at current prices
b) A sustained increase in per capita output
c) An increase in income and output in real terms and not in money
d) An increase in economic welfare
100) National income differs from NNP at market prices by the amount of : a) Current transfers from the rest of the world, b) Net indirect taxes
.9-) National debt interest, d) It does not differ
ANSWER TEST PRACTICE 2
1 A 2 C 3 A 4 D 5 A
6 B 7 A 8 B 9 B 10 C
— .
11 C 12 C 13 D 14 A 15 D
16 D 17 D 18 B 19 B 20 C
21 A 22 D 23 A 24 A 25 D
26 C 27 E 28 D 29 D 30 A
31 C 32 D 33 C 34 B 35 B
36 C 37 C 38 A 39 C 40 A
.. .
41 C 42 C 43 D 44 D 45 A
46 D 47 B 48 0 49 B 50 B
.
51 52 C 53 A 54 A 55 B
B

23
56 A 57 A 58 C 59 C 60
B
61 B 62 B 63 A 64 B 65 A
66 A 67 D 68 D 69 D 70 D
71 B 72 A 73 A 74 C 75 B
-
76 A 77 B 78 A 79 D 80 D
81 C 82 C 83 A 84 B 85 B
86 A 87 C 88 D 89 B 90 D
91 A 92 C 93 C 94 C 95 C
96 C 97 C 98 D 99 B 100 B
. - - -
MODULE – B BUSINESS MATHEMATICS

1. Time Value of Money
When cash flows take place at different time intervals, their value is different for a no. of reasons such as interest factor, inflation,
uncertainty ettz. In order to ascertain their value, these flows are required to be compared. The comparison is possible by using a time
line that shows the value and timing of cash flows.
Terms associated with cash flow:
Positive cash flow : When a firm receives cash which is called inflow, it is a positive cash flow. Negative cash flow: When a firm makes
payments, this is outflow of cash and is called negative cash flow.Future cash flow & present cash flow : Future cash flows are worth less than
the present cash flow. Rs.ioo available with a person presently and Rs..100 to be received after a year, carry higher present value. It is
becausethe people prefer present consumption rather than in future and to put off their consumption for future, more value requires to be
offered.Similarly due to inflation, there is erosion in money value.Further there is uncertainty about receipt of money in
future.Discounting: It is a process by which the future cash inflows are adjusted/discounted according the their present value. (say
Rs.ioo received at the end of a year, if discounted at say io%, will give a value around Rs.9o). For this purpose, the rate that used is
called discount rate.
Compounding : It is a process by which the present value is converted into future value by using a given rate of interest.
Trade-off: When present consumption is put-off, for some future time period in return for some monetary return such as interest, this is
called exchange or Trade Off.
Effect of Inflation and Risk on the discount rate.
The inflation reduces the purchasing power of future cash flows and it reduces the value of future cash flows. Hence, if the inflation is higher,
the discount rate will be higher to calculate the present value.Risk is due to uncertainty. If risk is higher, the discount rate would be higher.
Importance of discounting of the cash flows.The comparison becomes easier for cash inflows of different periods.The user becomes
indifferent for present and future cash inflows and can take more rationale decisions.
Other kinds of cash flows: The cash flows can be simple cash flows, annuities, growing annuities, perpetuities and growing perpetuities.
Simple cash flow: It is single cash flow to occur at a specified future time. Say Rs.i000 to be received at the end of one year. Its
present value can be worked out by discounting back by using an appropriate discount rate.
CALCULATION OF PRESENT AND FUTURE VALUES OF CASH FLOWS Calculation of present value of a future (simple) cash
flow: The present value can be calculated by using the formula
PV = Discount Factor x CI OR PV = 1 / (1+r) x C1 (where CI is the expected cash flow at the end of period .1)
Example : A person wants to get Rs.10 lac after one year. With prevailing interest rate of 9%, how much he should invest.
= 10,00,000 / 1.09 = 917531.19
Calculation of net present value
It can be calculatdd as NPV= PV of future cash flow -required investment OR it can be calculated as
= [(Ci / (t+r) + (Ci / (i+r) + (Ci / (i+r) + (Cn (i+r)] - Co Co = Cash flow at time o i.e. today.
r' means rate of discount.
Ci = Present value of cash flow at end of period one.
Example-i : You proposes to invest Rs.8 lac in a house and expect that it will fetch Rs.io lac at the end of the year. At 9% interest rate,
what is the net present value. Use the data in the above problem.
NPV= PV-required investment
= 917531.19 - 800000 = 117531.19
Example-2 : X paid Rs.l00000 to Y on Jan 01, 2009. Y returned Rs.65000 after one year, Its.g0000 at end of 2nd year.
What is the present value of amount paid by Y to X and what is net present value of the cash flows for X at 10% discount rate ? Present value
of amount paid by X = 100000
Present value of amount paid by after one year = 6500o / 1.1 = 59090 Present value of amount paid by Y after 2 years = 90000 / 1.1 x 1.1 =
74380 Present value of total amount paid by Y = 59090 + 74380 = 133470
Net present value of cash flows = 133470 - 100000 = Rs. 33470
Effect of Inflation and Risk on the present value.
The inflation reduces the purchasing power of future cash flows and it reduces the present value of future cash flows.
Risk is due to uncertainty. If risk is higher, the discount rate would be higher and present value of future cash flows would be lower.
Rule to take decision on making an investment:
If net present value at an acceptable discount rate is zero or positive, the investment can be made.

24
If internal rate of return (i.e. acceptable discount rate at which net present value is zero) is greater than the opportunity cost of capital, the
investment can be made.
Ibbotson and Sinquefield's Study:
Ibbotson and Sinquefield conducted a study of returns on investment in bonds and stock between the period 1926 - 1992. It was found
that average return on stocks was 12.4%, on treasury bonds 5.2%, on treasury bills 3.6%. If investment is made in these 3 instruments at
above rates of return, with a time horizon of 40 years, the future value of investment at 12.4% in stock will be 12 times more than
investment in treasury bonds at 5.2%
at 12.4% in stock will be 25 times more than investment in treasury bills at 3.6% This snows that if the time horizon is longer, the gap between
the return will be greater.
Conversion of nominal cash flows of future period, to real cash flows. Real cash flow = (Nominal cash flow) / (1+ inflation rate) If the inflation
rate is lo% per annum and an investor expects Rs.io lac, what will be his real cash flow. Real cash flow = (Nominal cash flow) / (1+ inflation
rate) io,00,000 / 1+1o% = 10 lac / 1.10 = Rs. 909091
Calculation of future value of a present (simple) cash flow: This can be done by way of compounding by using the formula
CF o (1+0 where (1 = at the end of period 0 (CF o = present cash flow) and ( r = rate of discount)
Example : X deposited Rs.i0000 with bank at 10% rate of interest for 2 years. What is the future value (maturity value) of this amount: =
10000 (1+10)2 = 10000 x 1.10 x 1.10 = 12100
Rule of 72
By using this method, we can find out as to, in how much period (appx), an amount will become double at a particular interest rate. If 72 is
divided by the interest rate, the resultant product, is the time period during which the amount will be doubled. For example if the
interest rate is 8%, the amount will double in 9 years.
Concept of effective rate of interest
It is the actual rate of interest that takes into account the compounding effect of interim interest payment, if any. At more frequent
compounding, the effective rate of interest would be more.
Determination of effective rate of interest It can be done by using the following formula:
(1+ given annual RoI /N )n - 1 (where N = no. of compounding periods. Say42= months).
Where the annual interest rate is 20%, what will be effective rate, where the compounding is on half-yearly (semi-annual) basis.
(1+ 'given annual Rol /N )n - 1
(1.10 2 - 1) = 1.21 — 1.00 = 21%
Effective rates for various compounding frequencies for 10% RoI:
Where compounding frequency is annual Effective Rol = 0.10 = 10% Where the compounding frequency is semi annual: Effective Rol = (1
+ 10/2) 2 - 1) = 10.25% Where the compounding frequency is monthly : Effective RoI = (1 + 10/12) 12 -1) = 10.47% Where the
compounding frequency is daily : Effective Rol = (i + 10/365)3°5 - 1) = 10.5156% Where the compounding frequency is on continuous
basis: Effective Rol = e,1° - 1) = 10.5171% Continuous compounding & calculation of effectiveinterest rate :It can be computed as = exp r
- 1 (where 'exp' means exponential number and 'r' means given interest rate).
Impact of frequency of compounding on effective rate of interest:
Effective rate increases and present value of future cash flows decreases if compounding is more frequent. ANNUITYIt is a constant cash
flow, accruing at regular intervals of time, for a pre-fixed period.It can occur at the beginning of each period (called annuity due) or at the
end of each period (called ordinary annuity)
Present value of amend-of-the period annuity (Ordinary ann ty):
= PV (A,r,n) = A fi-(1/ (1+r) n) r
(Alternative formulae : PV = A / r [{(1+r)n -1} / (1+r)n j
(A = annuity r=discount rate n=no. of years.
Example-1: Calculate the PV of Rs.9000 each year for 5 year/5 where R41$12%.
= PV (A,r,n) = A {1-(1/ (i+r) n r \ C) ‘'k
= 9000 {141/ (1+12)s) / 0.12 = 32442.98
Example-2 : X deposits Rs.i000 at end of each year for 4 y ars at io rate of Hite t. is the present value of the amount, +.1D be deposited:
= A + A/r [1-1/(i+r) n-i /(i+r) = moo+ 1000 / 0.1 [1-1/(1+0.10)4-1] / (Li) = 1000+ moo / 0.1 [1-1/(1.331)] (1.1) = woo+ moo / 0.1 [1-0.7513)]
(1.1) = 1000+ 10000 [0.2487] (1.1) = woo + 2487 = 3487 (Li) = 317
Future value of an end-of-the period annuity (Ordinary annuity):
= FV (A,r,n) = A {(i+r)n -1} r
(Alternative formulae : FV = A / r {(1+1)n --1} (A = annuity r=discount rate n=uo. of years.
Example - Z deposits Rs.i0000 annually for next 5 years. At 10% rate of interest, what will he be getting?
= A [ (1 +r) n - 1] / r = 10000 [ (1 +0.10) 5 / 0.10]
= 10000 [1.61051-1/ 0.10] = 10000 [0.61051 / 0.10] = Rs.61051
Present value of beginning-of-a-period annuity (Annuity due) over n years : = A + A/r {[1-1(i+r)n-
i] (A= cash flow per period or annuity, r= rate of interest, n= no. of payments)
Example : X deposits Rs.i000 at beginning of each year for 4 years at 10% rate of interest. What is the present value of the amount, to be
deposited:
= A + A/r [1-1/(t+r) n -1] = 1000+ 1000 / 0.1 [1-1/(1+0.10) 4-1 ]
= 1000+ 1000 / 0.1 [1-1/(1.331) = 1000+ 1000 / 0.1 [1-0.7513)]
= 1000+ 10000 [0.2487] = 1000 + 2487 = 3487
Future value of beginning-of-a-period annuity (Annuity due):
= C {[(i+r) n -1] r } x (i+r) OR A / r [(i+r) {(1+r)n-1)11
Example - Z wants to deposit Rs.10000 in a recurring deposit account for 3 years in the
beginning of the year. At io% p.a., how much will he be getting? =A/r{(1+r)[(i+r)n-i]}
10000/0.10 +0.0 [(1 +0.1) 3 - = 10000 / 0.10 [(1 +0.1) (1.331) - 1]
= 10000 / 0.10 [1.1 x .331] = 10000 / 0.10 x 0.3641 = Rs.36410
Calculation of Annuity given future value : = A(FV,r,n) = FV{r / (i+r)n - 1} Z wants to
receive Rs.61051 and wants to deposit an equal amount for 5 years at 10% p.a.. How
much should deposit regularly?
= 61051{0.10 / (i+0.10)5- 1}
= 61051{0.10 / (1.61051)- 1}

25
= 61051{0.10 / 0.61051 = Rs.i0000
Baloon repayment loan
it is a loan in which repayment of interest only is made during life period of the loan. The amount o loan is repaid in one instalment
at the end of repayment period, such as debenturesand bond's. The companies raising bonds or debentures set aside funds in a
sinking fundsmaturing with maturity period of the loan, so that do not face any problem at the time ofrepayment.
Sinking fund -It is fund created by companies for meeting special repayment obligations in which regularcontributions are made on
annual or other basis.
Growing annuity- It a cash flow which grows at a constant rate for a specified period of time.If A is the current cash flow and g is the
expected growth rate, the value can be calculated asunder:
Present value of a growing annuity : =A [(i+g) / (r — g)] {(1-(1+g) n / (i+r) " ) (g stands for expected growth rate)The present value
can be estimated in cases except when the growth rate is equal to discountrate, the present value is equal to the nominal sums of
annuities over the period, without the
growth effect.
Present value of a growing annuity for n years be calculated when r = g It is = nA
PERPETUITY
It is a constant cash flow paid or received at regular time intervals forever, such as a life time pension or rentals received from use of land.
Calculation of present value of perpetuity : It can be calculated by use of the formula : A / rWhen the coupon rate is equal to interest
rate, the value will be equal to face value.
Growing perpetuity- It is a cash flow which forever, is expected to grow at a constant rate. The present value of a growing perpetuity can
be written as.. Ci / (r-g)
Console Bond- It is a bond which does not have maturity. On such bond fixed coupon or RoI is paid.An investor has a console bond of
Rs.i0000 with 8% fixed coupon. If the interest rate is 10%,the current value of the bond would be:
=A/r= = 8000
2.Sampling Methods
Population means an aggregate of items to be studied for an investigation. Population may be finite or infinite. Finite population means
limited no. of items say 14 banks, roo branches. Infinite population means unlimited items bank customers, bank borrowers etc. Sample on
the other hand mearis that part of the population (or universe) which is selected for the purpose of investigation. The technique of statistical
investigation based on sample data is called sample method.
Census and sampling: In census, the information is obtained from all items but in sampling it is done front limited items. Census is suitable
where the area of investigation is relatively small. There is greater degree of accuracy in census. On the other hand its cost is very high and
cost of sampling is smaller. Verification of information collected under sampling is possible.
Statistics : It is a measure that describes the characteristics of a sample. Parameter : It is the value that describes the characteristic of a
population. Expressing Population & Statistics:
Roman letters in lower case are used for sample statistics and Greek or Capital letter are used to denote population characteristics.
Symbols used for population parameters: Population size = N Population Mean = p Population standard deviation : a
Symbols used for sample statistics:Sample size = n sample mean = x (called X-Bar)
Sample standard deviation = S
VARIOUS SAMPLING METHODS
There are two methods used in sampling. (1) Random or probability sampling (where any item has the possibility of being selected) and (2)
non-random or judgement sampling (where identification is done on personal knowledge or opinion).
Purposive (deliberate) sampling: it is the method in which the investigator himself makes the choice of the sample items that in his opinion
are best represent the universe (population). (-fence, the items are not left to the chance factor.
Judgement sampling : A method for selection of samples from a population where personal knowledge is used to identify the items for
including in the sample.
Quota sampling : Under this method, the population is divided into different groups or classes according to different characteristics of the
population. Some percentage of different groups in total population is fixed.
Methods of Random Sampling

Selection of elements in systematic sampling : These are selected from the population at a uniform level that is measured in
time, order or space.
Simple random sampling: Where samples are selected by a methOd that permit each possible sample to have an equal probability of
being picked up and each item in the entire population has an equal chance of being included in the sample.
Stratified or mixed sampling: Under this method, sampling is generally adopted when the population consists cidifferent groups with
different characteristics. Population is divided into different partsr(strata) having different characteristics and some of the items are selected
each strata, to ensure proper
representation.
Systematic sampling : As per this method, the units of population are numerically, geographically and alphabetically arranged. Every
nth item of the numbered items is selected as a sample item. If to out of ioo students are to be taken, every loot items would be selected.
Cluster sampling : When population is divided into groups or clusters and selection is made on a random basis out of these clusters. It
can produce a more precise sample at considerably less cost than that of simple random sampling. Those groups which are similar, within a
population. Such groups could have wide internal variation.
Sampling Distribution
Sampling distribution is the distribution of all possible values of a statistic from all possible samples of a particular size drawn from the
population. Any probability distribution (and hence sampling distribution) can be partially described by it means and standard deviation.
Sampling distribution of the mean : It is the probability distribution of all the possible means of samples of a given size say n, from
the population.
Sampling distribution of a statistic : It is probability distribution of all possible means that a statistic may take .Sampling error
It is variation (or error) among sample statistics due to chance, between each sample and the population and among several samples, that are
due the selected elements only.
Sampling fraction: It the proportion (or fraction) of the population in a sample.
Standard error of the mean: The standard deviation of the sampling distribution of the mean.

26
Central Limit Theorem It is a theory that states that the sampling distribution of the mean approaches normality as the sample size
increases. This is regardless of the shape of population distribution from which the sample is selected.
Example : Distribution of mean of earning of bank tellers with 5 year experience is Rs.19000 and standard deviation of RS.2000. A sample
of 3o tellers is taken. What is the probability, that their earning will average more than Rsag5o0.
First calculate the standard error of the mean:
(j = (a)/ n = 2000 / J30= 2000 / 5.477 = Rs.365.16
When dealing with sampling distribution, it is mandatory to use the equation for Z value and the standard normal probability distribution i.e.-
z*Xic - ujJ.ctx
Z = (19750 — 19000) / 365.16 =2.05 Hence, there is 2% chance of the average earning being more than Rs.19750.
Finite population: A population that has a size which is already stated or limited. Infinite population :A popillMion in which it is not possible
to observe all elements
Statistical inference : It is the process of drawing inferences about populations from information available in samples
Relationship between standard error and sample size : If dispersion decreases i.e. if a R becomes smaller, the value taken by the sample
mean tend to cluster more closely around .t. On the other hand if the dispersion increases i.e. if a x becomes larger, the value taken by the
sample mean tend to cluster less closely around 1..t. Inother Words when the standard error decreases, the value of any sample mean
will probably be closer to the valueof the population mean.
Relationship between the standard error and equation: Where n increases, standard error (a $) decreases. In equation, a larger
denominator on the right side would produce smaller (a 5) On the left side.If the population standard deviation (a) is 100 and n = 10 and
in other situation n = 100, what would be standarderror of the mean. (43 = (a )/ 4 n = 100 J 10 = 100/3.162 = 31.63 (Is' case) (o)0. =
(a ) / 4 n = 100 4 100 = 100/10 = 10 (2 case)
nd
Calculation of standard error of finite population : (a = ((a ) / J n) / 4 {(N-n) / (N -1)}

(N = size of population and n = size or sample)
Formula for finite population multiplier. 4 {(N-n) / (N -1)}
1.chere (N = size of population and n = size of sample)
If there ale 20 bank branches having excess staff and there is standard deviation of the distribution of annual turnover of 75 employees. What
would be the standard error of the mean if the sample size is 5 branches..
75/'15 x 4 {20-5) / 20/1)) = 75/45 x 4 15 /19 33.54 x 0.888 = 29.8
(a = ((a ) / 4.n) / 4.{(N-n) / (N -1 )}
Hence, the multiplier 0.888 has reduced the standard error from 33.54 to 29.8 In the above example if the total branches are 1000 and
sample branches 20, what would be finite population
J friltitOON= 41000-20) / 1000 -1)} = 4 4980) / 999)} = 4 0.981 = 0.99
When from the large population size (N) only a small sample size (n) is taken, the value of finite population multiplier shall be close to 1.0.
Fxample - In a sample of 25 observation from a normal distribution, with mean 98.6% and standard
deviation 17.2, find out (1) what is P(92 < X < 102) (2) the corresponding probability given a sample of 36. Solution : (1) Here N=25 p = 98.6
and a = 17.2
(5 )= {(u )/ n /N/25 = 3.44
-
= 17.2
Pi 92 < < 102) = P [92 -98.6) / 3.44 < (5 - p) /ji <100- 3.44]
1' [-19.2 < 98.6) +/0.3389 = 0.8115
>0.99) = 0.4726
Solution : (2) N =36.
(a = 1(a )/1/n= 17.2 / = 2.87
P(92 < 102) = P [92 -98.6) / 2.87 < (5 - p) / a k <(100- 2.87]
= P [-2.30 < z >1.18) = 98.6)0.4893/ + 0.3810 = 0.8703
normal
Example : Kamala, an auditor for a large credit card company, knows that, on average, the monthly balance of any given customer is Rs.112
and the standard deviation is Rs.56. If Mary audits randomly selected accoufits, what is the probability that the sample average monthly
balance is (1) below Rs.100 (2) between Rs.100 and Rs.130.
Solution : The sample size of 50 is large enough to use the Central Limit Theorem. (I) Here N=50 u = 112 and a = 56
)lein (0 [(a)/4n=56/ =7.920
I) < 100) = P p) / <(100-112) / 7.92]
- PI 7 <-1.52) = 0.5 -0.4357 = 0.0643
(2) P(100 << 130) = P [100-112) / 7.92 < O( - p) / a ;.( <(130-112) / 7.92] ( / MEANS – SQUARE ROOT )
('1-1.52 < z >2.27) = 0.4357 I 0.4884 = 0.9241
Objective Questions
1 Where items are induded in a sample, based on the judgement of the person who is selecting the sample, it is
called non-random. (Trife/False)
2 The statistic is a characteristic of a population (True/FalSe)
3 A sampling plan that selects members from a population at uniform intervals in time order or space is called
stratified sampling. (True/False)
4 As a general rule, it is not necessary to include a finite population multiplier in a computation for standard error
of the mean when the size of the samples is greater than 50. (True/False)
5 The probability distribution of all the possible means of samples is known as the sample distribution of the mean.
(True/False)
6 The principles of simple random sampling are the theoretical foundation of statistical inference. (True/False)
7 The standard error of the mean is the standard deviation of the distribution of sample means (TrUe/False)
8 A sampling plan that divides the population into well defined groups from which random samples are drawn is
called as duster sampling. (True/False)
9 With increasing ,sample size, the sampling distribution of the mean approaches normality, regardless of the
distribution of the population (True/False)
27
10 The standard error of the means decreases in direct proportion to sample size. (True/False)
11 To perform a complete enumeration, one would need to examine every item in a population (True/False)
12 In everyday life, we see many examples of infinite populations of physical objects. (True/Fall)
13 To obtain a theoretical sampling distribution, we consider all the samples of a given sizs, (True/False)
14 large samples are always a good idea because they decrease the standard error. (TrUF/False)
/15 if the mean for a certain population were 15, It Is likely that most of the samples we could take from that
population would have means of 15 (True/False)
16 the precision of a sample is determined by the no. of items in the sample and not the proportion of the total
population that is sampled. (True/False)
17 the standard error of a sample statistic is the standard deviation of its sampling distribution. (True/False)
18 judgement sampling has the disadvantage that it may lose some representativeness of a sample (True/False)
19 the sampling fraction compares the size of a sample to the size of the population. (True/False)
20 Any sampling distribution can be totally described by its mean and standard deviation. (True/False)
21 the predsion with which the sample mean can be used to estimate the population mean decreases as the
standard error increases. (True/False)
22 Which of the following is a method of selecting samples from a population
a: judgement sampling b: random sampling c: probability sampling d: a and b but not c
23 Choose the pair of symbols that best completes this sentence : is a parameter, whereas is d statistics:
a: N, p b: a, S c: N, n d: all the above
24 In random sampling, we can describe mathematically how objective our estimates are. Why is this 7a: we always
know the chance that any population element will be included in the sample
o: every sample always has an equal chance of being selected •
all the samples are exactly the same size and can be counted
none of the abovee: a and b but not c
25 Suppose you are performing stratified sampling on a particular population and have divided it into strata of
different sizes. How can you make your sample selection?
select at random an equal no. of elements from each stratum
draw equal no. of elements from each stratum and weigh the results CI draw no. of elements from each stratum
proportional to their weights in the population
d: a and b only e: . b and c only
26 In which of the following situations would a x = a / d n be the correct formula to use for computing:
sampling is from an infinite population
sampling is from a finite population with replacement
sampling is from a finite population without replacement
a and b only e: b and c only.
27 The dispersion among sample means is less than the dispersion among the sampled Items themselves
because:
each sample is smaller than the population from which it is drawn.
very large values are averaged down and very small values are averaged up
the sampled items are all drawn from the same population
none of the abovee: b and c and not a.
28 Suppose a population with N = 144 has p = 24. What is the mean of the sampling distribution of the mean for
samples of size 25:
a: 24 2 c: 4.8 d: cannot be determined from the information given
20 71 le Ltlii.rdi iimit tneorem assures us that the sampling distribution of the mean :
is always normal
is always normal for large sample sizes,
approaches normality as sample size increases :J. appears normal only when Nis greater than 1000
30 Suppose that for a certain population a X is calculated as 20 when samples of size 25 are taken and as 10 when
samples of size 100 are taken. A quadrupling of sample size, then, only halved a X. We can conclude that increasing
sample size is:
a: always cost-effective b: sometimes cost-effective
:lever cost-effective d: none of the above
31 For the above questions, what must the value of a for this infinite population
. a: 1000 b: 500 c: 377.5d: 100
Fill-in the blanks:
37 A portion of the elements in a population chosen for direct examination or measurement is a
38 the proportion of the population contained in a sample is the
39 is the process by which inferences about a population are made from information about a sample
rtto The is the distribution obtained by finding the sampling distribution of all samples of a given size of a population.
41 sampling should be used when each group considered has small variation within itself but there is wide variation
between
different groups.
42 A method of random sampling in which elements are selected from the population at uniform intervals is called
sampling.
43 is the degree of accuracy with which the sample mean can estimate the population mean.
44 Within a population, groups that ara similar to each other (although the groups themselves have wide internal variation) are
called
45 A sampling distribution of the proportion is a probability distribution of the
State whether the following is true or false
A rupee to be received in future has less value than a rupee available today (f/F)
28
Money has been invested in capital. of a firm instead of investment in bonds. The return on bonds is called
opportunity cost of capital (T/F)
When there are inflationary conditions the discount rates are low (T/F1.
Present value of a perpetuity is expressed as = 1/r (TM
The difference between cash outflows and present value of inflows is called net present value (T/F) Answers
01 T 02 F 03 F 04 F 05 T
06 T 07 T 08 F 09 T 10 F
11 T 12 F 13 T 14 F 15 F
16 T 17 T 18 T 19 T 20 F
21 T 22 d 23 b 24 e 25 e
26 d 27 b 28 a 29 c 30 b
31 d 32 e 33 d 34 d 35 d
36 b 37 sample 38 sample fraction 39 statistical inference
40 theoretical sampling distribution
46 T 47 T 48 F 49 T 50 T
41 stratified 42systematic 43 precision 44cluster 45 sample propo
3.CORREUITION & REGRESSION

Correlation analysis deals with the association between two or more variables. It attempts to determine the degree of relationship betweenvariables. The
problem can be broken up into two parts. Determine whether a relation exists. If it does then measuring it.
Significance-of the study of correlation: The study of correlation is important because:
We can measure in one,figure the degree of relationship existing between the variables.
Once we know that a relationship exists, we can estimate the value of one variable given the value of the
other variable. The reason for a significant degree of correlation may be due to one or more of the following
reasons:-
Correlation may be due to pure chance, especially in a small sample.
Both the correlated variables may be influenced by one or more other variables.
Both the variables may be mutually influencing each other. Type of Correlation:
1) Positive or negative 2) Simple or Partial, multiple 3) Linear, non-linear
Positive Correlation: - If both the variables are varying in the same direction i.e. if one variable increases, the other, on an average also increases or if one
variable decreases, the other, on an average also decreases, the correlation is said to be positive. Example of Positive Correlation:
X 10, 12, 15, 18, 20 x = 80, 70, 60, 40, 30
Y 15, 20, 22, 25, 37 y = 60, 50, 44, 30, 20
Negative Correlation: - If the variables move in the opposite direction i.e. if one variable increases with the decrease ir, the other or one variable
decreases with increase in the other, correlation is said to be negative. Example of Negative Correlation:
X 20, 30, 40, 60, 80 x = 100, 90, 60, 40, 30
Y 40, 30, 22, 15, 10 y = 10, 20, 30, 40, 50
Simple, partial and multiple: When only two variables are studied, it is a problem of simple correlation. When three or more variables are studies, it is a
problem of multiple correlation or partial correlation.
In multiple correlations three or more variables are studies simultaneously. In partial correlation. the relationship between
two variables is studies keeping the effect of othet Vdi constant.
Linear and non-linear Correlation: If the amount of change in one variable bears constant ratio the change of other variable then correlation is said to be
linear.
Correlation will be called non-linear or curvilinear if amount of change in one variable does not bear a constant ratio tc-the other variable.
+ve Linear Correlation Curvi Linear correlation
Assumptions of Pearsonian Coefficient

Karl Pearson's coefficient of correlation is based on the following assumptions:
There is linear relationship between the variables, i e when the two variables are plotted on a scatter diagram a straight line will be formed by the points so
plotted.
The two variables under study are affected by a large number of independent causes so as to form a normal distribution. Variables like height, weight,
price, demand, supply etc. are affected by such forces that a normal distribution is formed.
There is a cause and effect relationship between the forces affecting the distribution of the items in the two series. If such a relationship is not formed
between the variables, i.e. if the variables are independent. There cannot be any correlation. For example, there is no relationship between income and
height because the forces that affect these variables are not common.
Merits and Limitations of the Pearsonian Coefficient
Amongst the mathematical methods used for measuring the degree of relationship. Karl Pearson's method is most popular. The correlation coefficient
summarizes in one figure not only the degree of correlation but also the direction, i.e. whether correlation is positive or negative.
However, the utility of this coefficient depends in part on a wide knowledge of the meaning of this 'yardstick' together with its limitations. The chief limitations
of the method are:
The correlation coefficient always assumes linear relationship regardless of the fact whether that assumption is correct or not.
Great care must be exercised in interpreting the value of this coefficient is very often the coefficient is misinterpreted.
The value of the coefficient is unduly affected by the extreme items.
As compared with other methods this method takes more time to compute the value of correlation coefficient. Interpreting Coefficient of Correlation
The coefficient of correlation measures the degree of relationship between two sets of figures As the reliability of estimates depends upon the closeness of
the relationship it is imperative that utmost r,are he taken while interpreting Foe value of coefficient of correlation, otherwise fallacious conclusions can be
drawn
Unfortunately, the interpretation of the coefficient of correlation depends very much on experience_ The full significance of r will only be grasped after
working out a number of correlation problems and seeing the kinds of data that give rise to various values of r. the investigator must know his data
thoroughly in order to avoid errors of interpretation and emphasis. He must be familiar, or become familiar, with all the relationships and theory which
bear upon the data and sriduld reach a conclusion based on logical reasoning and intelligent investigation on significantly related matters
, , ,
However, the follov, ing genera! r ..!!es ?re given A,hich would help in interpreting the value of r
When r = +1, it means there is perfect positive relationship between the variables
When r = -1 it means there is perfect negative relationship between the variables.
When r = 0. it means there is no relationship between the variables. i.e. the variables are uncorrelated.
The closer r is to +1 or -1, the closer the relationship between the variables and the closer r is to 0, the less close the relationship.
Beyond this it is not safe to go. The full interpretation of r depends upon circumstances one of which is the size of the sample. All that can really be said that
when estimating the value or one variable from the value of another, the higher the value of r the better the estimates.
The closeness of the relationship is not proportional to r if the value of r is 0.8 it does not indicate a relationship twice as close as one of 0 4. It is, in fact,
very much closer
PROPERTIES OF COEFFICIENT OF CORRELATION
The coefficient of correlation lies between — 1 and + 1

29
The coefficient of correlation is independent of scale and origin the variable x and y
Coefficient of correlation is the geometric means of two regression coefficient.
The degree of relationship between the two variables is symmetric i.e. rxy = ryx
ILLUSTRATION -1
The following data o the scores obtained by 9 salesmen of a company in an intelligence test and their weekly sales in thousand rupees:
Salesmen intelligence I 1 El C 1 DI E -IF 1 G __I H 1
Test 50 60 50 60 80 50 16 40 -A
-
t
1 Weekly Sales I 30 1 60140-1_50 60 [ 301 70 1.. 50 I 60
Obtain the regression equation of sales on intel igence test scores of the salesmen.
If the intelligence test score of a salesman in 65, what would he his expected weekly sales? Solution: Let intelligence test score be denoted by X and
weekly sales by Y
CALCULATION OF REGRESSION EQUATIONS
X IX-60) Y (Y-50)
x x2 y y2 , xy
50 40 100 30 -20 400 +200
60 0 0 60 +10 100 0
50 -10 100 40 -10 100 100
60 0 0 50 0 0 0
80 +20 400 60 +10 100 200
50 -10 100 30 -20 400 200
80 +20 400 70 +20 400 400
40 -20 400 50 0 0 0
70 +10 100 60 10 100 100
Eye= 1600
2
EX = 540 Ex = 0 Ex = 1600 y = 450 Ey = 0 Exy =1200
4.Time Series
The statistical technique applied to measure the time based data over a period of time is known as time series analysis. It is a
set of data and values depending on time. In other words Time Series is an arrangement of statistical data in accordance with
its time occurrence. For example daily closing rate of stock market index, weekly position of the deposits and advances of a
bank branch etc. Mathematically, a time series is expressed as:
Y =1.(t) where Y is the value of variable at time t.
If the values of a variable at time L I, t2, t3 tn are Y I, Y2, Y3 Yn respectively, the time series would be:
t= t1 t2 t3 tn
Y = Y 1 Y2 Y3 Yn
Time series has two variables one of which shall be time, the independent variable and other, a dependent variable Y, at
different points of time. The value of t may be hourly, daily, weekly, monthly, quarterly, half-yearly or yearly. The time
series are generally studied with the help of diagram, where time is shown on X-axis and the quantity variable on Y-axis.
Objectives : Time series helps in review of current achievements, study the past behaviour, facilitate comparison,
predict future behaviour, forecast the trade cycle etc.
Components of time series : Value of time series shows various types of fluctuations (also called variations or the movements).
A time series has components such as secular trend or long term variation, seasonal variations, cyclical variations, irregular
variations or random variations
Secular trend : It refers to general tendency of the time series data to increase, decrease or remain constant during a long time
period. Hence a general rise in time series is a secular trend. The trend can be upwards or downwards. It can be linear (when rate of
change remains constant) or non-linear (where rate is not constant).
Trend can be linear or curvilinear. Where the trend can be described by a straight line, it is called linear trend. The equation for estimating a
straight line : = a + b x
Y is the estimated value of the dependent variable, x is the independent variable.
a =y-intercept (the value of y. when x = 0) h = slope of the trend line.
In time series, the independent variable x, is time.
=a+bx where
b= n x bar y bar} / {Ex2 –n x bare }
a = mean y – b mean x
The independent variable time is measured in terms of years, months etc. Example: The production record of a firm in the last few years is as
under:
Year 2003 2004 2005 2006 2007 2008 2009 2010
No. of 980 1050 1160 1190 1350 1560 1770 2080
Units
Estimate the no. of unit, it may produce in the year 2013?

Ti me T T – m (by using the c.time = x Xy x.x
code time) (to .
remove the
2003 -3.5 -7 -6860 49
2004 -2.5 -5 -5250 25
r- -1.5 -3 -3480 9
2006 -0.5 -1 -1190 1
2007 0.5 I 1350 1
2008 1.5 3 4680 9
2009 2.5 5 8850 25
2010 3.5 7 14560 49

30
* 980 x 7 =
M = v T / n = 2006.5 v xy = 12660 v x2 = 168
y= 11140 y bar= 1392.50 x bar = 0
h = 12660 / 168 = 75.36 a = 1392.50
The general equation for annual production is y bar = 1392.50 + 75.36 x
x is coded time. When we have to predict for a particular year say 2013, we will convert it to the coded time as
under:
x = 2 (2013 – 2006.5) = 13
Now Si = a + b x = 1392.50 + (75.36 x 13) = 1392.50 + 979.70 = 2372.20 = say 2372 units
This means the prediction for 2013 is 2372 units.
Analysis of time series:
As per classical time series analysis. multiplicative relationship between four components of time series (i.e. trend, seasonal
components, cyclical components, irregular components) is assumed. Accordingly:
0 =17 x S x C x I (where 0 stands for original data, T for trend, S for Seaton& component, C for cyclical component and I for
irregular component.
Example : If T = 800, S=1.4, C=1.5 and 1=2.6, then 0 = 800x1.4x1.5x2.6 = 4368
In another approach, each observation of time series is the sum of these four components: 0=T+S+C+I
Example : If T = 800, S=50, C=30 and 1= -40, then 0 = 840
Measurement of trend:
There are various methods for measurement of trend component in a time series that include graphic, semi averages & moving
averages and least squares or curve fitting by principle of least squares.
Graphic or free hand curve fitting method:
It is the simplest method and consists of following steps:
Obtain a histogram by plotting time series value on a graph paper Draw a free hand smooth curve through the points and then a straight
line on the basis of judgement.
It would show the long term tendency of the data.
Semi averages method:
Secular trend can be obtained by semi-averages by dividing the original data into two equal parts. The value of each part is summed up and
then averaged. The average of each part is centred in the period of time of the part from which it has been calculated and then plotted on
the graph. A line is drawn to pass through the plotted points.
Moving averages method:
It includes averaging of seasonal and other short term variations from the series so that only trend is left in the series. The no. of items
taken for averaging will be the no. required to cover the period over which the fluctuations occur. This average is taken as the normal or
trend value for the unit of time falling at the middle of the period covered in the calculation of the average. The averaging gives a
smoother curve, reducing the influence of the variations that pull the annual figures away from the general trend.
Least Square method:
This mathematical method is widely used with the help of which a trend line is fitted to the data in such a way that the two
conditions are satisfied i.e.
E re-yo = 0 (i.e. the sum of deviations of the actual values of Y and computed values of Y is Zero)
E (Y-Yc)2 is minimum. (i.e. the sum of squares of deviations of the actual and computed values is minimum from this line. It is for
this reason that the method is known as least squares method.
This line which we get by this method is called Line of Best Fit. The straight line trend is shown by the equation: YC = a + bX. (Yc
is the trend value to distinguish from the actual Y values, a is the intercept of the values of the Y variables when X =- 0. b is the
slope of the line, X refers to time.
Seasonal variations
Seasonal variation in a time series will be there if the data are recorded quarterly, monthly, weekly, daily etc. In a time series data,
where only annual figures are given, there are seasonal variations. Consumption, production of commodities, interest rates, bank
clearing etc. are marked by seasonal variations.
Cyclical variations :In some time series, there may be periodic up and down movements in economic data which are called cyclical
variations. These cycles are repeated at time intervals ranging from abbut 3 to 10 years. Cyclical variations help in formation of a
business policy, estimate of future behaviour, ideal of irregular fluctuations etc
OBJECTIVE QUESTIONS ON TIME SERIES

1 Ups and downs in the economy due to trade cycles are called:
a: cyclical variations b: seasonal variations c: secular tends d: none of the above
2 Which one of the following is the indication of seasonal variation:
a: improvement in techniques b: demand of woolen clothes in winter c: purchase of books during the beginning
of the academic sessions d: none of the above
3 Y = ? in series:
a: TxS+C+ 1 b: T-S+C-1 c: T-SxCx1 di TxSxCx1
4 The fluctuations which complete the whole sequence of change within the span of a year or has some pattern
year after year is known as:
a: secular trend b: seasonal variation c: cyclical fluctuation d: none of the above
5 Cyclical fluctuations are also known as :
a: oscillatory variations b: business cycle fluctuations c: either a or b d: none of the above
6 The period of moving average is to be decided on the basis of :
a: length of the cycle b: policies of the company c: both the above d: none of the above
7 Method of leaSt squares is:
a: flexible in nature b: non-flexible in nature c: semi-flexible in nature d: none of the above
8 Method of least squares cannot be used to fit:
d: Gompertz curve b: logistic curve c: both the above d: none of the above
9 In shifting the trend origin, the value of 'b':
a: changes b: remains unchanged c: badly fluctuates
10 ,The moving average may constitute a satisfactory trend for a series that is of:

31
a: linear duration b: whose cycles are regular in duration c: -- both the above
11 To convert an annual trend equation to a monthly basis, when original data are given as totals:
'a' is divided by 12 and 'b' by 144 b: 'a' is divided by 12 and 'b' by 12
c: 'a' is divided by 144 and 'b' by 12 d: 'a' is divided by 144 and 'b' by 144
12 changes that have taken place as a result of such forces that could not be predictel !Ilse floods etc. are known as:
a: seasonal variationsh: erratic variation c: cyclical variation d: none of the above
13 Seasonal variations repeat during a period of:
4; 12 months b; 24 months c: 36 months d; 46 months
14 Tha most important factors covering Magna' variations are:
a° growth of population h: technological improvements c: change in Wilton§ d; - weather
16 Seasonal moments are:
a: rapalitiVi h; predictable around the trend time e; -- l
d tren value .... di none of the above
16 The general movement persisting over long period Is called:
a; - secular trend b; seasonal trend e;trend value d: none of the above
17 The most widely used method of measuring seasonal variations Is ;
a:' ratio to moving averages method ---- -----• - - --. b: ratio to trend method
c: link relative method • — d: method of simple averages
18 irregular variations are caused by:
a: floods b: strikes c: wars d: all the above
19 A time series Is a set of observations taken at specified time, usually at:
a: • equal Intervals b: unequal intervals -- c: only at short-term intervals d:
nort6Of the above
20 Which one of the following is a component of time series:
a: secular trend b: seasonal variations c: cyclical variations d: all the above
21 In Yc 3: a + bx, if b is positive, it shows:
a: .. rising trend b: seasonal variations c: cyclical variations d: all the above
22 We find irregular variations due to:
a: lock outs b: transport bottlenecks c: floods d: all the above
23 How can be remove seasonal variations:
a: reducing prices in seasons b: introducing different products having different seasons
c: both the above d: none of the above
24 What is the sequence of the following phases in business (i) depression, ii) prosperity, iii) recovery, iv) recession):
a:./ ii, iv, i, iii b: iv, ii, I, iii c: iv, i, if, iii d: iii, II, iv, I
25 Which period give more tangible trend:
a: shorter period b: / long period c: medium period d: none of the above
26 The seasonal changes are always:
a: periodic but not regular b: not periodic c: periodic and regular d: none of the above
27 Which is the feature of prosperity:
a: inflation b: optimism c: high profits d: all the above.
Fill In the blanks:
Cyclical fluctuations are caused by r (trade cycle)
If in Y = a +bx, b is +ive;it indicates trend (rising)
If in Y = a +bx, b is -ive, it indicates trend (declining)
To reduce an annual rend equation to a monthly trend, a Is divided by and b is divided by : (12, 144)
The test is satisfied when (Pio) (P12) (P20) = 1 (circular)
The trend is linear if the growth rate is ( constant)
Seasonal variations repeat during a period of (one year)
The most important factors causing seasonal variations are (weather and customs)
Cyclical fluctuations are caused by (business cydes)
Of the 4 components of the time series, the one that has primary use for long term forecasting Is the — component (trend)
The time series comprises data arranged in ^ order. (chronological)
The additive model of time series Is shown as (arithmetic straight line)
shows long term fluctuations: (secular trend)
The line obtained by the method of least squares is called (line of best fit)
The method of moving average is satisfactory for a series that is linear and cycles of which are _____ In amplitude and duration.
(regular)
By shifting the trend origin, the value of 'b' (remains constant)
A seasonal variation comprises of no. one for each of a year. ( 12, months)
A time series is a set of items taken at specified usually at intervals. ( time, equal)
variations are repetitive and predictable movements around the trend line in a year. (seasonal)
State, if true or false:
Secular trends refer to one long term movement. (TRUE / FALSE)
When we shift the trend origin, the value remains the same. (TRUE / FALSE)
The multiplicative model assumes that the vlue of original data is the product of the values of the 4 cam,,.,. its. (TRUE / FALSE)
Trend refers to a lona term tendency to either inci ease or aecrease. (TRUE / FALSE)
A time series is affected by economic factors alone. (TRUE / FALSE)
It Is always necessary to edit the time series data. (TRUE / FALSE)
Secular trend cannot be curvilinear. (TRUE / FALSE)
A monthly or quarterly trend equation cannot be converted Into yearly trend equation. (TRUE / FALSE)
Deseasonalisatlon of data means eliminating the seasonal components from the data. (TRUE / FALSE)
Moving average can give objective project to the future. (TRUE / FALSE)
The multi-purpose model assumes the 4 components to be independent of each other. (TRUE / FALSE)
Climate and weather are significant factors for seasonal variation In the time series. (TRUE / FALSE)
131 Trade cycles have 4 phases, ire. prosperity, recession, depression and recovery, (TRUE / FALSE)
32
Answers
01 a 02 b 03 d 04 b 05 c 06 a 07 a
06 c 09 b 10 c
11 a 12 b 13 a 14 d 15 c 16 a 17 a
18 d 19 a 20 d
21 a 22 . d 23 d 24 a 25 b
26 c 27 d
Answers
1: trade cycle 2: rising ' 3: declining 4: 12, 144 5:
drcular
6: constant 7: one year 8: weather and customs 9: business cycles
10: trend
11: chronological 12: arithmetic straight line 13: secular trend 14: line of best fit 15:
regular
16: remains constant 17: 12, months 18: time, equal 19: seasonal
Answers
01 T 02 T 03 T 04 T 05 F 06 T 07 F
08 F 09 F 10 T
11 F 12 F 13 T
5.Estimation
In statistics, estimation refers to the process by which one makes inferences about a population, based on
information obtained from a sample.
Statisticians use sample statistics to estimate population parameters. For example, sample means are used to
estimate population means; sample proportions, to estimate population proportions. An estimate of a population
parameter may be expressed in two ways:
Point estimate. A point estimate of a population parameter is a single value of a statistic. For example, the sample mean
x is a point estimate of the population mean p.. Similarly, the sample proportion p is a point estimate of the
population proportion P. (Example - The accountant of a company, on the basis of past performance expects that the .firm will sell 500
units of its product in the forthcoming year)
Interval estimate. An interval estimate is defined by two numbers, between which a population parameter is said to lie. For
example, a s. x <h is an interval estimate of the population mean 1.1.. It indicates that the population mean is greater
than a but less than b. It indicates the error in 2 ways (i) by the extent of its range and (ii) by the probability of the true
population parameters lying within that range.
(Example : The accountant of a company, on the basis of past performance expects that the firm will sell between 500 to 550 units of its
product in the forthcoming year)
What is estimator : The sample statistics which is used to estimate a population parameter is called an estimator. The sample
mean x can be estimator of the population mean (p). The sample proportion can he used as an estimator the
population proportion.
When a specific numerical value of the estimator is observed, it is called estimate. For example, if mileage of a
used car is 100000 and this mileage of 10000 is taken as the basis to estimate the mileage of similar type of used
cars, it will be called an estimate.
Criteria of good estimator: The quality of an estimator can be judged on the basis of 4 parameters:
Unbiased — An estimator can be taken as unbiased if on average it tends to assume values that are above the population
parameter being estimated as frequently and to the same extent as it tends to assume values that are below the population
parameter being estimated.
Efficiency — It refers to the size of the standard error of the statistic. When 2 statistics from the same sample are compared, to decide as
to which one is more efficient estimator, the statistic which has smaller standard error would be pickedsup.
Consistency — A statistic is considered consistent if, with increase in sample size, it becomes almost certain that the value of
the statistic comes very close to the value of the population parameter.
Sufficiency — An estimator is sufficient if it makes so much use of the information in the sample that no other estimate could
extract from the sample additional information about the population parameter being estimated.
Point estimates:
The sample mean x is deemed to be best estimator of the population mean (p), because it is unbiased, efficient and
consistent. As long as the sample is sufficiently large, its sampling distribution can be approximated by the normal
distribution. For,example, the cartons of match-boxes contain 97 to 103 match-boxes. There are 40 cartons and
the total no. of match-boxes packed in these cartons is 4000. This means the sample mean is 100 (4000 /40).
Point estimate of the population variance and standard deviation : The most frequently used estimator of the population
standard deviation a is the sample standard deviation of s
Point estimate of the total population : The proportion of units having a particular characteristic in a given population is
denoted by p. If the proportion of units in a sample having same characteristics is known, it can he used an estimator of
p. For example. a firm want to know as to how many carton are damaged in transit. It takes a
sample of 100 carton and finds that 5 cartons are damaged. Hence it estimate that the proportion of damaged cartons is 5% i.e. 0.05.
Interval estimates: It describes the range of values within which a population parameter is likely to be.
Suppose a firm wants to know as to what is the average life of battery the firm is manufacturing for cars. It can take a sample of say 300
users of the battery and calculate the sample mean. Let us suppose the sample mean is 36 months. if the management also wants to
know as to what extent there can be uncertainty tagged with the estimate. For this purpose, the standard error of the mean will be required
to be calculated for the infinite population, by using the following formula.
a x bar = a n
Interval estimates and confidence intervals:

33
Confidence level - The probability that is associated with an interval estimate is called the confidence level.
The probability indicates the level of confidence that the interval the interval estimate will include the population parameter. The higher
probability indicates more confidence. In estimation, the most commonly used confidence levels are 90%, 95% and 99%.
Confidence interval : The confidence interval is the range of the estimate being made. For example if we are 90% confident that mean
of the population of incomes of persons in a particular community lies between Rs.15000 to 20000, the range Rs.15000 to Rs.20000 is
the confidence interval. The confidence interval will be expressed in standard errors instead of numerical value.
Confidence limits : These are the upper and lower limits of the confidence interval. Relationship between confidence level and
confidence interval: There is a direct relationship between these two for any given estimate. A high confidence levels seems to signify
a high degree of accuracy in the estimate. But high confidence levels will produce large confidence intervals and the large intervals
will not be precise and will provide not so accurate estimates.
6.Bond Investment
Loans can be raised by the Govt. and corporations in the form of Bonds.
Bonds are the instrument of borrowing with fixed period maturity, fixed value at maturity and interest payment. In return, the Govt.
promise to pay interest on the bonds (normally annually) called coupon. On maturity the bond holder receives the face value (or par
value) of the bond. The bond is debt instrument in which the investor lends a certain amount of money for a certain period at a certain
interest rate.
Example - A 6% bond is issued by RBI with a face value of Rs.i000 with a maturity period of 3 years. Investor gets Rs.i000 on maturity in
addition to annual payment of Rs.6o being the coupon. Bonds can be issued by National Govt. in rupees. When these are issued in foreign
currency, these are called sovereign bonds.
Different kinds of bonds
Convertible bonds : These bonds can be converted into shares at a specified rate and time period. Such bonds provide an opportunity to the
investor to participate in equity.
Callable bonds : When the issuer reserves the right to call back the bond and pay a fixed price (may be with premium). Since interest yield
declines ,in such bonds, these are less attractive.
Floating rate bonds : When the interest rate can be changed over a time period and yield is linked to current market rate by reset of the
interest rate. This ensures that the yield on the bonds is near the current market returns.
Negotiable bonds : These bonds are traded in the market and their face value changes depending on the current interest rates.
Zero coupon bonds: These bonds are priced at a nominal value below their face value and are redeemed at their face value. The investor gets
return as difference between the purchase price and face value.
Other terms
Coupon amount and coupon rate : Coupon amount is the amount of interest received periodically till maturity. Coupon rate is interest rate
specified in the bond.
Yield to maturity: It is the discount rate which makes the present value of the bond's payment equal to its price. It is a measure of the
average rate of return an investor earns over the bond's life, if it is held till maturity.
Current yield : It is the current return and does not take into account the bond price fluctuations.
Effective yield : Actual yield (instead of the nominal amount) compared to the market situation. It can be less or more than the current yield.
Rate of return : It is calculated for any particular holding period and is based on the actual income after taking into account, the capital gain or
loss on the bond over that period.
Bonds prices and yields
In certain cases, the bonds are listed on stock exchange, where trading takes place, in these bonds. Let us calculate the bond price with the
help of an example.
Example - A 6% bond is issued by RBI with a face value of Rs.i000 with a maturity period of 3 years. Investor gets Rs.moo on maturity in
addition to annual payment of Rs.6o being the coupon. If prevailing interest rate is 5.6% on such bonds, what is present value of the bond?
Solution : The interest shall be received on yearly basis and Rs.i000 will be available after 3 years. The present value of cash flow has to be
worked out. It is presumed that the prevailing interest rate on 3-year maturity offers a compounded return of 5.6%. Present value would be:
PV = PV of 1st year coupon + PV of 2nd year coupon + PV of 3rd coupon + PV of face value receivable on maturity at end of 3rd year.
PV = Rs.60 + Rs.6o + Rs.io6o
(i+r) (i+r) 2(1+r)3 r = compounded rate
PV = Rs.6o + Rs.6o + Rs.1060
(1.056) (1.056)2 (1.056)3PV = Rs.1010.77
Hence the 6% bonds is worth 101.077 % of the face value. Its price would be quoted around this amount.
Value calculation on the basis of annuity formula:
The value can be calculated on the basis of annuity formula as Rs.6o which are received every year for 3 years.
PV = PV of Coupons + PV of face value OR PV = PV (A, r, n) + PV (face value) (A ---- amount, r = rate of interest, n= no. of time intervals)
= 6o ( 1 - 1
( 0.056 0.056 (1.056)3 = 161.57 + 849.20* = 1010.77
*
it is PV of Rs.l000 to be received at the end of 3rd year.
Bond prices with half-yearly coupon
In the above case, the coupon payment was yearly. But if the payment is on a half yearly basis, the compounded return would be halved i.e.
5.6 / 2 = 2.8% and time interval would be doubled. In this case the value would be Rs.1010.91 as calculated as under:
PV = Rs.30 + Rs.30 + Rs.3o + Rs.3o + Rs.lo + Rs.1030
(1.028) (1.028) (1.028) (1.028)4 (1.028)5 (1.028)6PV = Rs.1olo.91
2 3
It will be observed that with reduction in compounding intervals (say from annual to half-yearly), the yield increases.
Bond prices and varying interest rates
With change in interest rates, bond prices change. The price can be worked out if the discnunt rate is 6%
PV at 6% = Rs.6o + Rs.6o + Rs.io6o
(1.06) (1.06)2 (1.06)3 PV = Rs.i000.00
It means that if interest rate is same as the coupon rate, the bond sells for face value. If the interest rate change from 6% to say, 15%, the
bond price would be Rs.794.51 as under:
PV at 15% = Rs.6o + Rs.6o + Rs.1060

34
(1.15) (1.15)2 (1.15)3 PV = Rs.794.51
Hence this bond can sell at 79.45 % of its face value. Quotation of bond price in market : The bond prices are quoted as a percent of their face
value. For example, if the bond with face value of Rs.i000 is current priced at Rs.1022.13, the quote would he 102.213% of face value. It would
be called 102.213.
Current yield
It is the current return and does not take into account the bond price fluctuations.
For instance, if a bond is issued for Rs.i000 for 3 years at io% coupon, its return would be Rs.ioo at the end of 1st. 2nd year and 3rd year. At
the end of 3rd year the face value will also be received by the bond hold. Hence the return is io%. Now let us assume that due to market
interest are lower than coupon rate and some one else purchases this bond for Rs.1136.16. The return on this investment (current yield) shall
not be io% because this time the return of Rs .100 will be available for an investment of Rs.1136.16 and not on Rs.i000. It shall be:
Current yield = coupon amount / purchase price x too.= too / 1136.16 x too = 8.8% .
The current yield on a bond could be less than or more than the yield to maturity. In this case, if the bond was purchased for Rs.96o instead of
Rs.1136.16, the ctkrent yield = 100 / 96o x too = to.42%
Rate of return
It is calculated for any particular holding period and is based on the actual income after taking into account, the capital gain or loss on the
bond over that period.
Important : Bond .prices fall, whell 'the market interest rates increase inozomparison to coupon rate of bond and vice versa. As a result, the
rate of return on a bond, fluctuates with change in market interest rates.
Example : An investor purchase 3-year, 6% bond for Rs.1010.77. He sells it for RS.1020 next year. What is his rate of return?
Solution : The return of this investor is not only Rs.6o being interest he has earned but also the difference in price at which he purchased and
sold the bond (i.e. capital gains in this case) of Rs.9.33 (1020 -1010.77).
Rate of return = (coupon income + price change)/ investment
Rate of return = (6o + 9.33)/ 1010.77 = o.686 or 6.86%
Important points about bond prices / valuation
When the market interest rate exceeds the coupon rate, the bonds can be sold for less than the face value i.e. at a discount and
When the coupon is more than the current market, the bonds earn premium.
A bond which is priced above the face value is said to sell at a premium. The investor who buys a bond at a premium faces a capital loss over
the life of the bond. His return on the bond is always less than the bond's current yield.
The investor who buys a bond at a discount earns capital gains over the life of the bond. His return on the bond is always more than the
bond's current yield.
Since current yield focuses on current income and does not take into account, the possible increase or decrease, it incorrectly measures the
bond's total rate of return. It overstates the return of premium bond or understates the return of discount bonds. But YTM takes care of this
problem. YTM takes into account both ,the current yield and the change in a bond value over its life period.
Yield to maturity (YTM)
It is the discount rate which makes the present value of the bond's payment equal to its price. It measures the average rate of return of
investor over the bond's life, if it is held till maturity. The total yield on a bond takes into account the capital gains or losses over the
time period of the bond.
Example — A 3-year to% bond is purchased for Rs.t000. What will be its YTM.
Solution : If bond is purchased at face value, its YTM = coupon rate = to%. No calculation is required as there is no capital gain or loss. But to%
YTM can he confirmed by calculation also.
PV at to% = Rs.too + RS.100 + RS.1100
(1.10) (1.10)2(1.10)3 PV = 90.90 + 82.65 + 826.45 = Rs.moo
In this case if the YTM is assumed 5% find out the price of the bond. Solution:
PV at 5% = Rs.too + RS.100 + RS.1100
(1.05) (1.05)2 (1.05)3 PV = 8.1136.16
Calculation of YTM: For manual calculation of YTM, 2 different YTM rates are assumed and then actual YTM is calculated.
Example : Bank purchased for Rs.85,• a Rs.ioo bond with 8% p.a. coupon rate and maturity period of 9 years. Find out the rate of return (i.e.
YTM) if the bond is held till maturity.
Solution : In this case, the Rs.ioo face value bond has been purchased for Rs.85. Hence the YTM should be greater than coupon rate of 8%.
The YTM will be calculated as under: (kd means YTM)
85 = 8 (PVIFA kd%, 9 years) + 100 (PVIF kd%, 9 years).
As mentioned above for calculation of actual YTM, we assume 2 YTMs of 12% and 10%.
At 12% discount rate the present value will be: (The factor values have been taken from Tables) = 8 (PVIFA 12%, 9
(years) + 100 (PVIF 12%, 9 years). = 8 x 5.328 + 100 x 0.361 = 42.62 + 36.10 = 78.72
At to% discount rate the present value will be: = 8 (PVIFA 10%, 9 years) + 100 (PVIF 10%, 9 years). = 8 x 5.759 + 100 x 0.424 = 46.37 + 42.10 =
88.47
It can be observed that the purchase price of Rs.85 falls within the above value of Rs.78.72 and Rs.88.47.
With the help of following, we can calculate the YTM:
Kd = Lower discount rate + different between 2 discount rates x (PV at lower discount rate - CMP / absolute difference in PV)
Kd = 1 + (12-10) x (88.47 / 88.47 — 78.72)
Kd = 1 + (2) x (3.47 /
Kd = 1 + (2 x0.356) = 10 += 10.71%
Distinction between rate of return and yield to maturity

As mentioned above, the rate of return is not the same thing as YTM.
YTM measures the average rate of return, a person earns over bond's life if the bond is held till maturity. The rate of return is
calculated for any particular period of holding and it is based on coupon income and capital gain•or loss over that period. This
distinction can be explained as under:
Example : An investors invests Rs.1010.77 in a 6% bond to mature in 2015, with 3 years left until maturity. Its YTM is assumed
5.6%. Assume that by the end of the year, the market interest rates have fallen to 4%, what will the value of the bond (after a
holding period of one year) and what will the rate of return?
Solution : The calculation will be made considering a holding period of one year and remaining period thereafter of 2 years.
35
PV at 4% = Rs.6o + Rs.io60
(1.04) (1.04)2 PV = Rs.io37.72
The investor gets Rs.6o + 26.95 (1037.72 — 1010.77) = 86.95.
His rate of return would be: 86.95 / 1010.77 = 8.6%
The YTM in the beginning of the year was 5.6% but due to fall in interest rate, the rate of return increased to 8.6%.
Relationship between rate of return and YTM during a particular period : It should be noted that :
If the bond's YTM remains unchanged during an period, its rate of return will be
equal to that YTM.
If the bond's YTM increases during an investment period, its rate of return will be less than YTM.
If the bond's YTM decreases during an investment period, its rate of return will be more than )(TM.
Different types of Risk in Bond Investment
Interest rate risk
The YT'M of bond fluctuate with the interest rate movement due to which the bond investment carries interest rate movement
risk. With market interest rate falling, the investors of a bond, gain. On the other hand with increase in current market interest
rates, the investors are bound to lose.
Default risk
Bonds are issued by Central Govt., State governments and also the local bodies and corporates. Bonds can be issued in different
currencies also.
In case of bonds issued by Govt., normally there may not be default. But bond issued by corporates earn' risk of default also
due to possible non-payment on due date. Hence, there is credit risk. To compensate for this risk, the companies have to offer
relatively high rate of interest. The difference between the coupon rate on a Govt. bond and the corporate bond is called default
premium or risk premium.
Price risk : The risk arising on account of fluctuation in the bond prices, that effects the return is called price risk. It also needs
to be noted that longer the period of -maturity, higher is the risk.
QUESTIONS ON BOND VALUATION

1) Bond holders are of the business (Bond issuer):
a) Creditors b) Share holders c) Partners d) Owners
2) Which of the following is true about the Yield rate of bonds?
It varies inveiseiy with changes in the bond's market price.
It is the bond rate at bond maturity.
It is computed in the same manner as Dividend yield on stocks. d) A and B
3) The summary of transactions for Bond issue is shown as an investing activity on the statement of cash flows.
a) True b) False
4) If the required rate of return is equal to the coupon rate, the bond will be trading at par value.
a) True b) False
5) A Bond with face value Rs 5,000 carries a Coupon rate of 12%. Market price of this bond is quoted at Rs. 4,500. What is the
Current yield of the bond?
a) 12% b)14.3% c) 13.3% 6)10.5%
6) Bonds outstanding are Rs. 2,000,000, 10%, 10-year bonds that were issued at par and with a call price of 105. The market
interest rates have declined and the market price of the bonds is currently 107. What is the amount of gain or loss on early
retirement of the bonds, if the bonds are retired today?
a) Loss on early'retirement of Rs.140, 000. b) Gain on early retirement of Rs.140,000
c) Loss on early retirement of Rs.100, 000. d) Gain on early retirement of Rs.20,000
7) Based upon the concept of present value, a bond that paid a "below market" rate of interest (say 3%), would sell at:
a) A price above its maturity value b) A price equal to its maturity value N) A price below as maturity value
d) None of the above. The bond might sell above or below its maturity value, depending upon the creditworthiness of the issuer.
8) A bend is a type of long-term, interest-bearing, note payable at maturity.
a) True b) False
9) Assume that Reserve Bank of India reduces Repo rates. How will the market prices of outstanding bonds payable be affected by thii
change?
L') Existing bend prices vii!: fan.
Existing bond prices will increase.
The impact on existing bond prices will be unpredictable.
Although the prices of new bonds issued will fall, existing bond prices will be unaffected
When the Required rate of Return (Kd) is greater than the coupon rate, bond prices will be trading at discount to face value.
a) True b) t'alse
A Rs. 1,000 bond selling at 103% would be sold for Rs.1,030:
a) True b) False
An unsecured bond is a debenture bond.
a) True b) False
13) A convertible bond is a bond that can be converted to cash at any given time.
a)" True b) False
14) A cash fund that is established with a trustee and is designated to repay the borrowed bond funds at bond maturity is called a
Sinking fund.
a) True b) False
15) A major advantage of raising capital through the sale of bonds is that the interest paid on the bonds is a tax-deductible item.
a) True b) False
16) Financing with bonds has no tax advantages for the business.
a) True b) False
17) The future value of a Rs.1,000, 10%, 1-year bond is Rs.1, 100, and the present value of the bond is Rs.1,000 for an investor
who requires a 10% return.
a) True b) False
36
18) When interest rates rise, the corporation's cost of borrowing through bonds issued at an earlier time will increase.
a) True b) False
19) There is no advantage to a corporation for early retirement of bond debt.
a) True b) False
20) An Underwriter provides the same basic services to corporations selling stock as they do for corporations selling bonds.
a) True b) False
21) If the market rates go up, the price of the Bond already held by you also go up:
b) a) True b) False
22) The Internal rate of return (IRR) is also called the YTM of the bond:
c) a) True b) False
23) Wiiich of the following is true about Bonds?
Bonds are securities that establish a creditor relationship between the purchaser (creditor) & the issuer (debtor).
The issuer receives a certain sum of money in return for the bond, and is obligated to repay the principal at the end of the lifetime
of the bond (maturity).
. c) At times bonds also require coupon or periodical interest payments.
Since all these payments are part of the original contract, bonds are also called fixed income securities.
All of the above
24) Which of the following is true about Straight bonds?
a) A straight (normal or with interest) bond is one where the purchaser pays a fixed amount of money (principal) to buy
the bond.
At regular periods, he/she receives an interest payment, called the coupon payment.
The final interest payment and the principal are paid on date of maturity. d) All of the above
25) Zero Coupon bonds are those
Which do not make a coupon payment
These bonds are bought for less than their face value (at a discount).
When issued by treasuries, are mostly issued in Auctions d) All of the above
26) Treasury securities are:
Debt obligations of the Government, issued by the treasury department.
They are backed by the full faith and credit of the government.
They are considered to be free of default risk d) All of the above
27) Debentures are
Normal types of bonds issued by Corporates
It is unsecured debt, backed only by the name and goodwill of the Company.
In the event of the liquidation of the corporation, holders of debentures are repaid before stockholders, but after other
secured creditors d) All of the above
28) Convertible debentures

Have the features of a Straight Bond (Normal)
Can be exchanged for stock of the Company on a given future date.
Instruments for raising long term Capital for the Company ' d) All of the above
29) Bonds maybe
a) Secured by Fixed charges on assets b) Floating charge on assets
c) Unsecured debentures can also be issued d) All of above
30) The Value of a bond is
a) Its Face Value b) Present value of its future Cash flows c) Market Price a) Issue price
31) Coupon rate means
Market rate of return of a bond / Debentt ire
The rate at which the bond would pay interest at stipulated periods
The total amount (Principal+ Interest) that a bond would pay d) Yield to maturity of the bond
32) It the Coupon rate & the Discount rate ( Market based ) or the expected rates of return are same:
a) The bond will be trading at par b) Bond will trade at a discount
c) Bond will trade at a premium d) Coupon rate & discount rates have no connection with each other
33) The value, which a bond holder gets on maturity, is called Redemption value.
a) True b) False
34) When the expected rate of return (market discount rate) is lesser than Coupon rate bond prices will rise.
a) True b) False
35) The Price at which the bonds are bought or sold (in other words traded ) is called the Market Value or the Market
price of the bond.
a) True 0) False
36) Zero coupon bonds do not promise periodical interests:
a) True b) False
37) Zero coupon bonds normally are available at a discount to their face value:
a) True b) Faise
38) In the case of Zero-Coupon bonds. face value is equal to the redemption value:
a) True b) False
39) In Perpetual bonds, there is date and no maturity value but interest r •3;nl3,-.J rates
perpetually:
a) True b) False
40) Current yield of a bond is measured using the current market price and coupon rate:
a) True b) False
41) Yield to maturity of a bond is its internal rate of return:
a) True b) False
42) A bond's price is inversely proportionate to its yield to maturity:

37
a) True b) False
43) The period for which if the bond is held (holding period), the interest rate risk on the bond is eliminated is
called-Duration of a bond:
a) True b) False
44) The concept of Duration is also called Macaulay's Duration:
a) True b) False
45) Duration of a bond is less than its maturity period or term
a) True b) False
ANSWERS (BOND VALUATIONS)
1 A 2 D 3 B 4 B 5 C
6 D 7 C 8 C 9 C 10 A
11 B 12 A 13 A 14 A 15 B
16 A 17 A 18 B 19 A 20 B
21 B 22 A 23 E 24 D 25 0
' 26 D 27 D 28 D 29 D 30 B
31 B 32 A 33 A 34 A 35 A
36 A 37 A 38 A 39 A 40 A
41 A 42 A 43 A 44 A 45 A
7.Linear Programming
Linear programming is a mathematical technique for allocating scarce resources in an optimum manner. The word linear
means that the relationships are represented by straight lines and the word programming means a procedure that is used to
get the best solution to a problem that implves limited resources. There are certain important aspects concerning linear
programming such as: Decision variables like products, services etc. compete with each other for scarce resources. These
variables should not have negative values. If a bank provides three services, the non-negativity condition would be RA? 0,
Ru > 0 , Rc > 0. This means that these products are being rendered or not rendered. But it cannot be negative. There
must be proportional relationship between the variable to give the linearity. The no. of activities should also be finite.
Basic variable: The non-zero variables in a basic feasible solution are called, basic variable.
Slack variables: If a constraint has a sign <, something positive has to be added to the left side to make it equal.
The positive variable, that is added is, called slack variable.
Surplus variable: If a constraint has a sign >, something positive has to be subtracted from the left side to
make it equal. The positive variable, that is added, is called surplus variable.
Steps : Formulation of Linear Programming problem, involves the following steps: I Identify the unknown variables to be
determined and assign symbols to them.
2 Identify all the restrictions or constraints in the problem and express them as linear equation or inequalities of
decision variable.
3 Identify the objective or aim and represent it also as a linear function of decision variables.
Problem : A firm manufactures two types of cables i.e. general use cables and special use cables. The general use
cable tukes one man hour per meter and the special use cable takes double time than the general use cable. The
firm has available 3000 man hours per day. Raw material is adequate to manufacture only 2500 metres of cable
per dais. The special use cable also requires special enameling for which the facility is available for 800 metres
per day.
Make out a linear programming problem (LPP), to maximize the profits, if the profit from general use cable is Rs.4
and from special use cable, it is Rs.6 per metre.
Solution:
Let us assume the production of general use and special use cable is xl units and x2 units respectively.
Hence. Profit function Z = 4xi and 6x2
The maximum man hours per day are 3000 and man days per day requirement is xl + 2x2 Hence, xl + 2x2 5 3000.
Raw material is available for producing 2500 metres xl + x2 < 2500
Enameling facility is available for 800 metres per day for special purpose cable: x2 5 800
Hence, the LPP would be Z = 4xi and 6x2
Subject to: xl + 2x2 <3000, xl + X2 <2500, x2 < 800 and xl + X2 >0 (non-negativity constraints).
Solution of linear programming problems:
methods are generally used for the solution i.e. Geometrical (or graphical) method and Simplex method.
Geometrical (or graphical) method : This method can be used where Z is function of 2 variables only as with increase
in variables, the calculations become complicated. The following steps are involved:
te.1)-1: formulate linear programming problem by restating the given information in mathematical form i.e. an
equation for the objective function.
Step-2: plot the constraints on the graph.
Step-3: identify feasibility region and ascertain coordinates for its corner points.
Step-4: test which corner point is most suitable. Find a point in the permissible region as obtained in Step-3,
that gives the optimum value of Z
Simplex method: This technique also known as Simplex Algorithm is an iterative procedure (i.e. doing
repetitively) for solving a linear programming problem in finite number of steps. The method is an algebraic procedure
that progressively approaches the optimal solution. The method assumes that the variables arenon-negative. The
value of the objective function is increased at each step of iteration till further
improvement is not possible. The method begins at the point of no production or zero solution. It involves the
following steps:
Step-1: Write the program relating to the given problem.
38
Step-2: To eliminate the inequalities add slack or surplus variable and rewrite the program.
Step-3: Determine the first basic feasible solution by starting at the origin (i.e. starting with zero solution)
Step-4: Write the initial simplex Tableau
Step-5: Calculate Zj (which is inner product of cj and xj)
Step-6: Calculate Zj — Cj and select the greatest absolute value with negative sign in index row
Step-7: Highest number with negative sign determines the key column and also determines the entering variables.
Step-8: Develop ratio column where R = bi / for the column of entering variables.
Step-9: Select the least positive ratio (or value of R) and determine the exiting variables. The row containing
the least positive ratio is the key row and variable corresponding to it is the exiting variable.
Step-10: Determine the key figure which is the number at the intersection of the key column and key row.
Step-I 1: Obtain new tableaus for entering variable, divide the figures in the row of leaving variable by key figure.
Step-12 Repeat the step 5 to 1 1, till no negative numbers exist in the index row.
Maximisation problems : Simplex method is suitable for the solution of maximistion problems such as profit
maximization or product maximization. The iteration process given above gives the requirement ofmaximization
problem. Constraints here are of type <.
Minimisation problems: Where the constraints are of the type = or > signs and the objective function may be of
minimization (say cost reduction, time reduction), the above method is used with certain modifications.
Primal problem : It is the original problem in the linear programming problem.
Dual problem : It is the other linear programming problem intimately related to the original problem. Either of these
problems can be primary problem, where the other will become dual problem.
Importance of linear programming :
1 It can provide insight into problem situations. 2 It leads to optimum utilization of productive factors by providing
information base.3 Different solutions are generated and best could be adopted by the management.4 Bottlenecks in
the production process can be identified for removal.5 It introduces an element of flexibility in analysis of variety of
multi-dimensional problems.
Limitations of linear programming :
It assumes linear relationship between variables, but in real business situations, the constraints may not be expressed
linearly.LP does not take into account the effect of time and uncertainty.3 Parameters in LP are taken as constants but in
real situation, that is not the case.4 Solutions provided by LP are good in static conditions and not in dynamic
situation because the effect of time is not taken.
Application of linear programming :
It can be used in various applications such as:
1 Management applications : Portfolio selection, staffing problem, profit planning, equitable salaries, traveling
salesman problems, finance mix strategy, media selection etc.2 Administrative applications : Optimal use of resources,
work allocation for optimal efficiency, evaluation of various schemes.
3 Industrial applications Product mix, blending mix, production scheduling, trim loss, transportation problems. 4 Non-
industrial applications : Agriculture, contract awarding, environmental protection
8. Simulation
Simulation : Simulation is the method of studying the effects of changes in the real system through models. A model
is manipulated to know the end result. The method is more appropriate to situations where the size and/or complexity of
the problem makes the use of other techniques difficult or impossible.
Use of simulation : The simulation can be used in Air traffic control queuing, air craft maintenance, assembly line
scheduling, inventory order designing, rail freight carriers, facility layout etc.
In a simulation model, the system's elements are represented by arithmetic, analog or logical processes that can be
executed, to predict the dynamic properties of the real system. In this model, the time can be increased by fixed time
increments (say on hourly, daily, weekly basis) or variable time increments. At each point of time, the system is scanned
to determine if any event has happened. Then the events are simulated and time is advanced. Time is advanced by one
unit, even when the events do not occur. Why use simulation? : Some situations do not lend themselves to precise
mathematical treatment. Others may be difficult, time-consuming, or expensive to analyze. In these situations, simulation
may approximate real-world results; yet, require less time, effort, and/or money than other approaches. How to Conduct
a Simulation
The steps required to produce a useful simulation are presented below.
1 Defining the problem (i.e. define objectives and variables)
2 Construct the simulation model (specify the variables, parameters, decision rule)
3 Specify the values of parameters and variables.
4 Run the simulation (determine the starting conditions and run length)
5 Evaluate the result and propose new experiment. (determine statistical tests and compare with other information).
Advantages:
Simulation is useful where the experiments on real system (a) would disrupt ongoing activities (b) would be too costly to
undertake (c) require many observations over an extended period of time (d) do not permit exact replication of events
and (e) do not permit control over key variables.
It is preferable when a mathematical model (a) is not available to handle the problem (b) is too complex (c) is beyond the
capability of available personnel (d) is not robust enough to provide information on all factors.
Disadvantages :
I. It is time consuming
2. It requires computer experience and expertise on the part of the user
3. There are very few principles to guide the user in making decisions on what to include in the model and the length and
no. of simulation runs. The user has to use his intuitive judgment.

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MODULE – C : HUMAN RESOURCE MANAGEMENT
1. Fundamentals of Human Resources Management
Human resources management is one of the most important task of any business organization that has bqaring on its performance.
People management is dynamic and always remains a 'live' issue. On the other gand, the technology get stabilised at least for certain
period in its evolution process, due to which it is passive. Human affairs in any organisation are influenced by a wide variety of emotions
like love, hate, needs, expectations, values, beliefs, traditions and changes in social, political and economic field.
Organisation — Organisation is the rational and planned coordination of the activities of a no. of people for the achievement of some
common organisational goal through division of labour and through a hierarchy of authority and responsibility (Schein, 1979).
Coming together of people can be formal or informal.In a formal set up there is given goal, a structure, explicit roles and relationships in
order to coordinate the activities. In informal organisation, these aspects evolve as an outcome of group process. There are 2 interdependent
aspects.(i) how to organise the activities most systematically and analytically so that specificity in the work processes and operations can be
brought about(2) how to understand an individual's relations to a given activity called 'Work'. Authors and their work related to HRIVI :
1. Peter Drucker (in the book Land Marks of Tomorrow) - no matter how much we can quantify, the basic phenomenon are qualitative ones
such as change, innovation, risk, judgement, dedication, vision, reward and motivation.
2. Robert Owen (1771-1858) — Best investment of organisation is in worker (he called vital machines)
3. Charles Babbage (1792-1871) — A professor of mathematics an advocate of division of labour. He believed in applying scientific principles
to work processes for increasing productivity and reducing expenses.
4. Frederick Taylor (1856-1915) — He is famous for his concept of Division of Labour and Time & Mother studies.
5. Grant and Gilberths — They substantiated Frederick Talylor's concepts. Major assumptions of approach of Frederick Talylor are:
Task can be broken down to simple units for people to understand and perform
People do a given activity in return for money.People will have to do what is defined by organisation and in turn by technology.
This approach ignored vital aspects of human behaviour (1) it concentrated on activities related to work only and bahaviour aspect not taken
into account.
6. Elton Mayo and others at Western Electric Company (1924-33) — Impact of Human Studies is landmark in evolution of management
thought and human approach in management.
7. Researchers like Chris Argyris, A. Maslow, Douglas McGregor and Fredrick Herzberg — Highlighted dimensions of motivation.
Development of people management function : The history of management of people as a distinct managerial function goes back
to end of 19th century and beginning of loth century when there was significant increase in no. and size of organisational units.
In India, the experiment of group behaviour in Ahmedabad Mills by Prof. AK Rice (1952) is a significant contribution.
HRM & HRD - STRUCTURE AND FUNCTIONS

Human resources management of an organisation is often an independent department composed of various sections including recruitment
and retention, performance and appraisal management, HRD and compensation sections. HRM refers to the art of managing all aspects of
the human work force in an organization. It aims at providing an optimal working environment for employees to fully and freely utilize their
skills to their best to achieve the organisational goals. HRD is sub category of HRM which focuses on 'nurturing' employee's skills. HRD
aims at developing a superior workforce so that the company and individual employees may achieve their work goals in the customers'
service. There is no conflict between the structure and functions of HRM and HRD. The routine functions are part of HRM and HRD
function emphasizes on organisational interventions for climate development, employee development & organisational development,
linked with organisational goals. Change of nomenclature of department relating to human resources management:
1st stage - Labour and welfare department.2nd _ Personnel department 3rd - HRM department Components:
The conventional components of people management are categorized under Personnel Administration.
The system related to acquisition, promotion, administration, salary and long term benefits are covered under administration.
The traditional labour management, grievance and discipline management activities are covered under maintenance systems.
The development systems such as induction, development and growth, performance appraisal and counselling, career
planning are covered under HRD.
ROLE OF HR PROFESSIONALS : With the passage of time, the role of HR professional came to be known as a specialized job - a staff
function. Individuals having special qualifications and skills joined the organizations as specialist professionals.
The traditional function of HR included ensuring attendance, ensuring output and quality, good working conditions, safety, hygiene
etc. Later on some of these functions became legal obligations. The bank unions gained prominence in 196os and to deal with them,
industrial relations functions emerged and occupied a special position in banks. These officers also dealt with misconduct and
disciplinary enquiries. The focus cn activities like recruiting, training,. promoting and compensation made the personnel function
more important.
ATTRIBUTES OF HR PROFESSIONALS
These have been developed by Pareek and Rao. Technical attributes: knowledge of performance appraisal system and their functioning
knowledge of potential appraisal and mechanism of developing a system. Knowledge of various tests and measurement of behaviour
ability to design and coordinate training program at worker and supervisory level Professional knowledge of personnel and management
Knowledge of behavioural sciences,Understanding of overall organizational culture. Knowledge of career planning, processes and
practices. Knowledge and skills in counseling
Managerial attributes : Organising ability it. Systems development skills Personality Initiative, imagination and creativity Positive attitude
towards others Concern for excellence Ability to work as a team member.
HR function in Banks: It is not generally performed professionally. HRD is considered a generalist discipline. CII developed an HR
Competency Model in 2004 that listed 19 inter-linked competencies for HR heads. These include 9 behaviourial competencies (such
as communication, initiative, drive, creativity, self confidence, teamwork, influence, problem solving and inter-personal skills),
which have been embedded in io functional competencies (such as business knowledge, change management, diversity
management, service orientation, execution excellence, financial perspective, building expertise, personal credibility, relationship
management and strategic thinking and alignment).
Role of HR professional in future (as per Ulrich): a partner with senior and line managers in strategy execution, helping to move
planning from board room to market place. an expert in the way work is organised and executed.
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a champion for employees representing their concerns to senior management and working to increase employee contribution.
an agent of continuous transformation, shaping processes and a culture that improve an organization's capacity for change.
What should the HR professional do ? acquire additional professional qualifications relevant to their role.
Holding regular meetings of study circle. Exchange ideas with personnel fraternity from different organisations. Association with and
participation in activities organised by other professional bodies. Interaction between HR and technology experts. 6. Undertake problem
based project studies.
Things to remember: i. The role of HR functionaries has undergone qualitative change
HR functionaries have total responsibilities about the management of human resource in the organization
HR functionaries are responsible for development of HR related systems.
HR
professionals must have qualification in HRM
5. Line managers should not meddle with the management of HR
DEVELOPMENT OF HR FUNCTIONS IN INDIA
In India, by the 6os, the demand for personnel. professionals start emerging. Around that time, institutions like Indian Institute of Personnel
Management (IIPM) and National Institute of Labour Management (NILM) were established.
The objective of establishing IIPM was to develop and spread the ideas concerning the human values and serve as a forum for exchange of
ideas and experiences and collection and dissemination of the principles, practices, techniques and methods regarding Personnel
Management.
The objective of establishment of NILM was to encourage and promote the development of cordial relations between the employers
and employees, conduct investigations in to different labour problems, undertake study of existing labour legislation for
improvement, organize training and instruction in personnel management.
Later on these two bodies were merged as National Institute of Personnel Management during 1982.
In the earlier phases, India had visionaries like JN Tata who established TISCO at Jamshedpur. This organization took a no. of steps in
the area of HRM based on which, some of important legislations were later on passed in India. These initiatives of TISCO and
following legislations are as under:
Aspect / Area By TISCO Enforced by Name of the Act

Law
8-hour working da 1912 1948 Factories Act
Free medical aid 1915 1948 ESI Act
Establishment of Welfare Deptt 1917 1948 Factories Act
School facilities for children ___
1917
Formation of committees for handing 1919 1947 Indl. Disputes Act
complaints concerning service conditions and
__grievances
Leave with pay 1920 , 1948 Factories Act
EPF Scheme 1920 1952 EPF Act
Workmen's Accident corn sensation scheme 1920 1923 Workmen's Compensation Act
Tech. Institute of apprentices, craftsmen and Engg. 1921 1961 Apprentices Act
Graduates
Maternity benefits 1928 1946 Bihar Maternity Benefits Act (GoI)
profit sharing Bonus 1934 1965 Payment of Bonus Act
Retiring gratuity 1937 19'2 Payment of Gratuity Act
In addition to the above, the other provisions of law include: Article 16(1) of Indian constitution — provision for equal opportunity for
employment. Employment Exchanges (compulsory Notification of Vacancies) Act 1959 — required the employers to notify the vacancies
Apprentice Act 1961 — provision for training linked to employment Child Labour Act 1986, Bonded Labour System Act 1976, Inter-state
Migrant Workmen Act 1979 — for safeguarding the interest of specific groups. In 198os, the Govt. started introducing employee
participation and allocating shareholding to workers. HRD as a sub-system of HRM emerged as afeature. In the 9os few organizations such as
Larsen & Toubro, BHEL, MARUTI, HDFC etc. started using innovative practices. Among Indian banks, SBI, BoB, Cana ra Bank also took
initiatives in HRM.
Other developments in India: Establishment of National HRD Network during 1985. Establishment of Indian Society for Traing &
Development in 197o. 5th Pay Commission that made recommendations for making performance appraisal open,
improvement in motivational skills etc.
2. Development of Human Resources

People in an organization cannot be treated like other factors of production. Hence, after originating as a set of activities, HRM has
over the years, acquired a status of a crucial function of the (organization. It has been recognized that there is linkage between the
individual's satisfaction and organisation's growth.
HRD & its sub-systems : HRD means organized learning experience in a definite time period to increase the possibility of improving job
performance growth (Nedlar-1984). Organisations set goals and direct their efforts to achieve these goals. These goals may be in terms
of production, finance, sale, control or monitoring of people. The organizations have structure to manage the entire process. This
structure is the edifice around which the processes are built. Each unit of this sub-system requires certain knowledge, skills and
attitude in an individual.Hence for ensuring performance of the individuals it is essential that:Individuals has the knowledge as to what is
expected of each unit / level. Individuals have the required capabilities to do what is expected Mechanisms are available to measure what
is expected. According to Nadler, HRD is a process, by which the employees are helped in a continuous and planned way to: Acquire or
sharpen capabilities required to perform various functions associated with their present or expected future jobs. Develop their
general capabilities as individuals and discover and exploit their own inner potentials for their own and or organizational development
purposes. Develop an organizational culture in which supervisor-subordinate relationships, teamwork and collaborition among sub-
units are strong and contribute to professional well being. Sub-systems: The sub-systems that can be developed to enhance the
HRD goals, include: Training and development Performance appraisal, feedback and counseling Potential appraisal, career planning

41
Organizational development HR information system HRM has three sub-systems viz. administrative, developmental and maintenance.
Job analysis :
Job analysis is a technique that facilitates the listing of what is required to perform a task. It
comprises ofjob description, (2job specification and ) job evaluation.
Job To record each and every activity an individual is to perform in a given set-up
description
Job A list of requirements in terms or educational qualification, age, work experience, specific
specification knowledge, skills, expertise, temperament etc.
Job Used to compare similarity between jobs within an organization or between organizations or
evaluation even in an industry.
Task A basic element of a job and requires a person to achieve a specific product. A
complex system of task requiring an individual to achieve an overall product and still
Job
making the relationship relevant.
It puts an individual in hierarchical pattern expecting those below to report or surrender to higher
Position positions
and conform to their expectation. %..'hiie those higher up, may be !ed to expinit the
relationship and
Role demand conformity. It emphasizes the pattern of mutual expectation
Work It involves still complex pattern as it goes beyond to encompass socio-psychological relationship.
Training a Development - Role & Impact of Training : The objective of training and development is to comprehend how
this concept of learning could be applied to the organizational context. Establishment of training and development system as part of the HRD
effort involves (a) identification of training needs (b) conducting of the training (c) evaluation of training and (d) selection and development of
trainers.
Objective of Training and Development: Employees should be provided with learning opportunities to enable the
organizations and individuals to achieve their goals. The organizations have to. analyse their requirement. The need of the
organization can be linked to the career progress of the individuals that could lead to: i. Improved performance of the individual on
his present job. His preparation for an identified job in a not-too distant future. His general growth not related to any specific job.
Training : It is the learning related to the present job. When goal is to improve performance, it should be conducted and evaluated to
check the improvement.
Education: It is the learning to prepare the individual for a different but identified job. If the goal is futuristic, it would be required to be
provided.
Development : It is the learning for growth of the individual not related to a specific present or future job. No direct impact may be seen
on the performance.
Theories of adult learning: Lindeman's work was the first instance of defining the perspective of adult learning. It is defined as a
cooperative venture in non-authoritarian & informal learning, the chief purpose of which is to discover the meaning of experience, a
quest of mind which digs down to the roots of the preconceptions which formulate our conduct.
There are a no. of theories to explain as to how we learn. Nadler categorizes them in three sets: Mechanistic (or behaviouristic) theories :
learner is passive in the process of learning. Learning occurs only when a learner is conditioned to give the right response.
Cognitive theories : The purpose of learning is to teach the brain to engage in such critical thinking and problem solving.
Organismic (or Humanistic) theories - Learning occurs when learners have the freedom to learn what is particularly relevant to their personal
life situation. As per Decenzo and Robbins: i. Learning is enhanced when the learner is motivated. Learning requires feedback.
Reinforcement increase the likelihood that a learned behavior will be repeated. Practices increase a learner's performance.
Learning must be transferable to the job.
APPROACH TO TRAINING : For proper training, a systematic approach has to follow certain logical processes for enhancing
knowledge, skills and attitudes of their personnel, which include: Step 1 - Analysis and identification of training needs. Step 2 -
Preparation old training plan. Step 3 - Conduct of the training program which includes designing the program in terms of the
time, duration, target group, sequence of inputs and methodology. The teaching methodology include readings, lectures,
experimental lectures, discussion, participation training, case studies, role plays. Step 4 - Evaluation of the training program and the
plan (there are various levels for evaluation i.e. reaction level, learning level, the behavior level, functioning level).
Step 5 - Selection and development of trainers.
ATTITUDE DEVELOPMENT
Attitude can be defined as a persistent tendency to feel and behave in a particular manner towards different situations.
Components:
Attitude has three basic components i.e. emotional, informational & behavioural.
Emotional component : This involves person's feeling that may be positive or negative. Information component : A belief
may be founded on insufficient observation or information or opinion. A branch manager is of the opinion that a 2 weeks' training
may be adequate for a person to work effectively as a System Administrator, which actually may be 4 weeks. The belief of the manager
represents his attitude toward training.
Behavioural component: It consists of person's tendency to behave in a particular way towards the object. The behaviour of the
manager in the above situation has impact on the workplace.
Significance of attitude at workplace : Attitudes help predict work behaviour. It also helps people adapt to their work
environment. Attitude serve 4 important functions: The adjustment function - which helps a person to adjust to his work environment.
The ego-defensive function - which helps a person to defend his self-image (example - a young officer questioning the wrong decisions taken
by a senior - the senior develops negative attitude towards the young officer. The value-expression function - which helps a person with a
basis for expressing their value (a manager strongly believes in work ethic. He often tells his subordinates to work hard). The knowledge
function - which helps a person to organize and explain the world around.
Changing attitude: Though it is difficult but it is not impossible to change the attitude of the people. The major barrier against such
change are prior commitments and lack of information. These barriers can be come over by providing new information, by resolving the
discrepancies between attitude and behaviour. To an extent, the change is possible by co-opting getting people involved in improving

42
the things. (a union leader is not satisfied with the staff welfare benefits. He is co-opted in the committee. Then he comes to know
about how the benefits are determined and what effort is put by the committee to formulate and balance the scheme, he changes his
attitude).
CAREER PATH PLANNING : Individuals expect certain changes or advancements to take place in a time bound period and when such
changes do not occur, they get frustrated or aliened. Erik Erikson has divided life into R stages (4 in childhood and 4 in adulthood).
The adulthood stages are relevant in understanding, as to what the individuals expect in the organizational careers. These
stages are: Adolescence — where individual's development is to achieve an ego identity. Young adulthood — where the individual starts
developing relationship with individuals, groups or occupation. Adulthood — where the individuals starts guiding the next generation and
passes on values and knowledge to others. Maturity — where the individual attempts to achieve ego integrity. Levinson's age-specific
transitions correspond to Erikson's 4 adult stages. Dalton, Thompson and Price have emphasized roles. and relationship, an individual may
experience in the 4 career roles such as : apprentice — this is beginning of the career. Individual is doing routine work at this stage.
colleague — beginning of making an independent contribution. Mentor — where individual develops ideas, manages others and Sponsor —
individual broaden his perspective and think long term as he is now a part of the top management.
Career pattern : Driver (1985) has listed these patterns as CAREER CONCEPTS. These include: a) Linear career — where the
individual enter into an occupation and plans for upward movement using the organizational hierarchy. b)S t e a d y s t a t e c a r e e r —
where the individual enters into an occupation, acquires skills but decides not to move upward.
( c ) T r a n s i t o r y c a r e e r — w h e r e i n d i v i d u a l s s h i f t t o n e w j o b s . (d) Spiral career — where individuals shift to new jobs,
move up in status and rank.
Schein has given another framework of 3 dimensional movement i.e. (a) vertical i.e. along with the hierarchy,(b) circumferential — along
with the different divisions and functions,(c) radial — towards the centre of the organization. In a bank situation, three types of
movements may be as under:
Vertical Movement
Scale Management level Minimum years of experience before
promotion to next grade
I Junior Management Middle 7 years
II Management 5years
III Middle Management 5 years
Iv Senior Management 3 years
V Senior Management 2 years
VI Top Management 2 years
VII Top Management 2 year
Horizontal movement
Branch size Branch Manager Major business dimensions
Small Scale I (JMG_) Personal Banking, agriculture, priority
Medium Scale II (MMG) sector
Personal Banking, agriculture,
priority sector,
Large Scale III (MMG) commercial credit
SSI, Industrial and institutional credit
Very Large Scale IV-V (SMG) SSI, Industrial, institutionalcredit
and foreign
exchange
Inclusion movement
n
office Management level Responsibilities
Regional Office Scale III Incharge of functions like
credit, staff,
Regional office Scale IV (Regional Manager) Coordination, control and
development of the
Zonal Office Scale IV (Chief) Incharge of functions like
Scale V credit staff.
Zonal Office Scale VI (Zonal Manager) Scale IV - Coordination, control and development of
Chief Manager the zone
Central Office development, inspection Head of functions like credit, staff,
development, inspection Overall
trte—ntral Office Scale V - AGM supervision and policy review function
Central Office _
Scale VI - DGM Overall control and policy review for
i Scale VII - General Manager modifications
Central Office Strategic management for a function :
review,
Career Anchors: Tins concepts refers to a personal sense of type of work individual wants to pursue and what that irk
implies about the individual. It has three components: Self perception of the talents and abilities based on one's performance.
Self perceived motives and needs based on self-diagnosis and feedback. 3. Self perceived attitudes and values based on interactions
with the norms and values implicit in the organization. As per Schein there are 5 types of career anchors: Technical / functional
competencies, Managerial competencies, Security,Creativity,Autonomy,
career Path Planning System.In general, the career development has two distinctive phases i.e. prior to acquiring qualification
and after acquiring qualification.Career planning is primarily an HRD sub-system. It establishes the linkage between
other sub Systems like manpower planning, job rotations, transfer, placement, training and performance appraisal.
Implementing the career plan, the organization has to see that: . Policy.of career planning is made explicit. Benchmarks are laid down.
Career path is a facility for growth and not a right for advancement. Career path should be made known to the employee. Career path is
followed uniformly for all employees without bias. Career path should be flexible to accommodate variation.
For effective implementation of career path, the organizations have to: Define the career stages in relation to the organizational levels.
Identify the core jobs at each level,Define and spell out the criteria for each successive level.Placement is the next career role.

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SELF DEVELOPMENT : Organisations are required to bring about strategic changes involving business diversification, expansion
and structural changes in response to emerging demands. Organisations are not able to bring total change of mindset of their people.
For creating learning organizations, the people in the organization have to be sensitized to the need or self-renewal. To achieve a
lasting effect, the organizations have to concentrate on how the HR could be reoriented towards such self-renewal. Unless the
individuals change, they would not be able to survive. The change in the organization comes only when the individuals sense that
change is occurring and he has to take corrective steps to ensure that he does not become a misfit. For self-development of the
individual in the context of an organization, the under-noted aspects require consideration: At individual level : motivation pattern,
locus of control and power bases. At inter-personal level : Interpersonal needs, Transactional Analysis At group level : Being
effective member in the work group
Interpersonal interactions
There are a very large no. of situations in an organization, when people interact with each other and influence each other. Accordingly, people
can acquire influencing styles. According to Schutz, there are 3 basic interpersonal needs implied in interaction among people i.e. inclusion,
control and affection. ( Satisfactory relationship includes (a) a psychologically comfortable relationship with people on a dimension of
initiating interaction and (b) a psychologically comfortable relationship with people with respect to eliciting the behaviour from others.
Transactional Analysis
Transactional Analysis (or TA) is the process of analyzing and understanding the beheviour of a human being. It helps in understanding the
behaviour of the self and others, improve the interpersonal relationship and ensures effective communication.
The concept was developed by Eric Berne based on the concept of Freudian Psychology suggested by Sigmund Freud. He made the Freudian
ego and superego simple by replacing with 3 ego states of human mind having no relationship with the age of a person. These ego states are:
Parent- 2 types egos are (1) nurturing parents (it is that part of a person which is understanding and caring about other persons and (2)
critical parents behaviour criticizes others for their undesirable behaviour. In this state a person is very evaluative and judgmental and makes
others feel that they are not OK. Adult This state evokes behaviour that is logical, rational, having control over emotions,
eagerness for problem solving, rational decision making. Such persons try to find alternatives based on facts and figures and probabilities
prior to engaging in behaviour.
Child-It is a state where a persons behaves emotionally, irrationally and his decision making normally not based on logic and
rationale. A person's child contains the natural impulses and attitudes learnt from experiences. This state can be classified into 3 (a)
Adopted child (it adapts to what must be done to other to get along) (b) natural child (tries to enjoy every bit and take the things as they
come) (c) little professor (it is thinking part and is creative, intuitive, imaginative and indulging in experimentation).
Life positions : People make basic assumptions about their own self-worth and also about the other people in the environment. Harris called
these combinations as Life Positions which are described in the form of OKAYNESS.
PERONALITY TRAITS UNDER TRANSACTIONAL ANALYSIS
Based on the ego states, there are 4 personality traits of a person. The most appropriate under these is considered to be "I am OK. You are
OK".
Working in teams : Synergy creates new untapped alternatives. It exploits the mental, emotional and psychological differences between
people.
Team: It is a group of people with high degree of interdependence for achievement of a goal. The term group and team are used
interchangeably.
Group dynamic : This term was given by Kurt Lewin in 193(3. It refers to (1) internal nature of the group (2) how group is formed (3).structure
and process of group GO how the group functions and affect individuals and organisation.: Stages in group formation and group
behaviour: There are 5 stages:
1. Forming (awareness) — members with varied experiences get to know each other. Understand the team's goals and its role..
2
' Storming (conflict) — the conflict amongst members. Through conflict, the team attempts to define itself.
Norming (cooperation) - Norms for accomplishment of task are laid. The rules and regulations follow.
Conforming (adjustment) — individuals adjusting with team expectations and norms S. performing (productivity) — Members focus on
accomplishment of goal by devoting full energy.
Self-awareness : Understanding self, helps in self-development and using one's potential better. SWOT analysis is beneficial to
understand one's strengths, weaknesses, safeguard against threats and capitalizing the opportunities.The concept of Johari Window by Luft
and Ingham, explains what is meant by self-awareness. There are two dimensions (a) how much of one's behaviour is known to him (b) how
much he feels others know him.
These two dimension give 4 windows called (a) arena (b) blind (c) closed and (d) dark.
Known to self Not known to self
Known to others Arena (i.e. open space) Blind
Not known to others Closed Dark
Arena : Area of personality known to self & known to others. Dark - Area of personality of a person not known to self and not known to
others. Closed- Area of personality of a person known to self and but not known to others. Blind - Area of personality of a person not
known to self but known to others. The size of arena is critical for improving effectiveness. More a person feels that other know him,
more conducive the environment becomes and the better he is equipped, to face the challenges. The Person becomes receptive to the
feed back and he discloses more and more about himself.Such persons are more trustworthy, open to ideas and suggestion given by
others.
Emotional intelligence:As per Daniel Goleman link between IQ test scores and the achievements in life is dwarfed (dusted) by the
totality of other characteristics that one brings to life. These characteristics are called emotional intelligence (i.e. abilities such as being
able to motivate oneself and persist in the face of frustration, to control the impulse and delay gratification, to regulate one's moods
and keep away distress from swamping the ability to think. There are ye components of emotional intelligence:
Self Awareness: ability to recognize, understand emotions and their effect on others. It includes self assessment and self confidence.
Self : ability to control disruptive impulse, to think before It includes self control
44
regulation acting.
Motivation Passion to work for reasons that go beyond money or It includes
status. achievement
Empathy drive.
It means understanding
Ability to understand emotions of others and treat
people according to their emotional reactions. others
Social skills Proficiency in managing relationships and building It covers influencing
networks and ability to fund common ground and build
rapport.
Morale : Morale is a mental state and spirit of a person or group which depends on a no. of intangible factors. High morale
contributes significantly to the achievement of organizational goals. It is reflected through confidence, cheerfulness, discipline and
willingness to perform assigned tasks. Positive morale is highly dependable on employee motivation, reward and recognition. Poor
morale impacts every aspect of the business.
Employees' Morale Boosters : There are a no. of initiatives that boost the employee morale, which include the following.
Welcome ideas Sharing and implementing the innovations and ideas of employees
Keep score Putting a score board to recognise top performers and motivate those on the bottom line
Inspect Inspect what you think is true

Thank you notes Send Thank You letter to staffs family praisii their efforts
Huddle Have a daily morning session to highlight tasks for the day and cheer previous day's wins
Open up Provide an open forum to perniit employees to express their concerns

Have fun Special events or outside activity can take the day to day pressure
3.Human Implications of Organisations

Human behaviour and individual differences : Human behaviour is a combination of originating and responding behaviour. It is the
result of biological and psychological processes.According to Kurt Lewin behaviour is a function of the person and environment around him.
The factors that influence the behaviour of an individual can be grouped as:Environmental factors — Economic (employment, wage rates
economic outlook), social (work ethic, achievement needs, values), political (stability of Govt.).Personal factors — Age, sex, education,
abilities, marital status and no. of dependents etc. Organisational factors — Physical facilities, organization structure and design,
leadership, compensation and reward system etc.Psychological factors — Personality, perception, attitude, values, learning etc.
From the angle of an organization, the organization views the employees as the rational humans motivated by money. As a result, it adopts
economic man and rational man approach.However, economic motives alone may not influence the behaviour at the workplace. Other
factors such as treatment, acknowledgement of their contribution etc. also affect the behaviour.
Employees behaviour at work :Employees behaviour at workplace plays important role in success of the organization. The people in an
organization do not work in isolation and their role and performance is interdependent.Assumptions about human behaviour at work: i.
There are difference between individuals.Concept of a whole person Behaviour of an individual is caused. An individual has dignity.
Organisations are social systems. There is mutuality of interest among organizational members. Organisational behaviour is holistic.
There are certain commonalities in the persons such as persons like all other persons, like some other persons and like no persons.
Hence, the individuals have certain common characteristics. Personality Theories of Motivation and their practical
implications : Motivation refers to a process beginning from the inner state of a person and ending with need fulfillment. When a student
puts in hard work in studies, his motivation level is considered as high. When a worker shirks work, his motivation level is deemed to be low.
The word motivation is derived from a Latin word `movere' i.e. to move. As a behavioural concept, motivation is of great interest to the
Managers in business organization.
There are various theories of motivation such as:
Name of Theory Description of the theory '

Scientific FW Taylor contributed much to this theory. Theory states that: Physical work could
management or be scientifically studied to determine the optimal method of performing a job.
Rational Economic Workers can be made efficient by giving prescription. Workers would be willing to
View accept these prescriptions, if paid on a differential piece work basis.
Human Relations As per Elton Mayo, social contracts at workplace are important in addition to money.
Model Workers can be motivated by acknowledging their social needs and making them feel
Abraham Maslow's useful and important.
He identified five levels of needs:
Need Hierarchy 1:Physiological needs: Food, rest, exercise, shelter etc. 2:Safety needs: Protection
Theory against danger, threat, deprivation. 3:Social needs: Need for belonging, for association,
for acceptance, for giving and receiving friendship and love. 4:Ego/esteem needs:
Need for self confidence, for dependence, for achievement, for knowledge and need
for status, recognition, appreciation. 5:Self-fulfillment or self-actualisation needs: To
realise one's own potentialities, to experience conrini 'err self-development, to be
creative. _ __

45
Frederick Herzberg's It states that there are two sets of motivating factors i.e. hygiene or maintenance factors
Two Factor Theory relating to job environment and other the motivators relating to contents of the job.
— Motivational factors include recognition, advancement, responsibility,
achievement, possibility of growth & work itself. Maintenance factors include
company policy and administration, technical supervision, salary, job security, personal
life, working conditions, status, inter-personal relations with peers and supervisors.
Clayton Aiderfer's It is based on existence, relatedness and growth (ERG). People have needs in a hierarchy
ERG Theory and these needs determine the human behaviour. ERG theory has three levels of needs
compared to 5 in case of Maslow. As per ERG theory, more than one need may be
Achievement
Motivation Theory According to DC McCelland, there are three needs i.e. for achievement, for power
and for affiliation.
VictorH Vroom's This theory is known by other names also such as instrumentality theory, path-goal
Expectancy Model theory, valence-instrumentality-expectancy theory. As per theory, motivation is
' determined by the nature of reward people expect to get as a result of their job. Man
being rational tries to maximize his perceived value of such rewards. There are three
elements in the model i.e. expectancy, instrumentality and valence (value a person
assigns to the desired reward).
lames Stacy Adams' Theory proposes that motivation to act, develops after the person compares the inputs /
Equity Theory outcomes with the identical ratio in comparison to the other person. Upon feeling inequity,
the person is motivated to reduce it.
Lyman W Porter and It states that the motivation does not equal satisfaction and performance. These are
Edward E Lawler — all separate variables. Effort does not lead to performance directly. The reward that
Performance follows will determine the satisfaction.
Reinforcement i The consequences of an individual's behaviour in one situation influences that
Theory. individual's l behaviour in a similar situation.
Motivation and behavior : Behaviour is generally influenced by a desire to achieve some goal and goal may be known to the individual or
it may not be known to him. Each activity is supported by motivation.
Motives — Individuals carry a set of inner motivations and drives that influence the way he behaves much more radically than he
realizes. Motives are needs, wants, drives or impulses within the individual.
Goals — These are outside an individual. These are the hopes for rewards towards which the motives are directed.
Motivation To Work
There are several ways of motivating people at work such as money, appreciation, job enrichment, job rotation, participation.
It is important motivator as money has the capability to meet several needs of a person.
Money
Maslow's physiological needs like food, clothing and shelter can be met by money. Money
has a limited impact as motivator and it has diminishing returns.,
Appreciation An effective non-monetary benefit is the recognition and appreciation for good job. It
satisfies self esteem need. It also has impact on other group members.
Job enrichment A job is enriched when it is challenging and creative. It provides more decision
making, planning and controlling experiences.
Job rotation Shifting an employee from one job to another keeps his interest in the job intact.
Besides, there is lot of learning opportunity in job rotation.
Participation Participation of the employee in the management of an organization keeps the
employee motivated.
Quality of work life Adequate and fair compensation, safe and healthy environment, jobs aimed at
developing and using employee's skills and abilities, integration of job career and family
all contribute in improvement in quality of work life.
Role concept and analysis :Role refers to a set of expected behaviour patterns attributed to someone occupying a given position
in an organization. Role and position are different concepts. Role is a position a person occupies in an organization and it is an
obligational concept . Position is a relational and power related concept. The concept of role widens the meaning of work and
relationship of the employee with other significant persons in the system. There are few import4nt aspect of role such as role
stagnation, inter-role distance, role set conflict (which has various forms such as role ambiguity, role expectation conflict, role overload,
role erosion, role inadequacy, personal inadequacy etc.)
4.Employees' Feed Back &I Reward System

Progressive organizations make efforts to obtain regular feedback from the employee on various aspects of HRM. This is done by
way of some satisfaction or climatic survey. The information is gathered both formally and informally about the attitude and
satisfaction of employees. At formal level this is collected through well designed questionnaires, psychological, suggestion schemes
etc. The informal information is gathered through discussions with the representatives of employee, observation of managers and
superiors based on the behaviour pattern of the employees.Thorough such surveys, the organization is able to understand as to how
effectively, it is managing its people.
Feedback through climatic survey : Under this, the organizations measure individuals' perception about the climate within the
organization. The coverage of a typical climate survey can be as under: Structure (employees' feeling about constraints on groups, rules,
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regulations, procedures, communication channel, delegation.) Responsibility (employees' feeling about being your own boss, clarity of
role) Reward (employees' feeling about being rewarded for good job, perception about reward and punishment system),Risk (sense of
riskiness and challenge in the job and in the organization),Warmth (general feeling of fellowship, informal supporting culture)
Support (perception about helpfulness of managers),Standards (perceived importance of implicit and explicit goals and
performance standards),Conflict (employees' feeling that the managers and others want to hear different opinion)
Identity (employees' feeling of belongingness to the organization and perceived value).
Reward and compensation
The wages as compensation is viewed as the main attraction to join or change a job. Compensation should be reasonable and
justifiable to keep the employee happy and devoted in the organization. Basic aim of an individual is to earn satisfactory wages
and perform well to be recognized for other financial and non-financial rewards.
Types of compensation : Compensation refers to a monetary reward for the performance of the job plus other benefits. It
include wages or salary, bonus, cash allowances, benefits such as accident, health insurance cover, employer' contribution to
the retirement funds, provision for accommodation.
Certain important information for questions on MINI (Common for all Chapters):
1.Attitude has emotional, informational, behaviourial dimensions.
2 Attitude though difficult, but it can be changed.
3 One of the weapons to change the attitude is by arousing fear.
4 Attitude changes can be tried through influence of friends and peers, opinion leaders and co-opting people in the decision making process.
5 Career roles such as sponsor, colleague, apprentice and mentor can be arranged in the ascending order as sponsor,
colleague, mentor and apprentice.
6 In transaction analysis, the transaction is blocked when a transaction takes place between parent to parent.
7 An individual's personality has a combination of child, adult and parent ego status.
8 In transactional analysis "I am not OK, you are OK' stands for — I do not have value. You have value.
9 Every member of the group has to work out the task of the group, maintain the cohesiveness of the group and understand the
decision making process of the group.
10. HR professionals must have concern for people and their development.
11. HR professionals must have ability to work as a team member
12 National Institute of Labour Management was started mainly for promotion and development of cordial relationship between employees
and employers.
13 Howthrone Studies revealed that productivity depends on emotional state, relationship with colleagues, kind attention of the supervisors.
14 Application of IT to serve customers of a bank has tremendous potential.
15 The main task of knowledge management is to capture tacit knowledge of people for future use. i6 Andragogy refers to adult learning.
Labour unrest and formation of unions was started because more emphasis was laid on work, there was mechanical approach
towards the workers, behaviour of the workers was totally ignored.
8 The central theme of Human Approach in Management is that the individuals are motivated by sense of achievement.
19 Human relations movement replaced 'rational economic man' by 'social man'. Social man means development of relationships through
organisational interaction.
20 Learning requires feed back, motivation and practice.
5.Performance Management
The basic objective of HRM is to create an environment, where the individual contributes his best to meet the corporate goals and gets
satisfaction, out of what he does. Their performance is measured to examine their contribution and also for compensation.
Definition of performance Appraisal:
As per Heyel, performance appraisal is a process of evaluating the performance and qualifications of the employees in terms of
requirement of the job for which they are employed, for the purpose of administration including placement, selection for promotion, for
financial rewards and other actions.
Appraisal system :
Performance appraisal is an important tool both for the organization and the employee. It is a process by which the management
finds out how effective it has been in hiring and placing the employees. It is an important tool to review employee performance,
take corrective steps through training, interventions or placement decision, reward good performance and attempt to take the
employee performance at a higher level. The appraisal system may be formal or informal depending upon the requirements of the
organization.
Objectives of the system: According to McGregor, the performance appraisal plans meet 3 needs: r. Judgmental for salary increases,
transfers and promotions. Developmental — telling an employee hoe is he doing and suggesting changes in his skills, attitude and behaviour.
Counselling by the superior. The specific objective, the system should serve are: To enable the organisation to maintain an inventory of
the quality and skills of people and identify and meet their training needs. To determine the performance linked increments and provide
data for promotions and transfers.To maintain individual and group development and fulfill their aspirations by sharing with them, their
standard of observed performance and help them reach the benchmarked by skill upgradations programs.
Benefits of performance appraisal
Making employee comparable at common footing as uniform rating scale is used.
It provides critical input to decide on promotion, compensation, training etc.
It provides input on weak areas relating to the employee to initiate corrective action
If implemented with openness and trust, the system provides better interpersonal relations between employees and supervisors.
Process of evaluation:
The process of evaluation has to take care of the following aspects: Organization sets up the performance standards, that should be
clear, realistic and measurable. Standards are required to be conveyed to the employees. For measurement of performance, data is
collected. Based on data/information, the performance is measured. Outcome of the appraisal is discussed with the employee
emphasizing the strong points and counseling him on the weak point Corrective steps are taken.
Appraisal methods:
Management by objective method (MBO):
This system emphasizes on goal achievement rather than the method involved. The process is: Setting up of organizational goals.

47
Goal setting is a joint process. Frequent reviews of performance through one to one meeting. Sharing of feedback in altering the course
of action, if required.
Advantages — Involves participative approach in goal setting. (b) enhances motivational skills (c) creates an environment of competition
within the organization for enhanced performance (d) provides objective appraisal method (e) early identification of problems.
Disadvantages — (i) concentrates on results and not processes (2) leads to unhealthy competition amongst employees (3) creates
conflicting situation at the time of goal fixation (4) soft targets may be fixed to show high performance.
Performance appraisal method in Banking Industry : It runs in 3 parts
(i) First part consists of self appraisal by the employee which ensures participation of employee.
, (2) Second part is appraisal by the reporting authority
(3) 3rd part is review by the senior authority to reduce subjectivity or bias.
Potential assessment:
The performance appraisals emphasizes the past performance and does not help much in making assessment about the potential
performance. For this purpose, the organizations may make use of Potential Appraisal Report. The assessment centre method (of
performance appraisal) used in conjunction with the performance appraisal system, can help in determining the potential.
6.HRM Information Technology

Globalisation has removed all the physical, and national boundaries by linking organizations from all parts of the world, by use of IT. HRM as a
function has dual responsibility to respond to the developments having taken place in the area of information technology (IT), for
transformation of the mind set of all individuals across the organization and also use of IT in day to day decision process.
The banking sector has absorbed maximum technology for their operations. IT has offered a variety
of delivery channels to support customers' needs in an efficient and effective manner.
Role of IT in HRM
There is lot of scope for use of IT in whole range of HRM functions i.e. recruitment, training, placement, appraisal and reward
system, organizational development initiatives etc. The need for use of IT can be seen through the following: i. Basic information about
employee used within the organization. New dimensions have been added to employee data such as training, competencies, skills,
expectations etc. Updation of employees data HRD decisions are data-based now and IT provides that data. Adherence to statutory
requirements. As per Nadler: i. Massive influx of technology into workplace presents great challenge in keeping the workforce's
v.-crk and knowledge base current and avoid workforce obsolescence New tools disrupt traditional work patterns and can have
demoralizing effect. HRD effort must align to the corporate planning. HRD efforts would be examined in terms of contributing to high
performance work unit and demonstrating results.
HR Information and Database Management
computer based data can enhance the quality of decision making. A typical HR information system includes the following types
of data: The need for use of IT can be seen through the following: i. Bio-data,Educational qualification,Professional qualification
Organisational history (entry level, promotion, placements, training, performance appraisal, competencies, Salary & allowances.
The above type of data, requires few changes over a time period. But the data base provides lot of information as input for decision
making.
HR Research : Research in HRM can be undertaken to understand: trends of existing systems like recruitment, promotion, training,
appraisal system etc. to understand the workforce in terms of motivation, commitment, expectation, frustration etc. to remain sensitive
to internal environment, regular opinion surveys, benchmarking, climate studies etc. can be conducted.
Knowledge Management (KM) : KM refers to process of (a) creating, (b) storing (c) distributing and (d) pooling the knowledge (as per
Wilcox-1997).The people in a system are the sources of creating knowledge while storing and distributing the information is the responsibility
of the information technology machinery of the organization. Hence management of 'knowledge worker' is very critical issue and cannot be
done by traditional, bureaucratic process. Knowledge management has gained prominence in the light of the uncertainty that the employee
who has created the knowledge, will continue with the organization or not, particularly where the attritions le77els are higher.
Use of technology in training : The technology offers an opportunity in designing training interventions to suit the individual
learners. Important features are: Mass learning user friendly material can be produces at low cost. Trainers and trainees can be physically
separated.Trainee has the option to choose time and date and place and convenience form for learning.
Technology based training methods help in distance learning.
Advantages of E-Learning: Trainee can choose his own time and place to learn. Trainee can learn at his own pace.Trainee can check his
understanding It is highly cost effective.
Disadvantages of E-Learning: i. Inflexible as program is pre-produced,It needs greater self discipline, It can produce a sense of isolation
If turnover is low, it can prove expensive due to high cost of hardware and software

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MODULE - D : CREDIT MANAGEMENT
1. Overview of Credit Management
Credit is important both for the producers and consumers. While the entrepreneurs can undertake projcicts or expansion with the help of
available credit, the consumers can plan to buy the products and spend more than what they have. This creates demand for goods and
services and helps the economy to grow.
Principles of Lending: The basic principles include (1) safety of funds (2) purpose of loan (3) profitability from lending activity (4) liquidity (5)
security (6) risk spread.
Types of borrowers: The borrowers fall in different categories and they are governed by different laws.
Type of Borrower Law governing the borrower
Individuals, Indian Contract Act
Sole proprietorship, Indian Contract Act
Partnership firms, Partnership Act
Joint ventures, Indian Contract Act
Hindu Undivided Family (HUF) ' Hindu Customary Law
Companies, • , - Companies Act 1956
Statutory corporations - Related Act
Trust Indian Trust Act
Societies etc. Societies Registration Act
Types of bank loans: These broadly fall in 2 categories, fund based and non-fund based. Fund based loans are the loans where the bank
funds are transferred to the borrowers. In case of non-fund loans, the funds are not transferred immediately, but there is definite
commitment of the bank to transfer the funds in case of contingency. For example, in a bank guarantee the bank transfers the funds to the
beneficiary of the guarantee, in case there is default by the applicant on whose behalf the guarantee has been issued.
Classification on the basis of time period involved : short term loans and long term loans.
Classification based on purpose : working capital loans, project loans, export credit, agriculture credit etc.
RBI guidelines on segment reporting: For public reporting pUrliose, from Mar 2008, the banks make reporting of their business, under the
following categories : Treasury : It should include entire investment portfolio
Corporate / wholesale banking : It include advances to partnership firms, companies, statutory bodies, trusts, which are not part of the retail
banking.
Retail banking: Retail lending is the business that fulfills the following 4 criterion: Orientation Criterion - The exposure (both fund-based and non
fund-based) is to an individual person or persons or to a small business; Person under this clause would mean any legal person capable of
entering into contracts and wokild include but not be restricted to individual, HUF, partnership firm, trust, private limited companies, public
limited companies, co-operative societies etc. Small business is one where the total average annual turnover is less than Rs. 5o crore. The
turnover criterion will be linked to the average of the last three years in the case of existing entities; projected turnover in the case of new
entities; and both actual and projected turnover for entities which are yet to complete three years.
Product Criterion - The exposure (both fund-based and non fund-based) takes the form of any of the following: revolving credits and
lines of credit (including overdrafts), term loans and leases (e.g. instalment loans and leases, student and educational loans) and
small business facilities and commitments.
Gr anul ar it y C ri teri on - Ban ks mu st ensure th at th e r egu lator y r eta il po rtfo lio i s
sufficiently diversified to a degree that reduces the risks in the portfolio, warranting the 75 per cent risk weight. One way of achieving
this is that no aggregate exposure to one counterpart should exceed 0.2 per cent of the overall regulatory retail portfolio. 'Aggregate
exposure' means gross amount (i.e. not taking any benefit for credit risk mitigation into account) of all forms of debt exposures (e.g.
loans or commitments) that individually satisfy the three other criteria. In addition, 'one counterpart' means one or several entities that
may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would
apply to the bank's aggregated exposure on both businesses). While banks may appropriately use the group exposure concept for
computing aggregate exposures, they should evolve adequate systems to ensure strict adherence with this criterion. NPAs under retail
loans are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion for risk-weighting purposes.
(iv) Low value of individual 'exposures - The maximum aggregated retail exposure to one counterpart should not exceed the absolute
threshold limit of Rs. 5 crore.
4. Other banking business: It includes banking operations that are not covered by any of the other 3 categories.
Components of credit management : The components include (i) Loan policy of the bank (2) Appraisal (3) Delivery (4) Control and
Monitoring (5) Rehabilitation and recovery (6) Credit risk management (7) Refinance.
1. Loan policy : Each bank formulates its own policy for sanction of credit proposals. The policy normally provides for (a) exposure limits
for individual and group borrowers (b) exposure limits for different sectors (c) discretionary powers at various levels within the bank.
2. Appraisal : It done on the basis of credit history, financial status, market report of the borrower, the prospects of economic activity being
financed. The objective of the appraisal is find answers to following important questions: a. Whether the borrower is creditworthy and what
he is going to do with the bank money h. What are the prospects of the economic activity to be conducted profitably . What are the
prospects of repayment of the loan by the borrower. What security will be available to the bank, to recover the loan, in case of need
3. Delivery : This includes formalities relating to loan documentation, creation of charge over securities and formal disbursement of the loan.
4. Control and monitoring : It involves post-sanction follow with a view to ensure that the conditions of the loan are being complied with and
the economic activity is as planned at the time of sanction. It also involves monitoring the recovery of lean as per schedule fixed.
5. Recovery or rehabilitation : If an economic activity faces some problem and borrower is unable to repay the loan, the bank may have to go
for re-structuring of the loan. If the normal operations are not possible with rehabilitation etc., bank may have to initiate recovery action
including sale of securities.
6. Credit risk management : Bank has to follow the best practices for credit risk management that include identification of risk,
quantification of risk, pricing of risk, mitigation of risk etc.
7. Refinance : It assumes importance when there is tight liquidity situation. It can be availed from institutions such as NABARD, SIDBI, RBI,
NHB etc. on the basis of eligible loans.
Role of RBI guidelines in Bank Credit Management : RBI guidelines influence the credit management policies and procedures of the
bank in a significaiii manner. Some of these guidelines are:

49
End use of funds :Banks are to ensure proper end use of bank funds and monitoring of funds flow. Systems and procedures of
banks are required to ensure that withdrawals from loans are for the approved Purposes such as to meet working capital or to
acquire fixed assets and there should not be diversion of bank loans to outside the business activity.
Priority Sector Lending
per RBI guidelines of July 23, 2012, the priority sector include (i) Agriculture (Direct and inuirect), (ii) Micro and Small
Enterprises (Direct and Indirect), (iii) Export Credit (iv) Education.
TARGETS FOR PRIORITY SECTOR
Domestic commercial banks & foreign banks with 20 or more branches
1. Priority sector will include (i) Agriculture (Direct and Indirect finance), (ii)Small Enterprises (Direct and Indirect Finance) including Retail Trade,
(iii) Education loans (iv) Housing loans (v) Other Priority Sector.
2. Targets,are linked to Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher as on the
last Businday of previous financial year.
3. ANBC means Net Bank Credit plus investment in Non SLR securities classified as Held Till Maturity.
Domestic Corn Banks & Foreign banks with 20 or more branches As % to ANBC or
CEOBE
Overall credit to priority sector (as % of ANBC or CEOBE) 40 %
Agriculture (% to AN BC or CEOBE) -
Within agriculture — Maximum for indirect agriculture (as % of ANBC or CEOBE) 4.5%
Weaker section (as % of ANBC or CEOBE) 10%
Small enterpriSes sector -Overall target as % of PS adv. N.A.
Of ols credit to M&SE to units with investment in plant & machinery up to Rs.10 lac and investment in equipment 40%
up to Rs.4 lac in service providing units _
M&SE units with investment in plant & machinery above Rs 10 lac but up to Rs.25 lac and investment in equipment above Rs 20%
4 lac up to Rs.10 lac in service providing units _
DRI advances No target
Export credit No target
Foreign banks with less than 20 branches
Priority Sector — overall (as % of ANBC or CEOBE) 32%
M&SE Credit for foreign banks.(of ANBC or CEOBE) N.A.
Export credit for foreign banks (of ANBC or CEOBE) N. A.
RRBs & Co op banks
Priority Sector — Overall for RRBs (of total advances) Within this, for Weaker Section (of 60%
total advances) 15%
Priority Sector overall for Urban Coop Banks (of Adjusted bank credit) 40%
Target for Annual growth in outstanding credit to micro and small enterprises 20%
Target for Annual growth in number of micro enterprise accounts 10%
Other than PS targets

Credit to women beneficiaries (pf ANBC) 5%
Housing finance allocation (of incremental deposit for last reporting_Friday of previous year. 3%
MICRO, SMALL & MEDIUM ENTERPRISES (MSMEs) : Govt. of India enacted the Micro, Small and Medium Enterprises De-v-elopment
(MSMED) Act, 2006 on June 16, 2006 (and notified on Oct 2, 2006. Consistent with the notification of the MSMED Act 2006, the
definition of micro, small and medium enterprises engaged in 'manufacturing or production and providing or rendering of services
has been modified by RBI.
Definitions :(a) Enterprises engaged in the manufacture or production, processing or preservation of goods as
specified below:
i ) A micro enterprise is an enterprise where investment in plant and machinery [original cost excluding land and building
and the items specified by the Ministry of Small Scale industries] does not exceed Rs. 25 lakh;
A small enterprise is an enterprise where the investment in plant and machinery (original cost excluding land and building and the items
specified by the Ministry of Small Scale Industries) is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and
A medium enterprise is an enterprise where the investment in plant and machinery (original cost excluding land and building and the
items specified by the Ministry of Small Scale Industries) is more than Rs.5 crore but does not exceed Rs.io crore.
(b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding
land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under MSMED Act,
2006) are specified below. These will include (a) small road & water transport operators (b) small business and (c) professional & self
employed persons.(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;
A small enterprise is an enterprise where the investment in equipment is more than Rs.io lakh but does not exceed Rs. 2
crore; and A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not
exceed Rs. 5 crore.
Credit Exposures to Individual/Group Borrowers
Standard exposure limit : 15 percent of capital funds in case of a single borrower and 4o percent of capital funds in the case of a
borrower group. The capital funds for the purpose will comprise of Tier I and Tier II capital as defined under capital adequacy standards.
Exception : Credit exposure to a single borrower may exceed the exposure norm of 15 percent of the bank's capital funds by an
additional 5 percent (i.e. up to 20 percent) provided the additional credit exposure is on account of extension of credit to
infrastructure projects. Credit exposure to borrowers belonging to a group may exceed the exposure norm of 4o percent of the
bank's capital funds by an additional 10 percent (i.e., up to 5o percent), provided the additional credit exposure is on account of
extension of credit to infrastructure projects.
Additional exposure : In addition to the above exposure, banks may, in exceptional circumstances, with the approval of their Boards,
consider enhancement of the exposure to a borrower (single as well as group) up to a further 5 percent of capital funds subject to the
borrower consenting to the banks making appropriate disclosures in their Annual Reports.
50
Oil companies: With effect from May 29, 2008, the exposure limit in respect of single borrower has been raised to 25% of the
capital funds, only in respect of Oil Companies who have been issued Oil Bonds (which do not have SLR status) by Government of
India. In addition to this, banks may in exceptional circumstances, as hitherto, consider enhancement of the exposure to the Oil
Companies up to a further 5 percent of capital funds.
Disclosure: The bank should make appropriate disclosures in the 'Notes on account' to the annual financial statements in .respect of the
exposures where the bank had exceeded the prudential exposure limits during the year.
Exposures to NBFCs: The exposure (both lending and investment, including off balance sheet exposures) of a bank to a single
NBFC / NBFC-AFC (Asset Financing Companies) should not exceed io% / 15% respectively, of the bank's capital funds as per its last
audited balance sheet. Banks may, however, assume exposures on a single NBFC / NBFC-AFC up to 15%/2o% respectively, of their
capital funds provided the exposure in excess of ro%/15% respectively, is on account of funds on-lent by the NBFC 1Ni-TO-AFC
to thC '-e-aSti-ilciule sector. Exposure of a hank to Infrastructure Finance Companies (IFCs) should not exceed 15% of its capital
funds as per its last audited balance sheet, with a provision to increase it to 20% if the same is on account of funds on-lent by the
IFCs to the infrastructure sector. Further, banks may also consider fixing internal limits for their aggregate exposure to all NBFCs put
together. Infusion of capital funds after the published balance sheet date may also be taken into account for the purpose of
reckoning capital funds. Banks should obtain an external auditor's certificate on completion of the augmentation of capital and
submit the same to the Reserve Bank of India lu fore 1. M:oiling the additions to capital funds.
Rates of Interest on Advances
RBI started prescribing the minimum rate of interest on advances by banks w.e.f. Oct 1, 1960.. In between, from Mar 2, 1968 the concept of
maximum lending rate was introduced and discontinued wef Jan 21, 1970. The ceiling rate was again introduced effective March 15, 1976
and the banks were advised to charge interest on advances at periodic intervals (i.e. at quarterly rests). In Sep, 199o, a new structure of
lending rates linking interest rates to the size of loan was prescribed. It significantly reduced the multiplicity and complexity of interest rates.
To allow greater functional autonomy to banks after introduction of banking system reforms, effective Oct 18, 1994, RBI decided to free
the lending rates of banks for credit limits of over Rs. 2 lakh and banks were given the free:11,pm to fix the lending rates for such credit
limits.
W..e,f. 1.7.2010, RBI introduced the Base Rate system to replace the BPLR system.
Base Rate Guidelines
On recommendations of a Working Group on (Chairman: Shri Deepak Mohanty) to review the BPLR system and suggest changes to make
credit pricing more transparent, RBI decided that banks should switch over to the system of Base Rate. The system is aimed at enhancing
transparency in lending rates of banks and enabling better assessment of transmission of monetary policy. For this purpose, RBI issued, the
following guidelines to banks: The Base Rate system replaced the BPLR system with effect from July 1, 2010. Base Rate shall include all those
elements of the lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the Base
Rate for a specific tenor that may be disclosed transparently. Banks are free to use any methodology, as considered appropriate to fix the
base rate, provided it is consistent and is made available for supervisory review/scrutiny, as and when required.
Banks may determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer
specific charges as considered appropriate. In order to give banks some time to stabilize the system of Base Rate calculation, banks have been
permitted to change the benchmark and methodology any time during the initial six month period i.e. end-December 201o.
The actual lending rates charged may be transparent and consistent and be made available for supervisory review/scrutiny, as and when
required. All categories of loans should henceforth be priced only with reference to the Base Rate. However, the following categories of loans
could be priced without reference to the Base Rate: (a) DRI advances (b) loans to banks' own employees (c) loans to banks' depositors
against their own deposits. The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from
external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base
Rate at the time of sanction or renewal. Changes in the Base Rate shall be applicable to all existing loans linked to the base Rate, in a
transparent and non-discriminatory manner. Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any
lending below the Base Rate. Accordingly, the current stipulation of BPLR as the ceiling rate for loans up to Rs. 2 lakh stands withdrawn. It is
expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rate and direct bank finance
will provide effective
competition to other forms of high cost credit: Banks are required to review the Base Rate at least once in a quarter with the approval of the
Board or the Asset Liability Management Committees (ALCOs) as per the bank's practice. Banks are required to exhibit the information on
their Base Rate at all branches and also on their websites. Changes in the Base Rate should also be conveyed to the general public. Banks are
to provide information on the actual minimum and maximum lending rates to the Reserve Bank on a quarterly basis, as hitherto.
The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. Existing loans based
on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the
existing contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any fee for such
switch-over.
General Issues In Interest Rates :Banks are required to charge interest on loans / advances or any other financial accommodation in
accordance with the RBI directives on interest rates on advances. The interest at the specified rates should be charged at quarterly rest
.(wef.A.pril 01, 2002) and rounded off to the nearest rupee. While debiting the interest on a monthly basis, the banks are to ensure
that the effective rate does not go up on account of the switch-over to the system of charging / compounding interest at monthly rests
and increase the burden on the borrowers.
Banks should club term loans and working capital advances together for the purpose of determining the size of the loan and the applicable
rate of interest. Banks should club the term loans and working capital advances together for the purpose of determining the size of the loan
and the applicable rate of interest.
Levying of penal rates of interest
Wef from io October 2000, banks may formulate transparent policy for charging penal interest with the approval of their Board of
Directors. Penal interest may be levied for reasons such as default in repayment, non-submission of financial statements, etc.
Floating & Fixed Interest Rates
Banks are now a days permitted to apply floating as well as fixed interest rates. In
case of fixed rates, the interest rate remains same, throughout the currency of the
loan. But in case of floating interest, the rate is modified periodically (quarterly
or half-yearly) on the basis of changes in the bench mark (called anchor rate)

51
interest rate. Benchmark interest rate is the underlying interest rate (may
be on govt. security or money market rate etc.) with which the floatin• rate
is linked. An chan e in this anchor rate would brin cha • in the floatini rate.
Collateral security :Banks are free to decide about obtaining collateral security. But in case of loans to Micro and Small
Enterprises, the general exemption is up to an amount of Rs.io lac. Proposal otherwise viable should not be rejected merely for
want of such collateral security or 3rd party guarantees.
Monetary and Credit Policy of RBI
The credit operations in the banking system, are guided by the directives issued by Reserve Bank of India (RBI) from time to time.
Traditionally, RBI expresses its views on economy through changes in the monetary policy (now called Annual Policy Statement) in the
months of April for the entire financial year and reviews it on a mid-term basis during October. The policy covering the period April-
September is known as Slack Season and the one covering October-March is called Busy Season Credit policy. Changes are also
announced intermittently depending upon the changes taking place in the monetary aggregates.
Restrictions for granting loans by Banks
1Advances against banks Own Shares: In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant any
loans aid advances on the security of its own shares.
2 Advances to banks Directors: Section 20(1) of the Banking Regulation Act, 1949 also lays down the restrictions on loans and
advances to the Directors and the firms in which they hold substantial interest. The term loans and advances shall not include the
loans or advances against Government securities, life insurance policies or fixed deposits.
3 Restrictions on Holding Shares in Companies: In terms of Section 19(2) of the Banking Regulation Act, 1949, the banks should not hold
shares in any company except as
provided in sub-section (i ) whether as nledgcc,11-,ortgagee of absolute owner, of an amount exceeding 3o percent of the paid-up
share capital of that company or 30 percent of its own paid-up share capital and reserves, whichever is less. Further, in terms of
Section 19(3) of the Banking Regulation Act, 1949, the banks should not hold shares whether as pledgee, mortgagee or absolute owner,
in any company in the management of which any managing
director or manager of the bank is in any manner concerned or interested.
4 Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks: There have been instances where fake term deposit
receipts purported to have been issued by some banks were used for obtaining advances Iron: other banks. In the light of these happenings,
the banks should desist from sanctioning advances against FDRs, or other term deposits of other banks.
Restrictions on granting loans to relatives of directors of banks. Restrictions on advances against sensitive commodities under Selective
Credit Control, Restrictions on advances against the certificate of deposits, Restrictions on advances to companies for buy back of their own
shares.
Loan system for delivery of bank credit : In the case of borrowers enjoying working capital credit limits of Rs. 10 crore and above from
the banking system, the loan component should normally be 80%. Banks, however, have the freedom to change the composition of
working capital by increasing the cash credit component beyond 20% or to increase the 'Loan Component' beyond 80%, as the case
may be, if they so desire. Banks are expected to appropriately price each of the two components of working capital finance, taking into
account the impact of such decisions on their cash and liquidity management. In the case of borrowers enjoying working capital credit
limit of less than Rs.io crore, banks may persuade them to go in for the 'Loan System' by offering an incentive in the form of lower
rate of interest on the loan component, as compared to the cash credit component. The actual percentage of 'loan component' in
these cases may be settled by the bank with its borrower clients.In respect of certain business activities, which are cyclical and
seasonal in nature or have inherent volatility, the strict application of loan system may create difficulties for the borrowers. Banks may,
with the approval of their respective Boards, identify such business activities, which may be exempted from the loan system of delivery.
Method of credit assessment :Since 1997, RBI has left it banks to follow the method of lending as per their discretion. The MBPF
system of Tandon Committee was also withdrawn. But MSE units having working capital limits of up to Rs. 5 crore from the banking
system are to be provided working capital finance computed on the basis of 20 percent of their projected annual turnover.
Fair Practices Code for Lender's Liability :RBI, on Dec 19, 2002, circulated the following broad guidelines to be adopted for framing the
Fair Practices Code by banks by April 1, 2003.
Loan Application forms and acknowledgement - Loan Application forms should be comprehensive to include information about
rate of interest (fixed / floating) and manner of charging (monthly / quarterly / half-yearly / yearly rests), process fees and other
charges, penal interest rates, pre-payment options and any other matter which affects the interest of the borrower, so that a
meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower.
Disposal of applications - Banks should verify the loan applications within a reasonable period of time and should state specific time period
from the date of acknowledgement, within which a decision on the loan request will be conveyed to the borrowers. In case of rejection of any
loan application, lenders should convey in writing, specific reasons for all accounts.
Assessment of Credit needs- Credit limit, to be sanctioned, should be mutually settled. Terms and conditions - Terms and conditions
governing credit facilities such as margin and security should be based on due diligence and credit worthiness of borrowers.
2. Analysis of Financial Statements

The financial statements are obtained from borrower to make assessment of the following:
(i) Net worth of the applicant is the excess of assets over outside liabilities. It helps the bank to make an assessment about the level of
activity that can be undertaken by the borrower.
Repayment capacity : The information available in the financial statements can help in assessing the repayment capacity (by calculation of
debt service coverage ratio).
Viability : The financial statements (the profit and loss account) throw light on the viability of the activity (whether the activity can be
conducted profitably or not).
Availability of securities : The audited financial statement indicate the type of charge on the assets of the borrower Bank can assess the level
of unencumbered securities.
Important financial statement: There are two basic statements namely (a) Balance sheet (b) Profit and loss account. These statements may
be accompanied by the Auditor's report. The another financial statement which is derived from information from above two statements is the
Funds Flow Statement. It indicates the changes in the assets and liability position, during a given period.

52
In addition the Accounting Standard — 3 (AS-3) makes it mandatory for certain organizations (which are listed on stock exchange or which
have turnover of above Rs.5o cr) to prepare cash flow statement also. They have also to do segment-wise reporting as per AS-17.
Users of financial statements: The financial statements are used by (i) Shareholders / investors (2) Lenders (3) Creditors (4) General Public (5)
Govt. (6) Employees (7) Regulators (8) Others, for serving their own purposes.
Basic concepts for preparation of financial statements: The accounting framework on the basis of which the statements are prepared is
based on certain elements which are popularly known as concepts or principles or rules, such as:
a: Entity concept b: Money measurement concept
c: A going-concern concept d: Cost concept
e: Conservatism concept f: Dual aspect concept
Accounting period concept h: Accrual concept
is Realisation concept Matching concept
k: Materiality concept. Full 1: Consistency concept
in: disclosure concept
Accounting period : As per Income Tax Act rules April-March is considered as financial year for tax purpose. But the companies can
have different financial year for their internal accounting purpose only. The maximum duration of a financial year can be extended up
to 15 years (18 months with permission of Registrar of Companies. It is to be done even in case of incomplete projects or even if there
is no activity.
Legal Position regarding financial statements: Format : There is no prescribed for partnership firms or proprietorship firms. The
format for balance sheet of companies is as per Companies Act 1956. But profit and loss account of companies, no format is
prescribed (Schedule IV states that P & L account should provide specified information. For banking companies, the format is prescribed
as per Banking Regulation Act. The balance sheet n lay he drawn in Horizontal or Vertical format as under:
Balance Sheet Components : Liabilities, Owned funds
Proprietor's capital or paid-up share capital comprising equity shares or preference shares or global depository, receipts (which the
promoters of the business or the shareholders bring in, to start with or which may be increased subsequently by fresh additions).
Reserves :The reserves are created out of profits and those reserves which are not earmarked for a particular purpose, are known as free
reserves. Capitalisation of free reserves (by debiting the reserves and crediting the capital) is also done by way of Bonus Shares
Long Term or Deferred Liabilities :(where funds are available to business for a period exceeding 12 months)
Debentures or fixed deposits: Debentures are just like long term loans and become redeemable (repayable) after a particular specified
time. Similarly, the fixed deposit also become returnable after a specified time. Term loans raised from banks and financial
institutions and deferred payment credits is treated on the pattern of debentures, as they are repayable as per repayment
schedule and they are generally secured.
Loans from friends & relatives and associate concerns are also to be treated as a liability of long term or short term nature
depending upon the repayment period.
Current liabilities or Short-term Liabilities :(where fund are available to business for a period up to 12 months)
The current liabilities are the liabilities the repayment of which is to be made within 12 months of date of balance sheet.
Various short term liabilities could be as under: Short term borrowings from banks and/or others in the form of cash credit against
stocks or book debts, pre-shipment credit, bills discounted, bills purchased, foreign bills, overdrafts etc. Unsecured loans including
commercial paper repayable within 12 months. Deposits from public maturing within one year. Staidly trade creditors (called creditors
or payable also) or bills payables for raw material/ consumable stores/spares and services. e: Expenses payable such as for wages, salaries,
rent and other expenses payable. f. Interest and other charges. i. Instalments of deferred payment credits, debentures, redeemable
preference shares, payable within one year to be classified under long term liabilities for current ratio and quick ratio calculation
purposes, it is to be added to current. liability (to be treated as per explanation given for debentures, above). Statutoryliabilitiessuchas
providentfunddues,provisionfortaxation,salestax,excise,obligationstowardsworkersconsideredasstatutory.k. Miscellaneous current liabilities such as
provision for dividends, bonus, liabilities for expenses, gratuity, other provisions, any other payments dues.
Contingent Liabilities : These liabilities are not shown in the body of balance sheet but are recorded as a footnote. These are also
called off-balance sheet items because of this reason. They are called contingent because their possibility of becoming a funded liability
or not, depends upon the fulfillment or non-fulfillment of certain conditions. These liabilities include: Pending law suits. Claims against
the organisation not acknowledged as debt. Guarantees given by the organisation on behalf of others. d.: Letters of Credit issued by the
banks on behalf of the organisation. Guarantees issued by banks on behalf of the organisation. Taxes and duties under dispute with the
Govt.
Bills and cheques discounted by banks, in case these have already been accounted for on cash basis.
ASSETS : Assets are the properties owned by a business and are acquired to use them for generation of income through operations.
Fixed Assets or Block Assets
These are the assets which are of relatively permanent nature and they are not disposed off within a short period. These are carried over
from year to year and put to use. A small portion of these assets is written off every year in the shape of depreciation. Whether an asset
is a fixed asset for a concern, is determined by the nature of its business (for one business, a vehicle dealer, a vehicle may a current asset
and for the other, an SSI unit, it may be a fixed one. The examples of such assets could be land, buildings and structures, machinery,
tools and equipment of all types, vehicles, furniture and fixtures, capital work in progress. Advances against fixed assets and other
assets of long term nature, lAbich will become fixed assets after some time, are part of Non-current Assets.
Current Assets: These are the assets which are required by the business for the purpose of re-sale and are recirculating and arise out of
usual business dealings. They are held temporarily for subsequent conversion into cash maximum within a period of 12 months. The
financing of current assets is partly be from the long term funds and partly, the current liabilities. The following types of assets could be
classified as current assets: Cash and bank balances,Investments in quoted/tradable Govt. and other trustee securities (other than for long
term purposes e.g. sinking fund, gratuity fund etc.) and fixed deposits with banks, Receivables (or bills receivables or book debts or debtors
or sundry debtors) arising out of sales. Instalments of deferred receivables due within one year, Raw materials and components,
Stock-in-process including semi-finished goods, Finished goods including goods in transit, Pre-paid expenses, Advances for purchase
of raw materials, omponents and consumable spares other advances,j Other current assets which fulfill the criteria of being
called a Current Asset.
Misc. Assets (Non-current assets) : These are neither current nor fixed, going by their use. Many times they may be unrelated to the
business operations or might have been acquired due to some compulsion. These assets could be : Investment in non-marketable
securities, Investment in long term loans to sister or allied or associate firms, Other long term investments, Non-consumable spare
parts and stores, disputed book debts or un-usable stocks, Loans and advances of long term nature,
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Intangible Assets :Certain assets in business don't have any physical presence or in other words these are just book entries created
with certain specific objectives. In order to account for the cost incurred on such expenses, they are shown as assets in the books, a
few examples of which may be as under: a: Goodwill,b: Patents, c: Copyrights, d: Trade marks, e: Formulae, f.Preliminary and
formation expenses and pre-operative expenses to the extent not written off. Loss incurred by the organisation. Some of these assets
are written off gradually to the debit of profit and loss account
Components of Profit and loss account
Profit and loss account is also called statement of Income and Expenditure. It also indicates the period which it covers. Different components
and their description is as under:
S.No. Particulars Description
1. Gross sales and net sales Total price of goods and services including excise duty is called
gross sale and excluding excise duty is called net sales.
2. Cost of goods sold It includes cost incurred on manufacturing of goods such as raw
material, wages, factory overheads etc. Cost of production is different
from cost of sales in that the cost of production is the cost of goods
produced.
3. Gross profit (1-2) This is calculated as net sales minus cost of sales
4. Operating expenses These expenses include administrative, selling, distribution
expenses, depreciation. It reflects operating performance of the
5. Operating profits (3-4) firm
6. Non-operating surplus / deficit This is the income or expenditure not connected with the normal
operations of the firm
7. Profit before interest and.tax This is also called Earning Before Interest and Tax (EBIT)
8. Interest These are the financial expenses including interest paid on bank
borrowing, debentures, public deposits etc.
9. Net Profit before tax (7-8) This provides the information earning capacity of the firm
1 0 . Tax This represents the tax, which the firm is to pay on its profits
11. Net Profit after tax (9-10) This is the amount which is at the disposal of the firm
Funds Flow Statement, Cash flow statement and Cash BUdget

Funds flow statement: The statement which depicts various sources of funds and their use is called a 'funds flow statement' and it is
different from a profit and loss account or a balance sheet. It depicts the change in assets and liabilities between two accounting
periods. The change will either be (1) addition of amount of assets or liabilities or (2) reduction in amount of assets or liabilities.
Increase in liabilities or decrease in assets means increase in sources of funds. Increase in assets or decrease in liabilities means increase in
uses of funds.
Cash flow statement : If we have to prepare cash flow statement, we follow the following process: 1.. Opening amount of cash balance
(i.e. cash balance in the first period balance sheet). 2. Add all additional non-cash sources, 3.Deduct all non-cash uses,
4.Closing cash balance (1+2-3)
Cash flow statem,mt and cash budget : There are different. Cash budget is used for assessment of working capital requirement. In
cash budget all cash flows during a particular period-are taken into account except the bank finance. The deficit, is shown as bank finance.
Distinction between cash flow and funds flow : Cash balances represent the unused amount of funds. If cash is also taken as use
or source of fulrds, there is no distinction between funds flow and cash flow statement.
Projected financial statements :The projected financial statements relate to the future period. These are prepared with the
objective of assessing working capital requirements or for term loan sanctions or for examining future viability of the activity. In case
of existing units, the past financial statements serve a useful purpose to understand the trend. The projected financial statements
submitted by borrowers require proper examination to ensure that the projected results and financial status, are reasonable and achievable.
Bankers' objective for analysis of financial statements : The bankers analyse the financial statements of borrowers with
following objectives:
Assessment of performance and financial position (it covers growth trends, formation of opinion about management and
efficiency of the firm, composition of assets and liabilities, financial health on the basis of trends)
Assessment of projections for future (it covers understanding the future earning prospects, growth rates etc.)
Detecting danger signals, if any (it covers detecting deterioration and initiation of appropriate remedial steps)
Assessment of credit requirements (it covers the level of activity, level of current assets required or the level of future profits to
repay the loans and interest) . Examine the funds flow - It helps to Cross checking - Banks can check the statements of stocks and book
debts submitted by borrowers to calculate drawing power, with the amount of stocks and book debts given in the balance sheet, which given
fair idea about accuracy of information provided.
Re-arrangement of financial statements for analysis : The bankers re-arrange the information given in financial statements
normally in the following format:
Rearrangement of Balance Sheet Rearrangement of Profit and
loss account
Liabilities Assets 1. Gross sales and net sales Cost of goods sold include:
1.Net worth 1.Fixed assets 2. Cost of goods sold 1. raw material cost
2.Long term 2.Current Assets 3. Gross profit (1-2) 2. power and fuel
4. Operating expenses 3. direct labour
3.Current liability 3.Non current assets 5. Operating profits (3-4) 4. other manufacturing
& provision 6. Non-operating surplus / deficit 5. depreciation
7. Profit before interest and tax Sub-total
4.Intangible assets 8. Interest 6. add opening stock
Total 9. Net Profit before tax (7-8) 7. deduct closing stock
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10. Tax 8. cost of sales
11. Net Profit after tax (9-10)
Important aspects in re-arranging Financial Statements : The following items require special attention while re-arranging
the financial statements. The classification made by the firm may be different from what banks are required to make while analysing these
statements :
Term loan installment to fall within a yearr Investment

Advance tax / tax provision Bills discounted and purchase'
deferred tax liabilities Contingent liabilities and provisions
Non-moving or slow-moving inventory Depreciation method
Book debts / receivables outstanding foi. more than 6 months Inventory valuation
Revaluation of fixed assets and intangible assets expenses relating to previous year
Analysis of Financial Statements : The bankers make use of the following methods: Funds flow statement, Trend analysis
Ratio Analysis
1. Funds flow :
Sources of funds Uses of funds
Long term sources Long term uses
Short term sources Short term uses
If long term uses are greater than long term sources, long term uses,
it means diversion of short term funds for adversely.
that impacts liquidity of the firm
2. Trend analysis: In this type of analysis %age changes are calculated for few successive years rather than two years (as in case of
horizontal analysis). Trend analysis provides a long term view and helps in understanding whether the trends are falling or rising OR
are favourable or unfavourable. The base year is taken as loo and the performance of following years is calculated with reference to
the base year.
1St year 2nd year 3rd year 4th year
Sales (amount) 400 500 56o 6oo
Trend calculation 100% 125% 14o% 15o%
Annual growth25% 25% 12% 7%
COMMON SIZE ANALYSIS : Common size analysis contains percentage of various figures (mainly key figures) without the corresponding
amount. It helps in making comparison between two periods or between two different firms. For example we can make comparison between
two firms with reference to their return on equity as under:
Finn A: Total equity Rs.3o lac and profit is Rs.60000. The return on equity will be = 60000/30 lac too = 2%
Firm B: Total equity Rs.60000 and profit is Rs.20000. The return on equity is = 20000/60000100 = 33.33%
The common size statements make the analysis more meaningful by allowing to compare the data that is easy to understand. For instance, in
the above example, the return appears to be mile11 lower for firm B but when it is seen in common size way, the real picture emerges.
3. Ratio analysis: The ratios represent meaningful relationship and are calculated for a pair of numbers. The ratio can help in
understanding the financial performance and position of a business firm. The ratios provide an input for further investigation wherever
needed. There is no standard list of ratios and for each business firm different ratio may have to be calculated taking into account the
purpose, for which the calculation is to be made. The details are given in Module C.
Types Of Ratios
The ratio can be expressed in one of the following forms: Proportion 2:1, Pure Number/period : 2 times
3. Percentage 200%
On the basis of functions, the ratios are' of four types namely: Liquidity ratios, Leverage or solvency ratios or capital structure ratios,
Profitability ratios, Activity ratios.
LIQUIDITY RATIOS : The ratios which indicate the liquidity of the firm are current ratio, acid test ratiq or quick ratio and net working capital.
Current Ratio :The current ratio is the relationship between the current assets and current liabilities and it can be worked out as under:
Current assets / Current liabilities
Acid Test or Quick Ratio :The quick ratio is the ratio between quick current assets and current liabilities. The ratio measures the
capacity of the organisation to pay off current liabilities of the urgent nature immediately and can he worked out as under:
Quick assets /Current liabilities
(quick assets include Cash or bank balances + receivables + quickly realisable securities such as govt. securities or quickly marketable &
quoted shares and bank fixed deposits) Quick assets are also calculated as deduction of stocks/inventories, pre-paid expenses/loans &
advances for total current assets..
LEVERAGE OR SOLVENCY RATIOS : The leverage ratios are the ratios which throw light on the long term solvency of a firm reflected in its
ability to assure the long term creditors withregard to periodic payment of interest during the period of the loan and repayment of
principal on maturity or in predetermined instalments at due dates. Just as the short term solvency is tested through liquidity
ratios, long term solvency can be judged by solvency ratios, most importance of which, is debt-equity ratio.
Debt-Equity Ratio : The ratio is very important since it shows the dependence of the unit on outside long term finance. A debt-equity ratio
of 2:1 is considered desirable by the banks and Reserve Bank.
It ca n be wor ked out as unde r: T ota l lon g t erm ou t sid e li ab iliti es / T ang ibl e net w orth.
(Where long term outside liabilities are liabilities of lonct term nature and tangible net worth is sum total of capital and reserves and
surplus (excludit:g depreciation reserve) reduced by intangible assets like goodwill, patents, deferred revenue expenditure, preliminary
or preoperative expenses which have not been written off fully, losses including past losses etc.)
Total outside liabilities or total debt to Equity Ratio : It can be worked out as under:
Total outside liabilities / Tangible net worth. (Where total outside liabilities are liabilities long term liabilities and current liabilities).
Debt service coverage ratio (DSCR) : 'The ratio explains the relationship between the funds available for servicing the long term
outside liabilities (where servicing means regular payment of interest on long term liabilities and also payment of due amount of

55
principal on year to year basis) on the one hand and funds required (amount of interest and installment of long term outside
liabilities) on the other side. This ratio is generally used for fixing the repayment schedules for term loans in banks and financial
institutions.
The variables taken for calculation of ratio are : Sources available to service the long term liabilities/ liabilities to be served
Where the sources are net profit + depreciation + annual amount of interest charged (or chargeable) on the long term liabilities.
The liabilities to be serviced include annual amount of interest charged (or chargeable) on the long term liabilities + annual amount of
instalment payable on the long term liabilities. For instance, if a firm's net profits are Rs.3 lac, depreciation its.2 lac, interest payment Rs.i lac
and the annual instalment RS.2 lac, the DSCR would be 2 ( (3+2+1) / (1 + 2) = 6/3 = 2
PROFITABILITY RATIOS : Profitability indicates the efficiency of the organisation in generation of income and surplus out of the
operations of main business. The profitability ratios are designed to provide answers to questions such as whether the profits earned
are adequate, what rate of return does the profits represent, what is the rate of profit for various divisions and segments of the firm,
what is the earning per share, what is the amount paid in dividends and .what is the rate of return to equity holders and so on. In order
to work out ratios, we can compare profit to the factors which regulate the quantum of profit directly, such as sales, total capital
employed etc.
Return on investment or capital employed The ratio can be worked out as under:
Return / Investment (or capital employed) x 100
Where, the 'return' is net profit before tax and 'investment or capital employed' means tangible net worth of the share holders' and outside
term liabilities. Capital employed can also be calculated by taking into account the equity/preference share capital, reserves and surplus
(excluding depreciation reserve), long term loans and liabilities minus misc. expenditure, accumulated losses and non-operating assets.
For example, if the net profits before tax are Rs.3o lac and the investment or capital employed Rs.120 lac, the return on investment shall be
25% (3o / 120 x 100).
R e t u r n o n e q u i t y : The ratio can be worked out as under:
Net profits / owned funds (or tangible net worth) x 100 : If net profits are Rs.3 lac and tangible net worth Rs.io lac, the
return on equity would be 30%.
G r o s s P r o f i t & N e t P r o f i t R a t i o : The gross profit is considered to be the surplus of sales over the cost of goods sold and the
ratio can be worked out as under:
Gross Profit / Net Sales x 100 : The net profit is the surplus of gross profit after meeting other operating expenses. This can be
before tax or after tax and is finally appropriated to meet the tax liability (if taken before tax provisions), dividend payment or
drawings and to retain• a part in the business, which is converted into the capital employed. The ratio can be worked out as under:
N et p rof i t / S al es x 100, The net profit could be before or after tax.
ACTIVITY RATIOS : These ratios Treasure the efficiency of the organisation in deploying the, available funds, particularly raised on short term
basis. Since the year end amount of assets may not represent the normal level of such assets, the average values (opening + closing / 2) can
be taken to reduce the incidence of manipulation. The following ratios could be worked out:
a: Inventory turnover: (also called stock turn-over ratio) Cost of Sales / Average stocks, Cost of sales can be calculated as
sales less gross profit. ( average of opening and closing stocks). A firm has total sales of Rs.4 lac with 25% gross profit margin. Stocks in
the beginning of the year were Rs.40000 and at the end of the year Rs.6o0Oo. What is the stock turn-over ratio.
The cost of sales would be Rs.3 lac (4 lac — 25% of Rs.4 lac i.e. Rs.i lac) and average stocks Rs.50000 (40000+60000 / 2). The ratio would be 6
times (300000 /50000).
b: Debtor turnover : Sales/ average debtors (average of opening and closing receivables). Sales of a firm have been Rs.4 lac and
its closing book debts as per balance sheet at Rs.40000. The debtor turnover Fatio would be lo times (4 lac / 40000). The debt collection
period or debtor velocity ratio can also be calculated : Debtors/sales x 12. Accordingly the debt collection period would be 1.2 months
(40000/40000012). This shows that the firm is able to collect the payment of its credit sales within 1.2 months on an average balance.
3.Working Capital Finance

Working capital: Working capital represents the amount of current assets, used by a firm to run its business operations smoothly and
regularly. These assets include cash, bank balances, stocks of raw material, in process and finished goods, consumable stores and spares,
advances to suppliers of raw material etc.
Role of liquidity ratios : The amount of working capital (the current assets) is financed by (1) creditors and other current liabilities, (2) net
working capital or working capital margin contributed by the borrower and (3) the bank working capital limits such as cash credit, overdraft,
bills etc. The amount of net working capital or margin for working capital contributed by borrower, is calculated as surplus of long term
sources over the long term uses (or at times as Current. Assets less current liabilities). The required amount is possible if the firm maintains
appropriate current ratio (it is 1.33:1 as per Tandon Committee method and 1.25:1 as per Nayak Committee method). In the absence of
adequate margin, the borrower will not be able to avail the sanctioned working capital limit and that would amount to non-compliance of
sanctioned conditions.
Working capital cycle or operating cycle The working capital or operating cycle comprises the following: i. Stock of raw
material required to kept to ensure uninterrupted production. Stock in process, which is being manufactured. Stock of finished goods,
before these are dispatched to customers, Amount of trade debtors outstanding, The amount of working capital would depend up on the
length of the operating cycle. Longer the cycle, more will be the working capital requirement.
Process of assessment of Bank finance : Before determining the level of bank finance, the amount of current assets is required to be
estimated. To estimates the current assets, the future sale is required to be estimated. In addition, the amount of creditors that will be
available will also be required to be estimated. The process would be as under:
Decide the level of future sales on the basis of which the working capital is to be calculated It may be based on past performance in case of existing
firms. It would be on the basis of production capacity, proposed market shares, industry norms etc.
Calculation of amount of current assets (i) stocks of raw material, (2) semi-finished goods and (3) finished goods, (4) receivables or book debts and (5) Other
current assets. This will on the basis of norms for inventory and receivables as determined by the bank policy. Determining the level of (i) trade creditors
on the basis of market practice (2) other current liabilities. Calculation of bank finance based on method of lending used.

56
Methods for assessment of Bank finance Once the sale is estimated, various methods can be used to calculate the working capital. There are
3 types of methods (i) Tandon Committee method (2) Nayak Committee method and (3) Cash Budget method.
As per Tandon Committee method, the norms for inventory and receivables are prescribed. These norms are not mandatory and banks have
their own norms. As per Nayak Committee method, the working capital will be calculated as minimum 25% of Projected sale
Calculation of bank finance: Tandon Committee had recommended 3 methods for calculation of bank finance. 1st and 2nd methods
were accepted and 3rd method was not accepted by RBI for implementation. As per First Method of lending the borrower was
required to bring margin (net working capital) @ 25% of working capital gap.As per 2 nd method of lending, the margin is 25% of
current assets.
As per 3rd method, the margin was 100% for core current assets and 25% for the remaining current assets.
The calculation as per Tandon Committee methods is as under:
r
Amount in Lacs 1st Method 2nd Method
1.Estimated current assets 1000 1000
2.Estimated other current liabilities 200 200
3.Working capital gap (1-2) 800 800
4.NWC 200 250
(25% of working capital gap) (25% of current assets)._
5.Bank finance 600 550
The current ratio as per 2nd method of lending is 1.33:1. Nayak Committee had recommended the working capital as minimum 25% of
projected sales (i.e. equal to 3 months of annual sales). It also recommended the margin of 5% of projected sales and bank finance
minimum 20% of projected sales. This method is applicable for working capital limits up to Rs.5 cr to MSE. Where the requirement of
a firm for working capital is more than 20X, of projected sales, the calculation to be made as per Tandon Committee based method
of lending.
The calculation as per Nayak Committee Turnover method is as under:
Projected sales for next year 800 lacs
Working capital (25% of projected sales)_ 200 lacs
Borrower's margin (5% of projected sales) 40 lac
Bank finance_(20% of projected sales) 160 lac
Under this method the current ratio is 1.25:1.
Cash Budget Method :This method is used for calculating bank finance for specific activities like seasonal industries, software development,
film production etc. irrespective of the amount of bank finance. The calculation is made on.the basis of cash budget (cash inflow and cash
outflow and resultant gap which may be surplus or deficit). The cash flow statement normally is prepared on a
ionthly or quarterly basis to calculate the amount of bank finance.
A normal cash flow will be as under:
Inflows Outflows
1. Opening balance of cash 1. Capital expenditure
2. Term loan from bank 2.Raw material purchases
3. Sales realisation 3.Wages, power and fuel
L ).Other
4. Sales cash
realization
flows 4.Interest payment and installment of TL
5. Total cash inflow (1 + 2 + 3 + 4) 5.Other cash outflows
6.Total cash outflows (1 to 5)
Deficit (if outflow is more) Sur pl us ( if i nflo w is mo r e ) C lo si ng
Bank finance required to cover the deficit balance o f cas h
Comparison between 3 methods : All the methods require estimation of future sales, based on which the amount of
current assets is estimated and then working capital calculated. But, the Tandon Committee method and Nayank Committee method are
more suitable where the operations of the business are on a regular basis. But if the operations are seasonal or volatile, the cash budget
method is more suitable.
Bills/receivable finance by banks : Receivables : When credit sales are based on invoices only (and not by any document of title to goods
such as Railway receipts-RR, goods receipts-GR etc.), the amount receivable from the customers ikc,alled receivables or. book debts or sundry
debtors or trade debtors. The banks provide bank—finance, against such book debts on the' basis of statement of book debts submitted by the
firm. This is shown by the firm as part of current liability in its balance sheet.
Bills : The other method of bank finance may be in the form of : bills purchase (in case of demand bills — which are used when no credit
period is given to buyer to make payment and he has to make payment immediately), bills discount (in case of usance bills, which are used
when some credit period is given to buyer to make payment and he makes payment on due date) or bills negotiation (in case of bills drawn
under LC).
It happens when the documents are in the form of invoice, bill of exchange and supported by transport document like RR, TR etc.
In case of purchase, discounting or negotiation of bills, the outstanding amount of bills is not shown in the balance sheet of the borrower.
Instead it is shown as part of contingent liabilities. In such cases, to calculate the working capital properly, the amount of bills purchased /
discounted / negotiated shall be added to amount of receivable. In case of bills purchase or discounting, the banks get additional
protection under Negotiable Instrument Act in the form of right to recover if the bills are dishonoured i.e. riot paid by buyers.
RBI guidelines for discounting and rediscounting of bills: Banks may adhere to the following guidelines while purchasing /
discounting / negotiating / rediscounting of genuine commercial / trade bills: Banks may sanction working capital limits as also bills limit to
borrowers after proper appraisal of their credit needs and in accordance with the loan policy as approved by their Board of Directors.
Banks should clearly lay down a bills discounting policy approved by their Board of Directors, consistent with their policy of sanctioning of
working capital limits. The procedure should include banks' core operating process from the time the bills are tendered till these are
realised, Banks may review their core operating processes and simplify the procedure in respect of bills financing. To address the
problem of delay in realisation of bills, banks may take advantage of improved computer / communication networks like the Structured
Financial Messaging system (SFMS) and adopt the system of `value dating' of their clients' accounts. Banks should open letters of credit

57
(LCs) and purchase / discount / negotiate bills under LCs only in respect of genuine commercial and trade transactions of their
borrower constituents who have been sanctioned regular credit facilities by the banks. Banks should not extend these facilities to non-
constituent borrower or / and non-constituent member of a consortium / multiple banking arrangement. If negotiation of bills drawn
under LC is restricted to a particular bank, and the benefieiaiy of the LC is not a constituent of that bank, the bank concerned may
negotiate such an LC, subject to the condition that the proceeds will he remitted to the regular banker of the beneficiary. Sometimes,
a beneficiary of the LC may want to discount the bills with the LC issuing bank itself. In such cases, banks may discount bills drawn by
beneficiary only if the bank has sanctioned regular fund-based credit facilities to the beneficiary. With a view to ensuring that the
beneficiary's bank is not deprived of cash flows into its account, the beneficiary should get the bills discounted / negotiated through
the hank with whom he is enjoying sanctioned credit facilities. Bills purchased / discounted / negotiated under LC (where the
payment to the beneficiary
As a rule, banks should avoid giving unsecured guarantees in large amounts and for medium and long-term periods. They should avoid undue
concentration of such unsecured guarantee commitments to particular groups of customers and/or trades. Unsecured guarantees on account
of any individual constituent should be limited to a reasonable proportion of the bank's total unsecured guarantees. Guarantees on behalf of
an individual should also bear a reasonable proportion to the constituerit's equity. In exceptional cases, banks may give deferred payment
guarantees on an unsecured basis for molest amounts to first class customers who have entered into deferrOd -payment arrangements in
consonance with Government policy. Guarantees executed on behalf any individual constituent, or a group of constituents, should be subject
to the prescribed exposure norms.
Precautions for Averting Frauds : While issuing guarantees on behalf of customers, the following safeguards should be observed by
banks: At the time of issuing financial guarantees, banks should be satisfied that the customer would be in a position to reimburse the bank in
case the bank is required to make-payment. In the case of performance guarantee, banks should exercise due caution and have sufficient
experience with the customer to satisfy themselves that the customer has the necessary experience, capacity and means to perform the
obligations, and is not likely to commit any default. Banks should refrain from issuing guarantees on behalf of customers who do not enjoy
credit facilities with them.
Bank Guarantee Scheme of Government of India : 1. Government of India formulated Bank Guarantee Scheme for the issuance
of guarantees in favour of Central Government Departments. Under the scheme, Government Departments can accept guarantees
from all scheduled commercial banks. 2. Banks should adopt the Model Form of Bank Guarantee Bond. The Government have
advised all the Government departments/ Pub! :c Sector Undertakings to accept bank guarantees in the Model Bond and to ensure
that alterations/additions to the clauses whenever considered necessary are not one-sided and are made in agreement with the
guaranteeing bank. Banks should mention in the guarantee bonds and correspondence with the various State Governments, the
names of the beneficiary departments and the purposes for which the guarantees are executed, to facilitate prompt identification of
the guarantees with the concerned departments. For the guarantees in favour of Government Departments in the name of the
President of India, any correspondence thereon should be exchanged with the concerned ministries/ departments and not with the
President of India. For guarantees issued in favour of Dirttf6iiteGerieral -of Supplies and Disposal (DGS&D), the following aspects should be
kept in view:
To speed up the process of verification of the genuineness of the bank guarantee, the name, designation and code numbers of the
officer/officers signing the guarantees should be incorporated under the signature(s) of officials signing the bank guarantee. The beneficiary
of the bank guarantee should be advised to obtain the confirmation of the concerned banks about the genuineness of the guarantee
issued by them as a measure of safety. The initial period of the bank guarantee issued by banks as a means of security in DGS&D contract
administration would be for a period of 6 months beyond the original delivery period. Banks may incorporate a suitable clause in the bank
guarantee, providing automatic extension of the validity period of the guarantee by 6 months, and also obtain suitable undertaking from the
customer at the time of establishing the guarantee to avoid any possible complication later. A clause would be incorporated by DGS&D in
the tender forms to the effect that whenever a firm fails to supply the stores within the delivery period of the contract wherein bank
guarantee has been furnished, the request for extension for delivery period will automatically be taken as an agreement for getting the
hank guarantee extended. Banks should make similar provisions in the bank guarantees for automatic extension of the guarantee period.
The Public Notice issued by the Customs Department stipulates, inter alia, that all bank
guarantees furnished by an importer should contain a self-renewal clause inbuilt in the guarantee itself. As the stipulation in the Public
Notice issued by the Customs Department is akin to the notice in the tender form floated by the DGS&D, the provision for automatic
extension of the guarantee period in the bank guarantees issued to DGS&D, as at above, should also be made applicable to bank
guarantees issued favouring the Customs Houses. vi. The bank guarantee Should be on non-judicial stamp paper.
Guarantees on Behalf of Share and Stock Brokers/ Comm9dity Brokers Banks may issue guarantees. (1) on behalf of share and stock
brokers in favour of stock exchanges: in lieu of security deposit to the extent it is acceptable in the form of bank guarantee. in lieu of
margin requirements as per stock exchange regulations. (2) on behalf of commodity brokers in favour of the national level commodity
exchanges, viz., National Commodity &Derivatives Exchange (NCDEX), Multi Commodity Exchange of India Limited (MCX) and National Multi-
Commodity Exchange of India Limited (NMCEIL), in lieu of margin requirements as per the commodity exchange regulations.
Banks should obtain a minimum margin of 5o percent including a minimum cash margin of 25 per cent within the margin of 5o per cent.
Letter Of Credit :A letter of credit is a commercial instrument of assured payment and widely used by the business community for
its various advantages. It is an instrument by which a bank undertakes to make payment to a seller on production of documents
stipulated in the credit. The credit specifies as to when payment is to be made which may be either when the documents are
presented to the paying bank or at some future date, depending upon the terms stipulated in the credit. LC are regulated by rules
called Uniform Customs and Practices for Documentary Credits - 600 (referred to as UCP-600), prepared by ICC, Paris. LTCPDC is applicable to
LCs that expressly indicate that these are subject to UCPDC-600.
Calculation of amount of limit : Letter of guarantee: The amount can be fixed taking on the basis of the contract between the
applicant i.e. borrower and the beneficiary. The contract would specify the amount of guarantee needed to be issued depending
upon the type of obligation, which would differ from case to case. For instance for performance guarantee, the amount of security
deposit or some other clause would spell the extent of guarantee required & in respect of earnest money
guarantee, the amount of earnest money to be deposited would become the amount of guarantee required. In this manner, a limit
can be set up for a specific purpose or guarantee or a general limit can be set up for all the guarantees to be issued in a given period
of say, one year, after taking all the proposed transactions, which the borrower wants to .cover under the guarantee facility.
'Calculation of limit of Letter of credit: It can be worked out on the basis of following: I. Average amount of LC — It depends on
monthly consumption of the material to be purchased under LC and economic order quantity (EOQ). EOQ depends upon the
source of supply, means of transport etc. EOQ is larger for imports compared with the domestic material.

58
Frequency of opening of LC — After fixing EOQ, the no. of LCs to be opened within one year can be calculated as : Annual consumption /
EOQ. Frequency = 12 no. of LC to be opened in one year. Amount of LCs outstanding ut cric iiate — Outstanding time for an LC is based on
the Lead Time (date of LC to date of shipment) + transit time + usance period from date of receipt of goods. If frequency of opening of LC is
less than this, bank will have more than one LC outstanding at one point of time. Calculation : Assume the following: Lead time -- au days,
transit time = to days and usance period = 6 m. Total time = 7 months. Total annual consumption Rs.6 cr, EOQ = Rs..1 cr. ) On the basis of
these assumptions : ,No. of LCs = 6/1 = 6 and Frequency of opening LC will be every 2 month. (12 / 6 ). No. of LC outstanding at any point
of time = 7 / 2 = 3.5 (rounded to 4). Limit = Rs.1 cr x 4 = Rs.4 cr (amount of one LC based on EOQ x no. of LC to outstand)
Commercial paper as a working capital financing source : Commercial Paper—(CP) introduced during 1990, is a
short term money market instrument issued as a usance promissory note (unsecured) . It is privately placed. The objective is to enable
highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide au additional instrum?nt to investors.
Subsequently, primary dealers and FI have also been permitted to issue CP to enable them to meet their short-term funding requirements
for their operations.
Eligibility for a Company: A company is eligible to issue CP if (a) its tangible net worth, as per latest audited balance sheet, is:not less
than Rs. 4 crore; (b) company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and (c) the
borrowal accounts of the company are classified as a Standard Asset by the financing bank/s/ institution/s and (d) minimum credit
rating from either CRISIL, ICRA, CARE or FITCH Ratings India Pvt. Ltd is P-2 of CRISIL or such equivalent rating by other agencies, which
should not be old than 2 months. Maturity: Minimum 7 days & maximum upto one year. Denominations: Rs.5 lakh or multiples thereof.
Time period ceilings: The total amount should be raised within a period of 2 weeks from the date on which the issue opens. Each CP shall
have the same maturity date. Every issue of CP, including renewal, should be treated as a fresh issue.
Mode of Issuance : CP can be issued in the form of a promissory note (in a dematerialised form) through any of the depositories approved by
and registered with SEBI. Wef 01.07.2001 PDs/FIs/Banks shall hold CPs in dematiorm only.
Acceptance and payment of CP amount: The investor in CP pay the discounted value of the CP and on maturity, the payment of face value
shall be made. Stand-by Facility: Banks and FIs have the flexibility to provide for a CP issue, credit enhancement by way of stand-by
assistance/credit backstop facility, etc., based on their commercial judgement and as per terms prescribed by them.
Other features: CP will be issued at a discount to face value as may be determined by the issuer. No issuer shall have the issue of
Commercial Paper underwritten or co-accepted. Issuing and paying agents would report issuance of CP on Negotiated Dealing System by the
end of 2nd day.
Factoring as a source of working capital finance : The Banking Regulation Act was amended during July 1990, and RBI desired that
the factoring services be provided through the subsidiaries of the Banks. Factoring offers the clients very flexible mode of cash
generation against receivables and once a line of credit is established, availability of cash is directly geared to sales so that as sales
increase, so does the availability of finance. Factoring has been defined as a continuing legal relationship between a financial company
(THE FACTOR) and a business concern (THE CLIENT), selling the goods or providing services to trade customers (THE CUSTOMERS)
whereby the factor purchases the client's book debts either without or with recourse to the client and in relation thereto, controls the
credit extended to customers and administers the sales ledger.
Functions of Factors: The factors would normally perform the functions which include: Providing finance against receivables/eligible
trade debts. Undertaking sales ledger administration responsibilities of the client including maintenance of books, accounting, assets
management, collection of debts and furnishing information reports to the client. e: Providing credit insurance facilit) to the client against
possible losses arising from ;Insolvency/bankruptcy, financial inability of the debtors(customer). d: Offering
onsultancy services in the area of production, finance and marketing.
In other words, the factor provides most of services relating to receivables management (a major problem with industrial
units) and frees the industrial units from related worries.
Evaluating the proposals for factoring : The evaluation of proposals for factoring and selection of clients and customers would
remain one of the most important action point for the factor, as it would primarily be the risk perception of the factor that would
determine the quality and viability of factoring business to be done. At the time of taking a decision whether to consider a proposal or
not, the factor would have to take into account, the following: Financial standing of the client , Operational efficiency of the client.
Managerial competencyof the client, Reliability of the customer in terms of financial standing, operational efficiency and managerial
competence.
Chances of continued viable operations of the business both of the client and the customer. The total risk exposure on behalf of a
particular customer on account of various clients. All the above factors taken together, will determine the amount of risk which can
be there in the proposal for factoring. In other words the factor would have to obtain credit report and financial information and
other necessary data, which presently the banks are obtaining for considering credit facilities.
Forfaiting : Forfaiting represents the purchase of obligations, which fall due at some future date and arise from delivery of goods (or
services) in export transactions, without recourse to the previous holder of the obligation. Under forfaiting, the forfaiter deducts interest in
advance for the whole period of credit and disburses the net proceeds to the exporter. The sole responsibilities of the exporter is to
manufacture and deliver the goods to the importer, which creates a valid payment obligation of the importer. term receivables
Forfaiting and Factoring : Factoring is suitable for financing smaller and short with credit period between 90 to i8o days, whereas forfaiting is used
to finance capital goods' exports with credit terms between a few months to io years. Factoring covers the commercial risk, whereas forfaiting
additionally covers the political and transfer risk.
4.Term Loans
Term loans (TL): The term loans are sanctioned to acquire fixed assets such as land, building, plant & machinery etc. by business firms. The
working capital limits are sanctioned to finance current assets. Working capital term loans are sanctioned to finance the working capital
margin, where the firms are not having adequate margin. These are repayable over 3 to 5 years. TL is expected to be repaid out of cash
profits to be generated by the firm in future. The debt service coverage ratio, plays important role to determine, whether the term loan
should be sanctioned or not. The repayment schedule depends on expected cash generation, which is different for each activity
(project). Hence, for different term loans, the repayment schedule or moratorium period is different. For salaried persons there is EMI,
for agriculture loans it is according to crop season and for others it can be monthly or quarterly.

59
Deferred Payment guarantee (DPG): Such guarantees are issued by banks to enable their borrowers to.acquire capital assets from
suppliers on long term credit basis. For example, if a borrower wants to purchase machinery,, he can do so from his own capital or by raising
term loan from bank. Alternatively, he can avail long term credit from supplier of machinery, on the guarantee of the bank (called DPG). In
this arrangement, as long as the borrower makes regular payment to the supplier as per repayment schedule, the bank will not be required to
pay, but if there is default in payment, the bank will have to pay. Hence, term loan and deferred payment guarantee meet almost similar type
of requirement i.e. acquiring capital assets. While the term loans are fund based, the DPG is non-fund.
TL appraisal and Project appraisal : In project appraisal, all aspect of a project including purchase of capital assets, other
capital expenditure, working capital margin and working capital requirement are taken into account. In addition, aspects like
management appraisal, detailed techno economic feasibility, IRR, DSCR are also taken in to account. Based on all these, the term
loans are sanctioned along with provision for working capital limits. In case of term loan, only the acquiring of fixed assets is taken into
account. If it is financing of an existing firm for expansion through term loan, management appraisal may not be required to be done. All the
basic aspects of term loan appraisal are automatically covered in the project appraisal. But some important aspects of project appraisal
are not taken into account in term loan appraisal.
Project appraisal: It comprises (a) appraisal of managerial aspects (b) technical appraisal (c) economic appraisal. Monngeriol
apprnisal The following aspects are looked into Credentials of the promoters, Existing as well expected financial stake of the promoters.
Form of business organization.
Technical appraisal : The following aspects are looked into: Location and locational advantages and disadvantages,Products to be
produced and manufacturing process, Infrastructure availability. Selling arrangement
Economic appraisal : It involves the following : Return on investment — by using net present value, internal rate of return, pay back method,
cost benefit analysis. Break even analysis : Projects with lower break-even are considered less risk prone and more profitable. Sensitivity
analysis: Effect of change in price of one important variable on the over all profitability, such as in case of change in price of raw material or
decline in selling price.
Appraisal and Financing of Infrastructure Projects :Infrastructure sector deals with roads, bridges, power, telecommunication etc. and is
defined in Section to of Income Tax Act. As per RBI guidelines, the infrastructure lending means a credit facility extended by lenders (i.e. banks
and select AIFIs) to a borrower for exposure in the following infrastructure sub-sectors will qualify as 'infrastructure lending':
Transport,Energy
Water & Sanitation, Communication, Social and Commercial Infrastructure:
Types of Financing by Banks : In order to meet financial requirements of infrastructure projects, banks may extend credit
facility by way of working capital finance, term loan, project loan, subscription to bonds and debentures/ preference shares/ equity
shares acquired as a part of the project finance package which is treated as "deemed advance" and any other form of funded or non-
funded facility.
Take-out Financing : Banks may enter into take-out financing arrangement with IDFC/ other financial institutions or avail of
liquidity support from IDFC/ other FIs (details given later, in this assignment).
Inter-institutional Guarantees :Banks can issue guarantees favouring other lending institutions in respect of infrastructure projects,
provided the bank issuing the guarantee takes a funded share in the project at least to the extent of 5% of the project cost and
undertakes normal credit appraisal, monitoring and follow-up of the project.
Financing promoter's equity : In terms of circular dated August 28, 1998, RBI advised banks that the promoter's contribution
towards the equity capital of a company should come from their own resources and the bank should not normally grant advances
to take up shares of other companies. An exception may be made for financing the acquisition of the promoter's shares in an
existing company, which is engaged in implementing or operating an infrastructure project in India on the following conditions:
The bank finance would be only for acquisition of shares of existing companies providing infrastructure facilities. Further, acquisition
of such shares should be in respect of companies where the existing foreign promoters (and/ or domestic joint promoters) voluntarily
propose to disinvest their majority shares in compliance with SEBI guidelines, where applicable. The companies to which loans are
extended should, inter alia, have a satistactory net worth. The company and the promoters/ directors of such companies should not be a
defaulter to banks/ FIs. Bank finance should be restricted to 5o% of the finance required for acquiring the promoter's stake in the company
being acquired. Finance extended should be against the security of the assets of the borrowing company or the assets 01 the company
acquired and not against the shares of that company or the company being acquired. The shares of the borrower company / company being
acquired may he accepted as additional security and not as primary security. The security charged to the banks should be marketable. The
tenor of the bank loans may not be longer than 7 years. The Boards of banks can make an exception in specific cases, where necessary, for
financial viability of the project. The banks financing acquisition of equity shares by promoters should be within the regulatory ceiling of 40%
of their net worth as on March 31st of the previous year for the aggregate exposure of the banks to the capital markets in all forms (both
fund based and non-fund based). The proposal for bank finance should have the approval of the Board.
Appraisal of Infrastructure projects : In respect of financing of infrastructure projects undertaken by Government owned
entities, banks/FIs should undertake due diligence on the viability of the projects. The individual components of financing and returns on
the project should be well defined and assessed. State Government guarantees may not be taken as a substitute for satisfactory credit
appraisal and such . appraisal requirements should not be diluted on the basis of any reported arrangement with RBI or any bank for
regular standing instructions/periodic Payment instructions for servicing the loans/bonds. Infrastructure projects are often financed
through Special Purpose Vehicles. Financing of taese projects Calls for Special appraisal skills. Identification of various project risks,
evaluation of risk mitigation through appraisal of project contracts and evaluation of creditworthiness of the contracting entities and
their abilities to fulfill contractual obligations will be an integral part of the appraisal exercise. Banks/FIs should constitute
appropriate screening committees/special cells for appraisal of credit proposals and Monitoring the progress/performance of the
projects. The size of the funding requirement necessitates joint financing by banks/FIs or financing by more than one bank under
consortium or syndication arrangements. In such cases, participating banks/ FIs may, for the purpose of their own assessment, refer
to the appraisal report prepared by the lead bank/FI or have the project appraised jointly.
Prudential requirements : pruudential credit exposure limits : The exposure ceiling limits would be 15% of capital funds.in
case of a single borrower and 40% ot capital funds in the case of a borrower group. The capital funds for the purpose will comprise of Tier I and
Tier II capital as defined under capital adequacy standards. In case of infrastructure projects it can be additional 5 percent (i.e. up to 20
percent) for individual Projects and an additional 10 percent (i.e., up to 5o percent), for group projects. In addition, banks may, in exceptional
circumstances, with the approval of their Boards, consider enhancement of the exposure to a borrower (single as well as group) up to a

60
further 5:6.O of capital funds subject to the borrower consenting to the banks making appropriate disclosures in the Annual Reports.
Assignment of risk weight for capital adequacy purposes Banks are required to be guided by the Prudential Guidelines on Capital
Adequacy and Market to Implementation of the New Capital Adequacy Framework , as amended from time to time in the matter of capital
adequacy.
Asset -Liability Management
T
he long-term financing of infrastructure projects may lead to asset — liability mismatches, Particularly when such financing is not in
conformity with the maturity profile of a bank's Liabilities. Banks would, therefore, need to exercise due vigil on their asset-liability position to
ensure that they do not run into liquidity mismatches on account of lending to such projects. Administrative arrangements Timely and
adequate availability of credit is the pre-requisite for successful implementation of infrastructure projects. Banks/ FIs should,
therefore, clearly delineate the procedure for approval of loan proposals and institute a suitable monitoring mechanism for
reviewing Applications pending beyond the specified period. Multiplicity of appraisals by every I nstitution involved in financing,
leading to delays, has to be voided and banks should be Prellared to broadly accept technical parameters laid down by leading
public financial I nstitutions. Also, setting up a mechanism fofor an ongoing monitoring of the projectimplementation will ensure that
the credit disbursed is utilised for the purpose for which it was sanctioned.
Take-out financing/liquidity support
Take-out financing arrangement : Take-out financing structure is essentially a mechanism designed to enable banks to avoid assetz liability
maturity mismatches that may arise out of extending long tenor loans to infrastructure projects. Under the arrangements, banks financing
the infrastructure projects will have an arrangement with IDFC or any other financial institution for transferring to the latter the
outstandings in their books on a pre-determined basis. IDFC and SBI have devised different take-out financing structures to suit the
.1equirements of various banks, addressing issues such as liquidity, asset-liability mismatches, limited availability of project appraisal skills,
etc. They have also developed a Model Agreement that can be considered for use as a document for specific projects in conjunction with
other project loan documents. The agreement between SBI and IDFC could provide a reference point for other banks to enter into
somewhat similar arrangements with IDFC or other financial institutions.
Liquidity support from IDFC : As an alternative to take-out financing structure, IDFC and SBI have devised a product, providing liquidity
support to banks. Under the scheme-, IDFC would commit, at the point of sanction;to-refinance the entire outstanding loan (prin_cipal+
unrecovered interest) or part of theToiii,Th the bank after an agreed period, say, five years. The credit risk on the project will be taken by the
bank concerned and not by IDFC. The bank would repay the amount to IDFC with interest as per the terms agreed upon. Since IDFC would be
taking a credit risk on the bank, the interest rate to be charged by it on the amount refinanced would depend on the I DFC's risk perception of
the bank (in most of the cases, it may be close to IDFC's PLR). The refinance support from IDFC would particularly benefit the banks which
have the requisite appraisal skills anal the initial liquidity to fund the project.
5.Credit Delivery
Documentation : The documents are got signed by banks from borrowers and guarantors with a view to establish a contractual
relationship and their liability in a court of law, in case of need. Further, the documents are got executed to create charge over the
securities, for securing the loan. Where security (say property) in the name of another person is charged, the said other person should be
made guarantor and then asset got charged as security for the bank. The general precautions in documentation include: 1. Payment of
proper stamp duty. Further, the payment of stamp duty should be before obtaining the signatures on the document. Date on the
documents should be on or after the date of purchase of stamped papers. Executors should have proper authority to sign the documents
if these are signed on behalf of the borrower. Documents should be filled before these are signed. In case of companies, the charge should
be filed with ROC for registration with in 3o days from date of document, where required. If document require registration with Sub-
registrar, these should be got registered.
3rd 3 Party Guarantees :Banks obtain 3rd party guarantees in many cases, to ensure recovery from 3rd parties, if the borrowers
fail to make the payment. In case of loans to partnership firms, the guarantee is not required from partners as they are otherwise
personally liable. But in case of loans to companies, societies etc. the personal guarantees are taken. In individual or partnership
cases also, the 3 rd party guarantees are obtained.
RBI guidelines on personal guarantees are as under: Where guarantees may be considered helpful
Personal guarantees of directors may be helpful in respect of companies, whether private or public, where ---bares are held closely by a
person or connected persons or a group (not being professionals or Government), irrespective of other factors, such as financial
condition, security available, etc. The exception being in respect of companies where, by court or statutory order, the management of the
company is vested in a person or persons, whether called directors or by any other name, who are not required to be elected by the
shareholders. where personal guarantee is considered necessary, the guarantee should preferably be that of the principal members of the
group holding shares in the borrowing company rather than that of the director/managerial personnel functioning as director or in any
managerial capacity. Even if a company is not closely held, there may be justification for a personal guarantee of directors to ensure
continuity of management. Thus, a lending institution could make a loan to a company whose management is considered good. Subsequently,
a different group could acquire control of the company, which could Ice-1 the lending institution to have well-founded fears that the
management has changed for the worse and that the funds lent to the company ,are in jeopardy. One way by which lending institutions could
protect themselves in such circumstances is to obtain guarantees of the directors and thus ensure either the continuity of the
management or that the changes in management take place with their knowledge. Even where personal guarantees are waived, it
may be necessary to obtain an undertaking from the borrowing company that no change in the management would be made without
the consent of the lending institution. Similarly, during the formative stages of a company, it may be in the interest of We company,
as \\'ell as the lending institution, to obtain guarantees to ensure continuity of management.
Personal guarantees of directors may be helpful with regard to public limited companies other than those which may be rated as first class, where
the advance is on an unsecured basis. There may be public limited companies, whose financial position ai,d/or capacity for cash generation is
not satisfactory even though the relevant advances are secured.. In such cases, personal guarantees are useful. Cases where there is likely to
be considerable delay in the creation of a charge on assets, guarantee may be taken, where deemed necessary, to cover the interim period
between the disbursement of loan and the creation of the charge on assets. The guarantee of parent companies maybe obtained in the case
of subsidiaries whose own financial condition is not considered satisfactory. Personal guarantees are relevant where the balance sheet or
financial statement of a company discloses interlocking of funds between the company and other concerns owned or managed by a group.
Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration by way of commission,
brokerage fees or any other form, would be paid by the former or received by the latter, directly or indirectly. This requirement should be

61
incorporated in the bank's terms and conditions for sanctioning of credit limits. During the periodic inspections, the bank's inspectors should
verify that this stipulation has been complied with. There may, however, be exceptional cases where payment of remuneration may be
permitted e.g. where assisted concerns are not doing well and the existing guarantors are no longer connected with the management but
continuance of their guarantees is considered essential because the new management's guarantee is either not available or is found
inadequate and payment of remuneration to guarantors by way of guarantee commission is allowed.
Charge over securities
The nature of security and the type of operational convenience decide the type of charge to be created on securities. These charges could be
the following:
VARIOUSKINDSOFCHARGESOVERSECURITIES:
Nature of security Types of security Kind of Charge Defined in Act
Mortgage
Immovable Property Land & Building Transfer of Property Act (Sec 58)
_
Actionable claims Book debts, FDR, Assignment Transfer of Property Act (Sec 130)
NSC, Life Policies
(i.e. unsecured debts)
Movable property / goods Plant & Pledge or Indian Contrail Ad (Pledge Sec 172). Hypothecation
machinery, hypothecation or lien (SARIAESI Sec 2-n)
Paper securities Shares, debentures, Lien . Indian Contract Act (Section 170 and 171) ,
Mutual fund units,
bonds
Personal guarantee Promoters and 3rd party Personal liability Indian Contract Act (Sec 126).
guarantees
Possession of security : I n case of pledge, the possession remains with the banks and ownership with the borrower. In case of
Hypothecation, the possession and ownership remains with the borrower. In pledge, the actual possession can be with the bank or it can be
with borrower as agent of the bank, which is called constructive pledge.
Disbursement of loans :
J. Working capital loans: The drawings in cash credit accounts are allowed on the basis of drawing power calculated as value of stocks
less margin, subject to maximum amount of DP equal to the sanctioned limit. For calculating the DP, the borrowers are expected to
submit stock statement, statement of book debts and the detail's of sundry creditors. The statement is obtained periodically say
monthly (or quarterly in certain cases). The amount of stocks and debtors is added and amount of creditors is reduced. There after
the applicable margin is reduced to calculate the DP. Disbursement of working capital by way of cash credit provides flexibility to the
borrower, but it creates funds management problem for the bank. For example, in case of tight money market conditions, the borrowers
avail the amount and in the easy money conditions, they do not avail the sanctioned limits. This alSo provides scope for diversion of funds by
the borrower. To take care of this, the banks switch over the loan system of credit delivery.
RBI guidelines on this aspect are as under:
In the case of borrowers enjoying working capital credit limits. of Rs. 1o crore and above from the banking system, the loan component
should normally be 8o% Banks; however, have the freedom to change the composition of working capital by increasing the cash credit
component beyond 20% or to increase the `Loan Component' beyond 80 percent, as the case may be, ifIlEy so desire. Banks are expected
to appropriately price each of the two components of working capital finance, taking into account the impact of such decisions on their cash
and liquidity management.
In the case of borrowers enjoying working capital credit limit of less than Rs.10 crore, banks may persuade them to go in for the 'Loan
System' by offering an incentive in the form of lower rate of interest on the loan components compared to the cash credit components.
The actual percentage of loan componnt in these cases 'May be settled-by the bank with its borrower clients:
In respect of certain business activities, which are cyclical and seasonal in nature or have inherent volatility, the strict application of loan
system may create difficulties for the borrowers. Banks may, with the approval of their respective Boards, identify such business activities,
which may be exempted from the loan system of delivery.
2. Term loans:
The disbursement in case term loans is on one time basis. It may be one payment in certain cases like vehicle loan or in stages, like in
case of house loans or project loan, where the disbursement is based on the progress of the project. The payments already made by the
borrower are treated as margin contribution of the borrower. In case of project financing, RBI guidelines on disbursement are as under:
Promoters should bring their contribution up front before the bank starts the disbursement. Promoters bring Certain portion of their
contribution (40-50%) up front and balance in stages.Promoters agree in advance, that they will bring their contribution on pro-rata basis as
the banks disburse the loan.
Lending under Consortium Arrangement/Multiple Banking Arrangement
The single bank financing is suitable for borrowers in partnership or small company cases. Banks permit lending with the exposure norms fixed
by them. In case of large companies., the banks have discretion to go for consortium arrangements or multiple banking arrangement,
depending upon their risk perception and exposure policy. In certain cases, even the borrowers want to have finance under a consortium /
multiple banking arrangement. In a consortium arrangement, the consortium decides the lead bank, that performs the functions such as
appraisal, holding of meetings, documentation and monitoring.
RBI regulatory guidelines: Various regulatory prescriptions regarding conduct of consortium / multiple banking / syndicate
arrangements were withdrawn by RBI in October 1996 with a view to introducing flexibility in the credit delivery system and to facilitate
smooth flow of credit. However, Central Vigilance Commission, Govt. of India, in the light of frauds involving consortium / multiple
banking arrangements which have taken place recently, has expressed concerns on the working of Consortium Lending and Multiple
Banking Arrangements in the banking system. The Commission has attributed the incidence of frauds Mainly to the lack of effective
sharing of information about the credit history and the conduct of the account of the borrowers among various banks. As per RBI

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guidelines, the banks are encouraged to strengthen their information back-up about the borrowers enjoying credit facilities from multiple
banks as under:
(i) At the time of granting fresh loans, banks may obtain declaration from the borrowers about the credit facilities already enjoyed by
them from other banks. In the case of existing lenders, all the banks may seek a declaration from their existing borrowers availing
sanctioned limits of crore and above or wherever, it is in their knowledge that their borrowers are availing credit facilities from
other banks, and introduce a system of exchange of information with other banks.
ii. Subsequently, banks should exchange information about the conduct of the borrowers' accounts with other banks at least at,quarterly
intervals. Iii. Obtain regular certification by a professional, a Company Secretary, Chartered Accountant or Cost Accountant, regarding
compliance of various statutory prescriptions that are in vogue; (iv)-Make greater use of credit reports available from cibil.
(v) The banks should incorporate suitable clauses in the loan agreements in future (at the time of next renewal in the case of existing facilities)
regarding exchange of credit information so as to address confidentiality issues.
Credit Syndications : A syndicated credit is an agreement between two or more lending institutions to provide a credit facility to a
borrower, using common loan documentation. Methodology: A prospective borrower intending to raise resources through this method gives
a mandate to a bank commonly referred as Lead Manager to arrange credit on his behalf. The mandate spells out the commercial terms of
the creditt and the authority of the mandated bank
The mandated bank is required to prepare an Information Memorandum about the borrower, in consultation with the latter and
distributes the same amongst The prospective lenders-, inviting their participation in the credit to be extended to the borrower. It presents
an opportunity to lend by extending an offer containing terms agreed between the mandated bank and the borrower. Thereafter the
mandated bank convenes a meeting to discuss the syndication strategy relating to coordination, communication and control within the
syndication process and finalizes deal timing, charges towards management expenses and cost of credit, share of each participating bank in
the credit etc. The loan agreement is signed by all the participating banks.
6.Credit Control and Monitoring
In spite of good quality of credit appraisal, defect free documentation and obtaining of appropriate securities, the loan accounts may start
showing signs of weakness due to changing business environment, contrary to what was estimated. Loan review is an effective tool for
constantly evaluating the quality of loans and to bring about qualitative improvements in credit administration. RBI in its guidelines to banks
on Credit Risk Management has emphasized that the banks should put in place proper Loan Review Mechanism for evaluating the
effectiveness of loan administration, maintaining the integrity of credit grading process, assessing the loan loss provision, portfolio quality etc.
The main objectives that the loan review mechanism could serve are: To ensure that funds of the bank are used for the intended purpose and
continue to be used properly. Any diversion of funds outside the business or use for a different purpose within the business can be detected.
To examine that the business is being conducted as planned. If there is any deterioration, it can be detected for correction.
If t h e d e t e r io r a t io n st il l co n t in u e s , b a n k ca n d e cid e in it i a t i n g so m e h a r sh a ct i o n su ch a s r e c a l l o f t h e a c co u n t a n d
i n i t i a t i n g r e co ve r y p r o ce ss .
Tools for credit monitoring : Conduct of the account with the bank : Operations in the loan accounts of the borrower is the
most reliable information. The debit and credit summations in the accounts should reflect the purchases and sales effected by the
borrower. The poor turnover in the account, persistent excess drawings, frequent return of bills and cheques or issue of cheques in round
sums or in favour of partie: not in line of business, are some of the danger signals indicating the impending trouble and weak financial
position of the borrower. An intelligent checking of the accounts and transactions in the bank's books can throw up these danger signals
and alert the banker. Hence, through regular vision over the operations in various account of the borrower, the banker can ensure
effective follow-up action.
Periodic information submitted by the borrower as per conditions of the sanction: Borrowers are required to submit statement of stocks and
receivables periodically (normally on a monthly basis) which is required to be verified properly as to its correctness, identification of old stocks
or overdue receivables. The drawing power should be allowed only after such verification.
Stock / receivable audit : Where the exposures are large and the companies are multi-division companies and the volume of their business is
large and the process and complex, it is better to have out-side help for security verification, which is also known as stock and receivable
audit.
The scope of stock audit is wider than the stock inspections carried out by the bank officials and such kind of audits can provide useful
information with regard to position of stocks, policies regarding procurement of raw materials and valuation of inventories, insurance of
stocks and other related aspects which have direct effect on the working of the unit. Many banks have introduced this system in the loan
accounts with suitable cut off points. It needs to be borne in mind that stock audit is not a substitute for normal inspection of stocks.
Financial statements of the borrower with Auditor's report: These statements are available normally on an annual basis and provide
very relevant information for monitoring of loan accounts. These throw light on the annual performance, profitability, sources and use
of funds.
Periodic inspection and visit : These visits serve a very relevant purpose in monitoring. Banks can make assessment of level of activity and
operations, the status of stocks and securities charged to the bank etc.
Market report about the borrower and his business segment in general : These reports can be obtained from the outsiders in the
similar business or from the industry associations or even from rating agencies.
Appointment of bank nominee on board of the company: In exceptional cases, the banks can get their own officials, appointed on the Board
of the respective company, to have better understanding of the company's working and taking suitable steps, where necessary.
Credit audit.
Credit Audit examines compliance with extant sanction and post-sanction processes and procedures laid down by the
Bank from time to time.
Objectives of Credit Audit -Improvement in the quality of credit portfolio, R e v i e w s a n c t i o n p r o c e s s & c o m p l i a n c e s t a t u s
of large loans, Feedback on regulatory compliance, independent review of Credit Risk Assessment, Pick-up
e a r l y w a r n i n g s i g n a l s a n d s u g g e s t r e m e d i a l m e a s u r e s , Recommend corrective action to improve credit quality, credit
administration and credit skills of staff.
Structure of Credit Audit Department :The credit audit / loan review mechanism may be assigned with a specific Department or the
Inspection and Audit Department.

63
Functions of Credit Audit Department : To process Credit Audit Reports,To follow up with controlling authorities,To process the
responses received and arrange for closure of the relative Credit Audit Reports,To apprise the Top Management,To analyse Credit
Audit findings and advise the departments/functionaries concerned To maintain database of advances subjected to Credit Audit
Scope and coverage of Credit Audit
Only standard assets, commercial advances accounts with total indebtedness above the prescribed cut-off are
covered.
All accounts of sister/associate concerns of the units at the same branch even with indebtedness of less than cut-off amount are also
examined to verify whether the conduct of these accounts is prima fade in order.
A percentage of accounts below the cut-off amount are also subjected to Credit Audit on random sample basis.
Frequency of Credit Audit
Each account required to be audited is subjected to audit within a period of 3 to 6 months of its sanction/enhancement/renewal.
Procedure is followed for Credit Audit : Credit Audit is conducted on site, i.e. at the branch which has appraised the advance and
where the main operative credit limits are made available. Report on conduct of accounts of allocated limits are to be called from the
allocatee branches. Credit auditors are not required to visit borrowers' factory/office premises
7.Risk Management & Credit Rating

Risk is inherent in the Banking business. While Banks face risks for a multitude of reasons, the major cause of serious Banking
problems continues to be directly related to lax credit standards for borrowers and counterparties, poor Portfolio risk management,
or a lack of attention to changes in economic' r other circumstances that can lead to deterioration in the repayment capacity of a
Bank's borrowers.
CREDIT RISK-DEFINITION: Credit risk is most simply defined as the potential that a borrower or counterparty will fail to meet its
obligations in accordance with agreed terms. Based on the counter-party or the nature of the transaction, Credit Risk has been
further classified as follows. Credit risk may be broken up into two components, viz: Quantity of risk, which is quantum of the
outstanding loan balance as on the date of default, and the Quality of risk viz; the 5‘everity of loss that is defined by both
probability of default as reduced by the recoveries that could be made in the event of default. Thus, credit risk is a combined
outcome of default risk and exposure risk.
i) Counter Party Default Risk: Such risk relates to specific trade transactions, sectors or groups and is related to non-
performance of trading partner or the counter-party. The appraisal skills of the Bankers should be sharp and the safety of the
advance should be is assured largely if the unit is generating surplus. Default occurs in many ways, the most dangerous being
the non payment of interest and installment on the due dates. Defaulting by not fulfilling the covenants of the contract (sanction
terms and conditions) also leads to risk (Non-submission of stock statements, non-submission of papers for renewal and so
on).Thus default can be: Non-payment default: payments not received, Technical default: Sanction terms not adhered to,
Economic default: Economic value of the assets charged is the value of the future payments or cash flows from the asset. When
the value of the asset drops below the outstanding dues, it leads to economic default. Economic default may not cause the asset
to become a NPA immediately but is a cause of concern at the same time.
Default Probability: Default risk is measured by the probability of default occurring in a given period of time. It can not be
measured easily. Normally, historical behavior helps arriving at the default probability. Arriving at the Default probability is one of
the basic steps of measuring Credit risk and used extensively in Credit risk measurement processes.
ii) Portfolio Risk: This risk arises out of non-diversified portfolios. Well-diversified portfolios carry lower risks. Bank's lending
focused on only few segments, sectors, borrowers or groups lead to the collapse of the portfolio in case the particular segment or
borrowing group etc face bad times and default. As such, lending should not only be diversified to a large number of borrowers, but
also spread in different segments or sectors. In India, RBI gives exposure norms which aim at reducing portfolio and concentration
risks. Credit rating models for borrowers and for sectors will largely minimize the risk exposure.
iii) Country Risk: This is the risk of the non-performance or default of the cross border counter-party due to constraints or
restraints imposed by the Government in that country. This normally occurs in export-import transactions. The term country risk
also relates to possibilities of loss due to Forex dealings with foreign banks working in foreign countries. The country risk arises
in the event of transaction goods/funds the borders of the country, and the buyers are unable to meet the commitment due to
restrictions imposed on the transfer of funds by the their Governments. When the counter-party is the Government itself, the risk
is called as Sovereign risk. Such risk arises due to change in Government. Therefore, countries, which are prone to frequent
changes in the Government, are more prone to country risk. At times, however, the restraints are due to wars, shortage of goods
there, floor pricing by the Government agencies etc.
OBJECTIVES OF CREDIT RISK MANAGEMENT
As this risk is inherent in the main business activity i.e. lending, the goal of credit risk management is to maximize a Bank's risk-
adjusted rate of return by maintaining Credit risk exposure within acceptable parameters. Banks need to manage the Credit risk
inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the
relationships between Credit risk and other risks. The effective management of credit risk is a critical component of a
comprehensive approach to risk management and essential to the long-term success of any banking organization.
CREDIT RISK MANAGEMENT - SOUND PRACTICES

Since exposure to credit risk continues to be the leading source of problems in banks world-wide, Banks and their
supervisors have drawn useful lessons from past experiences. Banks now have a keen awareness of the need to identify,
measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they
are adequately compensated for risks incurred. The following practices have emerged to the forefront in Credit risk management.
Establishing an appropriate credit risk environment Operating under a sharp-eyed credit sanctioning process . Maintaining an
appropriate credit administration, measurement and monitoring process. The process includes prudent delegation of powers, Risk
based supervision from the controlling offices & Central Bankers (Regulators) and proper monitoring of the credit portfolio at all
levels.
CREDIT RATING
Credit rating is a process of evaluation of an applicant (borrower) or the securities floated by a given entity by a rating agency.
Credit ratings are obtained and studied before lending or investing, in order to take an informed decision. A rating is.an opinion of
the rating agency about a specific entity or debt instrument on its capacity to repay principal and interest. Rating gives ,the first
hand information about the financial health of the company. Since the rating is done by recognized independent and approved
agencies, the investor is not to blindly believe the prospectus of the promoters of the company.
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IMPORTANCE OF RATING
Debt instruments issued by large number of companies are traded in the market. It is practically not possible that the investors
have full knowledge about the promoters or the prospects of the debt instruments available to them. Instead of relying upon the
information available in the prospectus, information provided by the independent assessing agency could be more useful t') the
investor. Similarly, Bankers rely on ratings to evaluate a borrower and even fixing the price (interest rate) commensurate with the
risk perceived through the rating mechanism.
MAIN CREDIT RATING INSTITUTIONS OR AGENCIES IN INDIA : There are four main credit rating providing
agencies operating in India,Credit Rating Information Services of India Ltd ( CRISIL ), Investment Information & Credit Rating
Agency of India Ltd ( ICRA ),Credit Analysis and Research Ltd (CARE),Fitch Ratings India Pvt. Ltd.
INTERNATIONAL CREDIT AGENCIES: Though there are many, those who are well recognized in India are:
Standard & Poor(S& P),Moody's, Fitch ratings
METHODOLOGY ADOPTED BY THE RATING AGENCIES
Though the method adopted by different agencies could be different, but the factors considered by all of them for arriving at the
rating are more or less the same. Some of the factors considered for rating are as under:
General Information: Provided by the promoters and collected by the rating agency.
Industry Risk: Nature and basis of competition, key success factors, demand & supply factors, market position of the company,
operating efficiency.
Financial Risks: Accounting qualities, position of profit and loss, inventory position, depreciation methods, off-balance sheet
liabiiities, sources of future earnings, and adequacy of cash flow.
Management Evaluation: Track record of the management, capacity of the promoters to overcome the adverse situations, goals
and strategies, regulatory and competitive controls over the products, structure and regulatory framework of the financial system,
trends in regulations, deregulations and their possible impact.
Fundamental Analysis: Liquidity management, capital structure, term matching of assets & liabilities etc, assets quality,
profitability and financial position, interest and tax sensitivity.
RATING SYMBOLS: Rating Agencies use different symbols for pointing out the ratings. Some of the important symbols used by
CRISIL for rating debt instruments are:
AAA - Highest Safety, A - Adequate Safety,BBB - Sufficient Safety, B- Greater Susceptibility to default
C- Vulnerable to Default, D- Likely to default
Credit rating therefore is a method of assigning specific rating to borrowers, banks and other counter-parties both by internal
methodologies and by using external organizations. The primary objective to determine whether the account, after credit facilities
are sanctioned/positions taken will continue to meet its obligations to its creditors, including bank and would not be become a NPA.
In simpler words, Credit rating tries to predict the future health and ability to perform, of a given Company at the time of sanction
itself.
Rulings such as AM+, AA+AA, BB etc are assigned based on the past behavior and other existing data. Different agencies give
different types of ratings but use the same basic criterion. Credit rating business is highly accepted now in India. Commercial
paper issued by Corporates is to be compulsorily rated. RBI has introduced new guidelines according to which banks can accept
Credit rating by standard agencies. Interest rates or Loan.pricing is done using Credit ratings. Borrowers with higher credit ratings
get to borrow at lower rates as they are perceived to pose less risk in comparison with other borrowers.
RATING MIGRATION: Rating migration is change in the rating of a borrower over a period of time when rated on the same
standard or model. For example, say a borrower M/s. Haryana steels Ltd. is rated as on 31-3-08 based on its positions as on that
date, and is given A+ rating. On 31-03-2009, the financial positions of the Company have deteriorated and the rating falls to B+.
This means the rating of the account has migrated from A+ to B+ over one year period. Rating migration of a single borrower leads
to a change in the covenants of financing that account( Bank will quote higher rate of interest or higher margin to mitigate its higher
risk in view of the 6eterioration).When several accounts or an entire portfolio is rated and tabulated, we can assess the probability
of the migration of one type of accounts(say A+ category) to another type (say B+ category) over a given period by using past data
and theories of Probability and certain mathematical models.
ECGC OF INDIA LTD
One on the many ways of mitigating Credit risk is obtaining third party guarantees and insurances. One of the best methods of
Credit Risk mitigation in exposures to the Export finance for Banks is obtaining ECGC guarantees. Apart from the normal
Counter party default risk that is inherent in all trade transactions, Exporters face Exchange risk, Country risk, Risk of loss due
to damage during transportation across the seas to name a few important risks. Recognizing this impediment, Governments
around the World provide support to the Export community in one form or the other to ensure that the exports take place arid
grow earning the much required Foreign exchange and helping the nation to accumulate healthy foreign exchange reserves.
Export Credit Guarantee Corporation of India Limited was established in the year 1957 by Government of India to strengthen
the export promotion drive by covering the risk of exporting on credit.
FUNCTIONS OF ECGC
ECGC provides credit risk insurance covers to Exporters against loss in export of goods and services. It takes away the Credit
risk from lenders in export finance transaction by offering its guarantee to the lenders and encourages export finance It provides
Overseas Investment Insurance to companies investing in joint ventures abroad in the form of equity or loan It helps cover
risks in Export business by offering protection against Exchange fluctuations, risks faced by Banks in undertaking confirmation of
Letters of Credit and so on
CREDIT RISK MITIGATION: ECGC GUARANTEES ISSUED TO BANKS AND FINANCIAL INSTITUTIONS
In order to provide timely and need based pre shipment or post shipment credit facilities to Exporters, Banks too need some
assurance that there will not be any financial loss to their institution in case of default on part of the Importer. With the motive
that Banks must not deny financial assistance to the Exporters for want of repayment assurance, the ECGC has formulated
different types of guarantees for suiting different needs of the exporters and protecting the Banks from default risks. A major
part of the export finance in India is covered by way of these guarantees.
TYPES OF GUARANTEES:
GUARANTEES FOR PRE-SHIPMENT GUARANTEES FOR PRE-SHIPMENT I

1.Packing Credit Guarantee 1 Post Shipment Export Credit
a) Normal, b) Whole Turn Over Guarantee
2. Export Production Finance Guarantee Export Finance Guarantee
Export Performance guarantee
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75% of theamountof default withmaximumupto37.50lacs. More than50lacs:50% of theamountof default withoverallceilingupto 50lacs
Exception: Micro enterprises upto Rs. 5 lacs : 85% with maximum upto Rs 4.25 lacs.
For Women, NER and Sikkim: Above 5 lac upto 50 lacs : 80% with maximum upto Rs. 40 lacs.
Above Rs. 50 lacs upto 1 crore: 50% with maximum overall ceiling upto Rs. 50 lacs.
GUARANTEE FEES: One time guarantee fee is payable 1.5° 75% in case of NER including Sikkim) on the credit facility agreed to be
covered by the Trust. (In case of credit facility upto Rs. 5 lac one time guarantee fee is 1%).
ANNUAL SERVICE FEE (ASF): Payable @ 0.75% on the guaranteed amount as on March 31, each year_within 60 days. (In case
of Credit facility upto Rs. 5 lac ASF is .50%)
Exceptions: Banks have been encouraged to absorb the ASF in excess of 0.25% p a. for : (a) Micro Units up to Rs. 5 lac (b)
Women Entrepreneurs (c) NER (including Sikkim) and J&K
Lock In period: 1mort_tIs from date of last disbursement or date of payment of the guarantee fee., whichever is later.
Settlement of claim: Trust shall pay 75% of the guaranteed amount within 30 days and the balance 25% on conclusion of
recovery proceedings by the lending institution.
When WC alone is extended, the cover shall be available for 5 years.
Credit facilities covered under DICGC or Govt or General insurers, or wl ere interearaleis more thar22°L)o.R shall not be
eligible for the cover.
CREDIT RISK MANAGEMENT THROUGH CREDIT DERIVATIVES
Credit derivatives are over-the counter financial contracts ("off-balance sheet" financial instruments), that permit the transferor to
transfer credit risk (arising due to creation and owning of a financial asset) to another party without actually selling the asset. It can
also be in the form of an on-balance sheet product. In other words, it is a financial contract, which involves payments by one party
to another based on "performance" of a specified underlying credit asset is called a Credit derivative.
Parties in a Credit Derivative: There are two parties namely,
Protection Seller (or Credit Risk Buyer or Guarantor — the party that receives premiums or interest — related payment), in return
for assumption of the credit risk) and
Protection Buyer (Credit Risk Seller or Beneficiary — the party that transfers the credit risk).
The protection seller makes the payment to protection buyer when the Credit Event happens, which usually includes bankruptcy,
insolvency, merger, cross acceleration, cross default, failure to pay, repudiation, and restructuring, delinquency, price decline or
rating downgrade of the underlying asset / issuer.
Types of Credit Derivatives: Credit derivatives can be divided into two broad categories i.e. transactions where credit protection is
bought and sold; and total return swaps. To start with, RBI has proposed to allow only the following two kinds of derivatives i.e.
a) Credit Default Swap ( CDS) b) Credit Linked Note (CLN).
Credit Default Swap (CDS): Under this contract (an off-balance sheet transaction), the protection buyer pays a fee through the life
of the contract, in return for a credit event payment by the protection seller following a credit event.
In case the credit event does not occur, the Protection Seller continues to receive the periodic payment and in case of occurring of
a credit event, the Protection Buyer will receive a credit event payment.
If a Credit Event occurs and physical settlement applies, the transaction shall accelerate and Protection Buyer shall deliver the
Deliverable Obligations to Protection Seller against payment of a pre-agreed amount. If a Credit Event occurs and cash settlement
applies, the transaction shall accelerate and Protection Seller shall pay to Protection Buyer the excess of the par value of the
Deliverable Obligations on start date over the prevailing market value of Deliverable Obligations upon occurrence of Credit Event.
Credit Linked Note (CLN): It is a combination of a regular note and a credit option and an on-balance sheet equivalent of a credit
default sue. Under this structure, the coupon or price of the note is linked to the performance of a rterence asset. It offers lenders a
hedge against credit risk and a higher yield for buying a credit exposure to investors. CLNs are generally created through a Special
Purpose Vehicle (SPV), or trust, which is collateralized with highly rated securities. Investors buy the securities from the trust (or
issuing bank) that pays a fixed or floating coupon during the life of the note. At maturity, the investors receive par value unless the
referenced creditor defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate. Here the
investor is, in fact, selling credit protection in exchange for higher yield on the note.
Introduction of Credit derivatives in India-review of status: The Reserve Bank had issued draft guidelines on credit default swaps
(CDS) in May 2007, followed by a revised version in October 2007. However, in view of adverse developments in international
financial markets, particularly credit markets, resulting in considerable volatility, it was riot considered opportune to introduce the
credit derivatives. Accordingly, the issuance of final guidelines on the introduction of credit derivatives is kept in abeyance. RBI has
announced in its October review of Annual policy that "Credit Default Swap" which is a Credit derivative will be introduced in Indian
markets to help Indian entities manage their Credit Risk.
8.Rehabilitation & Recovery

Credit default stands for inability or unwillingness of the borrower or counterparty to meet the commitment relating to lending, trading or
other financial transaction. The default can take place in the followiAg form:
Directlending i.e. fund Non-payment of principal or interest as per agreed terms and conditions
based loans
Non-fund based loans Repayment not coming from the borrower, on default while the beneficiary has been
demanding the payment
Treasury operations Payments are not coming from counterparties under the respective contracts Funds /
Security trading business securities settlement not being affected by the counterparties
Cross border exposure Transfer of foreign currency blocked due to restrictions imposed by the Govt. of
the concerned country.
NPAs: Banks are required to classify their loan accounts into Standard or Non-performing assets categories. The NPAs are further
classified into 3 categories (1) Sub--standard (2) Doubtful and (3) loss category depending up on their recovery and security status.
PERIOD OF CLASSIFICATION OF NPA A/Cs
Classification Period
Standard - Regular Any period
Standard - Irregular or out of 90 days
order or overdue
66
Sub-Standard ' 12 months
Doubtful - upto one year 12 months
Doubtful - above one year 24 months
but up to -3above
Doubtful years three years Uncertain
Loss Uncertain
A/c Accounts having loss of / damage to security

Doubtful Account was fully secured initially but later on, loss of security is more than
50% (i.e. secured balance less than 50%).
Loss Account was fully secured initially but later on, loss of security is more than
90% (i.e. secured balance less than 10%).
SUMMARY OF PROVISIONS PERCENTAGE
Standard - General accounts
Direct Agriculture & SME
Commercial Real Estate 0.40%
Teaser Home Loans (provision will be 0.4% after one year of increase in interest rate) 0.25%
New restructured a/c w.e.f 01.06.2013 : 5% 1.00%
Existing a/c Restructured upto 31.03.2013 2.00%
wef 31.03.14 ( spread over four quarters ) : 3.5%
Sub-standard Secured 15%
Sub-standard Unsecured 25%
Sub-standard unsecured (infrastructure accounts) 20%
Doubtful - up to 12 months 25%
Doubtful - more than 12 months but up to 3 years 40%
Doubtful - more than 3 years (secured/unsecured): 100%
Loss account 100%
Provisioning coverage ratio is to be calculated w.r.t. gross NPAs as on Sept 2010 (ratio of provisions 70%
/ gross NPAs). Excess amount (over and above account-wise provision) to be kept in Cyclical
Provision Buffer Account
Further the banks are required to make provisions on these loans on the basis of asset classification
Willful Default
A willful default would be deemed to have occurred if any of the following events is noted :-The unit has defaulted in meeting its payment /
repayment obligations to the lender even when it has the capacity to honour the said obligations. The unit has defaulted in meeting its
payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance
was availed of but has diverted the funds for other purposes. The unit has defaulted in meeting its payment / repayment obligations to the
lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of,
nor are the funds available with the unit in tho form of other assets. A unit that has defaulted in meeting its repayment obligation to the
lender and has also disposed of or removed the movable fixed assets or immovable property given by it for the purpose of securing a term
loan without the knowledge of the bank / lender. Penal measures: Any willful defaulter with an outstanding balance of Rs. 25 lakh or more,
would attract the penal measures stipulated as stipulated by RBI.
Reporting of willful defaulters with outstanding of Rs.25 lac and above,In case of suit filed cases report to be sent to CIBIL on quarterly
basis. In case of non-sutfiled cases report to be sent to RBI on quarterly basis.
Loans by other banks to willful defaulters : Any other bank will not consider sanction of loans to willful defaulters of other
banks. For a new.project ofrnittful defaulterlxinkslire not to consider any.loan for 5 years.
Options available to banks to deal with stressed assets The banks have following options to manage their stressed assets:
Exit from the account : This option can be used only when the bank is in a position to identify the symptom at very early stage. In this case, the
borrower is able to shift. the account tO.Safile other bank. This is easily possible in °consortium accounts. In single bank cases, it is relatively
difficult proposition, unless the account is taken over by other bank.
Rescheduling or restructuring: Where the default is genuine and not willful, a rescheduling or restructuring can work, depending up on
the future cash flows.
Rehabilitation: In case of sick units, the rehabilitation can be taken up after undertaking a viability study. As per RBI definition:
A "Non-SSI sick unit" is a Non-SSI industrial undertaking (regardless of type of incorporation) whose accumulated losses,
as at the end of the latest financial year, equal or exceed its entire net worth (viz., paid up capital and free reserves).
A "Non-SSI weak unit" is a Non-SSI industrial undertaking (regardless of type of incorporation) if a. any of its borrowal
accounts (principal or interest) has fernained,overdue for a period exceedm one year; OR b. there is erosion in the net
worth•dtee to accumulated losses, tio. the extent of 50% of its net worth during the previous financial year.
Compromise : Where the restructuring or rehabilitation does not come through successfully, the banks can go for compromise of the
dues by offering some relief to the borrower. The amount to be compromised depends upon the financial position of the borrower,
position of the securities in the account.
Legal action : Where even the compromise is not workable, the bank has no option except to initiate legal action. The
various forum available for legal action are:
Govt. This can be used specifically for recovery in Govt. sponsored schemes, where govt. may
machinery provide support for recovery.
Civil courts Suits involving amount less than Rs.10 lac can be filed-in civil courts. But the time taken is
very long in this case, even to obtain the decree.
LOK Adalt For loans up to Rs.20 lac where compromises can be reached, the banks can go the Lok
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Adalt and obtain consent decrees. As per Supreme Court suggestion, for personal loans of less than
Rs.10 lac, banks can give preference to the forum of Lok Adalt. These Adalts are constituted under
provisions of Legal Services Authority Act 1987
Debt Recovery DRts are created under the provisions of recovery of Debt due to Banks & FIs act 1993.
Tribunal (DRT) Banks can file cases of Rs.10 lac and above in these Tribunals which are specially created for loan recovery.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
Sale of 2002 enables the banks to sell the securities charged to them in eligible accounts, without filing suit.
securities For this purpose, banks have to take possession of securities by giving qo.clays notice. After
under possession, the charged security can be sold after giving a 30-days notice.
SARFAESI Act The Act also provides for sale of loan accounts to ASSet Reconstruction Companies created under
the Act ( such as ARCM).
Write-off : Where banks are convinced that none of the above given actions can help in recovery of the loan, the banks
go for write-off of the loan by using the provisions made for stressed assets. Where the provisions are not adequate,
the banks have to debit the amount to profit and loss account.
Restructuring of Advances
RBI issued the guidelines (Sep 2008) to harmonises the prudential norms across all categories of debt restructuring
mechanisms (other than on account of natural calamities - which will continue to be covered by the extant guidelines
issued by the RPCD-RBI).
General principles & prudential norms
The principles and prudential norms are applicable to all advances. Banks may restructure standard, sub-standard and
doubtful category accounts. Banks can not reschedule / restructure / renegotiate borrowal accounts with retrospective
effect. During the period, a restructuring proposal is under consideration, the usual asset classification norms would
continue to apply. Account will be taken up for restructuring only if the financial viability is established and there is a
reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability
parameters may include (a) Return on Capital Employed, (b) Debt Service Coverage Ratio, (c) Ga. p between Internal
Rate of Return and Cost of Funds and (d) the amount of provision required, in lieu of the diminution in the fair value of
the restructured advance. For the accounts not considered viable, banks should accelerate the recovery measures. The
restructuring without looking into cash flows and viability of the projects would be treated as an attempt at ever
greening a weak credit facility. The borrowers indulging in frauds and malfeasance will not be eligible for restructuring.
BIFR cases are not eligible for restructuring without express approval of BIFR.
CORPORATE DEBT RESTRUCTURING SYSTEM

Corporate Debt Restructuring System was implemented in India hi- August, 2001. Subsequently the guidelines were
revised in Feb 5, 2003 and during Dec 2005. The main features are given below:
Objective : The objective is to ensure timely and transparent mechanism for restructuring the corporate debts of viable
entities (industrial and others) facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the
benefit of all concerned.
Eligibility: The borrower should be a corporate borrower i.e. Companies, Co-operative societies etc.
The loan should have been raised from more than one bank or financial institution. The scheme will not apply to
accounts involving only one financial institution or one bank. The outstanding fund based and non-fund based exposure
should be Rs.10crores and above by banks and institutions. The CDR Mechanism is available to the corporates engaged
in industrial as well as non-industrial activities. The account should be standard, sub standard or Doubtful.The account
should be Standard, Sub Standarad or Doubtful. Loss accounts are not covered.There would be no requirement of the
account / company being sick, NPA or being in default for a specified period before reference to the CDR system.
Corporates indulging in frauds and malfeasance even in a single bank will be ineligible for restructuring under CDR
mechanism. Wilful defaulters an be covered with the approval of Core Group only if it is satisfied that the borrower is in
a position to rectify the wilful default provided he is granted an opportunity under the CDR mechanism.
The accounts where recovery suits have been filed by the creditors against the company, may be eligible for
consideration under the CDR system provided, the initiative to resolve the case under the CDR system is taken by at
least 75% of the creditors (by value) and 60% of creditors (by number).
BIER cases are not eligible for restructuring under the CDR system. However, large value BIFR oases, may be eligible
for restructuring under the CDR system if specifically recommended by the CDR Core Group. It should be ensured that
the lehding institutions complete all the formalities in seeking the approval from BIFR before implementing the package.
(iv) (v) The borrower should not have committed a fraud. (vi) Wilful defaulters can be considered only with consent of
Core Group. (vii)
Structure of the CDR system: The CDR structure consists of three tier structure namely (i) CDR Standing Forum and
its Core Group (ii) CDR Empowered Group (iii) CDR Cell. CDR Standing Forum is a self-empowered body, which lays
down policies and guidelines, and monitor the progress of CDR. The CDR Standing Forum comprise of CMD IDBI,
Chairman, State Bank of India; Managing Director & CEO, ICICI Bank Limited; Chairman, Indian Banks' Association as
well as CMDs of all banks and financial institutions participating as permanent members in the system. The CDR
Standing Forum shall meet at least once every six months. A CDR Core Group will be carved out of the CDR Standing
Forum to assist the Standing Forum. The Core Group will consist of Chief Executives of Industrial Development Bank of
India Ltd., State Bank of India, ICICI Bank Ltd, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks'
Association and Deputy Chairman of Indian Banks' Association representing foreign banks in India. ii) CDR Empowered
Group consists of ED level representatives of Industrial_ Development Bank of India Ltd., ICICI Bank Ltd. and State
Bank of India as standing members, in addition to ED level representatives of financial institutions and banks who have
an exposure to the concerned company. The individual oases of corporate debt restructuring shall be decided by the
CDR Empowered Group. The CDR Empowered Group would be mandated to look into each case of debt restructuring,
examine the viability and rehabilitation potential of the Company and approve the restructuring package within a

68
specified time frame of 90 days, or at best within 180 days of reference to the Empowered Group. The CDR Empowered
Group shall decide on the acceptable viability benchmark levels on the following illustrative parameters, which may be
applied on a case-by-case basis, based on the merits of each case: (a), Return on Capital Employed (ROCE) (b) Debt
Service Coverage Ratio (DSCR), (c) Gap between the Internal Rate of Return (IRR) and the Cost of Fund (CoF), (d)
Extent of sacrifice. The decisions of the CDR Empowered Group shall be final. iii) CDR Cell will make the Initial scrutiny
of the proposals received from borrowers I creditors, and put up the matter before the CDR Empowered Group, within
one month to decide whether rehabilitation is prima fade feasible.
Types of CDR: CDR is of two types namely CDR I & CDR II. CDR I is applicable to Standard and Sub Standard accounts
if at least 90% of creditors by value have treated the account as standard/substandard. It means that if in the books
of creditors- with exposure up to 10% by value, the account is classified as Doubtful, it can be still covered under CDR
I. CDR II is applicable to Doubtful accounts.
Category I and Category II restructuring: For making reference under CDR I, consent of 20% of lenders by value is
required whereas for making reference of doubtful accounts under CDR II and suit filed accounts, consent of 7S%
lenders by value and 60% by number is required. Legal Basis & Types of agreements: CDR is a non-statutory
mechanism which is a voluntary system based on two types of agreements namely (a) Debtor-Creditor Agreement (DCA)
and (b) Inter-Creditor Agreement (ICA) which shall provide the legal basis to the CDR mechanism.
Stand still clause: Debtors and creditors agree through an agreement called Debtor Creditor agreement that no party
shall take legal action during the standstill period i.e. 90 days (can be extended to 180 days).
Inter Creditor Agreement: The Inter-Creditor Agreement would be a legally binding agreement amongst the creditors,
wherein they will agree that if 75 per cent of creditors by value and 60 per cent of the creditors by number, agree to a
restructuring package of an existing debt (i.e., debt outstanding), the same would be binding on the remaining
creditors. ICA will be initially valid for a period of 3 years and subject to renewal for further periods of 3 years
thereafter,
Procedure: Preliminary case for restructuring will be prepared by the lead institution within one month for submission to
. CDR cell will prepare restructure plan within 30 days for decision by CDR empowered group within 90 days. The main
criteria for decision will be that the unit should be able to become viable in 7 years and restructured debt should be paid
within 10 years. Other important aspects for consideration of proposal include return on capital employed, DSCR, gap
between Internal rate of return and cost of funds and extent of sacrifice. Asset Classification during Pendency: During
pendency of the case with the CDR system, the usual asset classification norms would continue to apply. However, if a
restructuring package under the CDR system is approved by the Empowered Group;' and the approved package is
implemented within four months from the date of approval, the asset classification status may be restored to the
position which existed when the reference to the Cell was-made.
Additional finance: Additional finance, if any, is to be provided by all creditors of a 'standard' or 'substandard
account'on a pro-rata basis. The additional finance may be treated as 'standard asset', up to a period of one year after
the first interest/ principal payment, whichever is earlier, falls due under the approved restructuring package. However,
in the case of accounts where the existing facilities are classified as 'substandard' and 'doubtful', interest income on the
additional finance should be recognised only on cash basis. If the restructured asset does not qualify for upgradation at
the end of the above specified- one year period, the additional finance shall be placed in the same asset classification
category as the restructured debt.
Debt Restructuring Mechanism for SMEs
The guidelines are applicable to entities which are viable or potentially viable as follows : (i) All non-corporate SMEs
irrespective of the level of dues to banks. (ii) All corporate SMEs which are enjoying banking facilities from a single
bank, irrespective of the level of dues to the bank. (iii) All corporate SMEs which have, funded and non-funded
outstanding up to Fts.10 crore under multiple/ consortium banking arrangement.Accounts involving wilful default, fraud
and malfeasance would not be eligible for restructuring. The Reserve Bank has advised that banks may review the
reasons for classification of the borrower as wilful defaulter and satisfy themselves that the borrower is in a position to
rectify the wilful default provided he is granted an opportunity. Banks may admit such exceptional cases for
restructuring with their board of directors' approval. Banks should, however, ensure that cases involving frauds or
diversion of funds with malafide intent are not covered. Accounts classified by banks as Standard, Sub Standad and
Doubtful only are covered. "Loss assets" would not be _eligible for restructuring. For cases under the purview of the
Board for Industrial and Financial Reconstruction (BIFR) banks should ensure completion of-all formalities in seeking
approval from BIFR before implementing the package.
Viability: Banks should decide on the acceptable viability benchmark. It should be ensured that the unit becomes viable
in 7 years and the repayment period for restructured debt does not exceed 10 years.
Additional Finance: Additional finance, if any may be treated as Standard Asset in all accounts namely standard, sub
standard and doubtful accounts up to a period of one year after the date when first payment of interest or of principal
whichever is earlier falls due under the approved restructuring package. It the restructured asset does not qualify for
upgradation at the end of the above period, additional finance shall be placed in the same asset classification category
as the restructured debt.
Upgradation of restructured accounts: The account would be upgraded to the standard category after one year
from the date when first payment of interest or of principal whichever is earlier falls due under the rescheduled terms
provided there is a satisfactory performance during the period.
Time period for restructuring: Restructuring package should be implemented within a maximum period of 60 days from
the date of receipt of request.
DEFINITION OF NON —SSI SICK UNITS : A Micro or Small Enterprise may be said to have become Sick, if (a) Any
of the borrowal account of the enterprise remains NPA for three months or more or (b) There is erosion in the net worth
due to accumulated losses to the extent of 50% of its net worth during the previous accounting year.
A "Non-SSI sick unit" is a Non-SSI industrial undertaking (regardless of type of incorporation) whose accumulated
losses, as at the end of the latest financial year, equal or exceed its entire net worth (viz., paid up capital and free
reserves).
A "Non-SSI weak unit" is a Non-SSI industrial undertaking (regardless of type of incorporation) if (a). any of its borrowal
accounts (prindpal or interest) has remained overdue for a period exceeding one year; or (b) there is erosion in the net
worth due to accumulated losses to the extent of 50% of its net worth during the previous financial year.
69
Credit Information Companies (N H Siddiqui Working Group)
A Credit Information Company (CIC) is an independent organization licensed by RBI that enters into an agreement with
banks, NBFCs and financial institutions (called credit institutions), as its members and aggregates data and identity
information for individual consumers and business entities, from its members.
Legal provisions : The Credit Information Companies (Regulation) Act, 2005 was operationalised with effect from
December 14, 2006. In terms of Section 15(1) of the Act, every credit institution has to become member of at least one
credit information company within a period of three months from commencement of the Act or any extended time
allowed by RBI on application.
A. all commercial banks fall under the definition of credit institutions (Section 2 of the Act), they are required to take
membership of at least one credit information company and provide credit data (positive as well as negative) to the
credit information company in the format prescribed by the credit information company.
Sharing of credit report with customers : Section 21 of the Credit Information Companies (Regulation) Act,
2005, provides that any person, who applies for grant or sanction of cedit facility, from any credit institution, may
request to such institution to furnish him a copy of the credit information obtained by such institution from the credit
information company. It also provides that every credit institution shall on receipt of request furnish to such person a
copy of the credit information subject to payment of charges specified by RBI.
Charges for report : As per Credit Information Companies Regulations, 2006, framed under the Act, RBI has
prescribed a maximum fee of Rs. 50/- (Rupees fifty only) for the purpose.
Source of data : Members of the credit information companies, submit data of their borrowers on a regular basis which
is aggregated by the bureau and presented to its members. A credit bureau only reproduces information that is
submitted by its members. With CIC Act coming into force, RBI advised banks (Jul 01, 2013) that consent of the
borrower to share information with CIC, prescribed cariier, need aot be insisted upon by banks.
Wilful defaulters : Banks/Fis are required submit the list of suit-filed accounts of wilful defaulters of Rs.25 lakh and
above as at end-March, June, September and December every year to a credit information company which has obtained
certificate of registration from RBI in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005 and
of which it is a member. Credit Information Companies have also been advised by RBI to disseminate the information
pertaining to suit filed accounts of Wilful Defaulters on their respective websites.
List of Credit Information Companies (July 2013) : CIBI1, 2. Experian Credit Information Company of
India Private Ltd. 3. Equifax Credit Information Services Private Ltd., 4. High Mark Credit Information Services Private
Limited
MEMORY BASED RECALLED QUESTIONS

1) Net Interest income is: a)Interest earned on loans and advances only b)Interest earned on investments only c)Total
interest earned on advances and investment d)Difference between interest earned and interest paid
2) Investment made by a bank in its subsidiary is considered in the following category in its balance sheet: a) Secured
advances b) Other assets c) Investments d) Unsecured advances
3) Net Interest Income (NII) is calculated using the following formula:a) Interest income - Total expensesb) Total
income - Interest expenses c) Interest income - Interest expenses d) Total income - Total expenses
4) N.I.M. calculated using the following formula:a) Nil /Average total liabilities b) NII /Average Total Assets c)Total Interest
Income /Average Total Assets d)Total interest Income /Average Total Liability
5) Economic Equity Ratio is used to assess sustenance capacity of the,bank• It is calculated using the formula:
a) Net Interest Income / Shareholder Funds b)Total Income / Shareholder Funds c)Shareholder Funds Total of Assets &
Liabilities d)Shareholder Funds Total Assets
6) Risk of having to compensate for non-receipt of expected cash flows by a bank is called: a) Call risk b) Funding risk
c) Time risk dl Credit risk
7) 'Time risk' in the context of liquidity risk of an institution is caused due to: a) Systematic risk b) Swaps and options
c) Loss of confidence d) Temporary problems in recovery
8) Crystallisation of contingent liabilities in a bank is called: a) Call risk b) Funding risk c) Time risk d) Credit risk
9) If the volatility per annum is 25% and the number of trading days per annum is 252, find the volatility per day.:a)
58% b) 1.60% c) 158% d) 15.8%
10)RBI has put in place real time gross settlement system (RIGS) to mitigate the following risk: a)Markel risk b)
Settlement risk c) Operational risk d) Strategic risk
I.' 11) A bank is having Rs 500 Crore liabilities @ 7% of one year maturity to fund Rs 500 Crore assets @ 9% with 2
year maturity. The bank is exposed to: a) Gap Risk b) Basis Risk c) Price Risk d) Yield Curve Risk
12) In India, type of options are permitted now:a) American b) European c) Asian d) A & B
13) Interest rate risk is a type of:a) Credit risk b) Market risk c) Operational risk d) All the above
14) If Regulatory Authority of the country feels that the Capital held by a bank is not sufficient, it could require the bank
to:a) Reduce it's Risk b) Increase its Capital c) Both of these d) Either of these
15) When a bank sanctions a loan to a large borrower, which of the following risks it may not face:a) Liquidity b)
Market c) Credit d) Operational
16) A firm has an opening of stock of Rs.70,000. Closing stock of Rs.90,000 and Cost of goods sold Rs.2,40,000.
What the Inventory Turnover Ratio?a)5 b) 4 c) 3 d) 2
17-18) Based on the following information, solve questions number 17&18.
Credit Sales - Rs.3,00.000
Opening Balance of Accounts Receivable - Rs 40,000
Closing Balance of Accounts Receivable - Rs.60,000
Credit Purchases - Rs.1,80,000
Opening Balance of Account Payable - Rs 20,000
Closing Balance of Accounts Payable - Rs.40.000
17) The Debtors' Turnover Rati6 is:a) 6 b) 8 c) 10 d) 12
18) The Creditors' Turnover Ratio is: a) 8 b) 6 c) 4 d) 2
19) To solve a standard maximization problem using the Simplex method,we take the steps which are jumbled. Mark
the correct order of steps.
Step 1: Determine which variable to bring into solution
Step 2: Determine which variable to replace
Step 3: Formulate problem in terms of an objective function and a set of
constraints
Step 4: Update remaining Row values Compute new z
Step 5: Calculate new row values for entering variable and insert into new
tableau.
Step 6: Set up initial Tableau with slack variables
70
Step 7: If there is no positive (c-z) value found, the solution is optimum. If there
is a positive value, then iterate again (repeal earlier three steps)
Choose the correct sequence of steps.: a) 3,5,4,5.7,1,2 b) 3,6,2,1,5,4,7 c) 3,6,2,1,4,5,7 d) 3,6,1,2,5,4,7
20) Which of the following is not a motive for the companies to hold cash?: a) Transaction motive b)
Precautionary motive c)Lack of proper synchronization between cash inflows & outflows d)Capital investments
21) VaR means:a) Volume of Business at Risk b) Value at Risk c) Volume on Risk d) Value as Risk
22) The maximum loan against NREIFCNR Term deposit was Rs.20 lakh earlier. RBI has now increased it to:
a) Rs.25 lakh b) Rs. 1 crore c) Rs.50 lakh d) No change
23) Credit Risk Assessment of the borrowal units is for: a) Assessing the repayment capacity b) To fix the pncing of the
product c) To review the units performance d) None of the above
24) Pricing is equals to:a) Cost of the product b) Break Even Point of the firm c) Function of Risk rating d) All of the
above
25) The bond prices can be estimated using modified duration. The formula for calculating %age change in
price of a bond is: a)Modified duration x yield change b)Yield change /modified duration c)Modified duration 1 Yield
change d)Modified duration + Yield change
26) If both the Regression coefficients are negative, the correlationcoefficient would be : a) Positive b) Negative c)
Zero d) None
27) The most frequently used Average is: a} Mode b) Median c) Mean d) Geometric Mean
28) Advance in the form of Pledge cannot be granted in respect of:a) Stock-in-process b) Raw material c) Finished goods d)
Stores
29) In which of the following methods of capital budgeting annual returns of the future years are discounted to their present
value :a) Pay back period b) Internal rate of return c) Present value method d) Both 'a' & 'c'
30) Bonds may be secured by :a) Floating charge on assets b) Fixed charge on assets c) Without charge d) All of these
31) Which of the following statement is correct? :a)Forex markets are localized markets b)Forex markets are International markets
only c)Forex markets are dynamic & round the clock markets d)Forex markets are used only for trade transactions
32) If market quotes USD(INR as 53.61/63, at what rate can you buy USD at the given quote?:a) 53 61 b) 53 62 c)53 33 d)53 61
33) The main role function of the Welfare secretary was to meet the needs of the workers and prevent them from .: a) Forming
Unions b) Leaving the job c) Gossiping during duty d) Disturbing other workers
34) Union formations were seen in the_______phase of development of HRM:a) First phase b) Second Phase c) Third phase
d) Unions have been present even before HRM came in to existence
35) Climate Management is possible by using HRIT. Climate information is gathered using: a)Job satisfaction surveys
b)Performance appraisals by superiors c)Studying attendance patterns in different weathers d)AIL of the above
36) Job Analysis technique involves: a) Job Description b) Job Specification c) Job Evaluation d) All of the above
37) Mechanistic (or Behaviorist) theories, Cognitive theories and Organismic (humanistic) theories are three theories of
learning. Which one of these theories equates man with his brain? a) Behaviorist or mechanistic theories b) Cognitive
theories c) Organismic or humanistic theories d) All of the above
38) The Concept of Career path relates to of movements and deciding the_____for each stage.:a) Sequence, time period
b)Number, candidates c) Decision, number d) Type, time period
39) Johari Window is most useful for: a) Understanding others b) Self-Awareness c) Working in Teams d) Improving inter-personal
relations
40) The process of capturing the tacit knowledge of people in a systematic manner for future use is called:a) Data entry
b)Information technology c) Knowledge management d) All of the above together
41) Mandatory feature of a Letter of Credit: a)Must have an applicant and a beneficiary b)Should have an advising bank and a
confirming bank c)Should be confirmed to be operative d)Must be confirmed by the reimbursing bank
42.45) The top management of ABC Bank was in a triumphant mood after engaging XYZ Ltd, one of the top IT Companies as a
consultant for a massive technology upgradation in the Bank. Their enthusiasm was short lived, as the project did not progress well
and the consultants were not able to deliver the desired results even after several months. In fact the Consultants were of the view
that it may never be possible to implement the project with 100% success as they seemed to be facing resistance from the
employees at multi-levels. The employees at all levels seemed reluctant to co-operate. Their fear of Role erosion seemed palpable.
42) What does "Role erosion" mean in this context?: a)The fear of the employee that he will be sent out b)Fear that the responsibility
and the power will reduce c)Fear that he will no more be an indispensable d) a & b
43) The critical issue in this case is:a)Attitudes of individuals b)Training of people c)Group behavior due to a sense of the unknown d)All
the above
44) How could this situation have been managed better?: a)By issuing project details and time frame mentioning punishments in
case of delay b)By roping in the HR professionals to act as coordinator c)By recognizing that any change brings its own reactions
and co-opting the managers even before the Consultants moved in d)b & c
45) The Bank should deal with the employee resistance by: a)Co-opting the employees b)Communicating strategically about the
potential benefits c)Conducting simultaneous training to familiarize the staff with the new software d)All of the above
46) Mr. Ganguli is a brilliant manager in ABC Bank. He is one of the few persons picked up by the top management from an IIM
after MBA. Always on two phones at a time, he boasts about having no patience with tt laggards. Often, he can be heard
aggressively yelling at people on small issues. What type of person is Mr. Ganguli?: a)Type B personality b) Type A personality
c) Type C person d) Type D person
47) What is most essential for achieving Work-Life balance?: a) Time management b) Efficiency c) Assertiveness d) Emotional
maturity
48) A sales man in a shop showed a suit piece and told the customer that the cloth is very good, but costly. He was using the
following transaction: a) Duplex b) Angular c) Complementary d) None of the above
49) A prominent politician was heard saying that that people state was incapable of joining the army. He was :a)Stereotyping b)
Projecting c) Hallucinating d) All of the above
50) Mr. A is the Branch Manager in ABC Bank. He makes it a point to visit the prominent deposit customers himself to deliver
their deposit receipts. He does not even take the "Relationship Manager" appointed for this purpose. Mr. A believes that none of
the new generation staff is good enough to deal with such tasks. What is the "Life position" taken by Mr. A as regards the
"Relationship Manager" as per the "Theory of Lifr position" propounded by Dr. Thomas Harris?: a) I are OK, you are OK b) I
am Ok, You are not OK c) I am not OK, you are not Okd) I am not OK, you are not OK
51) Translation losses are significant for banks as they affect the Bank's:a) Markel value b) Interest income c) Both (a) & (b)
aboved) All of the above
ANSWER
1 D 2 C 3 C 4 B 5 D
6 C 7 D 8 A 9 A 10 B
11 A 12 D 13 B 14 C 15 B
16 C 17 A 18 B 19 D 20 D
21 B 22 B 23 B 24 C 25 A
26 B 27 C 28 A 29 0 30 D
31 C 32 C 33 A 34 A 35 A
36 D 37 B 38 A 39 B 40 C
41 A 42 D 43 C 44 D 45 0
46 A 47 D 48 B 49 A 50-B 51-A
RECALLED QUESTIONS JUNE 2014 : ADVANCED BANK MANAGEMENT

51) A firm has an Opening stock of Rs.70,000, Closing stock of Rs.90,000 and Cost of goods sold Rs.2,40,000. What the Inventory
Turnover Ratio?
a). 5 b) 4 c) 3 d) 2
52 & 53) Based on the following information, solve Q 2 & 3.
71
Credit Sales - Rs.3,00,000
Opening Balance of Accounts Receivable -
Closing Balance of - Rs.40,000
Rs.60,000
Accounts Receivable
Credit Purchases - Rs.1,80,000
Opening Balance of - Rs.20,000
AccountBalance
Closing Payableof - Rs.40,000
Accounts
52) PayableTurnover Ratio is: a) 6 b) 8 c) 10 d) 12
The Debtors’
53) The Creditors’ Turnover Ratio is: a) 8 b) 6 c) 4 d) 2
54) To solve a standard maximization problem using the Simplex Method,
we take following steps which are jumbled. Mark correct order of steps.
Step 1: Determine which variable to bring into solution.
Step 2: Determine which variable to replace
Step 3: Formulate problem in terms of an objective function and a set of
constraints
Step 4: Update remaining Row values. Compute new z
Step 5: Calculate new row values for entering variable and insert into new
tableau.
Step 6: Set up initial Tableau with slack variables
Step 7: If there is no positive (c-z) value found, the solution is optimum. If there
is a positive value, then iterate again (repeat earlier three steps).
Choose the correct sequence of steps.
a) 3,5,4,5,7,1,2 b) 3,6,2,1,5,4,7c) 3,6,2,1,4,5,7 d) 3,6,1,2,5,4,7
55) Which of the following is not a motive for the Companies to hold cash?
a) Transaction motive b) Precautionary motive
c) Lack of proper synchronization between cash inflows & outflows
d) Capital investments
56) In an Inflationary trend, the pricing of the bank products:
a) Decreasing trend b) Constant
57) The bond prices can be estimated using modified duration. The formula for calculating % change in price of a bond
is:
a) Modified duration x Yield changeb) Yield change /modified duration
c) Modified duration / Yield change d) Modified duration + Yield change
58) If both the regression coefficients are negative, the correlation coefficient would be _____. a) Positive b) Negative c) Zero
d) None
59) The most frequently used average is: a) Mode b) Median c) Mean d) Geometric Mean
60) Advance in the form of pledge cannot be granted in respect of ______:
a) Stock-in-process b) Raw material c) Finished goods d) Stores
61) In which of the following methods of capital budgeting, cash inflows of the future years are discounted to their present value
_______:
a) Pay back period b) Internal rate of return
c) Net Present Value method d) Both ‘b’ & ‘c’
62) Bonds may be secured by a) Floating charge on assets b) Fixed charge on assets, c) Without charge d) All of these
63) Climate Management is possible by using HRIT. Climate information is gathered using:
a)Job satisfaction surveys
b)Performance appraisals by superiors
c) Studying attendance patterns in different weathers
d)All of the above
64) Job Analysis technique involves:
a) Job Description b) Job Specification
c) Job Evaluation d) All of the above
65) Mechanistic (or Behaviorist) theories, cognitive theories and Organismic (humanistic) theories are three theories of learning.
Which one of these theories equates man with his brain?
a) Behaviorist or mechanistic theories b) Cognitive theories
c) Organismic or humanistic theories d) All of the above
66) The Concept of career path relates to _____ of movements and deciding the ______ for each stage.
a) Sequence, time period b) Number, candidates
c) Decision, number d) Type, time period
67) Johari Window is most useful for:
a) Understanding others b) Self-Awareness
c) Working in Teams d) Improving inter-personal relations
68) The process of capturing the tacit knowledge of people in a systematic manner for future use is called_______:
a) Data entry b) Information technology
c) Knowledge management d) All of the above together
69 to 72) The top management of ABC Bank was in a triumphant mood after engaging XYZ Ltd, one of the top IT Companies as a
consultant for a massive technology upgradation in the Bank. Their enthusiasm was short lived, as the project did not progress well
and the consultants were not able to deliver the desired results even after several months. In fact the Consultants were of the view that
it may never be possible to implement the project with 100% success as they seemed to be facing resistance from the employees at
multi-levels. The employees at all levels seemed reluctant to cooperate. Their fear of Role erosion seemed palpable.
69) What does “Role erosion” mean in this context?
a) The fear of the employee that he will be sent out
b) Fear that the responsibility and the power will reduce
c) Fear that he will no more be an indispensable d) a & b
70) The critical issue in this case is:
a) Attitudes of individuals b) Training of people
c) Group behavior due to a sense of the unknown d) All the above
71) How could this situation have been managed better?
a) By issuing project details and time frame mentioning punishments in case of delay
b) By roping in the HR professionals to act as coordinator
c) By recognizing that any change brings its own reactions and co-opting the
managers even before Consultants moved in d) b & c
72) The Bank should deal with the employee resistance by:
a) Co-opting the employees
b) Communicating strategically about the potential benefits
c) Conducting simultaneous training to familiarize the staff with the new
software d) All of the above
73) Mr. Ganguli is a brilliant manager in ABC Bank. He is one of the few persons picked up by the top management from an IIM after
MBA. Always on two phones at a time, he boasts about having no patience with the laggards. Often, he can be heard aggressively
yelling at people on small issues. What type of person is Mr. Ganguli?
a) Type B personality b) Type A personality
c) Type C person d) Type D person
74) What is most essential for achieving Work-Life balance?
a) Time management b) Efficiency
c) Assertiveness d) Emotional maturity
75) A sales man in a shop showed a suit piece and told the customer that the cloth is very good, but costly. He was using the
following transaction:
72
a) Duplex b) Angular c) Complementaryd) None of the above
76) A prominent politician was heard saying that that people of his state was incapable of joining the army. He was ________:
a) Stereotyping b) Projecting
c) Hallucinating d) All of the above
77) Mr. A is the Branch Manager in ABC Bank. He makes it a point to visit the prominent deposit customers himself to deliver their
deposit receipts. He does not even take the ‘Relationship Manager’ appointed for this purpose. Mr. A believes that none of the new
generation staff is good enough to deal with such tasks. What is the ‘Life position’ taken by Mr. A as regards the ‘Relationship
Manager’ as per the ‘Theory of Life position’ propounded by Dr. Thomas Harris?
a) I am OK, you are OKb) I am Ok, You are not OK
c) I am not OK, you are not Ok d) I am not OK, you are not OK
78) Business Cycle is also known as:
a) Entrepreneur cycle b) Economic cycle
c) Trade circle d) band c
79) State whether the following statements are true or false:
A. Id is the foundation of the unconscious.
B. Caring boss displays a Nurturing Parent ego state
C. Personality is a sum total of all that a person has learnt.
D. We have an image of our own & our actions are consistent with that image
a) All true b) All falsec) A & B are true d) C & D are true
80)______ is a prominent feature of Type B personalities:
a) Doing several things at one time.
b) Feeling guilty when relaxing. c) Being aggressive
d) Being patient and methodical
81)______ is a tool to increase “Self Awareness”:
a) Improving analytical ability b) Jointing Social circles / groups
c) Johari window d) All of the above
82) _____ is the method in which “Adults” should be taught:
a) Pedagogy b) Andragogy c) Distance learning d) All of the above
83) YTM of a Bond is also known as _______:
a) Internal Rate of Return b) Current yield
c) Net Present Value d) All of the above
84) Duration is a not function of :
a) Time to maturity b) Coupon rate c) Coupon frequency d) Principal amount
85) A Bond with coupon rate 7.35% is trading in a market where the market yield is 8.5%. Such a bond would be trading
___:
a) At a discount b) At a premium
c) At par d) Depends on the market
86) To earn a return of Rs.10,000 p.a., 20% discount rate, present investment for Perpetuity will be :
a) 40000 b) 50000 c) 60000 d) 65000
87) When population under investigation is infinite, we should use the:
a) Sampling Method b) Census method
c) Either census or sampling d) None of these
88) The coefficient of Correlation.
a) Has no limits b) Can be less than one
c) Can be more than one d) Varies between ± 1
89) Coupon rate means :
a) Market rate of return of a bond / Debenture
b) The rate at which the bond would pay interest at stipulated periods
c) The total amount (Principal+ Interest) that a bond would pay
d) Yield to maturity of the bond
90) An infinity level of inventory turnover ratio is in the case of ________
a) Never can be b) Just in time
c) Activity based costing d) Zero based budgeting
91) Effective interest Rate will with increase in frequency of
compounding:
a) Increase b) Decrease c) Equalize quoted rate d) Equalize nominal rate
92) What is Du Pont System :
a) Rate of Return based decisions b) Working Capital Management tool
c) Debtors solvency analysis d) Cash Management tool
93) Internal rate of return ( IRR) indicates :
a) The profit made by the unit b) Bench mark prices for material transfer
c) Discount rate at which NPV of the project is zero
d) Rate of rejection of project
94) In a Highly Geared Company :
a) Only ordinary capital is raised b) Only debentures are issued
c) Major part of finance is raised by debentures
d) Major part of finance is raised by equity capital
95) In a normal distribution, the Mean, Mode and Median are related as:
a) Mean > Median > Mode b) Mean > Mode > Median
c) Mean = Mode > Median d) Mean = Mode = Median
96) Low turnover of Stock ratio reflects :
a) Over- trading b) Solvency position
c) Good liquidity d) Over- investment in inventory
97) Over Capitalization is cured by :
a) Increase in the rate of debenture interest b) Redemption of debentures
c) Issue of bonus shares d) All the above
98) The sum of deviations of individual observations is zero from:
a) Mode b) Median c) Arithmetic Mean d) None
99) Suppose you receive annually Rs. 3,000 per year for 3 years, what is the present value of this stream of cash flows if the
discount rate is 10%.
a) 7261 b) 7361 c) 7461 d) 7561
100) Higher Debtor’s turnover ratio (in months) indicates ____ requirement: a) Less working capital b) More working
capital, c) No effect on working capital d) None of the above
c) Increasing trend d) No relevance
ANSWER
51 C 52 A 53 B 54 D 55 D
56 C 57 A 58 B 59 C 60 A
61 D 62 D 63 A 64 D 65 B
66 A 67 B 68 C 69 D 70 C
71 D 72 D 73 A 74 D 75 B
76 A 77 B 78 B 79 A 80 D
81 C 82 B 83 A 84 D 73 85 A
86 B 87 A 88 D 89 B 90 B
91 A 92 B 93 C 94 C 95 D
96 D 97 B 98 C 99 C 100 B
BASED ON RECOLLECTED QUESTIONS

1) As per RBI guidelines, Banks have to report their business, for public reporting purposes, based on segments,
segments as and :a) Locational; Domestic; Global b) Market; Domestic , International c) Price; Dollars; Euro.d) Value;
Quantitative; Qualitative.e) Geographical; Domestic, International
2) As per RBI guidelines, banks have adopted the business segments, for public reporting purposes:a) Treasury
b) Corporate! Wholesale Banking c) Retail banking d) Other Banking Business e) All of the above
3)is used for the purpose of segment reporting which includes the entire investment portfolio.: a) Treasury b) Retail
banking c) Wholesale banking d) Corporate banking
4) The Retail Banking would include exposures which fulfill the following four criteria: a)Orientation b)Product, c)
Granularity d)Low value of individual exposures. e) All of the above
5) BCBS stands for: a) Basel committee on banking supervision b) Blue cross blue shield c) Basel centre on banking
supervision d) None of these
6) What type of information is given by the financial statements of Auditor's report'? ': a) Diversion of funds b) Financial
health c) Realization of debts d) Profitability e) All of the above
7) Orientation Criterion is an exposure to the :a) Group of people b) Individuals c) Small business d) Both b&c
8) Annual turnover of the Small business is as per segment reporting: a) More than 80 crore b) Less than 50 crore
c) More than 50 crore d) Less than 80 crore
9) Product Criterion is the exposure which takes the form of ________credits: a) Revolving credit b) Lines of credit c)
Liquidity credit' d) Both a & b e) All of the above
10) In case of Granularity Criterion, aggregate exposure to one counterpart should not exceed_____ of the overall
portfolio:a) .5% b) .2% c) .10% d) .4% e) None of the above
11) Aggregate exposure means of all forms of debt exposures: a)Net amountb) Gross amount c) Balance d) Net loss
12) Corporate Banking includes advances to the firms:a) Partnership firms b) Trusts c) Companies d) Statutory bodies
e) All of the above
13) Which factors affect the probable consequences likely if a risk does occur:a) Risk cost b) Risk timing c) Risk scope
d) Risk resources e) Both b & c
14) The exposure of a bank to a single NBFC-AFC should not exceed_________percentage:a) 20-25% b) 15-20% c) 10-
15% d) 5-10%
15) What is the exemption limit for all MSME for obtaining collateral security?a) Rs 2 lakh b) Rs 5 lakh c) Rs.10 lakh d)
Rs15 lakh
16) How much percentages of core assets are required in case of Third Method of Lending as proposed by Tandon
committee: a) 100% b) 50% c) 200% d) 80%
17) ABC analysis divides on-hand inventory into three classet, generally based upon:a) Item quality b) Unit price c) The
number of units on hand d) Annual demand e) Annual dollar volume
18) What are the objectives of Credit Audit? a) Improvement in the quality of credit portfolio b))Review
sanction process and compliance status of large loans c)Feedback on regulatory compliance d)Independent
review of Credit Risk Assessment e) All of the above
19) What are the methods of Return on Investment?:a) NPV b) IRR payback period c) Cost benefit ratio d) Accounting rate of
return e) All of the above
20) A project with a high Break-even point is considered_______risky compared to the one with lower break-even point:
a) Less b) More c) Equal d) None of the above
21) is the difference between gross fiscal deficit and net lending: a) Gross fiscal deficit b) Net fiscal deficit c) Net primary
deficit d) Revenue deficit
22) Which of the lending arrangement is called Consortium?: a)When two or more banks get into a formal arrangement to
finance the working capital needs of a borrower b)When two or more banks get into a informal arrangement to finance the working
capital needs of a borrower.c)When two or more banks get into a informal arrangement to finance the basic needs of a borrower
23) Credit Default Swaps is a bilateral contract in which the risk seller pays a____to the buyer for protection against
credit default. a) Discountb) Premium c) Par d) None of the above
24) CDS is a standardized instruments of : a) Credit linked notes b) International Swaps & Derivatives Association
c) Internal Swaps and Derivatives Association d) Credit default swaps
25) As per RBI guidelines, only____CDSs are allowed:a) Double vanilla b) Plain vanilla c) Both d) None of the above
26) Stressed assets include which of the following:a) Exit from the accounts b) Rescheduling/Restructuring c) Rehabilitation d)
Compromise e) All of the above
27) Which of the following is a tool available to the bank for credit monitoring: a) Analysis of financial statements b)
Examine conduct of borrower a/c c) Periodic visits to the business place for inspection d) All of the above
28) What Is the main purpose of Stock audit? : a) To cross check the reliability of the statements b) To examine adequacy of
documentation c) To reduce the liquidity d) To increase the turnover e) All of the above
29) Which of the following is the guidelines of RBI for discounting Rediscounting of bills by bank: a)Bank should open
LCs and negotiate the bill under LC only b)Bank should mention working capital limit, Bills limit to borrowers after proper
appraisal of there credit needs c)Bank should provide credit requirements to the purchaser d)Both a & b
30) Which of the following are non-fund based facilities: a) Negotiate the bills b) Opening of LCs c) Providing Guarantees d)
b&c
31) Which of the following aspects covered under economic feasibility of the project: a)Return on investment b) Break
even analysis c) Marketing arrangements d) Both a & b
32) The stages of complete Business Cycle are: a)Boom, Recession, Depression, Recovery b)Boom, Depression, Recovery,
Recession. c)Peak, Contraction, Trough, Expansion.d) Both a and c.
33) One negative aspect of a Business cycle boom: a)A declining rate of inventory investment. b)A reduction in government
budget deficits. c)A declining rate of unemployment d) An increasing rale of inflation
34)is the excess of revenue expenditure over revenue receipts:a) Revenue deficit b) Capital deficit c) Gross fiscal deficit d)
None of these
35) The low point in the business cycle is referred to as the:a) Expansion b) Boom c) Depression d)Peak
36)The trough of a business cycle occurs when______hits its lowest point.:a) Inflation b) The money supply c) Aggregate
economic activity d) The unemployment rate
37)T h e m e a s u r e o f p r o d u c t i o n t h a t v a l u e s p r o d u c t i o n u s i n g c u r r e n t p r i c e s i s c a l l e d : a )
Underground GDP b) Nominal GDP c) Real GDP d) Value added GDP
38)_____= GDP + Non Resident:a) GNI b) GNP c) GDP d) None of the above
39) C+I+G+(X-M) is the formulae for:a) GNP b) GDP c) GNI d) NR
40)______ price is the nominal price for which a good or services is offered in the market place:a) Market price b)
Economic price c) Marginal price d) Deficit price
41) Which of the following is another derivative of GDP?:a)Income distribution b)Per capita Income c)Human development
Index
42) HD! stands for:a) Human democracy Index b) Human development Index c) Higher development Index d) None
43) Which of the following is newest concept of GDP:a) Green GDP b) Blue GDP c) Red GDP d) Yellow GDP
44) The National Income is equal to: a) GNP- Subsidies –Taxes b) NNP-Direct taxes+ Subsides c) NNP- Direct taxes - Subsidies
d) GNP- Subsidies +Taxes
45) Which of the following is not true?:a) GNP=Depreciation = NNP b) GNP = GDP + Net income from abroad c)NNPat Factor
cost=NNPat Market price + Subsidies - Indirect taxes d)GNP=NNP-Depreciation
46) The difference between GNP and GDP is equal to : a) Gross domestic Investment b) Net foreign Investment
c) Net imports d) Net factor income from abroad
74
47) Net tax revenue + Total non tax revenue = a)Capital receipts b)Total revenue receipts c)Debt receipts d) None of these
48) Which of the following items comes under capital expenditure?:a) Defence b) Loan to foreign Governments c) Loan to
public enterprises d) All of the above
CASE STUDY - 01
Mr. Mihir is the AGM in charge of Bank street, Hyderabad branch of ABC Bank. He is
Company regarding a TT remittance the Company has to make urgently in favour
USD One million on Thursday, the 250 of Oct. This is the first time the Company is making
of I
approached by XYZ
Siemens, Singapore for
such a remittance. it is
an advance remittance for import of services. The Chairman of XYZ Company is particular that the transaction should
go through smoothly. In this regard, please answer the following: •
49) ABC Bank should call for and verify the IlE code of the Company. a) True b) False
50) The exchange rate that would be applicable for this transaction is: a)TT buying b) TT selling c) Bill buying d)Bill selling
51) The Company has to produce a Bank guarantee or Standby Letter of Credit from a First class Bank backing up the
remittance because: a)The Advance payment is for a sum exceeding USD 100,000 b)The Advance payment is for a sum
exceeding USD 500,000 c)All Advance remittances require BG/SBLC d)BG/SBLC not required any more
52) What is the form that the Company has to submit to the Bank for such an Advance remittance?: a) Form A-2b) Form
A-1 c) Form A-3 d) Form ETX
CASE STUDY - 02
Mr. Mihir, AGM of ABC Bank has arranged for a "Customer Awareness" programme in his branch on 25th Oct. The
meeting is attended by customers from all categories such as Exporters, Importers, NRIs etc. A question answer
session as follows takes place. Please mark the answers that Mr. Mihir must give in correct response to the
customers:
53) Mr. Amrit, CEO of one of the big four auditing firms is a VIP customer residing in Hyderabad. He wishes to know
whether he can invest in a residential property in the USA as house prices have become very attractive there now:
a)Yes, he can invest and buy the house. b)No, he cannot invest in a house abroad. c)Yes, he can buy a house abroad but the
maximum remittance per calendar year is USD 100,000 under LRS. d)Yes, he can buy a house abroad. Maximum remittance
per FY is USD 200,000 under LRS
54) Mr. Amrit says that he will definitely make a remittance in the next few months towards the house purchase within
the permitted limit. However, he is worried that the Dollar: Rupee rates are not moving in his favour: a)He can book a
forward contract for USD 200,000 b)He can book a forward contract for USD 100,000 c)The maximum tenor of the contract is
12 months d)He should be informed of both a & c .
55) Mr. Anand is a NRI living in Richmond, U.S.A. Currently he is on a visit home. He has saved money in dollars in
FCNR deposits maturing in three months time. He wishes to know whether he can book a ForwarrtiF contract to receive
the maturity proceeds in GBP. He also wants to know whether the Bank can make a remittance in GBP on maturity date
to a third party directly (to his son studying in London School of Economics).: a)No, he cannot book a Forwara contract
and has to receive the proceeds in dollars only. b)Yes, he can book a Cross currency forward contract such that the proceeds can
be paid in GBP. c)Bank can pay in GBP but to him only.d)Bank can make a direct remittance to his son in GBP as third party
remittances are now allowed. e)Mr. Anand has to be informed of b & d
56) Mr. Mohandas from Omni exports wanted to know whether the interest subvention is applicable to his packing
credit. His firm deals with manufacture of pickles and has an original investment of Rs.4 crore in plant and
machinery:a)Yes, interest subvention of 2% applicable because it is food-processing industry b)No, interest subvention not
applicable. c)Yes, interest subvention is applicable because it is a SME unit. d)Interest subvention scheme has been scrapped
now.
57) Mr. Mohandas also wanted to know if he can give some credit (time to pay) to his buyers abroad. He has sent his
export bill on collection bask through the Bank. His unit is situated in the vicinity of the branch and not in SEZ:a)Yes,
time limit for realization of export proceeds is 180 days b)Yes, time limit for realization of export proceeds is 12 months c)Yes,
time limit for realization of export proceeds is 15 months. d)Yes, there is no time limit for realization of export proceeds now for all
exporters.
ANSWER
1 E 2E 3 lA 4 E 5 A 6E 7 D
8 B 9 D 10 B 11 B 12 E 13 A 14 C
15 C 16 A 17 E 18 E 19 E 20 B 21 B
22 A 23 B 24 B 25 B 26 E 27 D 28 A
29 D 30 D 31 D 32 D33 D 34 A 35 C
36 C 37 B 39 B 40 A 41 B42 B
38.8 ,
43 A 44 B 45 D 46 D 47 B 48 D 49 A
50 B 51 B 52 B 53 D 54 D 55 E 56-C, 57-B
MEMORY BASED RECOLLECTED QUESTIONS PREVIOUS YEAR

ADVANCE BANK MANAGEMENT
55) Which of the following statement is correct? a )Foreign Exchange markets are localized markets.b)Exchange markets
operate within a country's time zone.c) Exchange markets are dynamic and round the clock markets.d) Exchange markets
are used only for trade related transactions.
56)Which of the following definitions is most correct? UCPDC 500 is: a)- La of rules applicable to CC transactions
b)Set al rule having 500 articles.C) Set of rules framed by ICC governing LC business globally.d) Set Of universally applicable rules
governing LC business in India only.
57) W market quotes USDIINR as 43.61163, at what rate can you buy USD at the given quote: a) 43.61 b) 43.62 c) 43.63 d)
None of the above
58) A correspondent in Japan wants to fund his Vostro account for Rs 10.00 million. At USD/INR at 63.56157 and JPY at
109.60/70, how much JPY should the correspondent pay into your Nostro account with him, assuming no margins are loaded: a)
91157.70 b) 251636 c) 229515 d) 251762
Q. 59-63) Read the following situation carefully and tick the answer which is considered most appropriate on the issues raised
therein.
11 January 2000, Mr Mohan, a resident of Mumbai, was offered a job in Muscat by a construction company, as Sr. Civil Engineer on a 2
year job contract. He left India on 15.2.2000, after completing Visa formalities and joined the company in Muscat on 18.2.2000. His family
joined him in May 2000. He worked with the company till March 2002, and returned back to India bag and baggage. In May 2002, he joined
a large construction company in Mumbai, which also undertook large construction projects at overseas centers. He was posted at one of the
local construction sites initially, but in October 2003, he was deputed to a Hotel construction site in Moscow, by his employers. He stayed in
Moscow for a year, and returned in November 2004 on completion of the project work. On returning India, he resigned from the company to
go to Riyadh for taking up another job. He left for Riyadh in December 2004 and got a job with a large company immediately and continues
to be there until now. He had following accounts in India:
a) A Savings bank account with XYZ Bank opened in 1998.
b) A Savings Bank account with XYZ Bank opened in 2000, from the monies sent from Muscat, used for payment of monthly sustenance to
his old parents in India,
c) A Term Deposit with a Foreign Bank in India, made out of funds he received by selling his ancestral property in Goa.
d) A Term deposit account with an ABC Bank, for USD 5000.00, sent from Muscat, when he received his annual bonus. Answer the
following questions based on the above facts.
59) What do we call the savings account of Mr. Mohan with XYZ Bank between the period March 2000 and March 2002.
75
a) Ordinary savings account b) Resident Rupee account c) Non resident Ordinary Rupee A/c d) Non resident
External Rupee A/c
60) What do we call the savings account of Mr. Mohan with XYZ Bank, opened in 2000, until March 2002?:a) NRNR Account b) NRO
savings account c) NRE savings account d) FCNR savings account
61) What was the status of Mr. Mohan, during May 2002 and May 2003: a) Non resident Indian b) Returning resident Indian c)
Temporary resident Indian d) Resident Indian
62) What do we call the Term deposit account of Mr. Mohan with the foreign bank during his stay in India?: a) NRO account
b) NRE account c) Ordinary resident term deposit account d) Domestic term deposit a/c
63) What do we call the deposit of Mr. Mohan made in US Dollars, when opened?: a) NRE USD account b) Foreign Currency Resident
account c) Foreign Currency Non-Resident a/c d) Non —Resident Foreign currency a/c
64) ECGC of India Ltd is a corporation set up by the Government of indfa to encourage exporters & help the Exporting
community and the financing bankers to mitigate the risks involved in their business of Exporting. The corporation does so by
issue of: a) Financial guarantees to banks b) Policies to exporters c) Offering factoring services d) All of the above
65) You are the Manager of Indian Progressive bank. Your branch has a target to sell 1000 credit cards in year 2006-07. Your
NRI customer Mr Yash Mittal is willing to buy your card for use in India. You advise him
that he can pay the bills from :a) Inward remittance b) Balance in FCNR I NRE a/c c) Non-Resident (Ord) Rupee account d) All as
above
66) Omni Exports ltd have availed PCFC from you. They were however not able to export as their order was cancelled. Your
bank has to now adjust the PCFC as no export has taken place within the stipulated extended period. At what rate would the
bank convert the PCFC outstanding in to converted in to rupee liability for recovery: a) Bill buying rate b) TT buying rate c)
Bills selling rate d) TT selling rate
67) Diamond dollar account (DDA) scheme is available for companies dealing in purchase & sale of rough /cut diamond if
they have a good track record of at least three years in business of diamonds &have
Annual turnover of at least& above in preceding three licensint years, and should have been the bank's customer for at least three
years.: a) Rs 10 crores b) Rs 100 crores c) Rs 5 crores d) USD Onemillion
68) Recently RBI has granted Authorised dealer Category II status to This means they can not only purchase FX brought in
the formof TCs, Currency but also sell TCs, Currency/make outward remittances: a) UAE Exchange Centre b) Thomas Cook (I)
Ltd. c) Western Union Money transfers Ltd d) All of the above
69) Which amongst the following Foreign currency accounts is like a current account in nature: a) EEFC b) RFC (D) c) FCNR d) A &
B
70) Export vendor development programme is a programme by : a) EXIM bank b) ECGC India c) RBI d) Export corporation
of India
71) The term "Personal Efficacy" means: a)Self belief in one's own ability to complete a task efficiently b)Personal effectiveness c)
Personal efficiency d) None of the above
72) Johari Window is most useful for: a) Understanding others b) Self-Awareness c) Working in Teams d) Improving inter-personal
relations
73) A major limitation of the VaR is that: a) It requires long term historical data b) It is a tedious process c) It assumes extreme conditions
d) It assumes normal market conditions
74) The sensitivity of an investment's return to market movement is called :a) Alpha b) Betac Haircut d)None of the above
ANSWERS
Q A Q A CIA 0 /10 A QTA

55 C 56 C 57 C 58 0 59 C 60 C
61 D 62 D 63 C 64 D 65 D 66 1)
,
67 C 68 A 69 D 70 A 71 A 72 B
73 D 74 B Practice makes a man perfect.
MEMORY BASED QUESTIONS ON ADVANCE BANK MANAGEMENT

56) The main role function of the Welfare Secretary is to meet the needs of the workers and prevent them from: a)
Forming Unions b) Leaving the job c) Gossiping during duty d) Disturbing other workers
57) Climate Management - is possible by using HRIT. Climate information is gathered using: a)Job satisfaction surveys b)Performance
appraisals by superiors c)Studying attendance patterns in different weathers d)All of the above
58) Closed and Open Stored Value Card is also known as: a) Electronic Purse b) Electronic Wallet c) Both a and b d) Magnetic
Strip Card
59) The concept of Career Path relates to______ ofmovements and deciding the________for each stage.: a) Sequence, time period b)
Number, candidates c) Decision, numberd) Type, time period
60) Johari Window is most useful for: a) Understanding others b) Self-Awareness c) Working in Teams d) Improving
inter-personal relations
61) The class of the IP Address and the subnet mask determines: a)As to which part belongs to the network address b)As to which part
belongs to the node address c)Both a and b d) None of these
62) How data processing is handled in Advanced Ledger Posting Machines?:a) At a centralized place b) In the computer
being used c) At multi point situations d) At the networking place A
Q. No 63 to 70): Veena Jayaram was a student of St.Stephen College Delhi for three years during 2003- 06. She had a Savings
account with Syndicate Bank, which had an extension counter within the college. She shifted to Singapore in September 2006 to study
for her masters and opened an account with Development Bank of Singapore to receive her scholarship amount. She saved Singapore $
6,000 and sent the amount to her father in India who invested it in US dollars in IndusInd Bank for three years. She then moved to USA
in September 2007 and opened an account with Citibank New Delhi, which she funded with Rs.200,000 by converting some of her
money in DBS Bank, Singapore. Ultimately, she returned to India in June 2008 and brought with her USD 4000, which her father
invested again in USD in Indian Overseas Bank. Now, she works with Ministry of Finance and her salary is credited to State Bank of
India, New Delhi. Meanwhile, she has received a job offer from IMF in Singapore and will be proceeding to take up her job in May
2009. She has maintained all her accounts except the one in Syndicate Bank and kept all the Banks informed of her status.
63) The account in Syndicate Bank was initially a ________account and then later__________when Veena was in Singapore,USA
before the account was closed in June 2008.: a) Resident, NRE b) Resident, NRO c) NRO, NRE d) NRE, NRO
64) Her salary account opened in July 2008 in SBI iscurrently designated as ____. While opening
the account, she has provided the Bank with a letter from MoF that she is a permanent employee: a) Resident b) NROc) NRE
65) The Citibank, Delhi savings account was_on the date of opening: a) Resident b) NRO c) NRE d) None
66) The account in IndusInd Bank was designated as______on the date of opening and is designated as_______now: a) FCNR,
Resident FD b) FCNR, NRO c) FCNR, RFC (D)d) FCNR, RFC
67) What was Veena's status while she was studying in Singapore I USA and what is it now?: a) NRI / Resident b) Resident / Resident
c) NRI / NRI d) Resident / PIO
68) What is the designation of the account with Indian Overseas Bank? Will the Bank be paying any interest on this account?:
a)RFC-Interest as per RBI rates b)RFC-As per their Bank's internal policy c)RFC. No-the account does not attract interest d)RFC(D), No
interest
69) Is Veena in order in keeping her account in Development Bank of Singapore?:a) Yes, it is permitted now b) No, she should have
closed it c) Yes, but with RBI approval d) none of the above
70) When his daughter was in USA, Veena's father visited her on a tourist Visa. He had taken USD 10,000 under his travel quota.
He returned with USD 6,000. If he wanted to keep some dollars in cash with himself and balance in a deposit, he can do as
76
follows: a)Keep USD 2000 and open a RFC(D) for balance USD 4000 within 180 days of return b)Keep USD 2000 and open a RFC for
balance USD 4000 within 180 days of return c)Keep USD 4000 and open a RFC for balance USD 2000 within 270 days of return d)Keep USD
2000 and open a RFC (D) for balance USD 4000 within 270 days of return
71) YTM of a Bond is also known as_____•:a) Internal rate of return b) Current yield c)c) Net present value d) All of the above
72) Duration is a not function of_____: a) Time to maturity b) Coupon rate c) Coupon frequency d) Principal amount
73) Which among the following is not an OTC item?: a) IRS b) FRA c) Currency option d) Stock option
74) RBI has revised the interest rate ceiling on Post shipment advance in foreign currency to LIBOR plus basis
points: a) 200 bps b) 150 bps c) 100 bps d) 75 bps
75) A Bond with coupon rate 7.35% is trading in a market where the market yield is 8.5%. Such a bond would be trading
____: a) At a discount b) At a premium c) At par d) Depends on the market
ANSWERS
Q A Q A QA Q A Q A Q A
56 A 57 A 58 C 59 A 60 B
61 C 62 B 63 B 64 A 65 C 66 D
67 A 68 B' 69 A 70 A 71 A 72 D
7 Advice of eider taste bitter first sweet
73 _D 74 A 5 A later
36) How data processing is handled in Advanced Ledger Posting Machines?: a) At a centralized place b) In the computer being used
c) At multi point situations d) At the networking place
37) Mandatory feature of a Letter of Credit: A)Must have an applicant and a beneficiary b)Should have an advising bank and a
confirming bank c)Should be confirmed to be operative d)Must be confirmed by the reimbursing bank
38) Which of the following statement is correct?: a)Forex markets are localized markets.b)Forex markets are international markets
only c)Forex markets are dynamic & round the clock markets. d)Forex markets are used only for trade transactions.
39) What type of computer system is used for ledgers positing using ALPMs?: a)Stand alone b) Multi user c) WAN
d) None
40) If market quotes USD/INR as 43.61/63, at what rate can you buy USD at the given quote?:
a) 43.61 b) 43.62 c) 43.63 d) 4360
41) The main role function of the Welfare secretary was tomeet the needs of the workers and prevent them from : a) Forming
Unions b) Leaving the job c) Gossiping during duty d) disturbing other workers
42) The Concept of career path relates to -------- of movements and deciding the____ for each stage.:a)Sequence. time period b)
Number, candidates c) Decision, number d) Type, time period
43) Johari Window is most useful for: a) Understanding others b) Self-Awareness c) Working in Teams d) Improving
inter-personal relations
44) The process of capturing the tacit knowledge of peoplein a systematic manner for future use is called :a) Data entry b)
Information technology c) Knowledge management d) All of the above together
45) The three alternatives in collecting data for marketing research to: a)Sampling, questionnaire and door to door survey
b)Books & publications, interviewing of customers & experiment c)Economic surveys, industry reports and library reference
d)Observation, experiment and survey
46) Union formations were seen in the phase of development of HRM: a)First phase b) Second Phase c) Third phase d) Unions have been
present even before HRM came in to existence
47) Climate Management is possible by using HRIT. Climate information is gathered using:
a) Job satisfaction surveys b)Performance appraisals by superiors c)Studying attendance patterns in different weathers d)All of the above
48) Closed and Open Stored Value Card is also known as: a) Electronic Purse b) Electronic Wallet c) Both a and b d) Magnetic
Strip Card
49) Job Analysis technique involves: a) Job Description b) Job Specification c) Job Evaluation d) All of the above
50) Mechanistic (or Behaviorist) theories, cognitive theories and Organismic humanistic) theories are three theories of
learning. Which one of these theories equates man with his brain?: a) Behaviorist or mechanistic theories b) Cognitive theories
c) Organismic or humanistic theories d) All of the above
51) VSAT system enables to carryout: a) Electronic funds transfer b) EFT / POS c) Asynchronous Transfer Mode (ATM) traffic d) All
of the above
52) The class of the IP Address and the subnet mask determine: a)As to which part belongs to the network address b)As to which
part belongs to the node address c)Both a and b d) None of these
ANSWERS
36 B 37 A 38 C 39 A 40 C
41 A 42 A 43 B 44 C 15 A
46 A 47 A 48 C 49 D _50 B
51 D 52 C

1) Banks must augment their provisioning cushions to ensure that their total provisioning coverage ratio, including floating provisions, is not
less than by September 2010. Provisioning Coverage Ratio (PCR)
is the ratio of provisioning to gross NPA and indicates the extent of funds a bank has kept aside for covering loan losses.: a) 50% b) 60%
0) 70%d) 100%
2) As per current guidelines, the plan of realization for reconstruction of assets by a Securitization or Asset Reconstruction Company should not
exceed five years from the date of acquisition of asset. RBI in the revised guidelines has extended the time frame___years.: a) 6 b) 7 d;
9 el 10
3) As per Nayak committee, the margin contribution of the Small Mfg Enterprises is % of annual projected turnover a) 5% b) 10%c)
Rs 20% 0) 25%e) None
4) As per the second method of lending of Tandon Committee, the Current ratio should be:
a) Less than 1 b) Exactly 1 c) More than 1.33 d) 1.33 e) 1.17:1
5) The Exposure Ceiling limits for banks would be______ percent of capital funds in case of single borrower and______ % of capital funds in
the case of a borrower group.:(a) 40, 15 b) 15, 40 c) 20, 50 d) 50, 20
6) On scrutiny of a Balance Sheet of Mis Techno Inc, you observe that the long term uses of funds are more than long term sources. The
position of the Balance Sheet indicates: a} Negative Net Working Capital b) Positive Net Working Capital c) Negative Working Capital Gap d)
Positive Working Capital Gap
e) None of the above
7) SARFAESI Act 2002 is not applicable in : a)Any security interest not exceeding Rs 1 lac. B)Any security interest in agriculture land c)Pledge of
movable as per Section 172 of Contract Act d)Rights of unpaid seller under Section 47 of Sales of Goods Act e)All of the above
The Balance Sheet of M/S Vipin & Co reveals that the capital and free reserves are Rs 12 lac, term loans from banks for Rs.22 lac, CC (Nye)
limit from bank showing balance outstanding of Rs 10 lac, sundry creditors of Rs 10 lac and provisions of Rs 6 lac. On the assets side. fixed
assets are Rs 15 lac, non-Current assets are 3 lac, preliminary and pre-operative expenses Rs. 2 lacs and Current assets Rs 40 lac (cash Rs 2 lac,
sundry debtors Rs 13 lac, stocks Rs 25 lac). The Profit & Loss statement shows following important operational results:
77
-Sales : Rs 100 lac.
-Purchases : Rs 80 lac,
-Net profit : Rs 5 lac.
-Number of units sold : 1 lac units
-Total Fixed cost Rs 4.5 lac.
-Total Variable cost : Rs 90.5 lac
8) The Creditor's velocity ratio is: a) 1 month b) 1.5 months c) 2 months d) 2.5 months
9) The Net Working Capital is : al Rs 10 lac b) 14 lac c) Rs. 16 lac d) 18 lac
10) The Working Capital Gap is: a) Rs 20 lac b) Rs 24 lac c) Rs 26 lac d) Rs 28 lac
11) Working Capital turnover ratio is: al 1.5 times b) 2 times c) 2.5 times d) 3 5 times
12) Accumulated losses are to be classified as: a) Fixed liability b) Rolling liability c) Concurrent liability d) Current liability e)
Fictitious Assets
13) In the Keynes model above, which is independent?: a) Investment b) Consumption
c) National income d) Consumption and investment
14) The domestic Commercial Banks have a target of ____ % for total priority sector measured as a percentage of ANBC or CE-OBE
whichever is higher.:a) 32% ___________ b) 50% c) 18%d) 40%
15)___of Small Enterprises advances should go to the Micro Enterprises: a) 60% b)40%c) 25% d) 50%
16) In which of the following kinds of financing, the banks take up financing exposure for medium term (5.7 years) out of the very long-
term nature of the projects (15.20 years): a) Take Out financing b) Securitisation c) Project participation d) Consortium
17) Debt Equity denotes position of the firm: a) Profitability b) Solvency c) Liquidity d) None
18) In a Balance Sheet, profit is shown under: a) Liabilities b) Current assets c) Fixed assets d) None
19) Limitation period in case of Cash Credit Pledge Aic is: a)3 years from the date of pledge b)3 years from the date of documentation c)5
years from the date of legal notice d) No limit
20) A Micro Mfg Enterprise had been sanctioned CC(Hyp) limit of Rs 10 lac with 20% margin against paid stocks. The unit submits stock
statement, which indicates the value of stocks as Rs. 14 lac with sundry creditors to the extent of Rs 9 lac. What will be the drawing power": a)
Rs 1 50 lac b) Rs. 2 lac c) Rs 4 lac d) Rs. 6 lac
21) Accumulated loss will be deducted from: a) Paid-up capital b) Surplus capital c) Tier I capital d) Tier II capital
22) The Corporate Debt Restructuring Scheme (CDRS) introduced as per Vepa Kamesam committee has been modified under a special group
headed by RBI Dy Governor Smt S.Gopinath. Accordingly, the scheme's scope has now been extended to cover entities having multiple banking
exposure with outstanding exposure of Rs ______crores and above.: a) 10 b) 20 c) 5 d) 15
23) Category - Ii, CDR is meant for cases where the alcs have been classified as______in the books of creditors: a) Standard b)
Substandard c) Doubtful d) Loss
24) What is the minimum & maximum denomination amount for a Commercial Paper?: a) 5 lac. 5 lac b) 10 lac. 5 lacc) 10 lac, 10 lac d) 5
lac. 10 lac e) None of above
25) Recession is associated with fall in: a) Demand b) Supply c) Disinvestment d) Investment
26) Devaluation means: a) Fall in Marginal utility of Money b) Fall in printing of currency
c)Risk in black money d)Fall in the value of money in terms of foreign currency
27) From the Bank's perspective, the main difference between extending a Term loan and extending a Deferred Payment Guarantee is:
a)In Term loan, Bank faces outlay of funds b)In DPG Bank faces inflow of funds c) a & b d) Neither a nor b
28) Marginal utility curve of a given consumer is also his: a) Indifference curve b) Demand curve
c) Supply curve d) Total utility curve
29) The total utility is maximum when: a) MU is zero b) AU is the highest c) MU is the highest d) MU is equal to AU
30) How many motives for demanding money has been given by Keynes: a) 1 b) 2 c) 3 d) 4
31) In calculating a country's GNP at market prices one of the following is not included: a) Depreciation b) Net factor income from abroad c)
Net indirect taxes d) Transfer Payment
32) Indian Economy can be best described as: a) Developed economy b) Undeveloped economy
c) Developing economy d) Underdeveloped
33) The open market operations (0M0) refer to the sale and purchase by the RBI of: a) Foreign exchange b) Gob c) Government securities
d) All of the above
34) Which of the following is a direct tax?: a) Sales tax b) Entertainment tax c) Excise duty d) Estate duty
35) Capital deficit in India is: a) Positive b) Zeroc) Negative d) None of the above
ANSWERS
1 C 2 B 3 A 4 A 5 B
6 A 7 E 8 B 9 B 10 B
11 C 12 E 13 A 14 D 15 A
16 A 17 B 18 A 19 D 20 C
21 C 22 A 23 C 24 A 25 A
26 D 27 A 28 B 29 A 30 C
31 D 32 C 33 D 34 - D 35 A
CAIIB PAPER – 1 ADVANCED BANK MANAGEMENT QUESTIONS BASED ON MEMORY
FIRST TEST PAPER

01 Which sector of Indian economy is having the lowest share in Gross Domestic Product out of the following:
Aindustry B agriculture C services D services and industry
02 The share of which of the following sectors in the economy, in overall GDP, has come down during the last 25 years:
A industry and services B agriculture and industry C services D agriculture
03 Before opening up of the forex markets in India, the exchange earners (exporters) were required to surrender or purchase forex at:
A current market rates B at reference rates fixed by RBI C at foreign currency rates by FEDAI D at forward rates less premium or discount.
04 As part of financial sector reforms, the previous office of Controller of Capital Issues has been replaced by:
A CCI B SEBI C BCSBI D CIBIL
05 W hich of the following centersis the first in India, where the cheque truncation system has been introduced:
A Delhi BC h e n n a i C M u m b a i D B a n g a l o r e
06 Which of the following features, is not correct regarding National Electronic Funds transfer:

78
A it functions on a batch system B the settlement takes place on a net basis C it is a funds transfer as well as settlement system D none
of the above
07 Free and compulsory education to all children of 6 to 14 years of age, is a fundamental right. This provision was made by way of amendment to the
Constitution of India:
A 80 B 82 C 84 D 86
08 The term WMA stands for:

A why me alone B ways and means advance C weights and measures association D wealth and money advances
09 Square root of (N-n) / N-1) where N is size of the population and n is the size of sample, gives us:
A standard deviation B standard error of the mean C finite population multiplier D infmite population multiplier
10 Fraction n/N is referred to by the Statisticians, as :

A population fraction B sampling fraction C mean fraction D standard deviation fraction
11 The city police is stopping every vehicle at a check point moving on a particular road, within the city. They are using (1) simple random sampling (2)
stratified sampling (3) complete enumeration (4) systematic sampling
A 1 and 4 B2 and 4 Conly 4 D only 3
12 A school wants to predict the no. of poor students who may get better scoring in the examination when they are given extra classes. This prediction is
called:
A correlation B regression C standard error of estimate D none of these
13 If the value of correlation is equal to 1, this means that:

A there is large inverse relationship between 2 variables. B there is perfect inverse relationship between 2 variables. C there is large positive
relationship between 2 variables. D there is perfect positive relationship between 2 variables.
14 If the value of correlation r = 0, it indicates:

A perfect inverse correlation Bperfect positive correlation C no linear correlation D no correlation
15 Calculate the correlation coefficient based on the following data relating to demand and price:
Demand In quintals 65 66 67 68 70 72
Price InRs. 67 68 65 72 69 71
A no correlation B0.6812 C 0.5781 D 0.9221
16 In regression analysis, within the equation y = a + bx, a is :

A the y-intercept B the x-intercept C The b-intercept Dindicator of slope of the line
17 You are given the following data:

DEMAND IN QUINTALS 65 66 67 68 70 72
PRICE IN RS 67 68 65 72 69 71
If the value of x = 80, find out the value of y
A88.49 B 75.29 C 64.08 D Value cannot be calculated.
18 Which of the following represents the observed and predicted values and help to get the feel of the situation:
A dependent variable B scatter diagram C trend analysis D correlation analysis
19 The following information relating to no. of ships loaded in aharbour has been provided: 2005 (98 ships), 2006 (104 ships), 2007 (115 ships), 2008 (118
ships), 2009 (131 ships), 2010 (152 ships) and 2011 (174 ships). It is observed that there is increase in the no. of ships loaded over 7 years. Such variations
come under which type of time series
A secular trend B cyclical fluctuation C seasonal variations D irregular variations
20 Of the 4 variations of time series, which represents the long term direction:
A secular trend B cyclical fluctuation C seasonal variations D irregular variations
21 Which of the following is the benefit to study the secular trend (1) historical pattern can be described (2) future change can be projected I(3) trend
components and seasonal components can be separated. (4) accurate predictions can be made.
A 1 to 4 all B 1 to 3 only C 1 and 3 only D 2 and 3 only
22 Cyclical variation, as a component of time series, tends to oscillate above and below the secular trend line for how much time period:
A up to one year B one year C longer than one year D longer than 2 years
23 Which of the following is a component of emotional intelligence (1) self-awareness (2) self regulation (3) self motivation (4) empathy (5) social
skills
A1, 3 and 5 only B 2 and 4 only D 2, 3 and 5 only D 1 t o 5 a l l
24 Human behaviour is a complex phenomenon. It is result of many factors including (1) biological process (2) psychological process (3)
social process (4) nformation process
A 1 to 4 all B1 to 3 only C 2 to 4 onl y D 2 and 3 only
25Which of the following factors falls in organizational factors so far the influence on behavior of an individual is concerned:
A cultural, social, economic factors B age, sex and education C Personnel policies, reward and compensation system D 'values, perception
and attitude
26 The cabin of a bank branch manager gives an untidy look and messy appearance. His table is full of papers. He is exhibiting:
A type A behavior B type B behavior C a mix of type A and type B Dneither type A nor type B
27Which theory of personality believes that the traits of a person which determine his personality and behavior, are basically inherent to a person:
A Psycho-analytical theory B Trait Theory C Self concept theory D Social learning theory
28__________________theory of personality believes that the personality development is more a result of social variables than biological factors.
A Psycho-analytical theoryB Trait Theory C Self concept theory D Social learning theory
29Split brain (right vs left) psychology is closely related to ESB. Which of the following is not controlled by the left side of the brain:
A speech B emotions C reading and writing D sequential ordering
30 According to personality job fit theory of John Holland, there are 6 types of personality. Which of the following is not such personality (1) realistic (2)
investigative () social (4) conventional (5) enterprising (6) artistic:
A 1 and 3 B 2 and 5 C 6 only D none of these

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31 The human resources systems are largely designed by banks and other organizations for:
A a heterogeneous workforce Ba homogenous workforceC a diverse workforce D according to their need
32 Which of the following approach acknowledges the existence of cultural distance and attempts to teach individual members about cultural differences
through training:
A diversity enlargement B diversity sensitivity C cultural audit D all the above
33 The term motivation has been derived from :

A Roman word B an English word C a Latin wor Da Devnagari word
34 As per Abraham Maslow's motivation theory, the people have needs:

A 2 bB 3 C 4 D 5
35 Which theory on motivation observed that the opposite of satisfaction is not dissatisfaction and removing dissatisfying contents from job does not
necessarily make the job satisfying.
A Frederic Herzberg B Elton Mayo C A. Maslow D V H Vroom
36 According to ERG theory, there are sets of needs in the organizations. A 2B 3 C 4 D 5
37 In the balance sheet of a bank, the term loans and bank guarantees are shown as under:
A term loan in the asset side and DPG on the liability side B term loan and DPG both on the asset side C DPG is shown as a contingent liability and term
loan as an asset D none of the above
38 At times a small change in the price of one variable say, raw material, may impact the profitability drastically. This is examined through:
A break-even analysis Bsensitivity analysis C profitability analysis Dall the above
39. If a bank finances the promoters for acquisition of an infrastructure company, the maximum amount should be restricted to of finance
required for acquiring promoter's stake in the company being acquired.
A15% B 20% C 25% D 50%
40 Project loans can be allowed by banks to which of the following groups

A infrastructure companies only B any type of companies only C companies, partnerships only D any entity engaging itself in productive
economic project
41 What is the maximum amount of commission or brokerage fee that the borrowers can pay to the guarantors as consideration for the guarantee:
A 0.25% of the guaranteed amount B 0.50% of the guaranteed amount C 0.75% of the guaranteed amount D such payments cannot be made
by the borrowers
42If a borrower is availing working capital facilities with one bank and wants to open current account with another bank:
A it can do so at its discretion B it can not do so in any circumstances C it can do so with permission of the financing bank D it can do so at the
discretion of the bank, with whom it wants to open the account.
43 Under Loan system of Credit delivery, the permanent portion called working capital demand loan (WCDL) should normally be:
A 80% of the MPBF B 75% of the MPBF C 50% of the MPBF D 20% of the MPBF
44 With a view to restrict the happening of frauds in consortium or multiple banking loans, RBI made it mandatory to obtain declaration from borrowers
availing limits of and above, about limits availed from other banks:
A Rs.5 cr and above B Rs.10 cr and above CRs.15 cr and above D Rs.20 cr and above
45 If a firm provides wrong information about its debtors to avail the cash credit limits, it can be detected with the help of
A receivable audit B verification of receivables from books C cross-checking of information from the balance sheet data D all the above
46 If inventory (stock position) details are wrongly mentioned by a borrower, which of the following cannot be used to detect, incorrect mention of stocks in
the stock statement:
Aanalysis of balance sheet and profit/loss account
B stock audit C physical verification of stocks D cross-checking of information from the balance sheet data
47Credit risk can be defined as:

A possible willful default by borrowers in meeting their loan repayment obligations B possible genuine inability of the borrowers in meeting their
loan repayment commitments C possibility of loan account becoming NPA.s_ D all the above
48 Which of the following is not part of micro level risk mitigation step:
A following policies where the risk is evenly spread over all geographical areas B monitoring of individual loan account effectively C following
standards of appropriate loan documentation D obtaining collateral securities to secure the loans properly
49Which of the following is not a situation of credit risk:

A willful default by the borrower in repayment of the loan B inability of the borrower in repayment of the loan due to losses in the business C
invocation of guarantee by the beneficiary due to non- compliance by the borrower, on whose behalf the guarantee was issued Dfraud committed by a
borrower in connivance with the bank staff, not relating to the loan accounts
50 Which of the following does not match:

A IT has reduced the importance of human resources in the banks – false B IT can effectively substitute the manual systems and no other change is
required –false C IT can be used in HRM to reduce the drudgery of accounting and preparing salaries – True D The positive aspect of IT is that more
people can be used for strategic decision making - True
Answers Test No.1

01 b 02 d 03 b 04 b 05 a
06 c 07 d 08 b 09 c 10 B
11 d 12 b 13 d 14 c 15 C
16 a 17 b 18 b 19 a 20 A
21 b 22 c 23 d 24 b 25 C
26 a 27 b 28 d 29 b• 30 D
31 b 32 b 33 c 34 d 35 A
36 b 37 c 38 b 39 d 40 D
41 d 42 c 43 a 44 a 45 D
46 a 47 d 48 a 49 d 50 C

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SECOND TEST PAPER
CAIIB PAPER – 1 ADVANCED BANK MANAGEMENT
01The term ITES relates to which of the following:

Ainformation technology and enabled services B information technology andelectronic services C incoming technology and early solutions D
income tax and excise services
02 The goal before RBI is to help the economy to come out of ongoing depressed economic activity. What type of monetary policy it should follow:
A tight money policy B contractionary policy C expansionary policy D adhoc policy
03In a contractionary monetary policy, which of the following action is not initiated by RBI:
A increase in CRR B increase in Repo rate C increase in interest rates D none of the above
04Which of the following is not an implication of increase in statutory liquidity ratio:

A it helps in restricting the credit expansion B it ensures the solvency of commercial banks C it compels banks to invest more in govt. securities
D it ensures reduction in rate of interest in general
05The rate at which the banks park their short term excess liquidity is called:
A repo rate B r e v e r s e r e p o r a t e C bank rate D base rate
06 When RBI finds that there is too much money floating in the banking system, which of the following is initiated by RBI:
Aincrease in repo rate B increase in reverse repo rate C undertaking of repo transactions D undertaking of reverse repo transactions
07The fiscal policy has 2 main instruments:

A budget and deficits B fiscal deficit and revenue deficit C expenditure and earning D spending and taxation
08Which of the following is not a tool of monetary policy?

Aopen market operations B ways and means advances C repo rate D bank rate
09 The sale under SARFAESI Act can be through:

A private treaty B public tender C public auction D any of the above
10Banks that have declared a borrower as a willful defaulter, are required to send report to (which is not correct): •
A RBI for non-suit filed cases with outstanding of Rs.25 lac and above on a quarterly basis i.e. Mar, June, Sept and Dec B CIBIL for suit-filed cases with
outstanding of Rs.25 lac and above on a quarterly basis i.e. Mar, June, Sept and Dec C SEBI of all cases of willful defaulter on a half yearly basis i.e.
Mar and Sept D none of the above
11 When application is filed with DRT by the bank under provisions of RDDB Act, DRT sends notice to the defendant (borrower) within , as to why the
relief should not be granted to the bank:
A 7 days B 15 days C 30 days D 45 days
12A firm had estimated sales of Rs.25 lac for 2009, Rs.40 lac for 2010 and Rs.60 lac for 2011. The actual achievement is Rs.30 lac, Rs.40 lac and Rs.55
lac. What is relative cyclical residual for 2010 in this case:
A0 % B 100% C 40 lac Dinadequate information
13The index for measuring seasonal variation in time series, is based on

A0 B 10 C 100 D it varies from time to time.
14 Which of the following is a type of estimate (1) point estimate (2) interval estimate (3) range estimates (4) general estimate.
A 1 to 4 all B 1 and 2 only C 3 and 4 only D 1,3 and 4 only
15Which of the features of a point estimate is not correct?

A A point estimate is often insufficient B a point estimate is either right or wrong C a point estimate is much more useful if it is accompanied by
an estimate of the error that might be involved.D none of the above
16 Which of the following statement is correct (1) sample mean can be estimator of the population mean (2) sample mean cannot be estimator of the
population mean (3) Sample proportion can be used as an estimator of the population proportion (4) Sample proportion cannot be used as an estimator of
the population proportion
A1 and 4 B1 and 3 C2 and 4 D2 and 3
17 The sample size is increased. It is almost certain that the value of the statistic is very close to the value of the population parameter. This represents
which of the following features of a good estimator:
A unbiased B efficiency C consistency Dsufficiency
18 the bank branches maintains 10 very high networth individual deposit accounts. The balance in these accounts are ( Rs in lacs
1 2 3 4 5
190 198 212 187 206
What is the standard deviation
A 8.03 B 6.80 C 5.40 D 4.70
19 the average life of flash light of car is 26 months and standard deviation is 5 months. If a sample of 400 cars is taken to
know the range in which theaverage life falls calculate the range
A 26 months B 24.2 months to 27.2 months C 25.6 months to 26.4 months D information is not adequate
20 The simplex method in the linear programming is an iterative process which approaches an optimum solution in such a way that an objective function of
maximization or minimization is fully reached. Which of the following statement is correct in this connection:
AEach iter ation in this process increases the distance (mathematically and graphically) from the objective function B E ac h iter ation in
this pr oc es s s hor tens the dis tanc e (mathematically and graphically) from the objective function. C There is no change in the distance
(mathematically and graphically) from the objective function. D no statement can be drawn.
21In linear programming, the slack variables enter the objective function but receive a coefficient of and do not influence the final result.
A 1.0 B 0.5 C zero D -0.5

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2 2 T h e o p t i m u m m i x o f a f i r m a s s u m e s a g i v e n s e t o f constraints. If a constraint , a shadow price results and simply shows the change in
the contribution margin per unit or in costs thereby results.
A is added B is relaxed C is not changed D none of the above
23 Dynamic programming is best suited for decisions that must be made in and that influence future decisions in the sequence.
A promptness Bsequence Cemergency D haste
24India Manufacturing Company has several plants in different cities and serves customer in various other cities. It wants to know the best way to schedule
shipments from various plants to various customers and has been advised that the problem can be solved using linear programming. In transporting cost
minimization problem, the usual coefficients of the objective function would be:
A Usage rates for transportation facilities B Restrictions on transportation facilities C Shipping costs D Time estimates for the critical
path
25In a system of inequalities for a linear programming model, to equalize an inequality such as 3x + 2y 15 what will be required to be done?
A Invert the inequality B Add a slack variable C Add an artificial variable D Multiply each variable by -1
26As, per on motivation, the motivation to act develops after a person compares the input / outcome with the identical ratio in comparison to the other
person.
A Adam's Equity Theory B Achievement Motivation theory C Victor H Vroom theory D Reinforcement Theory
27means higher responsibility. It gives more decision making, planning and controlling powers.
A job enrichment B job enlargement Cjob satisfaction D job rotation
28A set of expected behavior patterns attributed to someone occupying a given position in a social unit is called:
A job B role C power D assignment
29The role set conflicts take which of the following Inns (1) role ambiguity (2) role expectations conflict (3) role overload (4) role erosion (5) role isolation
A 1 to 5 all B 1 to 4 only C2 to 5 only D 1,3 and 5 only
30 When a person finds that certain functions which he would like to perform are being done by some other person having a different
role. It is called:
A role expectation conflict B role overload C role erosion Drole isolation
31Type of compensation in which of the following is not matched properly:

A top or middle management – salary B supervisors – salary Cclerical or administrative staff - salary D
unskilled, semi-skilled, skilled or highly skilled staff – wages
32The compensation should be adequate which takes into account the following (1) minimum wages (2) living wages (3)
fair wages (4) need-based minimum wages.
A 1 to 4 all B 1 to 3 only C 2, 3 and 4 only D 2 and 4 only
33 What is meant by the term job evaluation?

A it is a method for fix the compensation B it is method of appraising the value or worth of one job incomparisonto other jobs in the organization. C it is
method of appraising the value or worth of one job in L-,comparison to other jobs in other organisations D it is a method for fix the compensational aid for
appraising the value or worth of one job in comparison to other jobs in the organisations.
34Find out the incorrect statement:

A wages, salary and remuneration mean the same thing – false B where the reward is linked to the performance, it helps in improvement of motivation level
of employees – true C uniform wage structure helps in improving the performance – false D the remuneration to managerial position is referred to as
salary - true
35 There are 2 methods for performance appraisal. Which of the following is correct, in this connection:
A the traditional methods emphasize on rating the individual personality traits B the traditional methods lay importance on job achievement
C the modem methods lay emphasize on rating the individual personality traits D none of the above
36 In the assessment center workshops method, in a job related simulated situation, the behavior of the employees is assessed through their. performance
of different exercises such as
A group discussions, psychometric tests B business games, committee meetings C in-basket exercises D all the above
37 In the 360 degree appraisal method, the appraisal of an employee is done by:
A seniors B colleagues C subordinates D all the above
38 What is the objective of review by the superior of' the reporting authority in performance appraisal:
A to eliminate the subjectivity B to ensure the objectivity C to minimise / reduce the bias or subjectivity D to eliminate the bias
39 Which of the following statement is correct:

A performance appraisal and potential appraisal are the same system B performance appraisal is to know the future performance C potential
appraisal is to understand the potential of the employee to contribute to growth of organization D none of the above
40Counseling has 3 stages (1) recognizing the problem or issue

A 1, 2 and 3 B2, 3 and 4 C1, 3 and 4 D 1, 2 and 4
41Information technology is the merger of (1) computers (2) human resources (3) communication.
A 1 to 3 all B 1 and 2 only C 1 and 3 only D 2 and 3 only
42 For credit risk, the banks are presently following which of the following approach:
A standardized approach B basic indicator approach C foundation internal rating based approach D advance internal rating based approach
43Which of the following is an external factor leading to credit risk

A bank branch failing to take adequate precaution in loan recovery B bank policyregarding exposure, not having clarity C change in RBI policy
on rate of interest D all the above
44 The due date for repayment of a term loan installment expires on feb 10, 2009 but borrower fails to make payment. The account becomes sub
standardwef
A May 13, 2009 B May 12, 2009 C May 11, 2009 D May 10, 2009
45Which of the following is correct in connection with classification of an account: A if account is out of order for more than 12 months, it becomes doubtful
advance B if account was sub standard for more than 3 months, it becomes doubtful advance C if account was sub standard for more than 12
months, it becomes doubtful advance D if account was sub standard for more than 36 months, it becomes loss account

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46 A loan. account shows a balance of Rs.10 lac but the overdue recoverable amount is Rs.3.20 lac only beginning Oct 12, 2007. The borrower
deposited Rs.3.40 lac on Feb 12, 2009. : A account will be classified standard wef Feb 12, 2010 B account will be classified standard wef Feb 12,
2009 C account will be classified standard wef Feb 28, 2009 D account will be classified standard wef Mar 31, 2009
47 Which of the following is not correct regarding CDR Standing forum: A it is CDR policy making body B Chairmen of all participating institutions
/ banks are its members C RBI representative heads the CDR Forum D it meets once in a 6 months period to review progress.
48 Which of the following cases are eligible under CDR mechanism: A cases pending with Board for Industrial and Financial Reconstruction (BIFR)
B suit filed cases C cases involving willful defaulters unless these are reviewed , D cases involving fraud / misfeasance
49Which of the following is correct regarding restructuring of SME accounts: A package to be approved by the bank within 60 days B accounts with
potential viability within 10 years and repayment of restructured debt within 7 years are eligible C additional amount of loan will be standard
account for one year D all the above
50 Sale of security under SARFAESI Act is possible when the possession of security is taken. Before Taking possession, a notice ofis to be given:
A one week B 30 days C 60 days D at discretion of bank
Answers Test No.2

01 a 02 c 03 d 04 d 05 b
06 d 07 d 08 b 09 d 10 c
11 c 12 a 13 c 14 b 15 D
16 b 17 c 18 c 19 c 20 B
21 c 22 b 23 b 24 c 25 B
26 a 27 a 28 b 29 a 30 C
31 a 32 a 33 b 34 d 35 A
36 d 37 d 38 c 39 c 40 B
41 c 42 a 43 c 44 b 45 C
46 b 47 c 48 b 49 b 50 C
THIRD TEST PAPER
1 Bank term deposit with original maturity of 2 years and residual maturity of 8 months will be placed as part of: MO
A M1 B M2 C M3
2 In money supply aggregation, the currency with public is calculated as
A equal to currency in circulationB currency in circulation plus cash in RBI currency chest C currency in circulation less cash balances with banks D
currency in circulation plus cash balances with banks
3 Which following is a positive of the effect of inflation:
A increase in real income B decrease in prices C mitigation of economic recession D all the above
4 Due to heavy demand of goods as a result of festive season, the prices of certain commodities in general, have increased.this is called
A cost push inflation B headline inflation C demand pull inflation D wholesale inflation
5 Which of the following is not a correct statement: money supply refers to the amount of money in circulation in the economy
A currency with public, demand deposits and other deposits B with RBI is called broad money C time deposits are not payable on demand.D none of
the above
6 If the current interest rates are low, the people will be reluctant to hold large quantity of bonds because of theinherent fear that bond prices
would fall in future, causingcapital losses. This is stated by:
A Keynes' Liquidity preference theory B Hicks-Hansen synthesisC Modern Economists D Classical Economists
07 Which of the following statement is not correct:
A bond prices and current rate of interest are positively related as per JM Keynes B Interest is the income from capital C supply and demand analysis
explains the rate of interest as a price, determined by the demand for money and supply of loans D none of the above
08 As per cyclical fluctuations
A boom is followed by another boom B depression is followed by another depression C boom is followed by depression and depression is again
followed by boom D during boom period capacity is not fully utilized.
5 nd rd
09 An investor invested Rs.7.50 lac in a project that gives profit of Rs.2 lac in the 1 ` year, Rs.2.60 lac in the 2 year and Rs.4.50 lac in the 3 year. At 10%
discount rate, what is the present value of the cash inflows?
A Rs.7.15 lac B Rs.7.25 lac C Rs.7.35 lac D Rs.7.45 lac
10 Z made an investment of Rs.18000 and he expects a return of Rs.3000 per annum for 12 years. What is the present value of the cash flow at 15%
discount rate?
A Rs.16263B Rs.16675 C Rs.16968 D Rs.17214
11 In statistics, the word is used to describe a portion chosen from whole lot of items:
A parameters B population C sample D statistics
17 When the population is normally distributed, the sampling distribution has standard deviation
A population standard deviation x square root of the sample size B population standard deviation / square root of the sample size C square root of the
sample size / population standard deviation D square root of the sample size x population standard deviation
18 Estimate, with 95% confidence, the lifetime of nine volt batteries using a randomly selected sample where the sample mean X = 49 hours, sample
standard deviation is s = 4 hours and no. of samples n = 36
A 32.5 and 41.6 hours B 39.1 and 45.7 hours C 47.4 and 50.3 hours D 49.8 and 53.1 hours
19 According to the distribution of annual earning of Juniorexecutives in a bank with 3 years experience, the distribution has a mean of Rs.500000 and
standard deviation of Rs.120000. If a sample of 16 executives is drawn, what is the probability that the average earnings will be more than Rs.585000.
0.9126
A 0 . 0 2 % B 0 . 8 2 % C 1.29% D 3 . 9 3 %
20 In a sample of 36 observations from a normal distribution, with mean of 92.3 and standard deviation of 15.8, what is probability of P (87 < sample mean
< 99).
A 0.8703 B 0.9126 C 0.9724 D 0.9864
21 A credit card company observes that on average the monthly balance of any given customer is Rs.224 and the standard deviation is Rs.112. If 64
accounts are picked, what is the probability that the sample average monthly balance is between Rs.200 and Rs.260.
A 9.5130 B 4.4061 C 1.0436 D 0.9513
22 Under career path planning, at each level, the jobs which are comparable in terms of the knowledge, skill requirement can be identified and
categorized as a group. This is called
A task group B job families C work cluster D any of the above
23 As part of the concept of self-development, the self can be categorized into 2 parts (1) patent self (2) explicit self (3) implicit self (4) inner self
A 1 and 2 B 3 and 4 C 1 and 4 D 2 and 3
24 People work for a variety of reasons i.e. there are a no. of factors that motivate a person to work, which include the following:
A money and appreciation Bstatus C work satisfaction, self-growth D all the above
25When an individual is of the view that the course of events is determined by one's own efforts and action and not due to external events or luck, this is called:
A external locus of controlB locus of control C internal locus of control D beyond control locus
26 Transaction analysis refers to
A understanding financial transactions B understanding interpersonal relationship and interaction C understanding transactions relating to business D
understanding transactions relating to business and ethic
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27 Which of the following statement regarding 3 ego states in
A the ego states are unique to an individual B the ego state is related to age of a person C the ego state has no direct relationship to demographic
parameter D none of the above
28Which ego state collects information and processes it.
A parent B adult C child D a and b
29 What is the feature of a adult ego state, out of the following
A more of ethical, conscientious behavior and influenced by preaching from parents and elders. B more of analytical, rational and practical orientation
C more of instinctive behavior with motive of enjoyment D more of every thing
30 The ______________ parent behavior criticizes others for theirundesirable behavior.
A caring B nurturing C critical D concerned
31 In his behavior, a person is displaying more of emotions than the facts. It can be classified as ego state:
A parents B elders C adult D child
32 Which of the following is a feature of a crossed transaction
A from parents to child and again from parents to child B it is undesirable C the transaction is blocked D all the above
33 According to Harris, what is the meaning of the life position, I am OK, you are not OK
A Both have value B I have value but you do not have value C I do not have value but you have value D neither person has value
34 The objective of understanding the ego states profile of a person is:
Ato counsel him B to make necessary modification in one's behavior C to bring desired change D all the above
35 In Johari Window, the window ARENA represents which of the following:
A known to self and othersB closed to self and others C known to others and not known to self D known to self and not to others
36 For improving effectiveness in interpersonal relations, which of the following area is most critical
Adark B arena C blind D closed
37Net sales can be calculated as:
A gross sales minus excise duty or customs dutyB gross sales plus excise duty or customs duty C gross sales — sales returns D gross sales + sales
returns
38 Profit before tax is calculated as:
A operating profit + non-operating surplus B operating profit - non-operating surplusC operating profit + non-operating deficit D none of the above
39 The bankers make analysis of financial statements with the objective of (a) assessment of performance and financial position (b) estimate for future
performance (c) detection of dangersignals (d) assessment of credit needs (e) improving profits of the financed firm
A a, c and e Bb, c and e C a, b and d only D a to d all
40 Financial statements contain the percentage of a key figure alone without the corresponding amount figures:
A trend analyzed B funds flow C common size D ratio analyzed
41 As regards the debt equity ratio, the banks prefer:
A high debt equity ratio Bincreasing debt equity C high and increasing ratio D low and declining ratio
42 Debtor turnover ratio indicates which of the following: A how fast the loans are paid Bhow quickly the loans are available C how quickly the trade debtors
are recovered D how quickly the trade debtors are recovered
43 Which of the following is most important ratio to assess liquidity, for making assessment of working capital bank limits:
A debt equity ratio Bdebt service coverage ratio current ratio D working capital turnover ratio
44 The cash budget method is used where the amount of working capital limits is
A Rs.1 cr or above B Rs.2 cr or above C Up to Rs. 1 cr D none of the above
45 Under projected turnover method of Nayak Committee, the working capital operating cycle is equal to min ___________projected sales
A one month B one month C three months D four months
46 If the bank provides guarantee to the beneficiary that bank will reimburse the loss arising on account non performance or under performance of a contract
by the customer (applicant), such guarantee is called:
A deferred payment guarantee B performance guarantee C financial guarantee D continuing guarantee
47 W hich among the following is an im portant factor for determining the amount of LC limits for working capital purpose (a) average amount of
each LC (b) frequency of opening the LC (c) amount of LC outstanding at a particular period.
A a and c only B a a n d b o n l y C b and c only D a to c all
48 The minimum and maximum time for which CP can be issued is
A 15 days, 6 months B 15 days, 12 months C 7 days, 6 months D 7 day, 12 months
49 Term loans are repaid
A by sale of fmanced assets B by additional contributions from promoters C by future profits / cash generations from the project D all the above
50 The term Knowledge Management refers to (which one is more appropriate):
A gaining knowledge B creating knowledge and storing it C a process of creating, storing, distributing and pooling the knowledge D a process of
converting knowledge into information
Answers Test No.3
01 D 02 C 03 C 04 C 05 B
06 A 07 A 08 C 09 C 10 A
11 C 12 B 13 D 14 C 15 C
16 A 17 B 18 C 19 A 20 C
21 A 22 B 23 C 24 D 25 C
26 B 27 B 28 B 29 B 30 C
31 D 32 D 33 B 34 B 35 A
36 B 37 A 38 A 39 D 40 C
41 D 42 C 43 C 44 D 45 C
46 B 47 D 48 D 49 C 50 C
FOURTH TEST PAPER
Read the following statement carefully : (1) In a no. of economies, most of the economic issues are settled by the market mechanism of demand and supply
where individuals and firms make the major decision about production and consumption. (2) In certain economies, the decisions regarding production and
consumption are taken by the govt. Ownership of most of the means of production are with the govt. (3) In certain economies, the economic decisions
regarding production and consumption are taken by the individuals and firms within a framework of regulation put in place by the goyt.
Based on this, answer the following questions:
1 The description of economy given as S.No.3, is that of a:

-
A market economy / capitalistic economy , Bsocialistic economy / command economy C mixed economy D regulated economy
2 The features of an economy given at S.No.2 are that of a:
A market economy / capitalistic economy B socialistic economy / command economy C mixed economy D regulated economy
3 The features of market economy / capitalistic economy have been given above at S. No
A 1 B 2 C 3 D none of the above
4 Which of the following statement is correct
A study of gross domestic product is part of micro-economics B study of individuals and firms is part of macro-economics C the term 'ends' in micro-
economics, refers to wants D none of the above is correct
5 You are given the following information
Combination Price in Rs. Quantity Demanded
A 800 300000 Units
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B 700 400000
C 600 500000
D 500 600000
E 400 700000
06 The information given above in the Table is called: A demand B law of demand C demand schedule D price and demand
07 From the given information, it can be concluded that:

A there is application of law of demand B application of law of demand is not visible in the given example C Demand has been declining D demand has
been rising as price is rising
08 If a demand curve is drawn on the basis of this information, the movement of the curve will be
A left to right downward B left to right upward C parallel to X axis D parallel to Y axis
09 Simple interest is calculated as:

A principal x rate B product x rate x time C principal x rate x time D principal x time
10 Compound interest is paid on which of the following:

A principal amount B interest amount C principal amount and interest already accrued D principal amount and interest to accrue
11 If interest is to be compounded monthly, which of the following will be used:
nB n x 2C
A P (l+r) P (1+r/2) P (i±r m)1X 4D p ( i + r / l e x 1 2
rt
12 In a compound interest equation P = Ae e, the exponential number is approximately:
A 2.82776 B 2.71728 C 2.77221 D 2.82179
13 Which of the following formulae can be used for calculation of equated monthly installment (EMI)?
n n n n n n n n
A P x r[ (l+r) x (l+r) —1] B P x r [ (l+r) / ( l+r) +1] C P x r [ ( l+r) / (l+r) —1] D P x r [ ( l+r) / (l+r) ]
14 Repayment of house loan installment for a pre-determined period on EMI basis is an example of
A single cash flow B annuity C perpetuity D any of these
15 Z rented his house for 2 years at a monthly rent of Rs.15000 to be received in advance. This is an example of?
Aordinary annuities B annuities due C initial annuities D base period annuities
16 Z is to invests Rs.100000 by end of each year for 5 years at 5% rate of interest. How much amount he will receive?
A Rs.555236 BRs.562461 C Rs.552563 D R s . 5 2 6 4 7 7
17 XYZ purchased machinery of Rs.100000. Rate of depreciation is 10%. At WDV value method, what is the amount of depreciation for 4 years.
A 34390 B 33291 C 33109 D 33012
18 A person wants to receive Rs.1250 every quarter for 5 years at 12% p.a. rate of interest. How much he should invest now.
A Rs.18969.85 B Rs.18956.58 C Rs.18596.85 D Rs.18695.85
19 X wants to receive a fixed amount for 15 years by investing Rs.9 lac at 9% interest rate. How much he will receive annually.
A Rs.101659 B Rs.110983 C Rs.111653 D Rs.114282
20 To calculate value of a sinking fund, which of the following formulae can be used:
11
A A [ { (l+r)" -1} / r] B A /[{ ( 1 +0 "- 1} /r ] C A [ { (1+0 +1} / r] D A [ (l+r)"-1} x r]
21 X wants to send his daughter to a management school after 5 years and will be needingone time payment of charges amounting to Rs.7 lac. At 12%,
how much he should invest annually?
A Rs.111105.21 B Rs.110186.81 C Rs.109672.22 D Rs.109486.89
22 X obtained a loan of Rs.92820 at 10%, which he is to pay in 4 equal annual instalment. Calculate the amount of instalment?
A Rs.28283 BR s . 2 9 2 8 2 C Rs.29476 D R s . 2 9 8 2 2
23 The Landmarks of Tomorrow, a book on human resources management has been authored by:
A Peter.Drucker BEdgar Schein C Frederick Taylor D Abraham Maslow
24In the years 1856-1915, who conceptualized and pioneered the scientific management approach
A Charles Babhage B Robert Owen C Frederick Taylor D Abraham Maslow
25 Which of the following is part of human resources management (HRM):

A routine functions B organizational development C employee development D all the above
26 The HR professional's role includes creating necessary

culture and values in the organization, diagnosing the problem at organization level and taking corrective steps. These fall, in which of the following
category:
A role of developing competence B process role C supportive role D supportive role
27 Which of the following statement is correct?

A HR functions in banks are generally performed professionally like other corporates B HR functions in banks are generally performed professionally like
other corporatesC HR functions in banks are generally not performed professionally like other corporatesD HR functions in banks are professionally
performed unlike other corporates
28 Which of the following enhanced the role of HR professional (1) growth of unionism (2) state interventions through a no. of legislations (3) stress on
statutory welfare
A 1 to 3 all B 1 to 3 all C 2 and 3 only D all
29 Which of the following aims at safeguarding interest and controlling exploitation of specific groups (1) Child Labour Act 1986 (2) Bonded Labour System
Act 1976 (3) Interstate Migrant Workmen Act 1979.
A 1 to 3 all B 1 and 3 only C 1 and 2 only D 2 and 3 only
30 In the present context, the objective of HRD (which one is correct)

A to develop capabilities of each employee as an individual to B develop team spirit and functioning in every organizational unit C collaboration amongst
different groups in the organization D all the above
5
31 The first decade of 21 ' century saw extensive competition in the banking activity due to (1) liberalization (2) globalization (3) deregulation. (4) privatization
A 1 to 4 all B 1 to 3 only C 2 to 4 only D 1, 3 and 4 only
32 Job role or job analysis comprises

A job description only B job description and job evaluation only C job specification and job description only job D description, job evaluation and job
specification
85
33 __________ is primarily used to compare similarity between jobs within an organization or between organisations or even in an industry:
A job description Bjob role or job analysis C job specification D job evaluation
35 As per explanation of the need hierarchy, need for an individual to realize his potential and self-actualization is as strong as satisfying physical needs.
A Robert Owen BCharles Babbage C Abraham Maslow D Douglas McGregor
36 According to Nadler, the learning for growth of the individual not related to a specific present or future job is known as:
A training B education C d e v e l o p m e n t D s e m i n a r
th
37 Whose work can be cited as the first instance of defining the perspective of adult learning in the 20 century:
A Socrates BC o n f u c i u s C L i n d e m a n D Aristotle
38 In the history of credit flow from banking system to the poor persons of society, the was a major event:
A opening of bank branches B nationalization of banks in 1969 C selective credit control of RBI D all the above
39 The trusts can be regulated by (a) Indian Trust Act (b) Public Trust Act (c) Religious and Charitable Endowments Act (d) Wakf Act
A a to dall B a and b only C a and c only D a, b and d only
40 Which of the following category is required to be adopted by banks as business segment for public reporting purposes, as per RBI guidelines (a) treasury
(b) corporate/wholesale banking (c) retail banking (d) other banking business
A a, b and c only Ba and d only C b and c only D a to d all
41 As per low value of individual exposure criterion for retail banking segment, the maximum aggregate exposure, to one counterparty should not
exceed:
A Rs.1 cr B Rs.2 cr C Rs.3 cr D Rs.5 cr
42The working capital limits such as cash credit or overdraft can be used for which of the following purposes
A purchase of fixed assets B investments in other firms and companies C purchase of current assets D investment in capital market
43Lending target for agriculture within priority sector is (which one is not correct)
A 18% ANBC or credit equivalent of off-balance sheet exposure whichever is higher B 25% of priority sector C for foreign banks there is no target for such
advances D indirect advance is also part of agriculture subject to certain conditions.
44 Within 60% target for micro enterprises within MSE advances, there are further targets for micro enterprises. Which of the following is correct:
A 40% points out of 60% points, should be given to micro enterprises with investment in plant and machinery and equipment up to Rs.5 lac B 40% points out
of 60% points should be given to microenterprises with investment in plant and machinery and equipment up to Rs.2 lac C 20% points out of 60% points,
should be given to micro enterprises with investment in plant and machinery and equipment above Rs.5 lac D 20% points out of 60% points, should be
given to micro enterprises with investment in plant and machinery above Rs.5 lac and equipment above Rs.2 lac
45 For a small enterprise in manufacturing, which of thefollowing investment criteria is correct:

A investment in equipment above Rs.25 lac but up to Rs.5 crB investment in plant & machinery of Rs.25 lac but up to Rs.5 crC investment in equipment
of Rs.25 lac but up to Rs.5 cr, Dnone of the Above
46 Which of the following can be included in micro credit:

A aloans of very small amount not exceeding Rs.25000 B loans of small amount not exceeding Rs.50000 C loans of amount up to Rs.1 lac D loans of small
amount up to Rs.20000
47 Advances allowed by banks to directors can be written off (remitted) by banks:

A under provisions, of Section 20 (A) of Banking Regulation Act B under provisions of Section 20 (A) of Banking Regulation Act with permission of RBI or
Govt. C under provisions of Section 20 (A) of Banking Regulation Act with permission of RBI D cannot be written off at all
48Which of the following statements is not correct with regard to Selective Credit Control directives of RBI:
A objective of directives is to prevent speculative holding of essential commodities with the help of bank credit B presently the directives are applicable on
pulses, food grains, oil seeds etcC bank have been given discretion to consider advances against sensitive commodities D selective credit directives are still
applicable on buffer stock of sugar with sugar mills and unreleased stocks of sugar with sugar mills representing levy sugar and free sale sugar
49 Under group exposure norms of RBI, the ceiling on such credit exposure in respect of single borrower is:
A 15% of the capital fund of the bank which can be relaxed to additional 10% for infrastructure projects. B 15% of the capital fund of the bank which can be
relaxed toadditional 5% for infrastructure projects. C 15% of the net worth of the bank which can be relaxed to additional 5% for infrastructure projects D
15% of the capital up capital + reserves of the bank whichcan be relaxed to additional 5% for infrastructure projects.
50 beneficiary of an LC wants to negotiate the documents under LC with a bank other than his own bank. Which of the following are RBI guidelines in such
cases
A since bills are being negotiated under LC, such transactions can be encouraged B since this restrict the cash flows to the loan accounts of the bank which
is regular bank of the beneficiary, banks should not encourage such negotiations to non-constituents C since LC is opened as unrestricted, the banks may
allow such facilities D none of the above
Answers Test No.4

r
01 c 02 b 03 a 04 c 05 c
06 a 07 a 08 C 09 c 10 c
11 d 12 b 13 C 14 b 15 b
16 c 17 a 18 C 19 c 20 a
21 b 22 b 23 A 24 c 25 a
26 b 27 c 28 A 29 a 30 a
31 d 32 d 33 D 34 d 35 c
36 c 37 c 38 B 39 a 40 d
41 d 42 c 43 B 44 d 45 d
46 b 47 c 48 B 49 b 50 B
FIFTH TEST PAPER
You are provided the following information:

Situation Price Demand Supply
1 800 300000 900000
2 700 400000 700000
3 600 500000 500000

86
4 500 600000 300000
400 700000 200000
1 On the basis of given information, what is equilibrium price demand and supply
A 800, 300000, 900000 B 700, 400000, 700000C 600, 500000, 500000 D 500, 600000, 300000
02 In situation (1) in the given Table, to reach equilibrium, the:
A the price should increase, demand should increase, supply should increase B the price should decrease, demand should increase, supply should
decrease C the price should decrease, demand should increase, supply should increase D the price should increase, demand should decrease, supply
should increase
03 Find out which is not a correct statement
A demand schedule is the relationship between price and quantity sold B market demand curve has downward sloping position C when a factor other
than price brings change in the supply, it is called shift in supply D market clearing price is another name for equilibrium price
04 Demand deposits of banks are not included in which of the following for the purpose of money supply aggregates:
AMO B M 1 C M 2 D M 3
05 Average income of the population in the country has increased by 15%. The demand for a commodity sat X will: A increase B decrease C increase, if it is
a superior commodity and decrease if it an inferior commodity D decrease, if it is a superior commodity and increase if it aninferior commodity
06 The shift in demand would not occur in the following cases:
A price of X has increased leading to decline in demand B demand for cold drinks has declined during winter season C demand for consumer durables
increased due to increase in income of the consumer D demand for ink has declined due to increase in cost of pen.
07 In the context of cost of production which of the following statement is not correct:
A if production cost for a commodity is low in relation to its market price, the producers would like to produce more and sell more B if production cost for a
commodity is high in relation to its market price, the producers would like to produce less and sell less C if production cost for a commodity is low in relation
to its market price, the producers would like to produce less and sell less D none of the above
08• Supply of a commodity is affected (which is correct statement):
A if price of a substituted commodity declines B if price of a substituted commodity increases C if price of a complimentary commodity increases D all the
above are correct.
09 Debts can be active or passive. Which of the following explanation matches in this context:
A active debts means which we owe B passive debts means what is due to us C passive debts means which we owe and active debts means what is due
to us D active debts means which we owe and passive debts meanswhat is due to us
10 The present value of a bond is equal to:
A the amount of interest it will earn B the amount of future cash to be received in future till maturity of the bond C the present value of cash to be received in
future tillmaturityof the bond D the amount to be received on maturity
11 A bond has been issued with a face value of Rs.20000 at 12% coupon for 3 years. The required rate of return is 10 %. What is the value of the bond?
A Rs.20689.70 B Rs.20988.80 C Rs.20898.30 D Rs.20918.40
12 Current yield of a bond can be calculated as under:
A current interest / current market price B coupon interest / face value C coupon interest / current market price D current interest / face value
13 A 10%, 6 years bond, with face value of Rs.1000 has been purchased by Z for Rs.900. What is his yield till maturity
A 12.50% B 12.20% C 11.80% D 11.60%
14 When the required rate of return is less than the coupon ratethe value of the bond is :
A less than face value B more than face value C equal to face value D maturity value
15 For a given difference between the YTM and the coupon rateof a bond, the longer the term to maturity, the with a change in YTM:
A smaller will be the change in the price B greater will be the change in the price C greater will be the change in the maturity value D smaller will be the
change in the maturity value
16 A change in the YTM affects the price of the bonds with aYTM more than it does the price of bonds with a YTM.
A lower, higher B higher, lower C lower, lower D higher, higher
17 X purchased a Bond with face value of Rs.1000 and coupon of 8% and maturity of 6 years. If YTM is increased by 1%, the change in price of Bond-2
would be:
A Rs.44.83 increase B Rs.44.83 decrease C Rs.48.33 increase D Rs.48.33 decrease
18 Z invested in 10% 3 year bond of face value of Rs.1000 each. The expected market rate is 12%. What is the duration of the bond
A 2.73 years B 2.93 years C 2.63 years D 2.83 years
19 An increase in the frequency of coupon payments duration and a decrease in frequency of coupons
A decreases, increases B decreases, decreases C increases, increases D increases, decreases
20 D x YTM/1 + YTM gives: (D means duration and YTM means yield to maturity)
A duration of the bond B bond price elasticity C yield to maturity of the bond D interest rate elasticity
21 Z purchased 8%, 5 years bonds of Rs.10 lac, with annual interest payment and face value payable on maturity. The YTM is assumed at 6%,. Calculate
percentage change in the price of the bond when the decrease in YTM is 100 basis points from 6% to 5% and the duration is 2.79% and modified duration is
2.63%
A 2,63% B 2 . 7 3 % C 2.83% D 2 . 9 3 %
22 Z is to receive Rs.60000 from bank at the end of 3 years, being the maturity value of a term deposit. How much he is depositing now, if the interest rate is
10%?
A R s . 4 4 0 9 7 B Rs.45079 C Rs.47075 D Rs.49059
23 Learning occurs when learners have the freedom to learn, what is particularly relevant to their personal life situation. It is stated by which of the following
theory:
A mechanistic theories B cognitive theories C organismic theories D behaviourist theories
24 The training needs can be identified by an organization on the basis of (1) performance appraisal (2) productivity norms fixed by the organization (3)
larger rejects for the job done by
the employee (4) inspection reports
25 W hile conducting the training programs, which of the following methodology is used:
A lectures and experimental lectures B reading and discussions C case studies and role plays D all the above
26 The evaluation of training is done at 4 levels. At one of these levels, the participants learn knowledge, skills and attitudes about the subject matter,
which is evaluated through some test conducted before and after the training. This level is called:
A reaction level B learning level C behavior level D functioning level
27 The trainer in a bank should be:
A practicing managers only B operational people only C specialists recruited as core faculty only D a mix of practicing managers, operational people
andspecialist recruited as core faculty.
28 The persistent tendency to feel and behave in a particular way, towards some object, is called:
A behavior B attitudeC habit D any of the above
29 Which of the following components of attitude, involve the feeling of an employee or their affect-positive, neutral or negative-about an object:
A emotional B informational C behavioral D all the above
30 Which of the following function is served by the attitudes (1) the adjustment function (2) the ego-defensive function (3) the value-expression function (4)
the knowledge function.
31 W hich of the following can play a great role in attitude change (1) friends (2) peers (3) opinion leaders a1 to 3 all
A 1 and 2 only B 2 and 3 only C 1 and 3 only
32 A stage when a person attempts to achieve ego integrity by examining whether life has been meaningful or satisfying, in the context of career planning, is
called:
A adolescence Byoung adulthood C adulthood D m a t u r i t y
33 According to Dalton, Thompson and Price, in the career path, which of the following is required to define the direction in which the entire organization or
at least a majorsegment of the organization would develop:
Aapprentice Bcolleague C m e n t o r s D s p o n s o r s

87
34 According to Driver, in the an individual takes a new job, works hard, performs well, moves up in status and rank and then moves on to another type of work and
follows the same pattern of development and performance.
A steady state careers B transitory pattern C spiral career D plateau career
35 Under career pattern, Schein has given comprehensive framework of 3 dimensional movements. The movement is along the hierarchy of the organization
A vertical B circumferential C radial D cervical
36 According to Schein, there arE _______type of career anchors
A two B three C four D five
37Which of the following career anchor category, as per Schein concept, does not match
A some individuals want to create something new – autonomy B some individuals are not comfortable with organization life They like to start something and
want to make it a success autonomy C some individuals want to create something new – creativity D none of the above
38 The loansystem of credit deliveryis not applicable incase of:
A activities cyclicalandseasonal innatureactivities B carrying higher risk weightactivities carrying lower C risk weight activities which are of regular nature
39 Whatis themaximum exposure abank canhavefor equipmentleasing, hirepurchase or factoring services:
A total exposure to these cannot exceed 10% of total advances B exposure to each of these cannot exceed 10% of total advances C exposure to each of
these cannot exceed 15% of total advances D total exposure to these cannot exceed 15% of total advances
40 The objective of introducing Base Rate by RBI is (a) at enhancing transparency in lending rates of banks (b) enabling better assessment of transmission
of monetary policy (c) keeping interest rates low.
A a to c all B a and b only C a and c only D b and c only
41 For which of the following category of loans the bank canlend at below base rate?
A corporate loans B priority sector loans C loans below Rs.2 lac D none of these
42 What is the periodicity of charging interest in loans by banks:
A monthly basis B quarterly basis C half-yearly basis D at discretion of banks
43 Which of the following is an basic financial statements (a) balance sheet (b) profit and loss account (c) funds flow statement (d) statement of bank
account
A a to d B a to cC a, c, d Da a n d b
44 When, the promoter of a business withdraws certain goods from the business for his personal use, his drawing account is debited. This is done due to
application of :
A going concern concept Bcost concept C business entity concept D realization concept
45 In a business firm, the assets = capital + liability: It is due to
A going concern concept B moneymeasurement concept C m a t c h i n g c o n c e p t D dual aspect concept
46 The concept makes a distinction between the receipt of cash and right to receive it or payment of cash and obligation to pay cash:
A realization system B cash concept C accrual concept D consistency concept
47 The books of business should be closed and reopened after regular time period as per:
A consistency concept B business entity concept C going concern concept D accounting period concept
48 The assets and liabilities are placed just opposite each other in case of
A common-size statement system B horizontal form of balance sheet C vertical form of balance sheet D a and b both
49 Which of the following is correct order in which the companies classify their liabilities:
A share capital, reserves and surplus, secured loans, current liabilities and provisions, unsecured loans B share capital, reserves and surplus, unsecured
loans, securedloans, current liabilities and provisions C share capital, reserves and surplus, secured loans, unsecured loans, current liabilities and provisions
D reserves and surplus, share capital, secured loans, unsecured loans, current liabilities and provisions
50 Which of the following is not part of secured loans raised by a company
A inter-corporate borrowing Bdebentures C term loan from a bank D term loan from a financial institutions
Answers Test No.5

01 c 02 b 03 A 04 a 05 c
06 a 07 c 08 B 09 c 10 C
11 b 12 c 13 A 14 b 15 B
16 b 17 b 18 A 19 a 20 D
21 a 22 b 23 C 24 a 25 D
26 b 27 d 28 B 29 a 30 A
31 a 32 d 33 D 34 c 35 A
36 d 37 a 38 A 39 b 40 B
41 d 42 a 43 D 44 c 45 D
46 c 47 d 48 B 49 c 50 A

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CAIIB MADE EASY : PAPER - 1

ADVANCED BANK MANAGEMENT

[THIS BOOK IS MADE FOR LAST MINUTE FINAL

PARTICULARS PAGE NO.

MODULE – A ( ECONOMIC ANALYSIS ) 03-24

MODULE - B ( BUSINESS MATHEMATICS ) 24-39

MODULE - C ( HRM IN BANKS ) 40-48

MODULE –D ( CREDIT MANAGEMENT ) : 49-70

QUESTIONS BANK ( RECALLED QUESTIONS ) & PRACTICE TEST 70-88

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

MODULE - A : Economic Analysis

MODULE - B : Business Mathematics

MODULE - C : HRM in banks

MODULE - D : Credit Management

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

2. Supply and Demand

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

3.Money Supply and Inflation

Three distinct elements can be distinguished in interest:

FACTORS AFFECTING THE RATE OF INTEREST:

D) Modern Theory of Interest (Hicks & Hensen Theory):

Business Cycle or Trade Cycle

ECONOMIC SURVEY– 2013-14

Salient features of Indian economy

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

8. Monetary Policy and Fiscal Policy

CASH RESERVE RATIO

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

CONCEPTS OF BUDGET DEFICITS IN INDIA

OVERVIEW OF THE ECONOMY

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

61) Multiple uses of a commodity will make the demand go up when:

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

MODULE – B BUSINESS MATHEMATICS

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Methods of Random Sampling

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Calculation of standard error of finite population : (a = ((a ) / J n) / 4 {(N-n) / (N -1)}

3.CORREUITION & REGRESSION

Assumptions of Pearsonian Coefficient

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

CALCULATION OF REGRESSION EQUATIONS

Estimate the no. of unit, it may produce in the year 2013?

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

OBJECTIVE QUESTIONS ON TIME SERIES

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

Distinction between rate of return and yield to maturity

QUESTIONS ON BOND VALUATION

28) Convertible debentures

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

ANSWERS (BOND VALUATIONS)

Compiled by Mr. Sanjay Kumar Trivedy, Sr. Mgr., RSTC, mumbai

HRM & HRD - STRUCTURE AND FUNCTIONS

Aspect / Area By TISCO Enforced by Name of the Act

2. Development of Human Resources