Join CAIIB WITH ASHOK YouTube & App

BFM FULL PDF CAIIB JUNE EXAM (2023) Joi

nCAI
IBWI
THASHOKonYouTube
Any Doubt or Query Call This Number:- 9494787882
BFM MODULE-A
Our Official App Link :- CAIIB WITH ASHOK APP
Chapt
er1:ExchangeRatesandFor
ex
Our Official YouTube Channel Link :- YouTube Channel
Business
Our Telegram Channel Link :-
1- CAIIB WITH ASHOK Whatwewi
llst
udy:
2- CAIIB WITH ASHOK DISCUSSION *
Whati
sfor
eignexchange
3- CAIIB WITH ASHOK ABM DISCUSSION *
Whati
sexchanger
ate
4- CAIIB WITH ASHOK BFM DISCUSSION *Whati
sforeignexchangemar
ketandi
t'
s
Join Our Social Media Platform:- char
act
eri
stics
1- Facebook Group For
eignExchange:
2- Facebook Page
*Thewor l
dt r
ade,exportandimpor tof
3- Instagram commodi t
ies,cr
ossbor dermovementofman
4-Twitter Handle powerandcapi t
al,
travelandtour
ism andexportof
serv
ices,
allnecessi
tatetheneedf orexchangeof
curr
encyofonecount rytothecurrencyofanother
countr
y.
Expor
t:Goodsmanuf
act
uredinI
ndi
aandsendto
USAwillbepai
dinUSDol
lar
s.TheI
ndi
anexpor
ter

needtovisi
tBankt
ogett
hisUSDpr
oceeds *
Forei
gnexchangemeansf
orei
gncur
rencyand
conver
tedintoI
ndi
anr
upees. i
ncl
udes:
Import:I
mpor tofcapit
algoodsfr
om Ger
manyinto A)Al ldeposits,cr
edit
sandbal ancespay ablein
Indi
awil
lbebi l
ledinEuroandneedtopai
dinEuro foreigncurrencyanddr af
ts,t
raveler
'scheques,
soimporterneedtov i
sitt
hebanktoconv
ertt
he l
etterofcr editandbil
lofexchangeexpr essedor
rupeesi
ntoEur o. drawni nIndiancurrencyandpay abl
einf oreign
currency.
Thusconv er sionofcurr
enciesfr
om currencyof
i
nvoicetot hehomecur rencyofexport
erwi l
lbe B)Anyinstr
umentpayableatopt
ionofDr
aweeor
general
lyrequi redforal
lcrossbordert
rades.This Holderoranyot
herpart
y,eit
heri
nIndi
ancur
rency
i
scalledfor eignexchange. orinfor
eigncur
rencyorpart
lyi
noneandpart
lyin
ForIndi
ani mport
erorexport
ertheUSDoll
aror other
.
Euroisforei
gnexchange(FX)andforAmeri
canor Thusbr
oadlyspeaki
ngfor
eignexchangei
sal
lthe
Germani mporter
/Expor
terRupeesi
sfor
eign cl
aimspayabl
eabroad.
exchange(FX).

ExchangeRat
e:
For
eignExchangeDef
ini
ti
onasper Wecansayf orei
gnexchangetr
ansact
ioni
sa
FEMA1999: contractt
oexchangefundsinonecurr
encyfor
fundsinanothercur
rencyatanagr
eedand
FEMA:For
eignExchangeManagementAct1999 arrangedbasi
s..
AsperFEMA1999(
Sect
ion2): Joi
nCAI
IBWI
THASHOKonYouTube
*
Exchanger
atet
husdenot
es For
eignExchangeMar
ket(
For
ex
t
hepr
iceor Mar
ketorFXMar
ket
):
t
her
ati
oor Foreignexchangemar ketscompr isealar
ge
t
hev
alue spectrum ofmar ketparticipantswhichi
nclude
i
ndi vi
duals,busi
nessent ities,
commer ci
albank,
atwhichonecur
rencyi
sexchangedf
oranot
her
Investmentbanks, Centralbanks,crossborder
cur
rency.
i
nv estor
s, Arbi
tr
ageursandspecul at
orsacrossthe
*Thenumberofunitofonecurr
encywhichare globewhobuyorsel lcurr enciesf
orthei
rneeds.
exchangedforagi
vennumberofunitsofanot
her
*i
tisacommunicat
ionsyst
em basedmarketwi
th
curr
encyiscall
edexchanger
ateofcurr
ency.
noboundar
iesandoper
atesroundthecl
ockwit
hin
Forexampl
e: acount
ryandbetweencountr
ies.
1USdol
lar=68.
10Rs *i
tisnotboundbyanywallsorbr
icksandmor t
ar
1Eur
o=1.
07USdol
lar marketpl
acewhichisacommonf eatur
efor
commodi t
ymarketssayveget
abl
esmar ketorfi
sh
market.
Exchanger at
esaredynamicandvar
iesf
rom dayt
o
*
iti
sapr ofi
tcent
erwi
thasi
mul
taneouspot
ent
ial
day,minutetominut
eandsecondtosecond,
f
orlosses
dependinguponvari
etyoff
actor
s.
*Theworl
dcurr
encymarketi
sav eryl
argemar
ket
Joi
nCAI
IBWI
THASHOKonYouTube withal
argenumberofpar
ti
cipant
s
Maj
orpar
ti
cipant
sofFOREXmar
ket
sar
e:-

Centr
albanks-Managingt
heirfor
exmar ketsand Indi
vi
dual:Ordinaryorhighnetworthi
ndivi
dual
usi
ngcurrencymarketsstr
ivestoreducethe usi
ngmar ketf
ort hei
rinvest
ment,
trade,per
sonal
vol
ati
li
tyandsmoot henoutthevalueoftheirhome andtr
avelandtour i
sm needs.
cur
rency.
Theparti
cipant
snotonl yusetheforexmarketfor
Commer cialbanks-of f
eringexchangeofcurrenci
es tr
avelandtradepurposesbutalsoforinv
estment,
totheirbigandr etailcl
ient'
sandhedgi ngand hedgi
ngandspecul ati
veacti
vi
ties,
thusgenerat
ing
i
nvestingthei rownasset sandl i
abil
iti
esasal
soon l
argevolumesf ormarket.
behalfoftheirclientsandal sospectulat
eon Itmaybesur pri
singtonot ethattheglobalfor
ex
exchanger atemov ement sinthemar ket
s.
mar kethandl esat ot
alturnov erofapproxUSdol l
ar
Invest
mentfunds/banks-
-Mov i
ngfundsfrom one 5.1tril
li
on( USD5100bi l
lion)perday ,whi
lethedail
y
countryt
oanotherusingexchangemarket sasa wor l
dwor ldt radetur
nov erisappr ox2%oft hi
s
vehicl
efori
nvestmentsasalsohedgingtheir forexturnov er.Thismeanst hatar ound98%oft he
i
nvestmentsinvari
ouscountri
es/cur
rencies. globalforext radi
ngisrelatedt oinvestmentor
speculativet r
ading.
Theforexmar ketsareveryhi
ghlydynamic.Onan
Forexbroker
s--
-act
ingasmiddl
emanbet
ween
otherpart
ici
pant
sandatti
mestaki
ngposi
ti
onson aver
aget heexchanger at
eofmaj orcurr
enci
es
thei
rbooks. (USD/GBP)f l
uctuateever
yfoursecondswhi ch
meansi tregi
stere21600(15*60*24).
Corporat
ion'
s--
--movingfundsbet weendif
ferent
countr
iesandcurrenciesforinvest
mentortrade Thi
smeansy oulookasi
deforamomentandwhen
youtur
nbackfortherat
ethesamecoul
dhave
tr
ansacti
onsorev enspectulati
onincurr
ency
movedeit
herway .
markets
*Forexmar ketusual
lyoperat
eMondayt oFriday *
Aglobalmar
ketwi
thnoboundar
ies/
nospeci
fi
c
global
lyexceptforthemiddleeastorot herI
slamic l
ocat
ion
countri
eswhi chfuncti
ononSat urdayandSunday *
Amar kett
hatsuppor
tsl
argecapi
talandt
rade
withrestr
icti
onstocaterthelocalneeds,butare f
lows
closedonFr i
day.
*
Highl
yli
qui
dmar
ket
s
*ThebulkofFor exmarketsar eOTC(Overthe
count
er)meani ngthatthetradesareconcluded *
Highf
luct
uat
ionsi
ncur
rencyr
ates(
ever4seconds)
thr
oughtelephoneorot herelect
roni
csy st
ems. *
Set
tl
ementaf
fect
edbyt
imezonef
act
or
*Nowwi t
htheint
ernetaccessi
bil
ityonmobil
eand *Marketaf
fect
edbygov
ernment
alpol
ici
esand
downloadi
ngtheappofmar ketplayer
s,thef
orex cont
rol.
marketcanbeaccessedanyt i
meanypl ace.
*MajorBankswhichactasmar ketmakersoff
er
twowayquot es(buyandsell
)andl eav
euponthe
cal
lertoei
therbuyorsellasperhisneeds.
Thi
s Joi
nCAI
IBWI
THASHOKonYouTube
generat
egreatermarketdept
handv ol
umes.
Thusthechar
acteri
sti
csoffor
eignexchange
marketcanbeli
stedasunder:
*
A24hour
smar
ket
*Anov ert
hecount
er(
OTC)mar
ketadwel
las
exchangedri
venmarket
.

Joi
nCAI
IBWI
THASHOKonYouTube ExchangeRat
eMechani
sm:
BFM-MODULE-A Ty
pesofset
tl
ementofFXdeal
s:
Chapt
er1:ExchangeRatesandFor
ex
Busi
ness(PART-I
I) Duetovastnessofmarket,operati
ngindif
ferent
Whatwewi
llst
udy: ti
mezone,mostofthef or
exdeal saredoneon
SPOTbasis,meansthedeli
v er
yoft hefundtakes
*
Exchanger
atemechani
sm
pl
aceonsecondwor ki
ngday( from thedateofdeal
*
Whati
sReadyorCashr
ate orcont
ract
)
*
Whati
sTOM r
ate
*
Whati
sSPOTr
ate Exampl
e:
*
Whati
sFORWARDr
ate
*
Fact
orsaf
fect
ingt
heexchanger
ate Dealdat
e Funddel
iv
erydat
e
01-
01-
2020 03-
01-
2020
10-
06-
2020 12-
06-
2020
4Oct
ober2021 6Oct
ober2021

Joi
nCAI
IBWI
THASHOKonYouTube
Funddel
iv
erydat
e 1-
ReadyorCash:
or I
fthesettl
ementoffundtakespl
aceonthesame
Val
uedat
e day(ondat
eofdeal)theni
tiscal
ledr
eadyorcash
rat
e.
or
Dealdat
e Set
tl
ementdat
e
Set
tl
ementdat
e
10-
07-
2020 10-
07-
2020
8-
05-
2020 8-
05-
2029
*Rat
eatwhi
chsuchdeal
sar
edonei
sknownas
SPOTrat
e.
*
SPOTr
atesar
ebaser
atesf
orot
herFXr
ates. 2-
TOM :
I
fthesettl
ementoffundtakesplaceont
henext
FXdeal
scanbeset
tl
edi
nthef
oll
owi
ng4way
s: day(
from dat
eofdeal)t
henitiscall
edTOM r
ate.
(Tommorow)
1-
ReadyorCash
2-
Tom
DealDat
e Set
tl
ementDat
e
3-
Spot
04-
02-
2020 05-
02-
2020
4-
Far
war
d
1June 2June
1-
04-
2020 02-
04-
2020
Joi
nCAI
IBWI
THASHOKonYouTube

Condi
ti
onsf
orset
tl
ement
: 3-SPOT:
1-Sett
lementdateordayshoul
dbeworki
nginbot
h Set
tl
ementoff
undstakesplaceonsecondwor
king
countri
es.Ifhol
idayi
nanyoneofthecount
ryt
hen dayaf
tert
hedateofcont
ractordeal
.
settl
ementdateshouldbenextcommonworki
ng
dayofbotht hecount
ry.
Dealdat
e Funddel
iv
erydat
e
2-Al
soifSatur
dayandSundaycomesdur i
ngthe
sett
lementdatet
henitwi
llal
sopostponethe 01-
01-
2020 03-
01-
2020
sett
lementdatet
onextworki
ngdate. 10-
06-
2020 12-
06-
2020
Exampl
e1: 4Oct
ober2021 6Oct
ober2021
Deal:
01-
06-
2020
Set
tl
ement:02-
06-
2020(Hol
idayi
nIndi
a)
Ready
,TOM andSPOTExampl
e:
Act
ualset
tl
ement:03-
06-
2020(
wor
kingdayi
nbot
h)
Exampl
e2:
DealDat
e Ready TOM SPOT
Deal:
15-
01-
2020
01-
01-
2020 01-
01-
2020 02-
02-
2020 03-
02-
2020
Set
tl
ement:16-
01-
2020(Hol
idayi
nIndi
a)
1Mar
ch 1Mar
ch 2Mar
ch 3Mar
ch
Nextdat
e:17-
01-
2020(
Hol
idayi
nUS)
12Nov 12Nov 13Nov 14Nov
Act
ualset
tl
ement:18-
01-
2020(
wor
kingdayi
nbot
h)
4-
FORWARD: *InFor
exmar ketal
lrat
esquot
edar
egener
all
y
SPOTrates.
I
fdeli
veryorset
tl
ementoffundst
akesplaceonany
dayaft
ertheSpotdat
ethenwecalli
tfor
wardrat
e. *For
war
drat
eisgener
all
ydi
ff
erentf
rom spotr
ate.
Butwhy
?

FORWARD-Pr
emi
um andDi
scount
:
DealDat
e SPOT FORWARD
Forwardr
atesar
eder
ivedf
rom spotr
atesandi
s
01-
01-
2020 03-
02-
2020 10-
03-
2020
equalt
o
1Mar
ch 3Mar
ch 4Mar
ch
For
war
drat
e=Spotr
ate+Pr
emi
um
12Nov 14Nov 31Dec
Or
For
war
drat
e=Spotr
ate-Di
scount
SPOT andFORWARDr
ates:
Pr
emi
um :
Ift
hef
orwar
dval
ueofacur
rencyi
s
highert
han(cost
li
er)t
hespot(
present
)val
uet
hen
Quot
e: thecurr
encyissai
dtobeatapremium.
USD/
INRquot
edas1USD=68.
10Rs Exampl
e:
GBP/
USDquot
edas1GBP=1.
2180USD i
fSpot GBP=1.
2100USD
EURO/
USDas1EURO=1.
0580USD For
war
dGBP=1.
2150USD(
1mont
hfor
war
d)
WecansayGBPisdear
ervalueonemonthfor
war
d
Joi
nCAI
IBWI
THASHOKonYouTube andapr
emium 0.
0050i
sbeingpaidf
orthesame.

Di
scount:
Ift
hef
orwar
dval
ueofacur
rencyi
s Joi
nCAI
IBWI
THASHOKonYouTube
cheapert
hanthespot(
present)val
uet
hent
he
curr
encyissai
dtobeataDi scount
.
BFM-MODULE-A

Exampl
e: Chapt
er1:ExchangeRat
esandFor
ex
i
fSpot GBP=1.
2100USD
Busi
ness(
PART-I
II
)

For
war
dGBP=1.
1100USD(
3mont
hfor
war
d) Whatwewi
llst
udy:
WecansayGBPi
satdi
scount
. *
Howt
oreadquot
erat
e

Note:I
fonecur
rencyi
satPremium t
henotheri
sat *
Howt
oroundof
findeci
mal
Di
scountandi
foneisatDi
scountt
henotherisat *
Whati
sval
uedat
e
Pr
emium.
*
Whati
sar
bit
ragei
nFor
ex
*
Whati
sDi
rectquot
e
*
Whati
sIndi
rectquot
e
*
Whati
sbi
drat
e&of
ferr
ate
*
Whati
sfi
xrat
eandf
loat
ingr
ate
Joi
nCAI
IBWI
THASHOKonYouTube

Joi
nCAI
IBWI
THASHOKonYouTube
Af
ewConcept
s: Per
centandPerMi
ll
e:
*
TT:Tel
egr
aphi
cTr
ansf
er
Per
cent(
%)i
sonepar
toutof100par
ts.
*
MT:MoneyTr
ansf
er
PerMi
ll
eisonepar
toutof1000Par
ts
*
For
war
drat
e=spotr
ate+pr
emi
um or
*
For
war
drat
e=spotr
ate-di
scount
Howt
oreadt
hequot
edr
ate:
NOSTROACCOUNT:(
ouraccountwi
thy
ou) Youwenttoabranchandaskthem t
oinfor
myou
thecur
rentr
ateofdol
larsot
heyshowy ou
A/Cofbanki nI
ndi
awithanybankabr
oadi
n
fol
lowi
ngquote:
for
eigncur
rencyi
scal
ledNOSTROaccount
.
Exampl
e1:
Ex:PNB'
saccounti
nBANKOFAMERI
CA(
indol
lar
)
USD/
INR=Rs68.
10/
11perUSD
i
.e1USD=Rs68.
10or
VOSTROA/
C:(
Youraccountwi
thus)
1USD=Rs68.
11
AccountofFor
eignbanki
nIndi
anbank(
inr
upee)
.
Exampl
e2:
Ex:
BANKOFENGLANDaccounti
nPNB(
inr
upee)
USD/
JPY=JPY116.
50/
60
i
.e1USD=116.
50or
LOROAccount
:(t
hei
raccountwi
tht
hem)
1USD=116.
60
BankofAmer
ica'
saccountwi
thBankofEngl
and.

Val
ueDat
e:
Roundi
ngOf
fofdeci
mal
inFor
ex: Thi
stermisusedtodefi
nethedat
eonwhi cha
Exampl
e1:If1USD=68.
9315(
roundof
fto paymentoffundoranent
rytoanaccountbecomes
near
est0.
25pai
sa) act
uall
yeff
ectiv
e.

Sowewi
llr
oundof
fthi
s: I
ncaseofpaymentsonTelegr
aphi
ctr
ansf
ers(TT)
t
heval
uedateisusual
lyt
hesameinbothcent
ers
68.
9315
i
.epay
mentofrespect
ivecur
rencyineachcent
er
Last2di
git
sindeci
malshoul
dbe
t
akesplaceonsamedaysonogai nandnoloss.
ei
ther00or25or50or75
Nowcheck15i
sneart
o00or25
Butifthereisti
mel agbet
weenrecei
ptoffundsat
Fr
om 00i
t'
s15awaywhi
lef
rom 25i
tis10away onecent erandpaymentoffundsatanot
hercenter
Sowewi
llt
ake25asr
oundof
fval
ue. thencompensat ionshoul
dbepaidtopar
tyinthe
form ofinter
est
.
Sof
inalr
ateaf
terr
oundof
fitwi
llbe68.
9325

Example2:50.
2339so39-
25=14&50-
39=11Fi
nal Thusthedat
eofset
tl
ementoff
undi
scal
ledv
alue
=50.2350 date.

Example3:1.
5288so88-
75=13&100-
88=12so
fi
nal1.
5300
Ar
bit
ragei
nExchange: Di
rectandI
ndi
rectQuot
es:

InForext
hearbitr
ageconsi stofpurchaseofone Underdir
ectquot
esthel
ocalcur
rencyi
svar
iabl
e,
curr
ency(
$)foranot her(
€)inonecent r
e forexamplei
nIndi
a
accompaniedbyanal mostimmediatesaleagai
nst 1USD=Rs68.
10
thesamecurrency($)inanothercenter.
1USD=Rs70
Thi
str
ansact
ioni
scal
ledsi
mpl
eordi
rectar
bit
rage.
1USD=Rs71.
20
1USD=Rs69.
80
Ifthesametransact
ionisconduct
edt hrought hr
ee
Theratesar
ecall
eddi
rectdi
rectasther
upeecost
ormor ecent
ersandinvolv
ingseveralcurrencies
ofForei
gncurr
encyi
sknowndi r
ectl
y.
thenthisi
scall
edcompoundort hree(mor e)poi
nt
arbit
rage. Thesequotesar
ecal
ledHomecur
rencyorPr
ice
quotat
ion.
Suchoperat
ionshoul
dbecarr
iedoutwit
hminimum
ti
medelaytotakeadvant
ageoftempor
arypr
ice UnderIndi
rectquot
e,t
helocalcur
rencyremai
ns
di
ffer
ences. fi
xed,whil
ethenumberofunitofForei
gncurr
ency
vari
es.Forexample
Rs100=1.
47USD
Rs100=1.
40USD

Rs100=1.
24USD t
hecur
renci
esar
equot
edasI
ndi
rectr
ates.i
.e.
Rs100=1.
8647USD
1GBP,
Eur
o,AUDorNZD=somanyuni
tsofUSD.
Note:Globall
yapract
icei
sbei
ngfoll
owedwhere
al
lthecurrenci
es(
exceptf
ew)arequotedasdi
rect
Someexampl
es:Thecur
rencyr
atesar
equot
edas
quotes,
intermsofUSD. bel
ow:
1USD=somanyuni
tofanot
hercur
rency
.
Q1-Fi
ndi
fiti
sDi
rectquot
eorI
ndi
rectquot
e
*
InI
ndi
aal
soDi
rectquot
esar
eappl
ied. Q2-Whi
chi
sbuy
ingr
ateandwhi
chi
ssel
li
ngr
ate
*
InDi
rectquot
ewef
oll
owsi
mpl
erul
eof
USD/
INR=Rs68.
10/
11perUSD

BUYLOW,
SELLHI
GH. USD/
JPY=JPY116.
50/
60perUSD

I
ndi
rectquot
edcur
rency:
GBP/
USD=USD1.
2100/
12perGBP
Onl
yincaseof
USD/
SGD=SGD1.
4375/
95
1-
GBP
2-
Eur
o
AUD/
USD=USD0.
7330/
40
3-
AUD
EURO/
USD=USD1.
0190/
00
4-
NZD
Joi
nCAI
IBWI
THASHOKonYouTube
FewRul
esr
elat
edt
oIndi
amar
ket
: Bi
dRat
e&Of
ferRat
e:
*
InI
ndi
aal
soDi
rectquot
esar
eappl
ied. Thebuy
ingr
ate=Bi
drat
e
*
InI
ndi
aal
lthecur
renci
est
obequot
edas Thesel
li
ngr
ate=Of
ferr
ateorAskr
ate
Peruni
tofFor
eigncur
rency=I
NR Exampl
e1:
1USD=70.
02Rs Abankquot
eUSD/
INRas68.
10/
11
1EURO=110.
02Rs I
tmeansthequot
ingbanki
sbi ddi
ngf
orUSDat
1GBP=94.
9432Rs. 68.
10andisof
fer
ingtosel
ltheUSDat68.
11

Cur
rencyQuot
edi
nmul
ti
pleof100uni
ts: Example2:AbankquoteGBP/USDr
ateas
1.2100/
10sot
hequotingbanki
swil
l
ingto
1-
JPY
BuyGBPat1.
2100andwi
ll
ingt
osel
lGBPat1.
2110
2-I
NDONESI
ANRUPI
AH
3-
KENYANSHI
LLI
NG
Spread:di
ffer
encebet
weenbuyi
ngr
ateandsel
li
ng
ar
etobequot
edas
rat
eiscall
eddealer
sspread.
100uni
tofFor
eigncur
rency=I
NR.
Exampl
e:
100JPY=56.
06Rs
100Shi
l
ling(
Keny
an)=42.
04Rs
100Rupi
ah=37.
6432Rs

Fi
xedVsFl
oat
ingr
ate:
Fi
xedexchangerateisoff
icialr
atesetbythe
monetar
yauthor
ityforcur
rency .I
tisusual
ly
peggedt
ooneormor ecurrenci
es.
Underfl
oatingexchanger
atethev
alueofexchange
rat
eisdecidedbysupplyanddemandfact
orofthat
part
icul
arcurrency
.
Insomecasesevenfi
xedint
erestrat
esareall
owed
tofl
uctuat
ebetweendefi
neupperandlowerbands
asfixedbythemonet
aryaut
horit
yofcountr
y.
Worldeconomieshasadopt
edfloat
ingexchange
rat
ein1973whi l
eIndi
aswit
chedtofloat
ing
exchangerat
ein1993.

Joi
nCAI
IBWI
THASHOKonYouTube
Joi
nCAI
IBWI
THASHOKonYouTube Buy
ing Sel
li
ng

BFM-MODULE-A USD/
INR 68.
09 68.
11

Chapt
er1:ExchangeRatesandFor
ex
Busi
ness(PART-
V) *
Nowdeci
dedbuy
ingorsel
li
ngr
ate?(
inf
lowofUSD)
Obv
iousl
yTTBuy
ingr
ate=68.
09
Whatwewi
llst
udy:
(Rememberweneed3thi
ngsi
nmaxi
mum
*Wewil
lsol
veFor
exexampl
esf
rom MacMi
ll
an
quest
ionsSPOTRATE,
PREMIUM,
MARGI
N)
book
Exampl e1:Infl
owofUSD1, 00,
000/-byTTfor
credi
ttoyourexport
er'
saccount,bei
ngadvance Exampl e4:On15September
, acustomerr
equest
s
paymentforexport
s(credi
treci
vedinNOSTRO forbookingofaFar
wardcontractf
orexpor
tbil
lof
accountfr
om NewYor kcorr
espondent).Whatrate USD1,50,000.
00/-tobereal
izedinmonthof
youwillt
aketoquotetothecustomer,i
fmar ket December .
ratei
s68.09/11? Gi
vent
hatUSD/
INRspoti
s68.
45/
50and
Sol
uti
on1: For
war
dpr
emi
um i
sasunder
Gi
venMar
ketr
ate=68.
09/
11or Oct
ober:18/
19pai
se
USD/
INR=68.
09/
11 Nov
ember:30/
32pai
se
Sowecanwr
it
e68.
09/68.
11 December:41/
43pai
se
Thi
sisdi
rectquot
esoBUYLOW ANDSELLHI
GH Mar
gint
obechar
ged0.
05pai
seperUSD.

Sol
uti
on4: Weneed3t
hingsspot
,pr
emi
um andmar
gin
1-
NowSPOT=68.
45
Buy
ing Sel
li
ng
2-Pr
emi
um =0.
30
USD/
INR 68.
45 68.
50
(
butwhy
,whynot0.
41asi
tsay
sDecember
)
OctPr
emi
um 0.
18 0.
19
3-Mar
gin=0.
05
NovPr
emi
um 0.
30 0.
32
DecPr
emi
um 0.
41 0.
43
Nowi
fyouar
ebuy
ingt
hen
For
war
dbuy
ingr
ate=SPOT+PREMI
UM -MARGI
N
*
Mar
gint
obechar
gedi
son1Dol
lar=0.
05pai
sa =68.
45+0.
30+0.
05=68.
70
*
Nowdeci
dedbuy
ingorsel
li
ngr
ate?(
expor
tbi
ll
)

RuleforPremium :Whenbuyi
ngifful
lmonthorlast
*
Buy
ingr
atewi
llbeappl
icabl
eso dateofmont h(l
ike31Decemberetc,
30Junei s
notwrit
tenalwaystakepr
emium ofprev
iousmont h.
Buy
ing
USD/
INR 68.
45
I
fsell
ingthent
akethesamemont
hinwhi
cht
hebi
ll
OctPr
emi
um 0.
18
i
sreali
zedorpaymenti
sdone.
NovPr
emi
um 0.
30
DecPr
emi
um 0.
41
Joi
nCAI
IBWI
THASHOKonYouTube
Example3:Reti
rementofimportbi
llf
orGBP Sel
li
ng
1,
00,000/
-byTTmargin0.20%,
ignor
ecash
GBP/
USD 1.
2185
di
scount/pr
emi
um.
USD/
INR 68.
15
GBP/
USD=1.
2175/
85
USD/
INR=68.
14/
15
*
NowGBP/ INRisnotgi
vendi
rect
lysoweusecr
oss
Comput
ether
atef
orcust
omer
.
r
atemechanism.

Sol
uti
on3: GBP/
INR=GBP/USD*
USD/
INR
WeneedGBP/
INR =1.
2185*
68.
15=83.
0408
GBP/
INR=83.
0408
Buy
ing Sel
li
ng
GBP/
USD 1.
2175 1.
2185 *
Cal
cul
atemar
gin:0.
20%of83.
0408
USD/
INR 68.
14 68.
15 Mar
gin=0.
1660

*
Nowdeci
dedbuy
ingorsel
li
ngr
ate? *
Nowt
hisi
ssel
li
ngsoMar
ginshoul
dbe?
(
ret
ir
ementofi
mpor
tbi
ll
) Bi
llsel
li
ngr
ate=SPOT+Mar
gin
Sobi
l
lsel
l
ingr
ate =83.
0408+0.
1660=83.
2068

Sobuy
ingr
ate.
Example6:Yourforei
gncorrespondent
Buy
ing
maintai
ningaNOSTROr upeeaccountwanttofund
hi
saccountbypurchaseofRs30mi ll
ionagai
nstUS USD/
INR 68.
2550
doll
ars.
AssumingthatUSD/I
NRi nt
erbankmar
keti
sat
68.
2550/2650whatratewouldbequotedt
othe
Sor
atequot
edbyy
oui
sUSD/
INR=68.
2550
corr
espondent,
ignor
ingexchangemar
gin.
SO1USD=68.
2550Rs
Cal
cul
ateamountofUSDy ouwil
lrecei
vei
nur
NOSTROaccount
,ifdeali
sstr
uck.
Sol
uti
on6: And1Rs=1/
68.
2550USD
so30mi
l
lionRs=30*
1000000*
1/68.
2550USD
Buy
ing Sel
li
ng 30mi
ll
ionRs=4,
39,
528.
24/
-USD
USD/
INR 68.
2550 68.
2650

t
hatUSD/
INRspoti
s68.
45/
50and
*
Nowdeci
dedbuy
ingorsel
li
ngr
ate? For
war
dpr
emi
um i
sasunder
(
cust
omerwantt
opur
chaseof30mi
ll
ionRs)

Joi
nCAI
IBWI
THASHOKonYouTube
Example5:On1June2016, acustomerr
equest
s Buy
ing Sel
li
ng
tobookforwardcont
ract,
forret
ir
ementofimpor
t
USD/
INR 68.
27 68.
29
bil
lforUSD1,00,
000/
-,dueforpaymenton
JunePr
emi
um 0.
10 0.
12
15Sept
ember2016.
Jul
yPr
emi
um 0.
21 0.
23

Gi
venr
ates: AugPr
emi
um 0.
32 0.
34

*
SpotUSD/
INR68.
27/
29 SepPr
emi
um 0.
43 0.
45
Augt
o15Sep 0.
06 0.
07

*
For
war
dPr
emi
um :
SpotJune10/
12 *
Nowdecidedbuyi
ngorsel
li
ngrat
e?(
impor
tbi
ll
r
eti
rement
)Soit'
ssel
li
ngrat
e:
SpotJul
y21/
23
Sel
li
ng
SpotAugust32/
34
USD/
INR 68.
29
SpotSept
ember43/
45&
Augustt
o15t
hSept
ember6/
7 JunePr
emi
um 0.
12
Jul
yPr
emi
um 0.
23

*
Char
geMar
ginof0.
20%onspotr
ate. AugPr
emi
um 0.
34
SepPr
emi
um 0.
45

Sol
uti
on5: Augt
o15Sep 0.
07

Weneed3t
hing
1-
Spot
2-For
war
dpr
emi
um
3-
Mar
gin
*
Spot=68.
29
*Premium (15Sept embernormal l
yweneedt ot ake
premium ofSept embermont hincaseofsel l
ing
ratebutsinceAugustt o15Septemberr at
eis
avail
ablesowewi l
l notuseSeptember (
ful
lmont h)
premium sot akeAugustpr emium fi
rstandthen
add15day spremium ofSept ember)
Pr
emi
um =0.
34+0.
7=0.
41
Sel
li
ngr
ate=SPOT+PREMI
UM =68.
29+0.
41=68.
70

Nowcal
cul
ateMar
gin=0.
20%of68.
70=0.
14
SoFi
nalsel
li
ngr
ate=68.
70+0.
14=68.
84

Joi
nCAI
IBWI
THASHOKonYouTube
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 2: Liberalised Remittance Scheme (LRS) and
other Remittance Facilities for Residents (PART-I)
What we will study?
*What is Liberalised Remittance Scheme (LRS scheme)?
Join CAIIB WITH ASHOK on YouTube & App
Example: A resident individual by investing abroad in the
equity of the Overseas Company obtains shares allotted in
his/her favor resulting in creation of an asset outside India.
Likewise, a resident individual by investing in property abroad
gets the ownership of the property purchased resulting in
creation of an asset outside India.
CURRENT ACCOUNT TRANSACTIONS:
Foreign Exchange Management Act (FEMA Act 1999), Sub-
section 2 (j) define that Current Account Transaction means a
transaction other than Capital Account Transaction and
includes payments connected to trade, interest on loans and
income on investments, expenses connected to travel, family
maintenance, medical treatment, etc.
Example: A parent remitting funds to the dependent son/
daughter abroad towards education expenses, maintenance
of the student abroad, etc.
Join CAIIB WITH ASHOK on YouTube & App
INTRODUCTION:
Liberalised Remittance Scheme (LRS scheme) for resident
individual was introduced w.e.f. 04th Feb 2004.
The scheme facilitates resident individuals to remit funds
abroad for permitted current or capital account transactions
or a combination of both.
LRS is available to:
The scheme is available to resident individuals (including
Minors).
LRS is not available to:
Corporates, Partnership Firms, HUFs, Trusts and NRIs are not
eligible.
CAPITAL ACCOUNT TRANSACTIONS:
Foreign Exchange Management Act (FEMA Act 1999), Sub-
section 2 (e) defines that Capital Account Transaction means a
transaction which alters the assets or liabilities, including
contingent liabilities, outside India of persons resident in India
or assets or liabilities in India of persons resident outside India.
Join CAIIB WITH ASHOK on YouTube & App
KEY SECTIONS UNDER FEMA ACT 1999:
Section 4:
Holding of foreign exchange, etc. - No person resident in India,
shall acquire, hold, own, possess or transfer any foreign
exchange or foreign security or any immovable property
situated outside India, unless it was acquired while being a
non-resident.
However, due to liberalization, resident individuals are
permitted to invest abroad in property or equity - subject to
adhering to the extant guidelines.
Section 6:
Any person may sell or draw(buy) foreign exchange to or from
an Authorized Person for a capital account transaction i.e.,
any class or classes of capital account transactions which are
permissible and the limits up to which such transactions are
permissible as per the extant regulations under the Act.
Section 10(6):
Any person (other than the Authorized Person) who has
acquired or purchased foreign exchange for any purpose
mentioned in the declaration made by him to authorized
person under sub-section (5) does not use it for such purpose
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
or does not surrender it to the authorized person within the In a nutshell, this section is about how foreign exchange
specified period. business has to be conducted by Authorized Persons and the
power of RBI to penalise APs in case of any breach in
If such foreign exchange is not used or uses the foreign
procedure.
exchange so acquired or purchased, for any other purpose not
permissible under the provisions of the Act, shall be deemed Section 13:
to have committed contravention of the provisions of the Act.
Any person contravenes any of the provisions of the FEMA Act
In a nutshell, this section is about utilization of foreign or contravention of any rule, regulation or notification, shall
exchange availed from an Authorized Dealer for the purpose upon adjudication be liable to pay penalty up to thrice the
for which such foreign exchange has been availed. amount involved in such contravention where such amount is
quantifiable or up to Rs. 2,00,000 where the contravention is
Section 11:
not quantifiable.
The Reserve Bank may, for the purpose of securing
Where the contravention is a continuing one, further penalty
compliance of the provisions of this Act, RBI may give any
may extend up to Rs. 5,000 for every day after the first day
directions to the Authorized Person with regard to making
during the period of such contravention.
payments or doing or desist from doing any act relating to
foreign exchange or foreign security. In a nutshell, this section is about the penalties which may be
imposed for contraventions of the provisions of the FEMA.
RBI may direct any authorised person to furnish such
information, in such manner, as it deems fit.
Failure to furnish such information or filing any returns, after
giving reasonable opportunity of being heard, RBI may impose
penalty which may extend to Rs. 10,000 and in case of
continuing contravention, with an additional penalty which
may extend to Rs. 2,000 for every day.

Join CAIIB WITH ASHOK on YouTube & App
PERMISSIBLE /NON-PERMISSIBLE REMITTANCES UNDER LRS:
There are 3 schedules in LRS:
1- Schedule I – Non-permissible remittances i.e. Prohibited
remittances.
2- Schedule II – Remittances permissible subject to approval of
the respective Government Departments / Ministries.
3- Schedule III - Remittances for resident individuals –
Permissible under the delegated powers of the Authorized
Dealers.
Schedule I – Non-permissible remittances (Prohibited
remittances)
The following remittances are not permitted:
*Remittances for margins or margin calls to Overseas
exchanges/Overseas Counterparties.
*Payment of commission on exports made towards equity
investments in Joint Ventures (JVs) / Wholly Owned
Subsidiaries (WOS) abroad.
*Payment related to “Call Back Services” of telephones.
*Remittance towards banned/proscribed magazines.
*Purchase of foreign currency convertible bond (FCCBs) issued
by Indian companies abroad.
Join CAIIB WITH ASHOK on YouTube & App
*Remittance of dividends by any company to which the
requirement of dividend balancing is applicable.
*Remittance of interest income on funds held in Non-Resident
Special Rupee accounts.
*Remittance out of lottery winnings, remittance for purchase
of lottery tickets.
*Remittance of income from racing, riding or any other hobby.
*Payment of commission on exports under Rupee State Credit
Route.
Schedule II – remittances permissible subject to approval of
the respective Government Departments/Ministries
Remittances towards Cultural tours – approval from
Department of Education and Culture - Ministry of Human
Resources Development.
Advertisements in Foreign Print Media by State Governments
/PSU Undertakings – Ministry of Finance.
Remittances towards Freights of Vessels chartered by PSUs –
Ministry of Road Transport.
Payment of Imports through Ocean Transport on CIF basis by
Government dept/PSUs – Ministry of Road Transport.
 Join CAIIB WITH ASHOK on YouTube & App
Remittances of hiring charges of transponders by TV Channels,
Internet Service Providers, etc. – Ministry of Information &
Broadcasting, Ministry of Information Technology.
Remittance of prize money, sponsorship of sports activities
abroad by a person other than International/ National/State
level sports bodies and where the amount involved exceeds
USD1,00,000 - Department of Youth Affairs & Sports, Ministry
of Human Resources Development.
Schedule III - Remittances for resident individuals –
permissible under the delegated powers of the Authorized
Dealers
● Private visits to any country (other than Nepal & Bhutan)
● Gift or donation
● Going abroad for employment
● Emigration
● Maintenance of close relatives abroad
● Travel for business by resident individuals - attending
international conferences, specialized training, etc.
● Accompanying as attendant to a patient going abroad for
medical treatment.
Join CAIIB WITH ASHOK on YouTube & App
No restrictions on the frequency of remittances in an FY.
However, once a remittance limit of USD 2,50,000 is utilized in
an FY, no further remittance is allowed. Even, if the proceeds
of investments have been brought back in to the country in
respect of investments abroad.
If a sole proprietorship firm intends to remit the money under
LRS by debiting its current account then the eligibility of the
proprietor in his individual capacity has to be reckoned.
International Credit Cards, International Debit Cards and ATM
Cards can be used for current account transactions.
Citizens of a foreign state (other than Pakistan) and resident in
India on account of employment or deputation of specified
duration or for a specific job or assignments, the duration of
which does not exceed 3 years, is a resident but not
permanently resident.
Such individuals are eligible to make remittances under LRS
subject to deduction of taxes, contributions to Provident Fund
and other deductions.
Any amount in excess of the LRS limits requires prior approval
from RBI.
If the applicant seeking remittances is a new customer of the
Bank, AD should carry out due diligence on the opening and
maintenance of the account.
Join CAIIB WITH ASHOK on YouTube & App
● Expenses in connection with medical treatment abroad
● Studies abroad
● Purchase of Objects of Art subject to Foreign Trade Policy
● Others viz., remittances towards health insurance, etc.
OPERATIONAL GUIDELINES:
General Guidelines:
PAN is mandatory under the LRS scheme irrespective of the
amount of remittance.
Remit funds abroad for permissible current (Schedule III
remittances) or permissible capital account transactions or a
combination of both.
Customer to designate a particular branch of the Bank
through which all remittances (under LRS) are to be made,
especially, with regard to capital account transactions.
Transactions freely allowed up to an overall limit of USD
2,50,000 per FY for any permissible current or capital account
transactions or combination of both.
Join CAIIB WITH ASHOK on YouTube & App
AD should obtain bank statement for the previous year to
satisfy itself about the source of funds or if the bank
statement is not available, copy of the ITR to be obtained.
Source of funds – examining the statement of account to
ensure the previous credits in the accounts with transaction
summary, STRs filed, if any, in respect of transactions in the
account.
Documentation:
RBI does not prescribe the documents which should be
verified by the AD while permitting remittances for various
transactions, especially, current account transactions.
The following are the documents which generally need to be
obtained while handling requests from Residents for
remittances towards LRS:
(a) Form A2 vis-à-vis FEMA Declaration – Online submission of
Form A2 allowed.
(b) Simplified documentation for individuals for amounts up
to USD 2,50,000 subject to the satisfaction of the AD Bank.
(c) Declaration of source of funds.
(d) PAN, irrespective of the amount.
 Join CAIIB WITH ASHOK on YouTube & App
(e) Copy of confirmed ticket and VISA, if the remittance is for
travel abroad.
(f) Where the services of Tour Operators are being availed, the
tour operator can collect the amount from the resident
individual either in INR or in FC.
In which case the tour operator can open a Special foreign
currency account with a Bank in India.
(g) Tax Collected at Source (TCS) applicable in respect of
release of exchange by the tour operators irrespective of the
threshold limits.
Join CAIIB WITH ASHOK on YouTube & App
REMITTANCES UNDER LRS FOR CURRENT ACCOUNT
TRANSACTIONS:
Private visits to any country (other than Nepal & Bhutan):
For private visits abroad, other than to Nepal and Bhutan, any
resident individual can obtain foreign exchange up to an
aggregate amount of USD 2,50,000 from an Authorised Dealer,
in any one financial year, irrespective of the number of visits
undertaken during the year.
Irrespective of the number of visits undertaken in a FY, cash
towards release of exchange can be accepted up to Rs.
50,000/- beyond which transaction to be routed through the
A/C.
Foreign Currency notes may be released up to limits permitted.
Unutilized foreign exchange to be surrendered to the AD
within 180 days from the date of return to India.
Note:
Release of foreign exchange in form of foreign currency (FC)
notes (cash):
(a) Foreign exchange in full may be released in the form of FC
Notes or up to the cash limit specified by the Haj Committee
of India, to the Haj Pilgrims.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 2: Liberalised Remittance Scheme (LRS) and
other Remittance Facilities for Residents (PART-II)
What we will study?
*More about Current Account Transactions under LRS?
*How much TCS to be deducted for LRS transactions?
*More about Capital Account Transactions under LRS?
Join CAIIB WITH ASHOK on YouTube & App
(b) Travellers proceeding to Islamic Republic of Iran, Russian
Federation (including erstwhile CIS countries) – full exchange
may be released in the form of FC Notes.
(c) Travelers proceeding to Iraq and Libya - USD 5000/-
(d) All other countries - USD 3000/-
Who is relative as per Companies Act 2013:
Companies Act, 2013 defines “relative" as "one who is related
to another" if:
(a) They are members of HUF,*Documentary evidence,
wherever applicable.
(b) They are husband and wife,
(c) One person is related to other in such a manner as
prescribed under the Act.
i.e., father (including step father), mother (including step
mother), brother (including step brother), sister (including
step sister), son (including step son), daughter, daughter’s
husband, etc.
 Join CAIIB WITH ASHOK on YouTube & App
Note:
(i). Certain relatives who were included under Companies Act
1956 are not included under the definition of relative for
gifting under Companies Act 2013.
These excluded persons are:
Step daughter, father’s father, father’s mother, mother’s
father, mother’s mother., Son’s son., Son’s son’s wife, son’s
daughter, son’s daughter’s husband, daughter’s son,
daughter’s son’s wife, daughter’s daughter’s husband,
brother’s wife, sister’s husband.
(ii) A resident cannot gift to another resident, in foreign
currency or foreign security, for the credit of the latter’s
foreign currency account held abroad, under this scheme.
Donation to a person outside India or to an Organization
outside India:
Any resident individual may remit up-to USD 2,50,000 in one
FY as gift to a person residing outside India or as donation to
an organization outside India.
Join CAIIB WITH ASHOK on YouTube & App
Maintenance of Close relatives abroad:
A resident individual can remit up-to USD 2,50,000 per FY
towards maintenance of relatives abroad.
[‘relative’ as defined in Section 2(77) of the Companies Act,
2013].
Purchase of Objects of Art: subject to Foreign Trade Policy,
Resident Individuals importing objects of art for personal
purposes not connected with trade or commercial purpose.
Business trips:
Visits by individuals in connection with attending of an
international conference, seminar, specialised training,
apprentice training, etc., are treated as business visits.
For business trips to foreign countries, resident individuals can
avail of foreign exchange up to USD 2,50,000 in a FY
irrespective of the number of visits undertaken during the
year.
(a) Travel for business. *1
(b) Attending conferences. * 2
(c) Specialized training. * 3
Join CAIIB WITH ASHOK on YouTube & App
Emigration – as prescribed by the country of Immigration:
A person wanting to emigrate can draw foreign exchange
from AD Bank up to the amount prescribed by the country of
emigration or USD 2,50,000.
Foreign exchange beyond USD 2,50,000 may be released if it is
so required by the country of Emigration[from] for meeting
any incidental expenses in the country of Immigration[to]
subject to suitable documentary evidence submitted by the
individual to the satisfaction of the AD Bank.
This should not, be for earning points /credits to become
eligible for Immigration[to] by way of Overseas Investments in
Government Bonds, Lands, Commercial Enterprises, etc.
Foreign Bank guarantees towards Overseas employers/
Immigration not permitted.
Going abroad for employment:
A person going abroad for employment can draw foreign
exchange up to USD 2,50,000 per FY from any Authorised
Dealer in India.
Join CAIIB WITH ASHOK on YouTube & App
*1, *2, *3 If an employee is being deputed by an entity for any
of the above and expenses are borne by the Company; these
are outside the purview of the LRS and may be permitted
without any limit.
Expenses in connection with medical treatment abroad:
Authorised Dealers may release foreign exchange up to an
amount of USD 2,50,000 or its equivalent per FY without
insisting on any estimate from a hospital/doctor.
For amount exceeding the above limit, Authorised Dealers
may release foreign exchange under general permission based
on the estimate from the doctor in India or hospital/doctor
abroad.
A person who has fallen sick after proceeding abroad may also
be released foreign exchange by an Authorised Dealer
(without seeking prior approval of the Reserve Bank of India)
for medical treatment outside India.
In addition to the above, an amount up to USD 2,50,000 per
financial year is allowed to a person for accompanying as
attendant to a patient going abroad for medical treatment/
check-up.
 Join CAIIB WITH ASHOK on YouTube & App
Studies abroad: After having obtained admission in the
Overseas University.
Note:
(a) Foreign exchange beyond USD 2,50,000 may be released if
it is so required by the University where the admission is
secured, subject to suitable documentary evidence submitted
by the individual to the satisfaction of the AD Bank.
(b) Foreign Bank guarantees towards educational purposes in
favour of Overseas Universities/entities are not permitted.
In terms of FEMA, students going abroad for studies are
considered as NRIs and the existing resident account needs to
designated as NRO in which case they can make use of
remittance facilities available to NRIs.
Customer
They can remit up to USD 1 Million from their NRO accounts
A 6,50,000 Date: Apr 04,
per FY provided the credits in the NRO are legitimate dues,
due in India, to the erstwhile resident.
TAX COLLECTED AT SOURCE (TCS):
The Finance Act, 2020 has a new insertion in the Income Tax
Act on Tax Collected at Source (TCS) at 5% on foreign
remittance LRS, with effect from 1st October 2020.
Join CAIIB WITH ASHOK on YouTube & App
Rs 7 lakh earlier)
Customer Makes a remittance of Rs 5% tax will be collected on
B 20,00,000 in the same FY Rs 13,00,000 (Rs 20,00,000
Date: Apr 30, 2020 – 7,00,000
Customer Makes a remittance of Rs 0.5% tax will be collected
C 10,00,000 for pursuing on Rs 3,00,000 (Rs
education through a loan 10,00,000 – 7,00,000
obtained from any
Financial Institute.
TCS is applicable only on the remittances made under LRS
Scheme and remittances other than LRS such as remittances
by non-individuals, remittances for payment of import of
goods or services, etc. are not subject to TCS provisions.
Join CAIIB WITH ASHOK on YouTube & App
The threshold for TCS is Rs 7 lakhs for an entire FY and TCS is
applicable only on the remittance amount that exceeds the
annual cap of Rs 7 lakhs.
● In case of non-availability of PAN/AADHAR – TCS is at 10%.
● TCS is also applicable for transactions involving transfer
from domestic rupee account to the NRO account under LRS.
● Remittances under LRS, towards studies abroad where the
source of funds is educational loan, 0.5% will be the TCS and
applicable over the threshold limit of Rs. 7 lakhs.
Given below are some examples for levy and calculation of
TCS, under LRS:
Makes a remittance of Rs No tax will be collected
202
Makes a remittance of Rs 5% tax will be collected on
9,50,000 Date: May 05, Rs 9,00,000 (Rs
2020 6,50,000+9,50,000–
7,00,000)
Makes a remittance of Rs 5% tax will be collected on
40,000 Date: Dec 10, 2020 incremental Rs 40,000 (as
the remitter has crossed
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 2: Liberalised Remittance Scheme (LRS) and
other Remittance Facilities for Residents (PART-III)
What we will study?
*What are the Capital Account transactions allowed
under LRS?
*All about Remittances under LRS for Overseas Direct
Investments (ODI)?
 Join CAIIB WITH ASHOK on YouTube & App
What is International Financial Services Centre (IFSC)?
An International Financial Services Centre (IFSC) is a financial
centre that caters to customers outside the jurisdiction of the
domestic economy.
It is also known as an offshore financial centre since it deals
with flow of finance, financial products and services across
borders.
CAPITAL ACCOUNT TRANSACTIONS under LRS:
Remittances to International Financial Services Centres
(IFSCs):
With a view to deepen the financial markets in the
International Financial Service Centers (IFSCs), an opportunity
is provided to the resident individuals to diversify their
portfolio wherein residents are permitted to make
remittances under LRS to IFSCs, set up in India under the
Special Economic Zone (SEZ) guidelines, subject to the overall
limit permissible under the extant guidelines.
The following provisions need to be adhered to by the
resident individuals:
● The remittances shall be made only for making investments
in IFSCs in securities, other than those issued by entities/
companies resident (outside IFSC) in India.
Join CAIIB WITH ASHOK on YouTube & App
4. Acquisition of shares of a foreign company towards
professional services rendered or in lieu of Director’s
remuneration.
5. Units of Mutual Funds, Venture Capital Funds, Unrated debt
securities, Promissory Notes, etc.
6. Setting up of JVs/WOS outside India where the JV/WOS is
engaged in a Bonafide business activity*.
(c) Extending loans including loans in INR to NRIs who are
close relatives.
*A resident individual is prohibited from making direct
investments in a JV/WOS which is engaged in the following:
1. In real estate business,
2. Banking business, or
3. In the business of financial service activities.
The following are also to be complied with reference to LRS
for capital account transactions:
(a) The resident individual to designate a Branch of an AD
Bank through which all the remittances relating to Capital
account transactions are to be effected.
Join CAIIB WITH ASHOK on YouTube & App
● Opening of a non-interest-bearing Foreign Currency account
(FCA) in IFSCs permitted for making the above permissible
investments under the LRS.
● Any funds lying idle in the account for a period up to 15 days
from the date of credit into the account shall be immediately
repatriated to domestic INR account of the investor in India.
● No domestic transactions are permissible to be settled with
other residents through these FCAs held in IFSC.
AD Banks allowing such remittances on behalf of resident
individuals shall comply with all other terms and conditions
including reporting requirements under the Scheme.
Remittances of capital account nature transaction can be
made, under LRS, for the following:
*Opening of foreign currency accounts abroad.
(a) Purchase of Immovable Property abroad.
(b) Making Investments abroad in the form of:
1. Acquisition & holding of shares both in Listed/Unlisted Cos.
2. Acquisition of debt instruments.
3. Acquisition of qualification shares of an Overseas Co., for
holding the post of Director.
Join CAIIB WITH ASHOK on YouTube & App
(b) The individual should have maintained account with the
Branch for a minimum period of one year prior to the date of
remittance and the dealings should be satisfactory.
(c) Investment in Property by resident individuals up to the
limit of USD 250,000 in a FY.
(d) No Credit facilities to be extended to facilitate capital
account transactions.
(e) Remittances can be consolidated in respect of family
members subject to individual family members complying
with the terms & conditions & all the family members are co-
owners, co-partners of the Overseas Property, i.e., Joint
ownership.
Remittances under LRS for Overseas Direct Investments (ODI):
*A resident individual (either singly or in association with
another resident individual/Indian party), may make Overseas
Direct Investments in equity shares and compulsorily
convertible preference shares of a JV/WOS outside India.
*Direct Investment outside India means (Regn. 2 (e)):
(i) Investments by way of contribution to the capital.
(ii) Subscription to Memorandum of Association of the foreign
entity.
 Join CAIIB WITH ASHOK on YouTube & App
(iii) Purchase of existing shares of a foreign entity either by
market purchase or private placement or through stock
exchange but does not include Portfolio Investments.
*A resident individual is prohibited from making direct
investments in a JV/WOS which is engaged:
(i) In real estate business,
(ii) Banking business, or
(iii) In the business of financial service activities.
*Investments can be either in listed companies or unlisted
companies or a combination of both subject to a maximum
overall limit for all purposes put together at USD 250,000/FY.
*No credit facilities to be extended to facilitate capital
account transactions.
*Opening of Bank account abroad permitted for facilitating
and putting through the investment transactions.
*Remittances can be consolidated in respect of family
members subject to individual family members complying
with the terms and conditions and all the family members are
co-owners, co-partners of the Overseas Investments.
Join CAIIB WITH ASHOK on YouTube & App
*The JV/WOS should be an operating entity only and no step-
down subsidiary is allowed to be acquired by the JV/WOS.
Step Down Subsidiary mean subsidiaries of direct subsidiary.
The permissible ceiling shall be within the overall limit under
LRS and the investments made out of balances in the
EEFC/RFC accounts shall be restricted to the LRS limit.
Resident individuals should not be on the RBI Caution list or
list of defaulters to the banking system or under Investigation
by any Investigation or Enforcement Agency or regulatory
body concerned.
Documentation for ODI:
(a) Form A2 vis-à-vis FEMA Declaration – Online submission of
Form A2 allowed.
(b) Simplified documentation for individuals for amounts up
to USD 25,000 subject to the satisfaction of the AD Bank*
(c) Declaration of source of funds.
(d) PAN CARD.
(e) Form ODI (in respect of investment in WOS/JV abroad).
Join CAIIB WITH ASHOK on YouTube & App
*In respect of investments in the existing JV/WOS, valuation
shall be as follows (Regn. 6 (6)):
(i) Where investments are more than USD 5 Mn (or equivalent
in other currencies), valuation by Category I Merchant Banker
registered with SEBI or an Investment Banker/Merchant
Banker outside India registered with appropriate regulatory
authority in the host country.
(ii) Where investments are less than USD 5 Mn (or equivalent
in other currencies), a Certificate by a C.A. or a C.P.A.
*Repatriate all dues viz., Dividends, Royalties, Technical fees,
etc., within 60 days of such amounts falling due.
*Disinvestments shall be allowed only after one year from the
date of making the first investment.
*No write-off allowed in respect of disinvestments by resident
individuals.
*A resident individual is prohibited in making Direct
Investments in FATF Non-compliant countries.
*The JV/WOS should be engaged in Bonafede business
activity.
Join CAIIB WITH ASHOK on YouTube & App
Part I of Form ODI to be submitted within 30 days of making
the first remittance.
Designated AD Bank to report to RBI in Form ODI (Part I & II)
within 30 days from the date of making the remittance by the
resident individual.
*Documentary evidence, wherever applicable.
Resident individual should submit share certificates/any other
document as evidence, within 6 months from the date of
making the remittance.
Post investment changes/alterations in share holding pattern
to be reported to the Designated AD within 30 days from date
of such changes.
Submit every year, before 31st December, the Annual
Performance Reports - APRs.
Foreign Liabilities and Assets (FLA) report is not required.
Disinvestments allowed after one year from the date of
remittance.
Disinvestments shall be repatriated to India immediately and
in any case not later than 60 days from date of disinvestment
& same is to be reported to the designated AD within 30 days
from the date of receipt of disinvestment proceeds.
 Join CAIIB WITH ASHOK on YouTube & App
Loans by resident individuals to NRI close relatives:
Resident individual is permitted to lend to a Non-resident
Indian (NRI)/ Person of Indian Origin (PIO) by way of crossed
cheque/ electronic transfer subject to the following
conditions:
Loan is free of interest.
Minimum maturity of loan is one year.
For borrower’s personal requirements or for business
purposes.
Loan shall not be utilized for:
(a) Business of chit funds/Nidhi funds.
(b) Agricultural, plantation or real estate activities,
construction of farm houses, trading in TDRs, etc.
Proceeds may be credited to the NRO account of the NRI/PIO.
The loan amount shall not be remitted outside India.
Repayment shall be from inward remittances or transfer from
NRO/NRE/FCNR accounts.
Join CAIIB WITH ASHOK on YouTube & App
REPORTING REQUIREMENTS UNDER LRS:
Earlier reporting of LRS by the AD Banks was based on the
declarations made by the resident individuals and no
independent reliable sources for verification were available.
However, with effect from April 2018, a daily reporting system
by AD Banks of transactions undertaken by the resident
individuals has been put in place by RBI.
(a) ADs are required to upload daily transaction-wise
information undertaken by them under the LRS.
(b) The reporting of daily transactions is to be reported on the
XBRL platform by close of business of the next working day.*
(c) NIL report to be uploaded if there are no transactions on a
particular business day.
(d) The data on such daily reporting is made available to all
the AD Banks.
*XBRL site through the URL https://secweb.rbi.org.in/orfsxbrl/

Joi
nCAI
IBWI
THASHOKonYouTube WhyweneedofI
nter
nat
ionalbanki
ng:
BFM-MODULE-A ThelargenumberotIndi
ansIivi
ngabr oad,send
remit
tancest
otheircountr
y,forsustenanceotthei
r
Chapt
er3:Cor
respondentBanki
ng
nearanddearones,asalsoforsavingspurposes.
Whatwewi
llst
udy:
NRIfundsconst
it
utealargecorpus,
fort
he
*
Whati
sCor
respondentBanki
ng countr
y'sFOREXresour
ces,andhaveaplaceof
*
Whatser
vicesar
eof
fer
edbyCor
respondentbanks i
mpor t
anceofit
sown.
*
Whati
sNOSTOACCOUNT
*
Whati
sVOSTROACCOUNT CORRESPONDENTBANKI
NG:
*
Whati
sLOROACCOUNT
*
Whati
sMI
RRORACCOUNT Correspondentbanki
nginit
struesense,isthe
rel
ationshi
pbetweentwobankswhi chhav emutual
accountswitheachother
,oroneoft hem has
Repat
ri
abl
e:Repat
ri
abl
efi
nanci
alasset
sar
e accountwiththeother
.
fi
nancialassetscapabl
eofbeingwithdrawnfrom
anaccounti naforei
gncountryandbeingdeposit
ed
toanaccounti naninvest
or'
scountr
yofr esi
dence
orci
tizenshipand Howev er,
inalar
gersense,t
hismeansa
i
fthef
inanci
alasseti
sacur
rency
,it
sconversi
on rel
ati
onshipandservi
cingofbanki
ngneeds,as
f
rom f
orei
gncurrencyt
ohomecountrycur
rency. agents,wit
houthav
ingaccountrel
ati
onshi
palso.
Becauseitwasnotpossi
blet
ohaveandmai
ntai
n Thusthecorrespondentbanki ngsystem al
lows
account
swithalar
genumberofbanks. bankstotakeadv antageofthebusiness
opport
unit
iesinot hercountr
ies,wit
houtabr anch
networkofit
'sownandwi thmi ni
mum operat i
onal
Thus,cor
respondentbankingisapract
ice,wherea costs.
bankisabletohandlebusinessi
nanotherci t
yor
countr
y,t
hroughlocalbanksther
e, t
helocalbank
acti
ngasanagentoft heformer,andchargingfees
fort
heservicesr
endered. Funct
ionsHandledorser
vicespr
ovi
dedby
Corr
espondentBanks:
Benef
it
sofCor
respondentbanki
ng: 1-AccountSer
vices
2-
BankAccount
s
Thi
ssyst
em el
iminatestheneedt ohav
eaglobal
net
workofbr
anches, whi
chI nvol
veshi
ghcost
sand
AccountSer
vices:
vol
umestoserv
icethebr anches.

Further
,itwasnotpossi blef
orallint
ernati
onal
a)Cl
ear
ingHousef
unct
ions:Thecor
respondent
bankstoobt ai
nper missionforopeningofbranches bankoffer
sserv
icesrelat
edtohandl
ingofout
ward
i
nsev eralcountr
ies,duet or
estri
ctedforei
gnbank payments,r
ecei
ptsofinwardpaymentsand
branchlicensi
ngpolici
esadopt edbysome col
lect
ionthr
oughtheaccountmaintai
nedwit
hit
.
countri
es.

b)Col
lect
ions:
Cor
respondentbankspr
ovi
de Joi
nCAI
IBWI
THASHOKonYouTube
servi
cesasagentstocollecti
onofexpor t/
impor
t
bil
lsaswellascheques,i
nt heircountr
y.Theyal
so
F)Ot
herSer
vices:
creditt
hepr
oceedsofsuchcol lecti
onsaft
er
real
izati
ont
ot heaccountmai ntainedwit
hthem. Theseserviceswouldnotnormallyrequir
eaccount
rel
ati
onship,andcanbeofferedonst andalone
C)Payments:Thecorrespondentbankhandl
esand
basisdependingupontherel
ationshipandcr edi
t
execut
esallpaymentInstr
ucti
onsofthecli
entbank,
assessmentbyt hecor
respondentbank.
bydebit
ingtotheacountmaintainedwi
thit
.
i
)Let
terofCr
edi
tadv
isi
ng
i
i)LCconf
ir
mat
ions(
LineofCr
edi
t)
D)Ov erdraft
sandloanf aci
li
ty:Thecor
respondent
bank,byv ir
tueofhav i
nganaccountoftheclient i
ii
)Banker
sAccept
ances
bank,alsogr ant
sov er
draft
sfortemporaryneeds, i
v)ssuancesofGuar
ant
ees
say,overnight,t
ofi
llupshort-
termfundi
nggaps.
v)Forei
gnExchangeser
vices,
incl
udi
ngder
ivat
ive
E)Invest
mentServ i
ces:Thecorrespondentbank product
s
off
ersservi
cesrelatedtoinvest
mentofov erni
ght
surpl
usbalancesint heaccount
,beyonda vi
)Otherfundr
aisi
ngserv
ices,l
ikepl
acementof
minimum pegbalance, att
hedomest i
ccallrat
es shar
es,bonds,
ADR/ GDRectc.
minusasmal lmargin. v
ii
)Tr ai
ningandseminar
sonv
ari
oust
opi
cs/
on
ForAtoEbankneedaccountwi
tht
he l
atestdevelopment
s.
corr
espondentbank
 BankAccount
s: LOROaccount:I
tret
erst
oaccount
sofot
herbanks,
i
.e."
Thei
raccountwit
hthem"
.
Theforei
gncur
rencyaccount
smai nt
ainedbya
bank,wit
hanot
herbankareclassi
fi
edasNOSTRO Forexampl
e
andLOROaccounts. 1-Ci
tiBank(
NY)r
efer
ri
ngt
o
RupeeaccountofAmer
icanExpr
essBank,
wit
h
NOSTROaccount
:Itmeans"
Ouraccountwi
thYou'
". PNBMumbai ,

Forexample,PNB,Mumbaimai
ntai
ningaUSD or
accountwit
hCITIBank,
NewYorkisNOSTRO 2-BankofEngl
andref
err
ingtot
heUSDaccountof
accounti
nthebooksofPNB,Mumbai . PNB,MumbaiwithCit
iBank,
NewYork.
LOROi
sanI
tal
ianwor
dwhi
chl
i
ter
all
ymeansThei
r.
VOSTROaccount
:Itmeans"
Youraccountwi
thUs"
. Hence,
Lor
oaccountmeans"
Thi
rdPar
tyAccount
.
SayAmericanExpr
essBank,NewYork,
maint
ani
ng
aRupeeAccountwithPNB,Mumbai,
isVOSTRO
accounti
nthebooksofPNB,Mumbai. Mi
rr
oraccount
:Whi
leabankmai
ntai
nsNOSTRO
accountwit
haf
orei
gnbank,
(most
lyi
nfor
eign
curr
ency)
,
I
thastokeepanaccountofthesameinit
sbooks.
Thi
sismoreorlessaref
lect
ionorashadowofthe
NOSTROaccount.

Theentri
esinthemir
roraccountar
eusedf
or J
oinCAI
IBWI
THASHOKonYouT
ube
reconci
li
ati
onofent
ri
esintheNOSTROaccount
. BF
M-MODUL
E-A
Themir
roraccountismaintai
nedint
wocurr
encies, Chapt
er3:Corre
sponde
ntBanki
ng(
PART
-II
)
oneofwhichi
sthef or
eigncurr
encyandt
heother
onei
shomecur rency Whatwewi
llst
udy:

Joi
nCAI
IBWI
THASHOKonYouTube ELECTRONI
CMODESOFT
RANSMI
SSI
ON/PAYME
NT
GATEWAYS
SWI
FT
CHI
PS
CHAPS
NEF
T
RT
GS
RT
GS+
SWI
FT:(
HQ:BEL
GIUM) Ol
dme
ssageaut
hent
icat
ionsy
ste
m:(
BKE)

Whatis SWI
FT:SWIF
Tis a sy
ste
mt ot ransmi
t *Thesyst
emhasbuiltinsecuri
tysy stemwi
than
fi
nanci
almessage
sbe
twe
enbanksglobal
ly. automati
cauthent
icat
onoff i
nancialmessage
s
throughbil
ate
ralkeyexchange(BKE).
OR
SWIFTisavastme ssagi
ngne t
workusedbybanks
and ot herf inancial i
nsti
tuti
ons t
o qui ckly, Avai
labi
li
tyofSWI
FT:
accurately, and se curel
y send and rece i
ve I
tisavai
labl
e24hoursadayand365 day
sina
i
nformat i
on, such as mone y t ransfer y
ear.
i
nstruct i
ons.
*
Thesy
ste
miscoste
ffe
cti
ve.
Ne
wme
ssageaut
hent
icat
ionsy
ste
m:(
RMA)
SWI
FTst
andsf
or:
SWIFT has i nt
roduced ne w sy stem of
Socie
ty for Worldwi
de I
nte
rbank F
inanci
al authenti
cation of me ssages be twee n banks,
Tel
ecommuni
cat
ions. whereby banks are re qui
re d t o have a
*Thi
sisacoope rati
vesociety
,owne
dbyme
mbe
r authenti
cation key exchanged bet
ween
banksandf
inancialinst
itut
ions, themselves ,through a setf ormatbyuseof
Rel
ationshipManagementApplicati
on( RMA)
*Swi
ftprovidese cure
dt ele
communi
cati
on and
one point contact with more than 11,000
fi
nanci
alinsti
tut
ions,spre
adover200countries.
J
oinCAI
IBWI
THASHOKonYouT
ube

CHI
PS:
(NY,USA)NET The banks mai nt
aini
ng US dol l
ar Nost ro
account swi t
h anyoft heUS base d banksare
CHI
PS:Cl
eari
ngHouseI
nte
rbankPay
mentSy
ste
m
given a specifi
c UID numbe r,whi
ch facili
tat
es
CHI
PS i
s a maj
or payme
nt sy
ste
mint
he USA, StraightT hrough Processing (
STP)ofmostof
ope
rati
ngsi
nce1970. the Interbank payments and recei
pts,through
*
Iti saf ull
y automated;computer based thesy st
e m.
messagi
ng and netsett
lementpaymentsystem
usedbymaj orbanksforsettl
ementofal arge F
edwi
re:
(USA)GROSS
partofUSdol l
arpaymentsintheUSA.
*CHI
PS was establi
she
d by New York Cl
eari
ng
ThisisanotherUSpay me
ntsy st
em operat
edby
House,asasubstit
utetopape
rche que
s.
FederalRese
rveBank,operat
edal lovertheUS
states si
nce 1918,and handles maj
ority of
*CHI
PSisoperat
iveonl yi
nNe wYork,andassuch, dome st
icpay
ments.
i
smai nl
yuse df orf ore
ign exchangeInt
erbank I
tis an automated comput
er-
base
d me
ssagi
ng
sett
lement
sandE uroDollarsettleme
nts. and pay ment sy st
em, working on gross
sett
lementbasis.

T
hesy
ste
muse
s All US banks mai
ntain account
s wit
hF ede
ral
ReserveBank,andareallottedan"ABAnumbe rs'
CHIP part i
cipant code
s t
o i
dent
ify t
he
to i denti
fy the senders and receive
rs of
parti
cipant
s,and
payme nts.
UI
Dnumbe
rst
oide
nti
fyt
hebe
nef
ici
aryaccount
.
As compare
dt o CHI
PS,t hisisal
argesy
ste
m,
wi
thove r9,
000parti
cipants.
J
oinCAI
IBWI
THASHOKonYouT
ube
T
ARGET
:(EURO)GROSS
CHIPS: Cl
eari
ng House I
nte
rbank Pay
ment Trans-European Automated Real-T
ime Gross
System(
NY) Settle
me ntExpre
ssTransf
ersyst
e m
CHAPS: Cleari
ng House Aut
omat
ed Pay
ment
s
Syste
m(London)
I
tisaEUROpay
mentsy
ste
m.
T
hepre
sentSy
ste
misT
ARGET
2.
CHAPS:(
LONDON)NET T
he use of TARGET
2 is mandatory for t
he
CHAPS: Cl
eari
ng House Aut
omat
ed Pay
ment
s sett
lementofpayeurooperat
ionsinvoi
vingt
he
Syste
m Eurosyst
em.

I
ti s Briti
sh equi
val
ent to CHI
PS,handl
ing TheEurosystemconsi
stsoftheEuropeanCenral
rece
ipt
sandpay
me nt
sinLONDON. Bank(ECB)andthenati
onalcentralbanksofthe
19EuropeanUni onmemberstat
e sthatarepart
Thi
s syst
em works on t
he same pri
ncipl
es as
oftheEuroz one
.
CHI
PS,worki
ngonthenetpay
me ntsyste
m.
CHAPSisusedbyal argenumbe rofbanksI nUK
with about 20 me
mbe rs banks and over 4500
i
ndirectmembersusingthesy st
emt hroughsome
largerbank J
oinCAI
IBWI
THASHOKonYouT
ube

RT
GS/
NEF
TinI
ndi
a:-
6.RT
GS-
plusandEBA:(
EURO)GROSS
RT
GS:Reserve Bank ofI
ndi
a has i
mpl
eme
nte
d
T
heseareot
herEurocl
eari
ngsy
ste
ms,wi
th RealTi
meGrossSe ttl
ement(RT
GS)systemforthe
RTGSplus,beingaGermanhybri
dcl earingsyst
em banksinIndi
a,whe rebankscanre mi
tf undsto
andOperatingasanEuropean-orie
nt e
dre alti
me otherbanksthrought hi
smechani
sm.
grosssettlementandpayme
ntsy stem. T
heRT
GSsy
ste
mismanage
dbyI
DBRT
,Hy
derabad,
RT
GSpl
ushasove
r90part
ici
pant
s. I
DRBT:Inst
itut
ef orDe
vel
opme
ntandRe
searchi
n
EBAi
ncl
ude
s(EuroBanki
ngAssoci
ati
on) Banki
ngTechnology

EURO1:f
orhi
ghval
uepay
ment
ssy
ste
m RTGS connect
s allbanks t
o a ce
ntralse
rve
r
maint
ainedatRBI
.
ST
EP1:Apay
mentsy
ste
mforre
tai
lpay
ment
s
Eachbankmai nt
ainsapoolaccountwit
ht heRBI
STEP2 : A Pan-Europe
an Aut
omat
ed Cl
eari
ng
forinflow andout f
low offundsrecei
ved/
pai
d
House(PE-
ACH).
throughRTGS.
STEP2f aci
lit
atesstraightthrough processi
ng
Gui
del
ine
sonRT
GS:
(STP)t
ome mberbanks,
usingi
ndustrystandards.
Mi
n=2L
ac
Max=nol
mit
Cust
ome
rtransact
iont
ime: NEF
T:
7AMt
o6PM
T
hisisanot
herfundst
ransf
erfaci
li
t yf
orbanks
Bankt
ransact
iont
ime: i
nIndi
a,whi
chrunsonabatchprocessmet
hod.
7AMt
o7:
45PM Thisi
susedf orsmallremitt
ancesbycustomers
from an account with one bank t
o another
accounti
naot herbank.
T
imi
ngofvari
ousphase
s:
The funds adjust
ment f
or NEF
Tis also done
Ope
nphaset
ime=7AM t
hrough t he pool accounts mai
ntaine
d by
*
Ini
ti
alcut
offt
ime
=6PM i
ndi
vidualbanks.
*
Finalcutof
fti
me=7:
45PM L
ate
stgui
del
ineonNEF
T:(
wef16De
cembe
r2019)
*
Reve
rsalt
ime=7:
45PMt
o8PM Avai
labi
li
ty:
24*
7*365
Therecei
vingbankshouldcre
ditt
he cust
ome
r MI
N:Nol
imi
t
accountwithi
n30minute
s. MAX:Nol
imi
t
*
Set
tle
menti
nbat
che
s
*
Bat
chrune
veryhal
fhour
J
oinCAI
IBWI
THASHOKonYouT
ube
*
Firstbat
ch:00:
30
*
Lastbat
ch:23:
30

*
Tot
albat
ch=48 Joi
nCAI
IBWI
THASHOKonYouTube
There ce
ivi
ngbankshouldcre
ditthecust
omer BFM-MODULE-A
accountwi t
hin2hoursf
romthebatchi
nwhich
Chapt
er3:Cor
respondentBanki
ng&NRIBanki
ng
transacti
onisset
tle
d.
(PART-I
II
)
Whatwewi
llst
udy:
F
ullF
orm:
SWIF
T: Soci
ety for Worldwi
de I
nte
rbank *
Whati
sNRIBanki
ng?
Fi
nanci
alT
e l
ecommuni
cat
ions.
*
Whoi
sNRI?
CHIPS: Cl
eari
ng House I
nte
rbank Pay
ment
*
Whati
sNREAccount?
System(
NY)
*
Whati
sNROaccount?
CHAPS: Cl
eari
ng House Aut
omat
ed Pay
ment
s
(L
ondon) *
Whati
sFCNR(
B)account?
RT
GS:Re
alt
imegrossse
ttl
eme
nt
NEF
T:Nat
ionale
lect
roni
cfundst
ransf
er
TARGET :Trans-
European Automat
ed Real
-Ti
me
GrossSett
lementExpre
ssT ransf
ersyst
em
EBA:EuroBanki
ngAssoci
ati
on

J
oinCAI
IBWI
THASHOKonYouT
ube
NRIBANKI
NG:
Indi
a needs to servi
ce the r
equirement
s ofi ts Aspert
heFEMA1999,
Non-
Resi
dentI
ndi
ani
s:
people,st
ayı
ngabr oadforbusinessorprofessi
on,
Per
sonwhoi
sci
ti
zenofI
ndi
a:
oranyot herpur pose orthose who are sett
led
abroad. i
)Aper
sonr
esi
dentout
sideI
ndi
awhoi
sa

Assuch, speci
fi
crulesforopeningofaccountsand cit
izenofIndi
a,i.
e.I
ndianci
ti
zenswhopr
oceed
maintenanceofnonr esi
dentIndi
ans,i
tsoperati
ons, abr
oadf oremploymentor
repat
riabil
ity
,inter
estpay ments,inv
estment sand f
orcar
ryi
ngonanybusi
nessv
ocat
ionor
otherf aci
li
ti
eshav ebeenf r
amedbyt heReser v
e
Foranyot
herpur
pose(
li
kewor
kingi
nWB,
UNOet
c)
BankofI ndiaandtheGov er
mmentofI ndi
aunder
FEMA. i
ncircumstancesi
ndi
cat
ingi
ndef
ini
teper
iodofst
ay
out
sideIndi
a.
Def
ini
ti
onofNRI:
Per
sonofI
ndi
anor
igi
n(PI
O):
AsperI
ncomet
axAct1961:
Apersoniscal
ledPer
sonoflndi
anorigi
nwhoi
sa
Apersonwhost
ayi
nI ndi
af ormor
ethan182day
s ci
ti
zenofanyot
hercount
ryot
herthan
i
nprevi
ousFYi
scal
ledResident
.
Bangl
adeshorPaki
stan
Soapersonwhost
ayi
nIndi
afor0t
o182day
sis
andsat
isf
yingt
hef
oll
owi
ngcondi
ti
ons
cal
ledNRI
.
1-
Whowasaci
ti
zenofI
ndi
a
2-Who is a chi
ld ora grandchi
ld ora gr
eat
Joi
nCAI
IBWI
THASHOKonYouTube
gr
andchi
ldofaci
ti
zenofI
ndia.

3-Aspouse,whoisaf orei
gnciti
zen,ofanI
ndi
an a per
son ofI
ndian or
igi
n and any account
s or
ci
ti
zenorapersonofI
ndianori
gin. i
nvest
mentsmustbeinthejoi
ntnamesofspouse.
4-
A personi sofIndi
anor i
ginifhehasheld an 4-
Tour
ist
sonbr
iefv
isi
ttof
orei
gncount
ri
esar
e
I
ndian passpor
t,orhe oranyofhi s par
ent
s or notcat
egor
izedasNRl
s.
gr
andparentswasacit
izenofIndi
a.
*
PIOal
soi
ncl
udean'
Over
seasCi
ti
zenofl
ndi
a'(
OCI
)

Thus,in gener
al,an NRIis a per son ofIndi
an Ov
erseascor
por
atebodi
es(
OCB)
:
nati
onal
it
y or or i
gin,who r esides abroad f
or
Overseasfi
rms,tr
ustsorcompani
es,
predominantl
y
busi
nessorv ocati
onorempl oy mentandandt he
ownedbynon-r esi
dentIndi
ansar
ecall
edOverseas
peri
odofstayabroadisi
ndef
inite.
Corporat
eBodies.

Whoel
sei
scal
l
edNRI
:
The l
evelofowner
shi
p ofNRIsin such bodi
es
1-
Gov er
nmentofi
cial
sgoingabroadonpost
ingto
shoul
d be mi
nimum 60%,by one ormore NRI
I
ndianmissi
onsorWor l
dBank,
IME,et
c,ar
eNRIs.
owners.
2-St
udents goi
ng abr
oad f
orhi
gherst
udi
es ar
e
Not
e:OCBar
enotal
lowedt
omakei
nvest
ment
sin
consi
deredasNRIs.
I
ndi
a.

3-Aspouse,whoisaf orei
gnCiti
zen,ofanIndi
an
ci
ti
zenorapersonofI
ndianori
ginisal
sotreat
edas
NRIACCOUNTS-RUPEEANDFOREI
GNCURRENCY
ACCOUNTS
NRIhavebeenpr ovi
dedwithvari
ousschemest
o
NRO NRE FCNR
openbankaccountsandi
nvesti
nIndi
a.
Cur
rencyof Rupee Rupee Forei
gn
1.Non-Resi
dent(
Ext
ernal
)RupeeAccount(
NRE) deposit Cur
rency
(RUPEE) Accountt
ype SA/
CA/
RD/
TD SA/
CA/
RD/
TD ONLYFD/
TD
2.Non-Resi
dentOr
dinar
yRupeeAccount(
NRO) Joi
ntaccount Al
lowed Al
lowed Al
lowed
(RUPEE) Nomi
nat
ion Al
lowed Al
lowed Al
lowed
3.For
eignCurr
ency(
Non-
Resi
dent
)Account(
Banks) Mi
nFDorTD 7Day
s 1y
ear 1y
ear
[
FCNR( B)](
RUPEE)(
FD) MaxFDorTD 10y
ear
s 10Year 5y
ear
s
4.Speci
alNon-
Resi
dentRupeeAccount-
SNRR J/
Aoper
ati
on ForS ForS ForS
account Taxoni
ncome Taxabl
e Not
ax Not
ax

Repat
ri
ate Max1mi
ll
ion Ful
l Ful
l
USDi
nayear

Cr
edi
t For
eign Onl
yforei
gn Onl
yforei
gn
r
emi t
tances remit
tance remit
tance
+l
ocal i
ncome

Exchanger
isk N/
A oncust
omer onbank
Joi
nCAI
IBWI
THASHOKonYouTube
I
nter
estr
ate Asperbank Asperbank Li
nkedwi
th
LI
BOR

Non-
Resi
dentOr
dinar
yRupeeAccount(
NRO)
: Retur
noft ouri
st:BalanceinNROaccountmaybe
paidt o the touri
st ifthe account has been
Rupeeaccount
maintai
nedf oraperiodnotexceedingsixmonths
Taxabl
e(30%changeabl
e) andaccounthasnotbeencr edi
tedwi thanylocal
SA/
CA/
RD/
FD(
NROTONROOK, fund'
sotherthanint
erestaccr
uedthereom.
NROTONRENOTOK) (
NRE)Non-
Resi
dent(
Ext
ernal
)RupeeAccount:

I
tisopenedbyNRIandFor
eignt
our
ist
sal
so. Rupeeaccount
Typi
cal
l
ywhenresi
dentbecomesnonresidentshi
s Not
ax
domest
icr
upeeaccounthast
obere-
designatedas Exchanger
iskoncust
omer
anNROaccount
.
SA/
CA/
RD/
FD
Thisisbasicall
yadomest i
caccountofan NRI ,
NRETONREOK
openedandmai nt
ainedtofacil
itat
ecr edi
tswhich
accruedi
nIndia,fr
om invest
ment sthatweremade NRETONROOK
priort
ohisl
eav i
ngt hecountr
y,rent,LI
Cmat ur
it
ies
Cr
edi
tsi
naccount:
etc.
(i
)remitt
ancesfr
om abr
oadbywayofTT,cheques,
For
eignt
our
ist:
draf
ts,oreventr
anst
erfrom anot
herNon-
Resi
dent
NROaccountcanbeopenedbyaf
orei
gnnat
ional account,
asalso
t
our
istv
isi
ti
ngIndi
a.
(i
i) by t
enderi
ng of f
orei
gn cur
rency t
rav
eler
s
Fund: ei
therTTfr
om abr
oadorf
orext
hathe chequesornotesbytheNRIduri
nghistemporar
y
broughtwithhi
m. vi
sittoI
ndia,
For
eignCur
rency(
Non-
Resi
dent
)Account(
Banks) Commonchar
act
eri
sti
csofNRO/
NRE/
FCNR:
[
FCNR(
B)Account
s]:
For
eignecur
rencyaccount Joi
ntoper
ati
on:
Not
ax Joi
ntaccount
scanbeopenedbyt
woormor
eNRI
s
Noexchanger
iskoncust
omer and/
orPIOsor

FDorTDonl
y byanNRI
/PI
Owi
thar
esi
dentr
elat
iveon

Since FCNR (B)isat erm deposi

taccount,the f
ormerorsur
viv
orbasi
s
permit
tedcreditisappli
cabl
eonlyforopeningthe i
.eNRI+NRI
accountandper mitt
eddebitwoul dbeapplicabl
e NRI+r
esi
dent
onlyforofcl osure orprematur
e closur
e ofthe
account. Howev er,duri
ng t
he li
fetime of the NRI/PI
O
accountholder
,theresi
dentrel
ati
vecanoper at
e
theaccountonl
yasaPowerofAttor
neyholder
Theint
erestonthedepositshal
lbepaidonthe
basi
sof360day stoay ear
,cumul
ati
veonhalf
- Rest
ri
cti
ononPowerofAt
tor
neyhol
der
year
lyi
nter
val
sof180days. Hecan'
tmakel
ocalwi
thdr
awal
s.
Hecansendmoneyabr
oadbutonl
ytoaccount
hol
der
(NRI
).

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

SpecialNon-
Resi
dentRupeeAccount-
SNRR
account:(
RUPEE)(NROTOSNRRNOTOK)
Anypersonresi
dentout
sideI
ndi
a,hav
inga
busi
nessint
eresti
nIndi
a,mayopenaSpeci
alNon-
Resi
dentRupeeAccount(SNRR)
Forthepurposeofputt
ingt
hroughbonafi
de
tr
ansacti
onsinrupeesnoti
nvolv
inganyvoil
ati
onof
prov
isi
onsofactrulesandregul
ati
ons.
Tenur
e:Maxi
mum 7y
ear
s.
Tax:YesTaxabl
e
*
Balancesint
heSNRRaccountshal
lbeel
igi
blef
or
r
epatri
ati
on
*
SNRRaccountmaybedesignatedasr esi
dent
r
upeeaccountont
heaccountholderbecominga
r
esi
dent.
*OpeningofSNRRaccountsbyPakist
anand
Bangladeshnat
ionalsandent
it
iesi
ncorpor
atedin
Paki
stanandBangl adeshr
equi
respri
orapprov
alof
ReserveBank.
Joi
nCAI
IBWI
THASHOKonYouTube
 Joi
nCAI
IBWI
THASHOKonYouTube
BFM-MODULE-A
Chapt
er4:
Document
aryLet
terofCr
edi
t(Par
t-
II
)
Whatwewi
llst
udy:
TYPESOFLETTEROFCREDI
T.

LETTEROFCREDI
T:
AnLCcanal
sobedef
inedasan
undert
aki
ngi ssuedbyt hebank,onbehal fofthe
i
mpor t
erort hebuyersi nfavouroft heexport
eror
thesel
ler
,that,i
fthespecifieddocument s,
showing
thatashipmenthast akenpl ace,oraservicehas
beensuppli
ed,arepresentedt otheissui
ngbank
oritsnomi natedbank,wit
hinthest
ipul
atedt i
me
and allotherLC t er
ms are compl
ied wit
h,t he
export
er/
sellerwil
lbepai
dtheamountspecif
ied.

TYPESOFLETTEROFCREDI
T(summar
y):

Rev
ocabl
eLC:
Which can be amended or cancel
led wi
thout Gr
een=Red+st
oragef
inance
concentofbenef
ici
ary
.
I
rr
evocabl
eLC:
St
andbyLC:i
tisj
ustl
ikebankguar
ant
ee
Which can'tbe amended orcancel
led wi
thout
concentofbenef
ici
ary
.
BacktobackLC:WhenLCi
sissuedonst
rengt
hof
Expor
ter
spr
eferi
rr
evocabl
eLC.
anot
herLC.
Tr
ansf
erabl
eLC:
LCwhi chcanbet r
ansfer
redfr
om onebenefici
ary
Restr
ictedLC:Whendiscount
ingornegoti
ati
onof
toanotherbenef
ici
ary
.LC canbetransf
erredonly thebil
lisrest
ri
ctedt
oapar ti
cul
arbank.
iti
scall
ed
oncebutcanbet r
ansfer
redfr
om mor ethanone
rest
ri
ctedLC
part
ies.
RedCl
auseLC:
Revol
vingLC:WhenLCbecomeav ai
labl
eagai
non
LC whi chcont
ainsacl
ousetoprovi
definanceto
negot
iati
onsofdocument
sunderLC.
the export
erformanufact
uri
ng ofgoods to be
exported Theirwil
lberest
ri
cti
ononnumberofti
mesitcan
rev
olve and maximum amount whi
ch can be
Green Cl
ause LC :which cont
ains a cl
ouse t
o
negoti
ated.
provi
defi
nancetoexport
erforst
rongalsoaddi
ti
on
tofi
nanceFormanufact
uri
nggoods Joi
nCAI
IBWI
THASHOKonYouTube
TYPESOFLETTEROFCREDI
T: (B)Irr
ev ocabl
eLC :
(t
hatcannotber
evokedor
cancel
led)
A)Re
( vocabl
eLC:
(thatcanber
evokedor
cancel
led) *LCwhichhol
dsacommi tmentbytheissui
ngbank
*LC whi
ch can beamended orcancel l
ed atany topayorrei
mbursethenegoti
ati
ngbank,prov
ided
momentbyt heissuingbankwi thoutt
heconsentof condi
ti
onsoftheLCarecompli
edwith.
anyotherpartyasl ongast heLC hasnotbeen Such an LC cannotbe amended orcancel
led
drawnordocument st akenup. wit
houtt
heconsentofal
lpar
ti
esconcer
ned.
*
Theval
ueofsuchrev
ocableLCi sver
yli
mitedand *TheIr
rev
ocableLetterofCr
editi
sanuncondi
ti
onal
t
her
efor
ethesear
ever
yrarel
yissuedandaccept
ed. undert
aki
ngbyt heissuingbanktomakepay ment
*l
n case the negoti
ati
ng bankhastaken up t
he on submissi
on ofdocument sconf
orming t
ot he
documentsunderr evocabl
eLCpr i
ortorecei
ptof ter
msandcondi t
ionsoftheLC.
cancel
lat
ionnotice. *All LCs whi
ch are issued unl
ess ot
her
wise
Theissui
ngbankisr
esponsi
bletocompensat
eor speci
fied,
arei
rr
evocabl
elett
erofCr
edi
t.
rei
mbursethesamet
othenegoti
ati
ngbank. HencethewordRevocableshoul
dbespeci
fi
cal
l
y
menti
onedi
nthebodyoftheLC.
I
ftheLCi
ssi
lent
,theni
tbecomesi
rr
evocabl
eLC.

Joi
nCAI
IBWI
THASHOKonYouTube

(
C) Irr
evocabl
e Confi
rmed Let
ter of Cr
edi
t (D)Transf
erabl
eLC: (
Thatcanbet
ransf
err
edt
o
(
ir
rev
ocabl
e+confi
rmed) other
)
*Thisi
sanLC,whi
chhasbeenconfi
rmedbyabank, *
At r
ansfer
able LetterofCr edi
tis av
ail
abl
ef or
othert
hanthei
ssui
ngbank(usual
lysi
tuat
edi
nthe t
ransferi
nfullorinpart,
infav
ourofanypart
yother
countr
yoft
heexport
er) t
hant hebenef i
ciar
y,byt headvisi
ngbankatt he
r
equestoftheissuingbank.
therebytaki
nganadditi
onalundert
aki
ngtopayon
receiptofdocument
sconf i
rmingtothet
ermsand *
Ther
ecanbemor ethanonesccondbenef
ici
ary
,i.
e.
conditi
onsoftheLet
terofCredit
. t
heLCcanbesplitandtransfer
edi
nfav
ourofmore
t
hanonesecondbenefi
ciary.
*Theconfi
rming bankcan bet headvi
sing bank,
whichonreceiptofrequestfr
om thei
ssuingbank Ram ->Shy
am
t
akesthi
sadditionalr
esponsi
bil
it
y.
Ram ->Shy
am,
Mohan,
Vinod
*Theconfi
rming bankhast oinfor
m theissui
ng *
Howev er
,suchsecondbenefi
ciar
ycannotfur
ther
bankifi
tdoesnotagreetoaddit
sconfi
rmat
ionand t
ransf
ertheLCinf
avourofanot
herthi
rdpar
ty.
has no obli
gati
on to add confi
rmat
ion tothe
amendmentsissuedther
eaft
er. Ram ->Sy
am(
A)->Mohan(
NA)

*The confi
rmi
ng bank l
ooks intovari
ous r
isks Ram ->Mohan,
Raj
esh(
A)->Madan(
NA)
i
nvolv
ed and t akes a decision t
o add i ts
conf
ir
mat i
on.
I
nshort,t
heconfi
rmi
ngbankstepsint
ot heshoes
oft
heissui
ngbankandper
for
m allf
unct
ionsofthe
i
ssui
ngbank.
(
E)Red Clause LC:(Gi
vesadvance pay
mentfor (
F)GreenCl auseLC:(RedClause+War ehouse)or
manuf
act
uringofgoodstoexpor
ter
)(useredi
nk) (
advance for manufactur
ing and st
orage also)
*Thesel
lercanrequestanadv anceforanagr
eed (
greenink)
amountf
r om t
hecorr
espondentbank. UnderGr eenCl auseLC t headv anceisnormal l
y
*Thisadv
anceisbasi
call
yintendedtofinancethe paid not onl y agai nst recei
pt and a wr i
tten
manufact
uri
ng orpurchase ofthe goods to be under t
akingfrom t hesell
ertosubsequentl
ydeliv
er
deli
ver
edundert
helet
terofcr
edit. the transport
at i
on document s befor
et he credit
expires,butal soagai nstrecei
ptofanaddi ti
onal
*Theadvanceisnormall
ypaidagainstrecei
ptanda documentpr ov i
ding proofthatthe goods to be
writ
tenundert
aki
ngf r
om thesell
ertosubsequentl
y shippedhav ebeenwar ehoused.
deli
verthe tr
ansport
ati
on document s bef
orethe
credi
texpi
res. *Wecouldsayt hatgreenclausepr
ovi
dessl
i
ght
ly
bet
tersecur
it
ythanredclauseLC.
*TheRed Cl auseLC can pr
ovi
det hebenefici
ary
withcredi
tthatmaynotbeav ai
lablelocal
lyorwith *
Now adayst heLCsaresentt
hrought
heSWI
FT
cheaperfi
nancing,
byhavi
ngthef undsadvancedby mechani
sm el
ect
roni
cal
ly
.
theissui
ngbank. *Bef
orethis,t
heLCswi t
hr edandgr eenclauses
wouldbetypedoutinredandgreencoloursi
norder
*The funds adv anced would be adj
usted bythe
Negotiati
ng Bank when t he document s are t
oi nvi
tet he at
tent
ion oft he expor
terand the
presentedandgoodsar eshippedbyt heexport
er. Negoti
ati
ngBank.
*I
ncase, theexpor t
eraftert
akingtheadvancedoes Gr
eenCl
ause=RedCl
ause+war
ehouse(
stor
age)
notcomef orsubmi ssi
onofdocument s,t
heissui
ng
bankwoul dbeart heloss.

(G)Backt o BackLC:
(LocalLC on guar
ant
ee of
ori
ginalLC)
(
I)St
andbyLC:(
Justl
ikeGuar
ant
ee)
*When an export
erar ranges toissue an LC in
favourofl
ocalsuppl i
ert oprocur
egoodsont he
str
enghofexpor tLC receivedinhisf avour
,itis St
andbyl
ett
ersofcr
edi
tar
esi
mil
art
oguar
ant
ees.
knownasBack- t
o-backLetterofCr
edit. I
ftheguarant
eedser
vice/
pay
mentisnotprov
ided,
*Generall
y,Back-
to-
BackLCisforprocur
ementof t
hesel
lercaninv
oket
hebank'
sobl
igat
iont
opay .
goodsl ocal
lyorforimpor
tofgoodsfor meet
ing bysubmi tti
ng,togetherwit hanyotherdocuments
theexportLCCommi tment
s. thatthelett
erofcr editmightrequi
re,adecl
arat
ion
(
H)Rev
olv
ingLC:
(Pay
menti
ninst
all
ment
) stat
ingthatthel et
terofcr edi
tcust
omerhasf ai
led
tomeethi sobli
gations/payment.
Ift he buy er r
equests parti
aldeliv
eri
es of t
he
order ed goodsatspeci fi
cinterv
als(cont
ractfor I
nanutshel
l,St
andbyLCisaguaranteerathert
han
deli
v erybyi nstal
lments),paymentcan be made apaymentinstr
ument.I
tmainl
ypr otectsagainst
usingar evol
vi
ngLCt hatcoverstheval
ueofeach t
heri
skofdefaul
t.
consecut iv
einstal
lment.
*Thebankisl
iabl
efort
het
otalv
alueofal
lagr
eed
(J)Rest
ri
ctedLC:TheLCmaybefreel
ynegot
iabl
e
part
ial
del
iv
eri
es.
ormayber est
ri
ctedt
oanybanknominat
edbythe
However,the second part
ial pay
ment i
s not LCissui
ngbank.
eff
ect
iveunti
lthefir
sti
nstal
menthasbeenpaid,
andsofort
h.
(
K)Ty
peofcr
edi
tunderLC: 3-
Def
err
edPay
mentCr
edi
t:
Thi
scr
edi
tal
mostsi
mil
art
oaccept
ancecr
edi
t,
1-Si ghtcr edi
t(D/P):Undera SightLC,the exceptthatt
herei
snobil
lofexchangeordr
aft
benefici
ary is abl
e to get t
he payment on drawnandispay
abl
eoncer
tai
nfut
uredat
e.
presentat
ionofdocument
sconf
ir
mingtothet
erms Theduedat
eisgener
all
yment
ionedi
ntheLet
terof
andcondi ti
onsoftheLCatthenominat
edbank'
s Credi
t.
counters.
The absence of bil
l of exchange saves the
These LCs ar
e cal
led D/
P(documentagai
nst benefi
ciar
yfr
om thecostofst ampdut yorother
pay
ment). l
evies,
asappli
cabl
eincert
aincountr
ies.

2-AcceptanceCredi
t(
D/A):thebil
lofexchangeor 4-Negoti
ati
onCr edi
t:Innegoti
ati
oncrediti
ssui
ng
draf
tsaredr awnwithcert
ainusanceperiod,and bankunder t
akes to make pay
mentt othe bank,
arepayable,
uponaccept
ance,atafut
uredate. whi chhasnegotiat
edthedocuments,i
.e.gi
vethe
valuefordr
aftand/ordocument
sdrawnunderLC.
Theusanceperiodmaybecer
tai
nnumberofday
s
fr
om t he dat
e ofshi
pmentordate ofbil
lof
exchange,
etc. Joi
nCAI
IBWI
THASHOKonYouTube

These LCs ar
e cal
led D/
A(document
s agai
nst
accept
ance)
 Joi
nCAI
IBWI
THASHOKonYouTube Document
sUNDERLC&I
t'
sSCRUTI
NY:

BFM MODULEA Documentsar ebasi

crequir
ementofanyt radeand
i
tev i
dencest hecarry
ing and complet
ing ofany
Chapt
er4:Document
aryLet
terofCr
edi
t tr
adet r
ansacti
on,whetherthetransact
ionislocal
(
PART-
IV) orint
ernat
ional.

Whatwewi
llst
udy: I
nf act,documentshav eamor eimport
antplacei
n
the inter
nati
onalt r
ade,si nce bank deal
s wit
h
*Var
iousDocument
susedi
nLC document snottheactualgoods.
*
Whati
sBi
llOfExchange(
BOE)? Scr
uti
nyofDocument
s:
*
Whati
sInv
oice? Thescrut
inyofdocumentspr
esentedunderanLC
*
Whati
sBi
llofLadi
ng? i
saverycruci
alandsensi
ti
vei
ssue.

*
Whati
sCer
ti
fi
cat
eofOr
igi
n? Thedeci si
onofpay mentoracceptanceofliabi
li
ty
forpayment ,bythei
ssui
ngbankorconf i
rmingbank,
*
Whati
sBi
llofEnt
ry?
solely depends upon the documents underthe
LetterofCredit
.
Personscruti
nizi
ngt hedocumentshast
obeext
ra
vi
gilantandgi
vefullatt
enti
ontothej
ob.
The document s shoul
d be scrut
ini
zed fr
om the
pointofart
icl
esofUCPDCaswel lasthetermsand
condit
ionsmentionedintheLet
terofCredi
t.

2-
Inv
oice:
1-Bi
llofexchange: Aninvoi
ceisacommer ci
aldocumentandi
sabasi
c
Bil
lofexchange,bei
ngoneoft
hemosti mportant necessi
tyoft
radedocuments.
fi
nanci
aldocuments,i
sdr
awnbythebenef
ici
aryon
theLCissui
ngbank.
Itispreparedbythebenef
ici
arygivi
ngdetai
lsof
*It env
isages the issui
ng bank t
o make t
he goods,quanti
tyandv
aluei
nunitter
ms,weightand
paymentimmediatel
y,ifi
tisdr
awnatsi
ght tot
alval
ueofgoods.
or Fol
lowi
ngspecifi
cpoint
sshouldbekepti
nmi
nd,
acceptand payon due dat
e,i
fitI
s dr
awn on whi
leprepar
ingorexami
ningt
heinv
oice
accept
ancebasi
s. i
)Itshoul
dbemadeoutbyt hesel
ler
/benefi
ciar
y
I
tshoul
dsat
isf
ythef
oll
owi
ngr
equi
rement
s: andi
nthenameoft
heappl
icant/
opener
soft heLC.

(i
)Itshoul
dindicat
etheissui
ngbank'
snameand i
i)Descri
pti
onofgoodsmustcorrespondwi
tht
he
Lett
erofCr
editnumberunderwhi
chiti
sdr
awn. descr
ipt
ionofgoodsgi
veni
ntheLC.

(i
i)Itshoul
d,unlessand other
wisespecifi
ed,be i
ii
)Invoi
cemustindi
catet
heor
dernumber
/cont
ract
drawninthecurr
encyofLett
erofCreditandshoul
d number,inv
oicenumberandnumberofLC al
ong
notexceedtheamountofLett
erofCredit
. wit
hissui
ngbank'sname.

(
ii
i)Anycor
rect
ionsshoul
dbedul
yaut
hent
icat
ed. (i
v)Termsofsal
econt r
act
,suchasFOB,C&F,CI
F,
ete.
,shoul
dbei
ndicat
edinthei
nvoi
ce.
3-Bi
llofLadi
ng:
- boar
dBOL"
Bil
lofladingisat ransportdocumentev i
denci
ng v
)BOLshoul
dbesubmi
tt
edt
oNegot
iat
ingbank
mov ementofgoodsf r
om theportofaccept
anceto
wi
thi
n21day
sfr
om dat
eofshi
pment
.
portofdesti
nat
ion.
v
i)TheBOLshoul
dnotbecl
auseBOL.
Iti
sar ecei
ptissued by t
he shi
p owner
(ori
ts
aut
hor
izedagent
) Claused BOL:When shippi
ng company putsa
cl
auseinBOLi ndi
cati
ngthedef
ecti
vecondi
tionof
stat
ingthatthegoodsi ndicat
edt her
ein(
quant
it
y, goodsorpackingthensuchBOLiscal
ledClaused
quali
ty,descr
ipt
ion,et
c.)ar eshippedonspeci
fic BOL.
dateandthroughspeci
fi
cv esseland
vii
)Part
ialshi
pment
sortrans-
shi
pment ,
if
del
iverabletot
hepersonmenti
onedtherei
nast
he permit
tedintheLCshoul
dbeclearl
yindicat
edi
n
consignee(ortohisorder
),afterpay
mentofall theBOL.
duest otheshi
ppi
ngcompany.
Parti
alShi
pment:Youor
dered1Lacf r
idgeandyou
i
)Thedescri
ptionofgoodsshouldcor
respondwi
th
recei
ved60kfri
dgeon1April
,30kfr
idgeon3Apr i
l
t
herequir
ement sintermsofl
ett
erofcredi
tandas and10kf r
idgeon10Apr
ilt
henthisi
scal l
edpar
tial
ment
ionedintheinvoice. shipment.
i
i)Bil
lofl
adi
ngshouldbeart
heLCnumberal
ong *I
f goods ar eloaded f
rom di
ff
erent port
s on
wit
hthenameoft
heissui
ngbank. dif
ferentdatesbutifonsameshipthent hi
snot
i
ii
)Pay
mentoff r
eightshoul
dbecl
ear
lyi
ndi
cat
edi
n call
edparti
alshi
pment.
t
heBil
lofLadi
ng.
i
v)BOLshoul
dbe"
Shi
ppedonboar
d"BOLOr"
On

Tr
ans-
Shi
pment: 4-
Insur
ancePol
icy
/Cer
ti
fi
cat
e
TheGoodsl oaded from London t hen i
tgoest o i
)I tmustbeissuedandsignedbythei
nsurance
Dubaiandgetunl oadedt hereandagai ngetloaded companyortheiragent
s.shoul
dnotbei
ssuedby
onanot hershipthengoest oMal aysi
aandagai n thebroker
.
getunloaded from t hi
s shi p and getloaded on i
i)Thedat eofissuanceofinsur
ancemustbeonor
anothershipandf inall
yr eachesIndiathent hi
sis
befor
et hedateofshipmentoritmustbeendorsed
cal
ledTr ans-
shi
pment .
byspecifi
cnotationthatt
hecov eri
sef
fect
ivef
rom
vi
ii
)TheBOLshouldnotbedat
edpr
iort
othedat
e thedateofshipment.
ofi
ssuanceofLC.
LC I
NSURANCE
1Jan2020 4Jan2020 NotOk
LC BOL
15June 10June Ok
1Jan2020 4Jan2020 Ok
4Feb 4Feb Ok
15June 10June Notok
13Mar
ch 27Mar
ch Ok
6Feb 4Feb Notok
(
effect
ivefrom
13Mar
ch 27Mar
ch Ok 13Mar ch)

i
ii
)Thecurrencyofi
ssuancemustbesameast
he
cur
rencyofLC.
v
)Unlessot
herwisespeci
fi
ed,i
tshoul
dbeissued 6.Ev
idenceofI
mpor
tbyt
heI
mpor
ter
:
f
oranamountof110%ofClF/CI
Pval
ueofgoods. Author
ized deal
ers,whil
e opening LC fortheir
vi)Thepol i
cyshouldcl ear
lyindi
cat
ethevoyageiti
s i
mpor t
ercli
entsshal
ltakeanundertaki
ngfrom t
he
covering, i.
e.,t he por t of shi
pment, por
t of i
mpor t
erthattheyshallsubmitexchangecontrol
desti
nat i
onandshoul dal somentionthepointof copyofBil
lofEntr
ywithi
ntheprescr
ibedperi
od.
terminati
onofi nsurancecov er
age.
vi
i)Clai
msshoul
dbemadepay
abl
eint
hecount
ry Thesubmi ssi
onofBi l
lofEnt
ry,dul
yapprov
edby
ofappli
cant
. thecust
omsascer tai
nsthatt
hereisact
uali
mpor
t
5-
Cer
ti
fi
cat
eofOr
igi
n:- ofgoodsinthecountr
y.
Cer
ti
fi
cat
eofor
igi
ndet
ermi
nest
heor
igi
nofgoods. Author
iseddeal
ers,onnon-recei
ptofEntrywit
hin
Itmustbeissuedandsi
gnedbyanyindependent si
xmont hsfr
om thedat eofpayment,shal
lfol
low
upwiththei
mporterforsubmissi
onofBil
lofEnt
ry.
aut
hori
ty,
suchasChamberofCommer
ce.
Inthepast ,
ifBi
llofEnt
rywasnotsubmitt
edwithi
n
Inf
ormingori
ginofgoods,v
alue,invoi
cenumber,
Bil
lof Lading number
,etc. appeari
ng in the anot herthr
ee months,Banks wererequired t
o
cert
if
icat
eoforigi
nmustbeconsistentwi
thother repor tthe same t o RBI t
he half
-yearl
y BEF
documents statement.

.
Itmustbeensuredthator
igi
nofgoodsisnotfr
om Howev er,since the implement
ati
on of I
DPMS
(ImportDataPr ocessi
ngandMoni t
ori
ngSystem)
,
anywar-f
ight
ingcountr
y,i
e.,consi
sti
ngofbanned
hazar
dousgoods. ther epor
ti
ngi smadet oRBIdir
ect
lythr
oughthe
system.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

BFM MODULEA UCPDC:

Chapt
er4:Documentar
yLet
terofCr
edi
t Unif
orm Cust
oms & Pr
act
ice f
or Document
aty
Credi
ts.
(PART-
V)
I
nordertobri
ngunifor
mit
yinmatt
erspertai
ningt
o
Whatwewi
llst
udy: l
ett
ersofcr
editdocument
sandt
ransact
ions,
*Whati
sUCPDC600 I
CChasf ramedunifor
mr ul
esandpr oceduresf
or
UCPDC : Unifor
m Cust
oms & Pr
act
ice f
or i
ssuanceandhandl
ingoft
ransact
ionsunderLC,
Document
aryCr
edit
s so thatpart
ies tolet
ter
s ofcr
edi
ttr
ansact
ions
*I
CC : I nt
ernat
ional Chamber
s of Commer
ce uni
formlyi
nterpr
etvari
ouster
msandar
eboundby
Establ
ished:1919 acommonr ule.

HQ:Par
is These r
ules and pr
ocedures ar
e cal
l
ed Uni
for
m
Customsand Practi
cesf orDocumentar
yCredi
ts
(UCPDC).
*DOCDEX:I tisoneoftheopt
ionsavai
labl
etothe
part
iesoftheLCtoresol
vel
ett
erofcr
editdi
sput
es. TheUCPDCwasf ir
stbroughtouti
n1933,andhas
I
tsfullf
ormis been revi
sed f
rom ti
me t otime withthe l
ast
revi
sionbei
ngcarr
iedoutin2007.
"I
CC's Document
ary Cr
edi
t Di
sput
e Resol
uti
on
Exper
ti
se". Thecurrentupdat
eofUCPDCisthepubl
icat
ionNo.
600,whichhasbeenimplement
edwitheff
ectfr
om
1.
7.2007.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

I
mpor
tantPoi
ntr
elat
edt
oUCPDC: Appr
ox20000 Bi
ll Yes/
No
Fi
rstt
ime:1933 About20000 18000 Ok
Lat
estr
evi
sion:2007 22000 Ok
Lat
estv
ersi
on:
UCPDC600(
Appl
icabl
e:1-
7-2007) 16000 NotOk
UCPDC600t
otalAr
ti
cles=39 23000 NotOk
Pr
evi
ousv
ersi
on:
UCPDC500 20500 Ok
UCPDC500t
otalAr
ti
cles=49

2-Quant
it
yinLC:
(5%)
1-AMOUNTi
nLC:(10%) AsperAr
ti
cle30ofUCPDC
AsperAr
ti
cle30ofUCPDC600 I
fquant
it
yofgoodsi
snotspeci
fi
edi
nLC
ifamountinLC iswr i
tt
enwithwor d"about"or t
hen+5% /-
5% v
ari
ati
oni
nquant
it
yisal
l
owedor
"appr
oxi
mate" t
hen vari
ati
on of +10%/-10% is t
oler
abl
e.
all
owedinamountofLC.
Example:Whentheissui
ngbankobser v
edtheLCit
Exampl
e: foundthatther
eisv ari
ati
onof2% i nquanti
tyof
I
nLCamountiswritt
enas"
about20000USD"or goodssuppl
iedbyexporter
.Isi
ttol
erabl
e?
"
appr
ox20000USD"
Theni
fexpor
terpr
esentabi
ll

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

3-
Expi
rydat
eofLC: 4-
Dat
eofDocument
s:
A)Ifexpir
ydateofLC i sa publ
ichol
idaythen
documentcanbenegot
iat
edonnextwor
kingday. Di
spat
chAsperar
ti
cle14ofUCPDC
B)For
ceMaj
eur
eCl
ause: Thedateofdocument
sunderLCcanbepr
iort
oLC
AsperAr
ti
cle36ofUCPDC butnotdat
edlat
ert
hanLC.

Ifonexpi r
ydat eofLCBankar ecl
osedduetoriots, Exampl
e1-
str
ike,t err
oristact
ivi
ti
esoractofgodwhichisnot Dat
eofLC:15May
undercont rolof bankt henexpi
rydat
eofLCwi ll
Dat
eofI
nsur
ance:10May
notbe ext ended and Bankswi l
lnothonouror
negotiat eunderaLCt hatexpi
redduri
ngtheforce Dat
eofi
nvoi
ce:6May
Majeur e-event. Dat
eifexpor
t:16May

*I
nt hi
scasetheexport
erneedt ogett
heexpi
ry Exampl
e2-
dateext
endedbyamendmentofLC.
Dat
eofLC:5December
Dat
eofI
nsur
ance:5December
Dat
eofi
nvoi
ce:4December
Dat
eifexpor
t:1December
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Exampl
e3- 6-
Par
ti
alShi
pment:
Dat
eofLC:20Januar
y
AsperAr
ti
cle31ofUCPDC600
Dat
eofI
nsur
ance:21Januar
y
Ifsamev esselisusedt odeli
verthegoodstot he
Dat
eofi
nvoi
ce:15Januar
y buyerevent houghthegoodsar eloadedi
nsame
Dat
eifexpor
t:20Januar
y ship on dif
ferentdifferentdates st
il
litis not
consi
deredaspar t
ialshipment.
5-
Present
ati
onofDocument
s: Exampl e:Abuy erorder
ed300Car sf
rom ansel
ler
.
Asperar
ti
cle3ofUCPDC Theexpor terl
oaded100Car sonashi pon1June
2019and200car sinsameshipon6June2019
andexpor tergivetwoBOLoft hese2datesand
Ifi
nLCt heexpi
rydat
eiswr
it
tenas"onorabout
" fi
nallytheshipreachedinbuyer
scountrywit
h300
with dat
et hen +5 Day
s/-5 Daysvari
ati
on i
s cars.Isthi
sparti
alshipment
?(no)
all
owed.
7-Rev
iewofDocument
s:
Exampl
e:Expi
ryofcr
edi
t
AsperAr
ti
cle14ofUCPDC600
"
onorabout
"20Jul
y2020
Issui
ng bank and negoti
ati
ng bank getfiv
e(5)
Thendocument
scanbepr
esent
edf
rom bankingdayst
or ev
iew orexami
net hedocuments
15Jul
yto25Jul
y. underLC.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

8-
Submi
ssi
onoft
ranspor
tdocument
s(BOL): I
mpor
tantchangesi
nthear
ti
clesofUCP600
The documents showing the pr
oofofexpor tof 1-
UCPdoesnotapplybydefaulttol
ett
ersofcr
edi
t
goods shoul
d be present
ed orsubmi t
ted t
ot he i
ssuedaf
ter1stJul
y2007.
(Art
icl
e1)
bankwithi
n21day sformt hedateofshipment.(
or A st at
ementneeds to be i
ncor
por
ated i
ntothe
fr
om dateofBOL)
creditthatexpr
essl
ystatesi
tissubj
ecttothese
9-
Int
erpr
etat
ionofMont
h: rules.

AsperUCPDC600 2-Revocablecr
edi
t:Theterm Revocabl
eCredi
ts,
whichcanbeamendedorcancel l
edatanyt ime
Begi
nni
ngofMont
h1-
10
wit
houtnoticetot
hesel
lerceasetoexisti
nUCP
Mi
ddl
eofMont
h11-
20 600.(
Arti
cle2)
EndofMont
h21t
olast Amount -
10% +10%
Fi
rsthal
foft
hemont
h:1t
o15 Quant
it
y -
5% +5%
2ndhal
foft
hemont
h:16t
olastdat
eofmont
h Document
(cust
omer -
5day
s +5day
s
10-I
nsur
ance: Doc(
Bankr
evi
ew) -
5banki
ngday
s +5banki
ngday
s
AsperUCPDCt hei
nsur
anceshouldbeissuedf
or Expi
rydat
e Hol
idayt
hen Nextwor
king
anamountof110%ofCl
F/CI
Pvalueofgoods.
I
nsur
ance 110%ofCI
F
Tr
anspor
tDoc 21day
sfr
om Dat
eof
shi
pment
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

BFM MODULE-A Whi l

ethepol i
ciesandpr oceduresr
equir
edtobe
Chapt
er5:FACI
LITI
ESFOREXPORTSand foll
owedf orexporttrade/ImportTr
adeare
IMPORTERS(PART-
I) announcedbyt heDGFT, fi
nancingofexpor
t
trade/I
mpor tTradeandf acili
ti
esgr
antedunder
Whatwewi
llst
udy? FEMAr egulationsaregov ernedbytheRBI
*
Whati
sWor
kingCapi
tal
? regulat
ions/guidel
ines.
*
Whati
sWor
kingCapi
talCy
cle? *Pol
ici
esandpr
ocedur
esofi
mpor
t/expor
t:Made
byDGFT
*
Financi
ngofexpor
t/i
mpor
t:
Gov
ernedbyRBI
I
MPORTEXPORTCONTROL:
InIndi
a,exporttr
ade/
ImportTradeisregulat
edby
theDir
ectorateGener
alofForeignTrade(DGFT), EXCHANGEANDTRADECONTROLGUI
DELI
NES
whichfuncti
onsundertheMinistr
yofcommer ce FOREXPORTERS:
andIndustri
es,ofGover
nmentofI ndi
a. 1.I
mpor
ter
-Expor
terCodeNumber:
Expor
tandI
mpor
tTr
ade: Everyperson/
fir
m/ companyengagedinExport
-
*
Regul
atedby:DGFT Importtr
adehast oapplyandobtai
nanimporter
export
erCodeNumber( I
ECNumber )f
rom the
*
DGFTundermi
nist
ry:Mi
nist
ryofCommer
ceand
Dir
ectorGeneralofForei
gnTrade(DGFT).
I
ndust
ry
Thisi
sar egist
rat
ionnumberoft
hef
ir
m/company
fori
nter
nationalt
rade.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

2.Expor
tDecl
arat
ionFor
ms: 3.Pr
escr
ibedTi
meLi
mit
s:
AsperFEMAAct ,al
lexportofgoodsf r
om India, A.ForSubmi
ssi
onofExpor
tDocument
s:(
21day
s)
whetherinphysicalf
orm oranyotherform,requires
Theexporteri
srequi
redtosubmitt
heexpor t
tobedeclaredintheprescri
bedformst otheef f
ect documents,al
ongwiththedupli
cat
e/exchange
thatful
lval
ueofexpor t
swi l
lbereal
izedwithinthe
contr
olcopyofEDFform wit
hin21days
prescri
bedperi
odandi ntheprescri
bedmanner .
f
rom t
hedat
eofexpor
t
Theprescr
ibedf
ormsareEDFandSOFTEXfor
ms
whichareusedf
orthepur
posesnot
edbel
ow: or

(
i)EDFFor
m:(
Elect
roni
cDecl
arat
ionFor
m) f
rom t
hedat
eofcer
ti
fi
cat
ionoft
heSOFTEXf
orm

Expor
tsot
hert
hansof
twar
emadebyal
lmodes. toanaut hor
iseddeal
er,
f orcol
lect
ion,
pur
chase,
discountornegoti
ati
on,asthecasemaybe.
(
ii
)SOFTEXFor
m:
Theauthorizeddealermayacceptthedocument s
Expor
tofsof
twar
einnon-
phy
sicalf
orm.
pert
aini
ngt oexportsubmit
tedaftertheexpi
ryof
El
ect
roni
cDat
aInt
erchange(
EDI
): thespeci
fiedperiodof21days,forreasonsbeyond
Withtheintroduct
ionofElectr
onicDat aInt
erchange thecontr
oloft heexport
er.
(EDI)syst
em atcertaincustomsoffices,where *Wi
thi
n21day
sfr
om t
hedat
eofexpor
t.
shippingbi
llsareprocessedelect
ronical
ly,
theGR
form hassincebeenr epl
acedbyadecl arati
onin
form EDF(Electr
onicDeclarat
ionForm) .
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

B.ForReal
isat
ionofExpor
tBi
ll
s: (b)f urthert
hattheReserveBank,orsubj ecttot
he
Iti
sobli
gat
oryonthepartoftheexport
erthatthe directionsissuedbythatBanki nthisbehalf,
the
amountofexpor
tsisr
ealizedandrepatr
iat
edinto aut horiseddealermay,forasuffi
cientand
reasonabl ecauseshown, extendtheperiodofnine
Indi
a,wi
thi
nthesti
pul
atedt i
meperiod.
mont hsorfift
eenmont hs,asthecasemaybe.
1.Theamountr epresent
ingthef
ullexportv
alueof
goods/sof
tware/servi
cesexport
edshallbereal
ised (
C)Repor
ti
ngOfOv
erdueBi
ll
s:
andrepatr
iat
edt oIndiawit
hinni
nemont hs I
fthebi
lli
snotreal
isedwit
hint
hist
imesti
pulated,
t
heexport
ershouldappl
ytohisADforext
ensionof
(
9mont
hs)f
rom t
hedat
eofexpor
t.
t
imeinETXform.
However
,ther
eal
isat
ionper
iodmayber
elaxedas
under
: Allover
duebill
swhi charenotreali
zedwithint
he
duedateshouldbef oll
owedupv igorousl
yand
(a)Wher ethegoodsar eexport
edt oawar ehouse report
edtoReser v
eBankofI ndiainahalf-y
earl
y
establ
ishedgout si
deIndi
awi t
ht heper mi ssionof statementXOS( Tobesubmi t
tedbyeachAD
theReser veBank,theamountrepresent ingt heful
l branchforJuneandDecembereachy ear
).
exportvalueofgoodsexpor t
edshal lbepai dtothe
authori
seddeal erassoonasitisrealisedandi n *
ForNor
malExpor
t:9Mont
hs
anycasewi t
hinfif
teenmonths(15Mont hs)f rom *
ForWar
ehouseExpor
t:15Mont
hs
thedateofshi pmentofgoods; *XOSfor
mi susedt
orepor
tov
erdueExpor
tbi
llt
o
RBI(
hal
f-
yearl
y)

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

4.Pr
escr
ibedMet
hodofPay
ment
: (e)InIndi
anrupees,
whentr
ansact
ionar
ewi
th
personsresi
denti
nNepal
.
Theamountrepresent
ingthefullexportval
ueof
thegoodsexpor
tedshallbereceivedthroughanAD
Bankinthemannerspecifi
edint heForeign
ExchangeManagement.
Everyreceiptinforei
gnexchangebyanaut hori
zed
dealer
,whet herbywayofr emi t
tancefrom aforei
gn
countr
yorbywayofr ei
mbur sementf r
om his
branchorcor respondentoutsi
deI ndi
aagainst
paymentf orexportfrom I
ndia,oragainstanyother
payment ,shal
l beasment i
onedbel ow:
(a)For
m ofbankdr
aft
,payorder
,cr
edittoExpor
ter
Bank'
sNostr
oaccount
,Inwar
dRemittance,
etc.
(b)For
eigncur
rencynot
es,
trav
ell
erschecksf
rom
t
hebuyer.
(
C)Pay
mentoutofFCNR,
NREaccountoft
hebuy
er.
(d)Thr
oughInt
ernat
ionalcr
edi
tcards,whengoods
aresol
dduri
ngtheov er
seasvi
sitoftheexpor
ter
concer
ned.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

t
hatt
her
elat
iveshi
pmenthasal
readybeenmade.

BFM MODULE-A
(
B)Reduct
ioni
ninv
oicev
alue
Chapt
er5:
FACILI
TIESFORIMPORTER&
Exporter
smayal l
owr educti
onininv
oicevalue,on
EXPORTER(PART-
II
)
accountofcashdiscounttoover
seasbuyers,for
Whatwewi
llst
udy? prepaymentofusancebill
s.
*Whataret
hev
ari
ousf
aci
li
ti
esav
ail
abl
efor Thediscountcanbeallowedf
ortheunexpir
ed
expor
ter
? per
iodatthestipul
atedrat
eofint
erestoraLIBOR
oft
hecur r
ency.
FACI
LITI
ESFOREXPORTERS- Inothercases, wheretheexpor tbil
lhasbeen
FACI
LITI
ES/REMI
TTANCESCONNECTED negotiat
edorsentf orcollect
ion,ifreducti
onin
i
nvoicev alueisrequi
redtobeal l
owed, ADscan
WI
THEXPORTS
approvet hereducti
on,ifsati
sfiedaboutthe
genuinenessoft herequest,provided
(
a)AgencyCommi
ssi
ononExpor
tsAgency
:
(i
)ther educti
ondoesnotexceed25%oft heinvoi
ce
Commi ssi
oncanbeal lowedeit
herbyremi
ttanceor value,
t hereducti
oni snotinrespectof
deducti
onf r
om invoi
cevaluebytheADssubjectt
o commodi ti
essubj ecttomini
mum pr i
cerestr
ict
ions,
thecondit
ionthat: (f
loorpr i
ce)andt heexportershouldnotbeinthe
I
thasbeendeclaredi
ntherel
ati
veEDF/SOFTEX exporterscautionl i
stofRBI.
f
orm,andacceptedbythecust
omsauthori
ti
es,and

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

wereori
ginal
lyr
eceived,
provi
dedtheexporterhas
submit
tedtheevidenceofre-
importofgoodsinto
Indi
aonaccountofpoorqualit
y,t
radedispute,
etc.
Ther educti
oncanbeal lowedwi thoutany However,i
nsuchcases,A.D.smust
percentagerestri
cti
on,incasetheexpor terisinthe
exportbusinessforlastthr
eey ears,t
het rack
(i
)Exerci
seduedi
li
gencer
egar
dingt
het
rackr
ecor
d
recordissatisf
actoryandtheexpor tbil
ls
oftheexpor
ter
outstandingintheaccountisnotmor ethan5%of
theav er
ageannual exporttur
nov erofthepr ecedi
ng (
ii
)Ver
if
ythebona-
fi
desoft
het
ransact
ions
threecalendaryears. (ii
i)Obtai
nf rom theexporteracerti
fi
catei ssuedby
DGFT/ Custom aut hor
it
iesthatnoincentiveshav e
beenav ai
ledbyt heexporteragainsttherelevant
(
c)Cl
aimsAgai
nstExpor
ts
exportorthepr oporti
onateincenti
vesav ai
led,ifany
,
Bankscanal lowclaimsagai nstexportbi
ll
s, fortherel
ev antexporthavebeensur rendered
providedtherelat
iveexportproceedshav ebeen
real
izedandr epatr
iatedt
oI ndia,andtheexport
eris
(
e)Ext
ensi
onofTi
meLi
mit
:
notint hecauti
onlistoft
heReser veBankofIndi
a.
Iftheexportbil
lisnotreal
izedwithinthe
prescri
bedperiod,forr
easonsbey ondcontrol
,the
(
d)Ref
undofexpor
tpr
oceeds:
exporteri
srequiredtomakeanappl i
cati
oninform
Ref
undofexportpr
oceedscanbeallowedbythe ETXt otheAD, whichhashandledt heexpor
tbil
l,
AD,t
hroughwhom theproceedsoft
heexpor
tbil
l andseekext ensi
onoft i
mel i
mitforreali
zat
ionof
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

expor
tpr
oceeds. centoftheaver
ageexportreali
zati
onsduri
ngt
he
TheADi spermi tt
edbyt heReser veBankofI ndi
a,t
o precedi
ngthr
eefinanci
alyears,whi
cheveri
shi
gher
.
grantextensionoft imelimitf orreali
zat
ionof
exportproceedsbey ondt hest i
pulatedperi
odf r
om
thedateofexpor t,
upt oper i
odofsi xmonthsata
ti
me, ir
respect i
veoft heinvoicev alueofexport,
(
f)Wr
it
eof
fofunr
eal
izedexpor
tbi
ll
s:
subjecttofollowingcondi ti
ons:
Anexporterwhohasnotbeenabl et oreali
zethe
(a)Theexporttransact
ionscoveredbyt heinv
oices
outst
andingexportduesdespi tebesteffort
s,may
arenotunderinvesti
gat
ionbyDirector
ateof
ei
thersel
f-writ
eof forapproachtheADCat egor
y–I
Enforcement/
Cent r
alBureauofInvest
igati
onor
banks,whohadhandl edtherel
evantshipping
otherinv
esti
gati
ngagenci es.
document s,
withappr opr
iatesupporti
ng
(b)TheADCat egory-Ibanki
ssatisf
iedthatt
he document ar
yev i
dence.
exporterhasnotbeenabletoreal
izeexport
RBIhasprescr
ibedl
imit
sandcondi
ti
onsf
orsel
f
proceedsforreasonsbeyondhiscontrol
.
wri
teoffaswellaswri
teof
fbyA.D.
(C)Theexpor tersubmit
sadecl ar
ati
ont
hatt
he
Sel
fwiteoff
:upt
o5%ofexpor
treal
i
zat
ioni
nlast
exportproceedswi l
lbereal
izedduri
ngt
he
cal
endaryear
.
extendedperiod.
Ifexportisst
atushol
derandhi
saccounti
s
(d)Whileconsi
der
ingextensi
onbey ondoneyear
sati
sfactoryt
henupto10%.
from t
hedateofexport
,thetotaloutst
andi
ngofthe
export
erdoesnotexceedUSDonemi l
li
onor10per BankorA.
Dcanwr
it
eof
f:upt
o10%

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Curr
encyaccount
sinIndi
aorinfor
eigncount
ri
es
subj
ectt
ocertai
nsti
pulat
ions:
(
g)Ef
fect
iveDat
eofReal
izat
ion: *Export
erstoopenf orei
gncurr
encyaccountsin
I
ntermsofFEDAIrul
es,t
heeffect
ivedat
eof forei
gncountr
ies,orinIndi
a,t
oholdexport
r
eal
izat
ionofanexpor
tbil
lis: proceeds,f
orthepur poseofmaki
ngpay mentsfor
thegoodsimported.
I
fFor
eignCur
rencyBi
ll
:
*Part
ici
pant
sininter
nati
onaltr
adefair
s/exhi
bit
ions
Theef f
ect
ivedat
eofreal
izati
onofexportbil
lwil
lbe
havebeenall
owedt oopentemporaryfor
eign
thedateonwhichthebank’s‘
NOSTRO' accountget
curr
encyaccounts,t
odepositsal
eproceeds.
credi
ted.
Thebal ancesintheseaccountshav
etobe
I
fRupeesCur
rencyBi
ll
:
repatr
iatedtoIndia,
withi
nonemont hf
rom t
he
Theeffect
ivedat
eofreal
izati
onofexpor
tbil
lwil
lbe closeoft heexhi
biti
on/tr
adefair
.
thedateonwhichthebank’s‘
VOSTRO'accountget
*Aunitl
ocatedi
naSpeci
alEconomicZone(SEZ)
debi
ted.
mayopen,holdandmai
ntai
naFor ei
gnCurr
ency
Accountwit
hanADCategory-IbankinI
ndi
a.
(
h)For
eignCur
rencyAccount
s: *Apersonresi
denti
nIndi
abeingaproj
ect/
servi
ce
(
1)Ov
erseasFor
eignCur
rencyAccount
: export
ermayopen,holdandmaint
ainf
orei
gn
curr
encyaccountwi
thabankoutsi
deorinIndi
a.
TheReserv
eBankofIndi
aper
mi t
sthefoll
owi
ng
ent
it
iestoopen,
hol
dandmaintai
nForeign
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

i
nwardpayment
srecei
vedi
nfor
eigncur
rencyt
o
t
hisaccount
.

(
2)Di
amondDol
larAccount(
DDA)
: TheseEEFCaccount
sarei nthenatur
eofcur
rent
account
,andar
enon-int
erestbeari
ng.
Whocanopen:
Nocr edi
tfaci
li
ti
es,
eitherfund-
basedornon-f
und
Expor
ter
s-i
mport
ersdeal
inginr
oughandpol
ished based,shouldbepermitt
edagainstthesecur
it
yof
di
amondsordiamond-st
uddedj
ewell
ery
. balancesheldi
nEEFCaccount sbytheADCat egor
y
*Agoodtrackrecord,
ofatleast
,twoyear
sand -Ibanks.
aver
ageexporttur
noverofRs.3.
00crores
*
HecanopenDi amonddol
laraccountwit
hanAD,
f
ort
ransact
ingbusi
nessi
nf or
eignexchange.
*
Anexpor
tercanmai
ntai
nupt
o5DDAs.
(
3)EEFCAccount
:
Apersonresi
dentinIndiamayopenwi th,anAD
Cat
egory-IbankinIndia,anaccountinforeign
cur
rencycall
edtheExchangeEar ner
s'Foreign
Cur
rency(EEFC)Account ,
I
nExchangeEar
ner
sForei
gnCur
rencyAccount
(
EEFC),
hecancurr
ent
lycr
edi
tupto100%oft he

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE-A
Chapt
er5:
Faci
li
ti
esf
orExpor
ter
sandI
mpor
ter
s Thesal
ientf
eat
uresoft
heschemear
e:
(
PART-
II
I) (
i)Allcr
edit
worthyexpor
ter
s,incl
udingthosei
nsmalland
medium sector
s,wit
hgoodtrackrecordwouldbeeli
gibl
e
Whatwewi
llst
udy
?
f
orissueofGoldCardbyindivi
dualbanksasperthecrit
eri
a
*Whati
sbenef
itofGol
dCar
dSt
atusf
orexpor
ter
? t
obel ai
ddownbyt hebank.
*Whati
sEDPMS&I
DPMS? (i
i)Theschemewillnotbeappli
cablef
orexpor
ter
s
GOLDCARDSTATUSFOREXPORTERS: bl
ackli
stedbyECGCorhav i
ngoverduebil
lsi
nexcessof
10%oftheprevi
ousy ear
'st
urnover
.
RBI,i
nconsult
ati
onwithsel
ectbanksandexporter
s,has
drawnupaschemef orexport
erwhichiscal
ledgol
dcard (i
ii
)GoldCardhol derexpor
ter
s,dependingontheirt
rack
scheme,whichenvi
sagescert
ainaddi
ti
onalbenefi
tsbased recordandcreditworthi
ness,
willbegrantedbet
terter
ms
ontherecor
dofperformanceoftheexport
ers. ofcredi
tincl
udingr at
esofint
erest.
I
twasi
ssuedbyMi
nist
ryofCommer
ceandI
ndust
ry. (i
v)Appl
icat
ionsf
orcr
editwi
llbeprocessedbasedon
si
mplernormsandunderaprocessfastert
hanforot
her
Forei
gnTradePoli
cy2003-04suggestedt
ol aunchaGold
expor
ter
s.
cardschemeforcredi
twort
hyexport
erswithgoodtrack
recor
dforeasyavail
abi
li
tyofexpor
tcredi
tonbestterms. (vi
)Thechargesandfee-
str
ucturei
nrespectofservi
ces
provi
dedbybankstoexport
ersundertheSchemewi llbe
Thegoldcardholderwoul
denj
oysi
mplerandmore
rel
ati
vel
ylowerthant
hoseprovidedtootherexpor
ter
s.
eff
ici
entcredi
tdeli
ver
ymechani
sm i
nrecogni
ti
onofhi
s
goodtrackrecor
d. (
vii
)'I
n-pr
inci
ple’
li
mi tswil
lbesancti
onedforaperi
odof3
y
earswi t
hapr ovi
sionforaut
omat i
crenewalsubj
ectt
o
f
ulf
il
lmentoftheter msandconditi
onsofsancti
on.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
(vi
ii
)Astand-byl
imitofnotl
essthan20percentofthe TheEDPMShasbeenoper
ati
onal
izedwi
thef
fectf
rom 1st
assessedli
mitmaybeaddi t
ional
lymadeavail
ablet
o March,
2014.
faci
li
tat
eurgentcredi
tneedsforexecut
ingsuddenorder
s. Theobject
iveofEDPMSwast osi
mpl i
fytheprocedur
efor
(ix)Incaseofunantici
pat
edexportor
der
s,nor
msfor fi
li
ngretur
nsonasinglepl
atform andforbet
termonitor
ing;
i
nv entor
ymayber elaxed,
taki
ngint
oaccountt
hesi
zeand toint
egrat
etheret
urnsrel
atedto
natureoftheexportorder
. (
a)handl
ingofshi
ppi
ngbi
l
lsf
orcaut
ionl
ist
edexpor
ter
s;
(x)Request
sf r
om cardholder
swoul dbepr
ocessedquickl
y (
b)del
ayedut
il
izat
ionofadv
ancesr
ecei
vedf
orexpor
ts;
and
bybankswi t
hin25day s/
15day sand7daysforfr
esh
appli
cati
ons(25)/
renewalofli
mits(
15)andadhoclimi
ts(7)
, (
c)expor
tsout
standi
ngbey
ondt
hest
ipul
atedper
iod.
respect
ivel
y.
(xi
)GoldCardholders,
onthebasi softhei
rtr
ackrecordof Feat
uresofEDPMS:
ti
melyreal
izati
onofexportbil
ls,wil
lbeconsi
der
edf or
ADbankscanaccesst
heupdat
edlistofcaut
ionl
ist
ed
i
ssuanceoff or
eigncurr
encycr edi
tcardsf
ormeeting
expor
ter
sthr
oughEDPMSondailybasis.
urgentpay
mentobl i
gati
ons,etc.
Hence,bankscannowrefertot
heupdat
edcaut
ionl
i
stof
expor
tersonaregul
arbasis.
EXPORTDATAPROCESSI
NGANDMONI
TORI
NGSYSTEM
RBIwil
lcaut
ion/de-
caut
iont
heexpor
ter
sbasedont
he
(EDPMS)
:
recommendati
onofADbanks.
Forbet t
ermonit
ori
ngofexpor tofgoodsandsof twareand
ADsmayf or
wardit
sfindingstotheconcernedr
egi
onal
facil
it
ati
ngADbankst orepor
tv ari
ousretur
nst hrougha
off
iceofRBIr
ecommendi ngincl
usionofthenameofthe
singl
epl at
for
m,theReserveBankofI ndi
ahasl auncheda
export
eri
nthecaut
ionlist.
compr ehensi
veIT-
basedsystem call
edExportDat a
ProcessingandMonitor
ingSystem (EDPMS) . Thi
swi
llr
equi
ret
hebankst
orepor
tcaseswher
ethe

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
export
erisnott
raceabl
eornotmakinganyser
iousef
for
ts I
MPORTDATAPROCESSI
NGANDMONI
TORI
NGSYSTEM
forr
eali
zati
onofexportpr
oceeds. (
IDPMS)
:
Thegui
deli
nesrequi
rebankstorecor
dadvance Reserv eBankofI ndi
ahadconstit
utedaWor kingGr oup
remi
tt
ancesrecei
vedforexpor
tsinEDPMS. (Chairman:Shr iA.K.Pandey ,
CGM, FED)compr i
singof
represent at
ivesf r
om Cust
oms, DGFT,SEZ,
FEDAIand
Besides,bankswi
llal
soberequir
edt
orecor
dol
d
selectedADbanks, t
osuggestputti
nginplacea
outstandi
ngadvancesrecei
ved.
compr ehensiveIT-basedsystem t
ofacil
it
ateeffi
cient
Thi
swouldrequi
rebankstodevel
opar ecor
ding processi ngofal li
mporttr
ansacti
onsandef fect
ive
mechani
sm toensur
ethatal
ladvanceshavebeencapt
ured moni toringthereof.
i
ntheEDPMS.
TheWor kingGrouphadr ecommendeddevel
opmentofa
Ext
ensionofti
mel i
mitforr
eali
sat
ionofexpor
tproceeds robustandeffecti
veIT-basedsyst
em “
ImportData
anddetail
sofexportbi
ll
swrit
tenoffbyADBanksarealso ProcessingandMoni t
oringSyst
em”(I
DPMS)ont heli
nesof
i
ncorporat
edintheEDPMS. “ExportDataProcessi
ngandMoni t
ori
ngSyst
em”( EDPMS).
Banksarenowr equir
edt odi
sconti
nuesepar
ateXOS Ear
li
erthecoordi
nat
ionbetweentheCustomsandBanks
repor
ti
ng(forExportbil
lsout
standi
ngbeyondthest
ipul
ated wasnotuptoadesir
edlevelandhencetherewer
ealarge
peri
od)andreportthesameonEDPMS. amountofinf
ormati
ongapst hatneededt
obeplugged.
Thechangei
ntherepor
ti
ngr
equi
rementsi
nvol
veshi
ft
s Withthesetti
ngupoft heIDPMS, i
tisexpect
edthatal
l
fr
om manualr
epor
tingt
oaut
omatedrepor
ti
ng. concernedagencies,vi
z.,
Customs,RBIandBankswi l
luse
acommoni nfor
mat i
onplatf
orm whichwil
lstr
eamli
nethe
enti
reprocess.
TheIDPMSwasi
mpl
ement
edwi
thef
fectf
rom 10t
hOct
ober
,
2016.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Totrackthemov
ementofimporttr
ansact
ionsthroughbanking BFM MODULE-A
syst
em, Cust
omshav
emodi f
iedtheBil
lofEntr
yf or
mattodisplay
Chapt
er5:Faci
li
ti
esf
orExpor
ter
sandI
mpor
ter
s
theADCodeofbankconcer
ned,asreport
edbyt heimport
ers.
Pri
marydataonimporttr
ansactionsfr
om Customswil
lfi
rstf
low (
PART-
IV)
i
ntotheIDPMSserverandthereupondependi
ngontheADcode Whatwewi
llst
udy
?
shal
lbesharedwit
htherespectivebanksf
ortaki
ngthe
tr
ansact
ionsfor
ward. *Whati
sFact
ori
ng?

Thisissimi
lartosystem wher
eintheShi
ppi
ngBil
ldet
ail
sar
e *Whati
sFor
fai
ti
ng?
sharedforexportt
ransacti
onsthr
oughtheEDPMS.
TheADbankwi l
lent
erev erysubsequentacti
vit
y,v
iz.document
FACTORI
NGANDFORFAI
TING:
submission,out
wardremi t
tancedata,et
c.inIDPMSsoast o
updat
et heIDPMSdat abaseonr ealt
imebasis. Factor
ingandfor
fai
ti
ngaret
hetwoproducts,whichal
low
FornonEDI( manual
)Customspor t
s,ti
llt
heyareupgr
adedt oEDI theexport
erst
osellt
hei
rbookdebt
sandr ai
sefinance
(computeri
sed)port
s,thenodalbr
anchofADbankswi llupl
oad upfr
ont.
Bil
lsofEntry(
BoE)databasedonor i
ginalBoEwith Fact
ori
ng:
stamp/signat
ureoftheCustomsassubmi ttedbyi
mporter.
Factoringisdef i
nedasanagr eementbet weenaf inancial
Sinceal
linf
ormat
iononsubmissi
on/non-
submissi
onofBi l
lsof
i
nst i
tuti
on( knownas“ Factor'
)andt hebusi nessconcer n
Entri
eswouldbeavai
l
abletoRBI,
thr
oughtheIDPMSser ver,
submissi
onofBEFstatement
sbyBankshasbeendi sconti
nued.
(theexpor ter/
sell
er)sel
li
nggoodsorser vicest ocust omers
oncr edit
, wherebythefactorpur chasest heclients'book
debts,eitherwi t
horwi t
houtrecour set othecl i
entandi n
relat
ionther etocontr
olsthecr editextendedt ot he
customer sandadmi ni
stersthesal esledger .

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Asgivenabov e,
thepurchaseofbookdebtsiscent
ral Thedat
abaseontheindiv
idualbuy
ersbui
ltupoveraperi
od
funct
ionoft hefactor
ing,whil
ecredi
tcontr
oland oft
ime,byt
hefactorcoul
dbeusedbyt hecli
entf
orafee.
administrati
onofsalesledgerar
eotherservi
cespr
ovi
ded (
c)Fact
orFi
nanci
ng:
bythef actor.
Whi
leinIndi
afi
nanci
ngisanessent
ialact
ivi
tyforafactor
,
Whi l
efactori
nghasal onghistory
,dati
ngbacktoseveral
i
ncert
aincount
ri
esitmaynotbeanessentialser
vice.
centuri
es,inIndia,
itwasintr
oducedinearl
y90safter
recommendat i
onofKalyanasundaram Committ
ee,setup General
ly
, afact
orwil
lbewil
li
ngt
oadv
anceupt
o75–80%
toexami nethefeasibi
li
tyofint
roduct
ionoffact
ori
ngin oftheoutstandi
ngdebts.
Indi
awhi chwer eacceptedbytheReserveBankofIndia. HowFact
ori
ngwor
ks(
Fact
orMechani
cs)
:
Afact
orprov
idesdi
ff
erentser
vices,
whi
chcanbedescr
ibed Forfactor
ingoperat
ions,t
hebasi
cneedi
stohav
ea
asunder
: fact
oringagreementbetweent
hefact
orandt
hecli
ent
.
(
a)DebtAdmi
nist
rat
ion: Besidesthesetwopart
ies,
thepurchaser,
whohas
Managingthesalesledgeroft
hecli
ent,savi
nghis purchasedthegoodsfrom t
hecli
ent,isal
soapart
ytothe
admini
strat
ivecostofbookkeepi
ng,inv
oi ci
ng,
credi
t factor
ingdeal,
whichnormall
yevolvesonthest
epsas
cont
rolanddebtcollect
ion. givenbelow:

Thi
swoul dal
soi
ncl
udewor
koff
oll
owi
ngupf
ort
hedebt 1.Thecli
ent/export
erapproachesthefact
orwit
hrequi
sit
e
col
lect
ion. detai
lsofbusiness,debt
orsandordersinhand,
whichhe
i
ntendstogetf act
ored.
(
b)Cr
edi
tPr
otect
ion:
2.Thefactor
,(exportfactor
),contactshi
scounterparti
n
Asprof essional
s,factorswil
lhav
et hef
acil
it
yforcr
edi
t thecountr
yoft heimporter/buyer
,(knownasi mportfact
or)
,
i
ntell
igencet oenablet hem t
oassesscredi
tri
skandadvi
se
toassessthecr edi
tworthi
nessoft hedebtor
/buyer,t
oset
thei
rclientsaccordingly.
l
imitsonhim.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
3.Theexportf
actor,
thensi
gnsanagr eementwit
hhis 1.Singlefact
orsystem:whereusuall
ytheexport
erandthe
cl
ient,
det
ail
ingtermsofservi
ces,
alongwithindi
cat
ive i
mpor terdecidetohaveacommonf act
or,
with
l
imitsonthebuyers/
import
ers. offi
ces/branchesinboththecount
ri
es,tospeedupthe
processandr educecosts.
4.Thecli
entssubmitt
wocopiesoftheinvoi
cesdrawnon
thebuyer
/debtor
s,andgetf
inanceuptotheextent
approv
ed. 2.Twof act
orsy st
em:wher etwodiff
erentfact
orsi
ntwo
5.Theexportfactorsendsonecopyoft
heinvoi
cetohis countr
iesareused, bothindependentl
yrenderi
ngserv
ices
counter
part(
normal l
ycall
edasimportf
act
or)
, i
nthecount
y totheexporterandt heimporter
.
oftheimport
er,forcoll
ecti
onofdebt
,whendue.
6.Theimportfactor,col
lectsthedebt,onduedat eand 3.Di
rectexpor tf
actor
ing:inthi
scase,
onlyonefactor
ing
remit
sproceedst otheexpor tfact
or,enabl
inghimtoadjust company, basedinexporterscount
ryi
sengaged,who
hisoutst
anding.Thebalanceamounti srel
easedtothe makesallar r
angements,assessmentofcredi
tofthe
export
er,af
teradjusti
ngf ori
nterest,
charges,et
c.
debt
or,etc.,onhisown.
I
ncaseonnon- pay mentbyt hedebtorsonduedate,the
i
mpor tfactorsett
lest hedues,andstepsint
ot heshoesof
thecli
ent/exportfactorforrecover
yofduesfrom the 4.Di
rectimportf
actor
ing:her
eonl
yonef
act
or,
basedi
n
debtori
ncludingtakingl egalr
ecourse. i
mpor t
erscountr
yisengaged.
Heisengagedbythei
mpor
tert
opr
imar
il
yfaci
li
tat
e
fi
nanci
ngofdebts.
Dependi
ngupont heneedoftheexport
er-
cli
entandhis
pri
cebeari
ngcapacit
yv ar
iousty
pesofint
ernati
onal
fact
ori
ngarei
nv ogue,t
hepr i
nci
palamongstthem ar
e:

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Wi
thr
ecour
sef
act
ori
ng: 2.For
fai
ti
ng:
Whent heimport
erdoesnotpayhisdebt
s(donotmake Tot
all
ysi
mil
art
oFact
ori
ngexcept
:
paymentforthegoodsorser
vices)t
hentheSel
lerhas
*
her
etheper
soni
scal
ledf
orf
eit
er(
notFact
or)
.
responsi
bil
it
yofit
.
*
Immedi
atef
inanci
ngupt
o100%ofi
nvoi
cev
alue.
*Inforf
aiti
ngy ouhaveonl
ywithoutrecourseoption.
Wi
thoutr
ecour
sef
act
ori
ng:
(export
erisnotl i
abl
eforanydefaul
tfrom importer
Whent heimport
erdoesnotpayhisdebts(donotmake ,forf
eit
erwi l
lberesponsi
blef
orthisdefaultandhewi l
l
paymentforthegoodsorservi
ces)thentheSel
lerhasno makeef fortt
or ecov
erthemoneybyt akinglegalopti
ons
responsi
bil
it
yofit
.Theresponsi
bil
it
ylieswit
hfactor
. avail
able)
*
Wit
hrecour
seopt
ioni
snotav
ail
abl
einf
orf
ait
ing.
Adv
ant
agesofFact
ori
ng: *
For
fai
ti
ngi
sdoneonbehal
fofLCorBG.
(
a)I
mmedi
atef
inanci
ngupt
o75-
80%oft
hei
nvoi
cev
alue. *Total5part
yinv
olv
edinfact
ori
ng1-Import
er2-
Expoer
ter
3-I
mpor t
er’
sbank4-Expor
ter
’sbank5-
Forf
eit
or
(b)Noneedf
orLC,
thussav
ingcost
sfort
hei
mpor
ter
/
buyer
. *
Onl
yEXI
M banki
sal
lowedbyRBIf
orf
orf
ait
ing.
(
c)Cr
edi
tcheckoni
mpor
ter
s/buy
ers.
(
d)Sal
esl
edgermai
ntenance.
(
e)Cr
edi
tpr
otect
iononal
lappr
oveddebt
orl
imi
ts.
(
f)Adv
isor
yser
vicesf
ornewar
eas,
count
ri
es.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE-A
Chapt
er5:Faci
li
ti
esf
orExpor
ter
sandI
mpor
ter
s *Total5part
yinvol
vedinfact
ori
ng1-Impor
ter2-
(
PART-
V) Expoerter3-
Import
er’
sbank4-Expor
ter’
sbank5-
Forf
eitor
Whatwewi
llst
udy
?
*
Onl
yEXI
M banki
sal
lowedbyRBIf
orf
orf
eit
ing.
*Whati
sFor
fai
ti
ng?
Anot
herproductf
orf
inanci
ngofexpor
trecei
vabl
es
*
Whatar
ethebenef
it
sofFor
fai
ti
ng? i
sForfai
ti
ng.
I
tcanbedef inedasamechani sm f orfinancingby
2.For
fai
ti
ng: discounti
ngofexportreceivables(billofExchange),
withoutrecoursetot
heexpor ter/sell
er, f
ora
Tot
alFact
ori
ngexcept
:
medi um ter
m, onafi
xedr atebasis, f
ort hefull
*
her
etheper
soni
scal
ledf
orf
eit
er(
notFact
or)
. valueofthecont r
act
/invoice.
*
Immedi
atef
inanci
ngupt
o100%ofi
nvoi
cev
alue. I
nanot herwords,for
fait
ingisthepurchasebyt
he
*I
nfor f
ait
ingy ouhav eonl
ywithoutrecourseopti
on. fi
nancer,ofmedium term exportcl
aimsonthe
(
expor t
erisnotl i
ableforanydefaul
tfrom import
er buyer
s, wit
houtrecoursetotheexporter
s.
,f
orfeit
erwillberesponsiblef
orthisdefaultandhe I
tisasour
ceoff
inanceandnotat
ypeofcr
edi
t
wil
lmakeef forttorecoverthemoneybyt aking i
nsur
ance.
l
egal opti
onsav ail
able)
Thefinanceragreestofinancethet
ransact
ionon
*
Wit
hrecour
seopt
ioni
snotav
ail
abl
einf
orf
ait
ing. thebasisofthestandingoft hei
mporter
,hi
s
*
For
fei
ti
ngi
sdoneonbehal
fofLCorBG. countryri
sk,andatti
mes, doessoont hestr
engt
h

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
ofguar
ant
eeoft
hei
mpor
ter
'sbank.
Sinceforf
aiti
nggener
all
ycoversmedi um-term Thediscountchargesfort
hetransact
ionwoul
d
fi
nancing,expor
tofcapit
algoods,project
s,etc.
, dependupont hequali
tyofcr
edit,
countr
yri
skand
madeonmedi um t
erm basi
s,areeli
giblefor thenatur
eoftransacti
on.
forf
ait
ing.
Ift
heconditi
onsareagr eeabl
etothepart
ies
However,therei
snor estr
ictionforfi
nanci
ngof concerned,
acontracti
ssi gnedbetweent
he
medium t
erm export
sonly, assuchexportsof export
erandtheforfai
ter.
commoditi
es,consumergoods, whereexport
sare Ther
eaft
er,
theexpor
tsaremadeandbi
llsor
aised,
nor
mallymadef orshortperiodsofsayupt o12
di
scount
edbythefor
fai
ter.
monthsarealsofi
nancedt hrought hi
srout
e!
Forf
aiti
ngisdoneagainstthebil
lofexchangeor
Mechani
sm ofaFor
fai
ti
ngTr
ansact
ion: thepromissorynot
e,dulyaccept
edbyt heimpor
ter
Ther
ear
efi
vepar
ti
est
oanyf
orf
ait
ingt
ransact
ion. andguaranteedbyhisbank.
Otherthant heexport
er,
impor
terandthe Thi
sisknownasav
ail
ingoft
hebi
llofexchange.
fi
nancer(Forfai
ter
),t
hebanksoftheexpor
terand Thecostchar
gedbyt heforf
aiter
,usual
l
ycover
sthe
t
hei mpor t
erarealsoinv
olv
ed.
commitmentfees,di
scount/
financi
ngchar
gesas
Aftergetti
ngthepr oposalf
rom t
heexpor
ter
,the al
sodocument at
ionfees.
forfai
terascert
ainsthecountr
yrisk,
asal
sothe
Thecommitmentfeesusual
lyrangesbetween0.50
creditworthi
nessoft heimpor
ter.
to1.
50%perannum, ontheunuti
li
zedporti
onofthe
I
fneedbe,t
heimport
eri
sadvi
sedtogetguar
ant
ee val
ueofcont
ract
,andischargedfortheperi
odthe
ofhi
sbankforpay
mentofi
nvoi
cesonhim. commit
mentisgiven.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Thecommi
tmentf
eei
snon-
ref
undabl
e. BFM MODULE-A
Discountchargesaremarket
-rel
atedfi
nancing Chapt
er5:Faci
li
ti
esf
orExpor
ter
sandI
mpor
ter
s
costs,basedonLIBORfortheperiodofcredit
,pl
us (
PART-
VI)
amar gintocoverfor
fai
ter
'sr
isks.
Whatwewi
llst
udy
?
I
nI ndi
a,RBIhaspermi
ttedEXIM Banktofaci
li
tat
e
fi
nancingofmedium-t
erm expor
tbill
sthr
ough *
Whati
sExpor
tFi
nance?
Forfai
ti
ng. *
Whati
sPr
eshi
pmentcr
edi
t?
Benef
it
sofFor
fai
ti
ngt
oExpor
ter
s:
(a)Takesawaypol
it
icalandcommerci
alr
isks EXPORTFI
NANCE:
associat
edwit
hexportrecei
vabl
es.
TheReser v
eBankofI ndi
ahasf ramedspecific
(
b)Makesav
ail
abl
e100%f
inanceagai
nstt
he guidel
inesforfi
nancetoexporters,
soast oall
ow
i
nvoi
cedr
awn. fi
nanceatconcessionali
nterestrat
es,tomake
(
c)Wi
thoutr
ecour
sef
aci
li
ty. exporter
scompet ewitht
heircompet i
torsf
rom
othercountri
es,andal
sotoboostt heexportsfrom
(d)Fr
eedom f
rom cr
edi
tadmi
nist
rat
ion,
andf
oll
ow- thecountry.
up.
TheRBIfi
rsti
ntr
oducedt
heschemeofExpor
t
(
e)Costsavi
ngonexpor
tcr
edi
tinsur
ance,
besi
des Fi
nanci
ngin1967.
r
elat
edpaperwor
k.
Theschemei sint
endedtomakeshor t
-t
erm
(
f)Fi
xedratef
inanci
ng, f
reedom f
rom mov
ementof workingcapi
talfi
nanceavai
labl
etoexport
ersat
i
nter
estr
atesforthetenorofthebil
l. i
nternati
onal
lycomparabl
einter
estr
ates.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Exportcr
editi
savai
labl
ebot
hinr
upeeaswel
lasi
n TheReserv
eBankofI ndiahasalsopermit
ted
for
eigncurr
ency. bankstoal
lowbot hPacki
ngcreditsaswellaspost
-
TheReser veBankofI ndiahasi
ssuedbr oad shi
pmentadv ancest
oexporter
si nIndi
anrupeesas
wellasi
nforeigncur
renci
es.
dir
ecti
vestobanks, ont hesubj
ectofexpor tf
inance,
andbanksar efreetochar gei
nterestr
atesupt o Letusseetherul
esrel
atedt
orupeeadvancesfi
rst
,
thecei
lingsandi naccordancewithguidel
ines befor
egoingtothef
orei
gncurr
encyexportcr
edi
tto
prescr
ibedbyRBIf rom timetotime. export
ers.
Fi
nancet
oexpor
tercanbeoft
wot
ypes: Pr
e-shi
pmentf
inancecanbeoft
wot
ypes:
1-Pr
e-Shi
pmentLoanorPacki
ngCr
edi
tLoan(
PCL)
: 1.Packi
ngCr
edi
t(EPCorPCL)
.
Financeall
owedt oanexporter,t
ofundtheneedfor Packi
ngCr
edi
tLoan(
PCL)orExpor
tPacki
ngCr
edi
t
procurementofrawmat eri
al,manufact
uri
ngandup (EPC)
.
tothestageofpackingandshi pment,i
scall
edPre-
2.Advanceagai
nstGov
t.r
ecei
vabl
es,
i.
e.Dut
y
ShipmentFinance/Loan(PCL)alsocall
edPacki
ng
Drawback,et
c.
credit
.
Dut
ydr
awback:
(r
efundofcust
omsdut
ybyGov
)
2-Post
-Shi
pmentExpor
tFi
nance(
PSEF)
:
Dutydrawbackprovi
sionsar
egi venundersecti
on
Whi l
eontheotherhand,
financeagai
nstexpor
tbi
ll
s, 74and75oft heCustomsAct ,1962.Secti
on74
whent heshi
pmentisalr
eadymade, i
scall
edPost
al
lowsdutydrawbackonr e-
exportofdutypaid
ShipmentCredi
torPost-
ShipmentExportFi
nance
goods.Whereassecti
on75al l
owsdr awbackon
(PSEF). i
mpor t
edgoodsusedi nthemanuf actur
eofexport
goods.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Post-
shipmentfinancecanbeofvarioust
ypes,
as Forallowi
ngPackingCreditadvancesitisapre-
under:1.Expor
tbill
spurchased/
discount
ed requi
sitet
hattheborr
owermusthav eaf i
rm export
/negoti
ated. orderoranExportLett
erofCr edi
t,andthattheloan
soallowedmustbel i
quidatedoutofrelati
veexport
2.Adv
anceagai
nstbi
ll
ssentoncol
lect
ion.
proceeds.
3.Adv
ancesagai
nstexpor
tsonconsi
gnmentbasi
s.
Here,i
ncert
aincases,
thebankcanwai
ve
4.Adv
ancesagai
nstundr
awnbal
ances. submissi
onoforderorLCattheti
meofavai
li
ngof
5.Adv
ancesagai
nstDut
yDr
awback. advance.
Whilemakingapprai
salofanexportcr
editpr
oposal
,
banksaresupposedtofoll
owtheguideli
nes/
rul
es
i
ssuedbyRBI ,
DGFT, ECGC,andeachbank’s
1.Pr
e-Shi
pmentFi
nance: i
nternalsy
stem f
orgranti
ngadvances.
Asgivenabov e,pre-
shipmentfinance,general
ly Normall
y,t
hefol
lowi
ngbr
oadgui
del
inesneedt
obe
knownasPacki ngCreditLoan(PCL)orExpor t ascer
tai
ned:
PackingCredit(EPC),i
sessent i
all
yawor ki
ng
A.Pr
e-sanct
ion:
capit
aladvanceal l
owedf orthespecif
icpurposeof
procuri
ngpr ocessi
ng/manuf acturi
ngofgoods 1.Thebor
roweri
sbank'
scust
omer
.
meantf orexport. 2.Theyshoul
dhav
eImport
/Expor
tCodenumber
Itcoul
dcov eral
lcostspri
ortoshipmentoffi
nished (I
EC)all
ott
edbyDi
rect
orGener
alofFor
eignTr
ade
goods,i.
e.packi
ng,localt
ranspor
tati
on,l
abour (DGFT).
charge,et
c. 3.Thei
rnameshoul
dnotappearundert
hecaut
ion

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
l
istofRBI
. i
nsurance)f
rom t
heCI Fval
ue,i
fthedi
spat
chis
4.Theyshoul
dnotbeundert
heSpeci
fi
cAppr
oval t
hroughseaandar ound25%ifthedi
spat
chisbyai
r.
l
istofECGC. Aft
erarr
ivingattheFOBval
ue,
theusualmar
gin,
i.
e.,
5.Theyhavethecapaci
tyt
oexecutetheorder pr
ofitmarginsti
pulat
edi
nthet
ermsofsanct
ionsto
bededucted.
withi
nsti
pul
atedti
meandhasagenui neandv al
id
exportor
derorLet
terofCr
edi
tforexportofgoods. 8.Normall
ythetot
alper
iodofPCLshoul
dnot
exceed180days.
6.Al
l‘
KnowYourCust
omer
'(KYC)gui
del
inesar
e
compli
edwi
th. Bankscangr antextensionsbeyond180day supto
7.Thetot
alper
iodsancti
onedshouldbeasperthe 360day s,basedont hei
rassessmentandneedof
thecustomer .Anyextensionbeyond360day s,
manufact
uri
ngcycl
eort heprocesscycl
eoft
he
goodsbei
ngmanuf act
ured.
(normall
y180days) wouldceaset oqualifyforconcessi
onalr
ateof
i
nteresttotheexporter.
Nor
mally,
quantum offi
nancewillbefi
xedont he
9.TheRat eofI
nteresti
sli
nkedtotheBenchmar
k
FOB(Fr
eeOnBoar d)val
ueoft hecontr
actortheLC
MarginalCostofFundsbasedLendingRate(
MCLR)
ort
hedomesticvalueofthegoodswhicheveris
eff
ectiv
e1stApr i
l2016foral
lcommer ci
al
l
essaft
erdeducti
ngthepr of
itmargi
n.
advancesincl
udingexport
s.
Advancef
orthefrei
ghtandi
nsur ancechar
gesar
e
nottobedi
sbursedatthei
nit
ialstageit
sel
f. 10.Banksmayadoptaf lexi
bleat
ti
tudewithregard
todebt-
equit
yratio,
marginandsecuri
tynormsbut
I
fthecontractortheLCi sonCI Fbasis(cost, ther
ecouldbenocompr omi sei
nrespecttoviabi
li
ty
i
nsurance,
f r
ight
),theFOBv aluewillbearri
vedatby oftheproposalandthei
ntegri
tyoftheborr
ower .
deducti
ng13%t o14%( representi
ngf r
eightand
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
11.Expor
ter
'scr
edi
trequi
rementsatpr
e-andpost
- count
ry.
shi
pmentstagesar
etobeconsideredi
ntotal
. 6.Afterpropersanct
ioni
ngofcr edi
tli
mits,
the
B.Post
-sanct
ion: di
sbur si
ngbranchshouldinform ECGCthedetai
ls
1.NoPCLhasbeenavai
ledbyhim agai
nstt
he ofli
mi tsancti
onedintheprescri
bedformatwit
hin
30day sfrom thedateofsancti
on.
sameorder
/LCf
rom anyotherbank.
Forthisr easononly,t
heBankwhi chhasgr anted (Whereveradvancesarecover
edunderWhole
thePr e-Shipmentfaci
li
tyshouldnotethefactofits Tur
nov erPre-
ShipmentPoli
cy(WTPCG)and/or
credi
tf acil
ityontherever
sesideoftheoriginalLC WholeTur nov
erPost-Shi
pmentPol
icy(WTPSG)of
ororiginalCont r
actsothatiti
sawar ni
ngtoany ECGC.)
otherbankwhi chishandli
ngtheexporter
's 7.Theadvanceshouldbeliqui
dat
edonsubmi ssi
on
document s. ofrel
ati
veexportbi
ll
s,bywayofallowingpost
2.Bankshoul
dcallf
orCr
edi
tRepor
t/St
atusRepor
ts shi
pmentfinanceagainstt
hosebil
ls.
onthefor
eignbuy
ers. (Eveni ncasepost-
shipmentli
mitsarenot
sanctioned,PCLshouldbeliqui
datedbyall
owing
3.Theexpor
tershoul
dsubmi
tstockstat
ement
sfor
thegoodsonwhichPCLhasbeenall
owed. post -
shipmentadvancetotheextentofPÇL.Once
goodshav ebeenshipped,
wecannotcont i
nuewit
h
4.Iftheexport
sarecoveredunderlet
ter
sofcr
edi
ts, apr e-shi
pmentadvanceagainstthesegoods)
.
bankswoul dneedtobesatisf
iedaboutthe
standingofthecr
editopeni
ngbank. 8.I
ncaseafterall
owingPCL,exportsdonottake
pl
ace,t
headv anceistr
eat
edasl ocaladv
ance,and
5.Banksmayalsolookint
otheregul
ati
ons,t
he i
nter
estatdomest i
cpenalr
atesistobecharged.
pol
it
icalandf
inanci
alcondi
ti
onsofthebuyer
's

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
C.SpecialCasesf
oral
lowi
ngPacki
ngCr
edi
t I
nt hecaseofcommodi t
iescoveredunderSel
ecti
ve
Advances: Credi
tContr
ol,banksshouldi
nsistonproduct
ionof
(a)Packingcredi
tscanbeall
owedtosub-suppl
ier
s l
etter
sofcredi
t/fi
rm or
derswithi
naper i
odofone
monthfrom t
hedat eofsanct
ion.
alsoatthefi
rststageundert
heRupeecredit
scheme. (i
v)IncaseofPCLal l
owedforpurchaseofseeds,
forexpor
tofde-oi
ledcake,t
heproceedsf rom l
ocal
(b)Bankshav ebeenauthorizedtograntpre-
shipmentadv ancesforexportsofanycommodi ty saleofoilcanbeusedtoli
quidat
ePCL, withi
na
peri
odof30day sfrom t
hedateofadv ance.
withoutinsi
sti
ngonpr i
orlodgmentofl ett
ersof
credit
/fi
rm exportor
dersunder'RunningAccount (v)I
fthecommodi tytobeexpor
tedfall
sunder
facil
it
y’subj
ecttothefoll
owi ngcondi
tions: ‘
Restri
ctedCategory'
,ali
censef
rom thecompetent
author
it
yisrequir
ed.
(i
)Thefaci
li
tymaybeextended,pr
ovi
dedtheneed
for'
Runni
ngAccountfaci
li
ty’
hasbeenest
abli
shed Ift
hecommodi t
yfal
lsunder‘Negat
iveCat
egor
y’,
it
bytheexpor
ter
stothesati
sfact
ionoft
hebank. cannotbeexpor
tedoutofIndia.
(
ii
)Thebanksmayextendt
he‘Runni
ngAccount
f
acil
it
y’onl
ytot
hoseexpor
ter
swhosetr
ackrecord
i
sgood.
(i
ii
)Inallthecaseswher epr
e-shi
pmentCr edit
RunningAccountf aci
li
tyhasbeenextended,lett
ers
ofcredit
/fir
m ordersshoul
dbepr oducedwithina
reasonableperi
odoft i
me.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 6: External Commercial Borrowings and Foreign
Investments in India (PART-I)
What we will study?
* All about ECB?
Join CAIIB WITH ASHOK on YouTube & App
INR Denominated ECB:
Which includes bank loans, floating/fixed rate notes/bonds/
debentures (other than fully and compulsorily convertible
instruments), trade credits beyond 3 years, Foreign Currency
Convertible Bonds (FCCBs), Foreign Currency Exchangeable
Bonds (FCEBs) and includes Plain Vanilla Rupee denominated
bonds issued overseas which can be either placed privately or
listed on exchanges - as per host country regulations.
Plain Vanilla Bond is the most basic type of bond, wherein
when an investor buys a bond, there is a fixed coupon
payment at pre-determined fixed intervals, and the maturity
of the bond is also pre-determined.
EXTERNAL COMMERCIAL BORROWINGS – CONCEPTS:
Eligible Borrowers:
(i) All entities eligible to receive FDI.
(ii) Entities recognized as Startup by the Central Government
as on date of raising ECB.
(iii) Port Trusts, Units in SEZ, SIDBI, EXIM Bank.
(iv) Registered entities engaged in micro-finance activities viz.,
registered Not for Profit Companies, registered societies/
trusts/co-operatives and Non-Government Organizations are
permitted only to raise INR ECBs.
Join CAIIB WITH ASHOK on YouTube & App
INTRODUCTION:
External Commercial Borrowings (ECBs) are commercial
borrowings raised by eligible resident entities from recognized
non-resident entities (lenders) towards medium-term (3/5
years) and long-term (10 years) foreign currency denominated
debts including Indian Rupee denominated borrowings with a
minimum average maturity period (MAMP) of 3 years and
above.
The eligible resident Indian entities are also eligible to borrow
for periods of less than 3 years, subject to the extant
guidelines of the Reserve Bank of India.
ECBs can be raised either under the Automatic route where
the cases will be examined by the Authorized Dealers
Category I (AD Cat I Banks) or through the Approval route,
under which prospective borrowers are required to obtain RBI
approval by routing their requests through their AD Banks for
examination.
FCY Denominated ECB: It can be in any freely convertible
foreign currency and includes bank loans, floating/fixed rate
notes/bonds/ debentures (other than fully and compulsorily
convertible instruments), trade credits beyond 3 years,Foreign
Currency Convertible Bonds (FCCBs), Foreign Currency
Exchangeable Bonds (FCEBs).
Join CAIIB WITH ASHOK on YouTube & App
Not Permitted End Use:
The negative list for which ECB proceeds cannot be utilized
would include the following:
(i) Real estate activities.
(ii) Investment in capital market.
(iii) Equity investment.
(iv) Working capital purposes except from foreign equity
holder.
(v) General corporate purposes except from foreign equity
holder.
(vi) Repayment of Rupee loans except from foreign equity
holder.
(vii) On-lending to entities for the above activities.
ECBs Recognized Lenders:
The lender should be resident of FATF (Financial Action Task
Force) compliant country or IOSCO (International Organization
of Securities Commission) compliant country.
Multilateral and Regional Financial Institutions where India is
a member country will also be considered as recognized
lenders.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Individuals as lenders can only be permitted if they are foreign (c) ECB raised for 10 years
equity holders or for subscription to bonds/debentures listed (i) working capital purposes or general
abroad. corporate purposes

Foreign branches / subsidiaries of Indian banks are permitted (ii) on-lending by NBFCs for working capital
as recognized lenders only for FCY ECBs (except FCCBs and purposes or general corporate purposes
FCEBs). (d) ECB raised for 7 years
Foreign branches / subsidiaries of Indian banks, subject to (i) repayment of Rupee loans availed
applicable prudential norms, can participate as arrangers / domestically for capital expenditure
underwriters /market-makers/ traders for Rupee (ii) on-lending by NBFCs for the same purpose
denominated Bonds issued overseas.
(e) ECB raised for 10 years
Minimum Average Maturity:
(i) repayment of Rupee loans availed
Minimum average maturity period (MAMP) will be 3 years, domestically for purposes other than capital
including borrowing by startups. expenditure

(ii) on-lending by NBFCs for the same purpose

Sr.No. Category MAMP For the categories mentioned at (b) to (e)

(i) ECB cannot be raised from foreign branches / subsidiaries of

(a) ECB raised by manufacturing companies up to 1 year
Indian banks.
USD 50 million or its equivalent per financial
year. (ii) the prescribed MAMP will have to be strictly complied.
(b) ECB raised from foreign equity holder for 5 years
working capital purposes, general corporate
purposes or for repayment of rupee loans.

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A All-in-Cost: It includes rate of interest, other fees, expenses,
charges, guarantee fees, whether paid in foreign currency or
Chapter 6: External Commercial Borrowings and Foreign
INR but will not include commitment fees and withholding tax
Investments in India (PART-II) payable in INR.
What we will study? In the case of fixed rate loans, the swap cost + spread should
* All about ECB Continued...? not be more than the floating rate + spread.
Additionally, for FCCBs the issue related expenses should not
exceed 4% of issue size if listed and in case of private
placement, these expenses should not exceed 2% of the issue
size, etc.
All-in-Cost ceiling:
For new ECBs - Benchmark Rate + 500 bps spread.
For existing ECBs linked to LIBOR whose benchmarks are
changed to ARR – Benchmark Rate + 550 bps spread.
ARR: Alternative Reference Rates
For INR denominated ECBs - Benchmark rate + 450 bps spread.
Benchmark rate in case of Rupee denominated ECB will be
prevailing yield of the Government of India securities/bond of
corresponding maturity.
 Join CAIIB WITH ASHOK on YouTube & App
ECBs other operational concepts:
• Change of currency of ECB from one freely convertible
foreign currency to any other freely convertible foreign
currency as well as to INR is freely permitted.
• The ECB borrower will be required to cover principal as
well as coupon through financial hedges. The financial
hedge for all exposures on account of ECB should start
from the time of each such exposure (i.e., the day liability
is created in the books of the borrower).
• All eligible borrowers can raise ECB up to USD 750 million
or equivalent per financial year under Automatic Route.
However, entities recognized as Startup by the Central
Government can raise maximum of USD 3 million or
equivalent per financial year.
• In case of FCY denominated ECB raised from direct
foreign equity holder, ECB liability-equity ratio for ECBs
raised under the automatic route cannot exceed 7:1.
• Issuance of any type of guarantee by Indian banks, All
India Financial Institutions and NBFCs relating to ECB is
not permitted.
• ECB proceeds meant only for foreign currency
expenditure can be parked abroad pending utilization.
Join CAIIB WITH ASHOK on YouTube & App
The borrowers are required to report actual ECB transactions
in Form ECB 2 Return through the AD Category I bank on
monthly basis to reach RBI within 7 working days from the
close of month to which it relates.
Changes in ECB parameters in consonance with the ECB norms,
including reduced repayment by mutual agreement between
the lender and borrower, should be reported to the RBI
through revised Form ECB at the earliest, in any case not later
than 7 days from the changes effected.
Refinancing of existing ECB:
Refinancing of existing ECB by fresh ECB is permitted,
provided the outstanding maturity of the original borrowing is
not reduced and the all-in-cost of fresh ECB is lower than the
all-in-cost of existing ECB.
Foreign branches of Indian banks are permitted to participate
in refinancing of existing ECB, only for highly rated corporates
(AAA) and for Maharatna/Navratna Public Sector
Undertakings.
Join CAIIB WITH ASHOK on YouTube & App
• Until utilization of ECB proceeds, funds can be invested in
liquid assets viz.,
➢ Deposits or Certificate of Deposit (CD) or other products
offered by banks rated not less than AA- by Standard and
Poor/ Fitch or Aa3 by Moody’s.
➢ Treasury bills and other monetary instruments of one-
year maturity having minimum rating as indicated above
and
➢ Deposits with foreign branches of Indian banks abroad.
• ECB proceeds meant for Rupee expenditure should be
repatriated immediately for credit to Lender's Rupee
accounts with AD Category I banks in India.
• ECB borrowers are also allowed to park ECB proceeds in
term deposits with AD Category I banks in India for a
maximum period of 12 months cumulatively.
• Any draw-down in respect of an ECB should take place
only after obtaining the Loan Registration Number (LRN)
from the Reserve Bank on submission of Form ECB.
Draw-down: Withdrawal
Join CAIIB WITH ASHOK on YouTube & App
REPORTING REQUIREMENTS:
Loan Registration Number (LRN) – Drawdown of ECBs should
happen only after obtention of LRN from the RBI.
The borrowers are required to submit Form ECB through the
AD Category I Bank who in turn will forward the application to
RBI, Department of Statistics and Information Management,
External Commercial Borrowings Division for their perusal and
issuance of LRN.
The borrowers are required to report the actual ECB
transactions through ECB 2 returns through the AD Category I
Bank on a monthly basis so as to reach within 7 days from the
close of the relevant month.
Changes, if any, in the ECB parameters, after obtention of the
LRN should also be incorporated in the monthly returns.
Any borrower, who is otherwise in compliance of the ECB
guidelines, can regularize the delay in reporting by payment of
Late Submission Fees (LSF) for the period of delay and the
delays may range from up to 30 days from the due date of
submission to beyond 3 years from the due date of
submission.
The late submission fees may also range from Rs. 5,000 to Rs.
1,00,000 per year depending on the extant delayed
submission.
 Join CAIIB WITH ASHOK on YouTube & App
CONVERSION OF ECB INTO EQUITY:
Conversion should be with the lender's consent and without
any additional cost and adhering to the sectoral cap as per the
FDI Policy.
Pricing guidelines to be adhered to.
If the borrower has availed any credit facilities from the Indian
banking system, all prudential guidelines issued by the
Department of Banking Regulation of RBI to be complied with,
including consent of other lenders.
Join CAIIB WITH ASHOK on YouTube & App
FOREIGN INVESTMENTS:
Foreign Investment in India is regulated in terms of Section 6
[sub-section 2A] and Section 47 of the Foreign Exchange
Management Act, 1999 (FEMA) read with Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019 (NDI Rules).
Foreign Investments - Revised Framework:
There are multiple regulators dealing with foreign investment
as under:
*Department of Economic Affairs of Finance Ministry notifies
Non-Debt Instruments (NDI) rules.
*RBI – Nodal authority for Valuations & Reporting of foreign
investment.
* Approval for foreign investment not falling within automatic
route - earlier "Foreign Investment Promotion Board (FIPB)".
*Now, Department of Industrial Policy & Promotion (DIPP) -
For issuing policy measures and approvals in some sectors like
NRI investment and retail trading & Formulate FDI Policy.
Ministry of Commerce - approvals / licenses for specific
matters like defense, insurance, etc.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 6: External Commercial Borrowings and Foreign
Investments in India (PART-III)
What we will study?
*All about Foreign Investment?
Join CAIIB WITH ASHOK on YouTube & App
Key changes in the above context:
*Foreign Investment Promotion Board (FIPB) abolished in
2019.
*On-line reporting of Foreign Investment to RBI through AD
Banks - filing SMF (Single Master Form) through FIRMS portal.
*Late submission fee introduced.
*FEMA Notification No. 20/2000, Master directions dated 03-
05-2000, replaced with the NDI rules (33 Rules and 10
Schedules).
FIRMS: Foreign Investment Reporting and Management
System.
Key Concepts:
Foreign Direct Investment (FDI):
*Any investment in Equity instruments.
*Made by a Person Resident Outside India (PROI).
*On a repatriable basis:
(a) In an unlisted Indian company
(b) 10% or more of the paid-up equity capital, on a fully
diluted, basis in a listed company.
(c) In an LLP towards capital contribution.
 Join CAIIB WITH ASHOK on YouTube & App
*In case an existing investment by a PROI in equity
instruments of a listed Indian company falls to a level below
10% of the post issue paid-up equity capital on a fully diluted
basis, the investment shall continue to be treated as FDI.
Once an FDI, always an FDI.
Foreign Portfolio Investment (FPI):
*Foreign Portfolio Investor (FPI) means a person registered in
accordance with the Provisions of SEBI (FPI) Regulations 2019
wherein FPIs can invest in securities in the primary and
secondary markets including shares, debentures and warrants
of companies, listed or to be listed on a recognized stock
exchange in India.
*Investment made by a PROI in less than 10% of the paid-up
equity capital, on a fully diluted basis of a listed company.
*The 10% limit for foreign portfolio investors shall be
applicable to each foreign portfolio investor or an investor
group as referred in Securities and Exchange Board of India
(Foreign Portfolio Investors) Regulations, 2014.
*A PROI may hold foreign investment either as FDI or FPI in
any particular Indian company.
Join CAIIB WITH ASHOK on YouTube & App
Sectoral Cap:
Sectoral Cap is the ceiling limit up to which a PROI can
subscribe to the Paid-up capital of Indian Investee Company
as prescribed under Sector-wise/Activity-wise by Department
of Industrial Policy & Promotion (DIPP), Govt. of India.
If the foreign investment in the investing entity is 50% or
more, then the entire investment will be regarded as indirect
foreign investment.
Foreign Venture Capital Investments (FVCI):
FVCI is incorporated outside India and can invest in Domestic
Venture Capital Fund or a Venture Capital undertaking
(Domestic unlisted Company).
They are SEBI registered Investment Vehicle.
*Venture capital funds are pooled investment funds that manage the
money of investors who seek private equity stakes in startups and
small-to medium-sized enterprises with strong growth potential.
These investments are generally characterized as very high-risk/high-
return opportunities.
Foreign investment in Investment Vehicle:
Means it is an entity registered under SEBI, example:
Join CAIIB WITH ASHOK on YouTube & App
Downstream Investments (Indirect Foreign Investments):
Downstream investment means the indirect foreign
investment in the Indian company (i.e. investee company) as a
result of investment by other Indian company (i.e. investor
company) having foreign investment in it.
For example, A (an Indian Company) makes investment in the
capital of B (another Indian company).
It is just an investment from A to B.
However, if A is already having foreign investment in it, then B
will also be considered having indirect foreign investment
from that foreign source.
Therefore, it is technically called as Downstream Investment.
Downstream investments also mean Investment by an
Investment Vehicle which is not owned and not controlled by
resident Indian citizens.
In other words, is owned or controlled by persons resident
outside India (PROI).
Join CAIIB WITH ASHOK on YouTube & App
• Real Estate Investment Trusts (REITs) governed by the
SEBI (REITs) Regulations, 2014.
• Infrastructure Investment Trusts (InvITs) governed by the
SEBI (InvIts) Regulations, 2014.
• Alternative Investment Funds (AIFs) governed by the SEBI
(AIFs) Regulations, 2012.
Start-up Company:
Start-up Company means a Private Company incorporated
under the Companies Act, 2013 or a Registered Partnership
Firm or an LLP, recognized as such by the DIPP, Ministry of
Commerce and Industry, Government of India and complying
with following conditions:
(a) Start-up recognition will be restricted to 7 years from the
incorporation/registration.
(b) In case of bio-technology sector, start-up recognition will
be up to 10 years.
(c) Turnover for any FY since incorporation/registration does
not exceed INR 100 crores.
(d) The entity is working towards innovation, development or
improvement of product or processes or services, or operating
on a scalable business model with high potential for
employment generation/wealth creation.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 6: External Commercial Borrowings and Foreign
Investments in India (PART-IV)
What we will study?
*All about foreign investment continued...?
Join CAIIB WITH ASHOK on YouTube & App
Eligible Investment Instruments:
*Fully paid Equity shares.
*Partly paid Equity shares, provided 25% of total
consideration is received upfront and balance within 12
months.
*Fully, Compulsorily and mandatorily convertible
debentures/Preference shares.
*Share warrants provided at least 25% of consideration is
received upfront and balance within 18 months of issuance.
Share warrants or stock warrants are documents issued by a company
that give you the right to buy or sell the company's shares at a specific
price at a particular date or within a period.
*Convertible notes issued by Startup entities, repayable at the
option of the holder or converted into equity within a period
not exceeding 5 years from the date of issue of the CN.
*Bonus Shares/Rights Shares/ESOPs.
ESOPs: Employee Stock Ownership Plans
*Swap of equity instruments (FDI & ODI) - NRI owned
companies.
ODI: Outward Direct Investment.
Join CAIIB WITH ASHOK on YouTube & App
Eligible Foreign Investors: Who can invest?
*PROI- Non-resident entities, NRIs, OCIs, Foreign Nationals.
*NRIs resident in Nepal and Bhutan subject to the inward
remittances received in free foreign exchange.
*Erstwhile overseas corporate body (OCBs) who are not under
the RBI caution list.
*Foreign Portfolio Investors (FPI).
*Foreign Venture Capital Investors (FVCI).
Eligible Investee Entities: Where you can invest?
*Indian Companies as defined under the Companies Act 2013.
*Trusts being Venture Capital Funds regulated by SEBI.
*LLPs.
*Special Investment Vehicles.
*Start-up companies.
Join CAIIB WITH ASHOK on YouTube & App
ODI occurs when a resident company invests in a non-resident
country as part of a strategy to expand their business.
*Import of capital goods/machinery.
*Conversion of ECB into equity shares.
Prohibited Sectors: Where you can't invest?
*Lottery business including Government, Private and On-line.
*Gambling and betting including Casinos.
*Chit Funds.
*Nidhi Business.
*Trading in Transferable Development Rights.
*Real Estate Business, Construction of Farmhouses, etc.
*Manufacturing of Tobacco, Cigarettes tobacco substitutes.
*Sectors do not open to Private investments, eg., Atomic
Energy, Railways.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Rules Governing Pledge of Shares: BFM MODULE - A
Any person resident outside India (PRIO) holding equity Chapter 6: External Commercial Borrowings and Foreign
instruments in an Indian Company may pledge in favour of a Investments in India (PART-V)
Bank in India.
What we will study?
(a) To secure credit facilities being extended to such Indian
company. *All about timeline of reporting using various reporting forms?

(b) For genuine business purposes.

(c) Submission of a declaration/annual certificate from the
statutory auditor of the investee company that the loan
proceeds will be utilized for the said purpose.

Any person resident outside India holding equity instruments

in an Indian Company may pledge in favor of Overseas Bank.
(a) To secure credit facilities being extended to PROI who is
the promoter of such Indian company or the overseas group
company.
(b) Loan is availed only in an Overseas bank.
(c) Loan is utilized for genuine business purposes and not for
investments.
(d) Loan proceeds should not result in any capital inflow into
India.

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Process of reporting using various reporting forms: Foreign Transfer between Resident Within 60 days of
Currency- resident to Non- transferor/ transfer of capital
Transfer of Resident. transferee or instruments of
Various Reporting Forms Shares (FC-TRS) the person receipt/remittance
Sale of shares on Stock of funds whichever
resident
FORM PURPOSE RESPONSIBILITY TIME FRAME Exchange* is earlier.
outside India.
FOR FILING
In case of transfer as
*Responsibility
per Regulation i.e.,
Foreign Reporting of capital Investee Entity Within 30 days from of the NR.
deferred payment
Currency - Gross instrument issued to a the date of issue of
transfer, reporting
Provisional person resident capital instruments.
be done on receipt
Return (FC-GPR) outside India and
of every tranche of
where such issue is
payment.
reckoned as Foreign
Direct Investment.
Reporting of
Employees' Stock option to Issuing Indian Within 30 days from
conversion of ECB into
Stock Option persons resident Company. the date of issue.
Equity.
(ESOP) outside India.
Annual Return Annual reporting by Investee Entity On or before the
of Foreign Indian company which 15th of July.
Liabilities and has received FDI or LLP
Assets (FLA) which has received
capital contribution in
the previous year(s)
including the current
year.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
FORM PURPOSE RESPONSIBILITY TIMEFRAME Downstream An Indian company Indian Entity or Within 30 days of
FOR FILING Investment making downstream Investment such investment.
(Form DI) investment in another Vehicle making
LLP (I) LLP receiving amount Investee Indian Within 30 days from Indian company DI.
of consideration for LLP. the date of receipt which is considered
capital contribution the amount of indirect foreign
and acquisition of consideration. investment for the
profit shares. investee company.
LLP (II) Disinvestment/ Investee Indian Within 30 days from
LLP. the date of receipt Form InVi An investment vehicle Indian Within 30 days of
transfer of capital
funds. which has issued its Investment issuance of units in
contribution profit
share between a unit to person Vehicle investment vehicle.
resident and non- resident outside
resident (or vice India.
versa).

Depository Reporting of issues in Domestic Within 60 days of

Receipt Return accordance with the Close of the issue.
Custodian
(DRR) Depository Receipt
Scheme, 2014 by the Form Issuance & Transfer of Issuing Within 30 days of
Domestic custodian. Convertible CNs by Indian startup company/ issuance/transfer.
Notes (CN) company. Transferor/
Transferee

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Table on late submission fee (current scale): List of Documents for Obtention of Foreign Investments
(Illustrative List):
*Application (for Inward) along with FEMA declaration signed
Amount involved in LSF as % of amount Max. LSF
by Investee Company.
reporting.
*Brief profile of Investee Company providing main business
activities of the entity with 5-digit NIC code as per NIC 2008
Up to INR 1Cr 0.05% INR 10 lakhs or 300% of list.
amount involved.
NIC: National Industrial Classification.
(Whichever is lower)
*Copy of MOA of Indian Investee Company.
More than INR 1Cr 0.15% INR 1 Cr or 300% of amount
*Copy of MOU/share purchase agreement.
involved.
MOA: Memorandum of Association.
(Whichever is lower)
MOU: Memorandum of understanding.
*% of LSF doubled for every 12 months of delay
*6 Point KYC SWIFT of the remitter/investor as per RBI format.
* Includes Sundays/Holidays.
*NOC from joint account holder if shares are being issued on
*The period shall begin from "the day after due date" till preceding
single name (applicable for remittance received from joint
day of reporting.
accounts only).
*Declaration stating Capital instruments against this
remittance would be issued within 60 days accordance with
the provisions.
*Scan email acknowledgement received by the investee
company from FIRMS helpdesk w.r.t to Entity master.
 Join CAIIB WITH ASHOK on YouTube & App
FIRMS: Foreign Investment Reporting and Management
System.
*Undertaking from customer confirming FC-GPR & related
documents will be reported in FIRMS portal within 30 days
from date of allotment of shares.
FC-GPR: Foreign Currency Gross Provisional Return.
FC-GPR is applied when entity receives foreign investment,
and against such investment, the entity allots shares to the
foreign investors.
Join CAIIB WITH ASHOK on YouTube & App
*Letter from the Company mentioning reason for return of
funds.
*Board resolution from the company confirming excess funds
have been received as share application money and the excess
funds are being repatriated back to the investor.
*Letter confirmation that no interest element involved in
refund of excess share application funds.
*Branch has to intimate to RBI about refund once refund
transaction is processed.

List of Documents for Refund of Foreign Investments

(Illustrative List):
*Application (FCTRS Outward) + Form A2 signed by Investee
Company.
FC-TRS: Foreign Currency Transfer of Shares.
*FIRC in original obtained and endorsed and retained along
with the records.
FIRC: Foreign Inward Remittance certificate.
*Copy of UIN letter/FIRMS FC-GPR reporting Ref Number.
UIN: Unique Identification Number. Allotted by RBI.

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE – A Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 7: Risks in foreign trades-Role of 2-
Whyweneedf
orexpor
tcr
edi
tinsur
ance:
ECGS (PART-I) War:
What we will study:
Anoutbr
eakofwarorcivilwarmaybl
ockordel
ay
*What is Risk? pay
mentforgoodsexpor
ted.
*What is ECGC? Coup:
*Why do we need insurance in international trade? Acouporani nsur
rect
ionmayal
sobr
ingaboutt
he
1-ECGC: ECGC Ltd. sameresul
t.
(Earlier known as Economi
cdi
ff
icul
ty:
Export Credit Guarantee Corporation Ltd.) Economic diffi
culti
es or bal
ance of pay ment
ECGC Ltd. Is a credit guarantee institution, set up for probl
ems( di
fferencebetweenincomingmoneyt o
the promotion of exports, by protecting the exporters countrynadandoutgoi ngmoneyf rom countr
y)
from any financial loss due to the buyer’s failure to mayl eadacount r
ytoimposerestri
cti
onsonei t
her
pay or insolvency of buyer. i
mpor tofcer
taingoodsoront r
ansferofpay ments
*Insurance policy for exports forgoodsimported.
*Guarantee for banks Commer
cialr
isk:
The commer cialr
isks ofa for
eign buy
ergoing
bankrupt or losi
ng his capaci
ty to pay are
aggravated due t
ot he pol
it
icaland economic
uncertai
nti
es.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
5-
Var
iousr
isksi
nInt
ernat
ionalt
rade:
3-Benef
it
sofExpor
tCr
edi
tinsur
ance: 1-
Buy
ersr
isk

Exportcreditinsurance i
s designed to prot
ect 2-
Sel
ler
sri
sk
export
ersfrom theconsequencesoft hepayment 3-
Shi
ppi
ngr
isk
ri
sks,bot
hpol i
ti
calandcommer ci
al,andtoenable
4-Ot
herr
isk
them t
oexpandov erseasbusi
nesswi t
houtfearof
l
oss. 4.
1)Cr
edi
tri
sk
4.
2)Legalr
isk

4-Whati
sRI
SK: 4.
3)Count
ryr
isk&Pol
it
icalr
isk

Ar i
skcanbedef i
nedasanuncert
aineventwith 4.
4)Oper
ati
onalr
isk
fi
nancialconsequencesr
esul
ti
ngi
nlossorreduced 4.
5)ExchangeRi
sk
earni
ngs.
Whi
le,in human l
if
e,risk i
srel
ated t
oil
lness,
A.BuyerRi sk:Thesell
erf
acesri
sksrel
ati
ngtonon-
i
mpair
mentorlossofl
if
e,
acceptabil
ity, non-
payment
, qual
it
y acceptance,
i
ncommercialandbusinessact
ivi
ti
es,
thebusi
ness credi
trisk,etc.
pr
ofi
torl
osswoul ddependuponhowt hebusi
ness
B.Sell
erRisk:Thebuy erfacestheriskrel
ati
ngto
i
srunori
tsaffai
rsmanaged.
thesell
ernotshi ppi
ngt hegoodsaf t
errecei
vi
ng
I
notherwordsi
tcanbedef
inedast
heuncer
tai
nty advancepayment,mayshi ppoorqualit
ygoodsand
oft
heoutcome. mayshipthegoodsaf t
erconsiderabl
edelay.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Reduct
ionofbuy
er/
sel
lerr
isk: Pr
otect
ionf
rom Shi
ppi
ngr
isk:
Overaper i
od,whent hebuy er
/sell
erundertakea Duet oabov er i
sks,beyondt hecont r
olofbuyers
few transacti
ons,know each ot her's busi
ness, andsellers,nati
onsatt i
mesdecl ar eshippi
ngand
practi
cesandcommuni cat
ionwel l
,thebuyer'
sand otherrelated acti
viti
es as essentialservi
ces to
sell
er'
sriskreducest
oagr eatextent. promotecr ossbor dertr
ade,particularl
ywhent he
countyisl argel
ydependentei theronexpor t
sor
C.
Shippi
ngRisk:I
ncl
udesrisksari
singduetoot
her i
mpor t
s.
i
nter
mediar
iesint
heint
ernati
onaltr
ade,l
ike D.OtherRi sks:Someoft heot herri
skslikebank
shi
ppi
ng compani es, handli
ng agent
s, port fai
lur
erisk,settl
ementr
isk,l
egalrisketccoul
dalso
aut
hor
iti
es,
localt
ranspor
ter
s,orev
enl
oaders,
etc.
, aff
ectthepar t
iestot
heinter
nati
onaltrade.

which may l
ead t
o del
ays ornon-shi
pmentof Wewi
llst
udyi
ndet
ailaboutt
heser
isks:
goodsinti
me,duetoavar
iet
yofr
easons,
li
ke,
goodsbei
ngmi
shandl
ed, (a)CreditRisk:Rel
atestocredi
twor t
hinessofthe
goodsabandoned, buy er
,andcoul dresulti
nnon- pay
mentofexpor t
bil
ls,due t o any r
easons,li
ke fi
nancialcrunch,
goodssi
phoned,
defaults,
insol
vency,et
c.
goodswr
ongl
ydel
iv
ered,
goodsdel
iv
eredatanot
herdest
inat
ion, (b)LegalRisk:Relatestoanyamendmenti nthe
l
awsoft hesel l
ersorbuy er'
scountr
y,whi
chcould
Stri
ke by local t
ranspor
ter
s causi
ng del
ay i
n
resul
tininabil
it
yoft hesell
ertoexportorofthe
reachi
nggoodstoports,
buyertor
emi tproceedsofinvoi
ces.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
(d)Operat
ionalRi
sk:Rel
atestooper
ati
onali
ssues
Thiscouldbeduet oembargoesoncountri
es,ban atbothendsorev enatsuppor
ti
ngorgani
zati
ons
orrest
rict
iononexportofpart
icul
argoods,banor place.
rest
ri
ction on remi
tt
ance offunds t
o parti
cul
ar St
ri
kes:
countr
ies,etc. sel
ler
'sf
act
oryor
even atsel
lers'raw materi
alsuppl
ier
s'f
act
ory
,
(
c)Count
ryRi
skandPol
it
icalRi
sk: tr
anspor
ter
s,loaders,
bankset
c.
Relat
es t
othe devel
opment
sint he count
ry of Fai
lur
eofSy
stem :
buy
erorsell
er,leadi
ng t
o def
aul
tin exportor operat
ionalbr eak outs orfailur
es ofsy st
ems,
pay
ments. connecti
v i
ty,and communi cation br
eak downs,
Thi
scoul
dbeduet
ouncer
tai
ntyi
nlaws, commot ions and ot her st
rikes, or er
rors by
uncert
aint
yinf inanci
alposit
ionoft hecountr
ies, operat
ingst af
f,et
c.
i
nharmonious relat
ionshi
p between count
ri
es,or coul
dleadtononshipment,ordel
ayinshi
pment
,
fl
uidpoli
ti
calsi
tuati
on. shi
pmentofdef
ect
iveordamagedgoods,
(e)ExchangeRi sk:Rel
atestoadv er
semov ementi n
currenci
es. Any expor ter or impor t
er f aces
exchange risk,direct
lyori ndi
rectl
y.Invoi
cing in
currency
,othert hanhomecur r
ency,st
rengthening
orweakeni ng ofcur rency i
n which i
mpor ts are
bil
led.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Count
ryr
iskcl
assi
fi
cat
ionofECGC:
6-
COUNTRYRI
SK: The count
ryr i
sk cl
assi
fi
cati
on ofECGC gr
oups
count
ri
esintosevencat
egori
es.
Ther ecoul
dbeSev eralreasonsleadingtodefaults
byt hebuyers,duetor easonsnotwi t
hinhiscontrol Banksarealsorequi
redtomakeprovi
sionsincase
butf orgovernmentalpol i
ti
caleconomi calorlegal i
tsexposurestoanyonecount r
yis1% ormor eof
reasonsofthel and. i
tstot
alassets,
asont hel
astbal
ancesheetdat
e.
Factor
s, whi
ch need to be assessed, whi
l
e
revi
ewingt
hecount
ryr
isk,
areenumer
ated
Count
ryr
iskpol
icyandcount
ryr
iskr
ati
ng:
bel
ow:
Reser
veBankofIndi
ahaspr escr
ibedcount
ryr
isk
gui
deli
nesf
oraut
hori
sedbanks. (
i)Pol
it
icalSt
abi
li
ty/
Inst
abi
li
ty
Intermsoftheseguideli
nes,banksarerequi
redt
o (
ii
)Int
ernat
ionalRel
ati
ons
havet hei
rown countryr i
sk poli
cy and havea (
ii
i)Economi
cPol
icy
syst
em ofgrading/
rati
ngofcount r
ies,basedona
setofparamet
ers. (
iv)Gr
ossDomest
icPr
oduct(
GDP)

Wher e banks do nothav

ethei
rown system of (
v)I
nfl
ati
on
rat
ingtheycanadoptt hecount
ryr
iskrati
ngs,of (
vi)ExchangeRat
e-Vol
ati
li
ty
ECGC.
(
vii
)Lev
elofFor
eignTr
ade
(
vii
i)Bal
anceofPay
ment
(
ix)Ext
ernalDebt
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
ECGC7Fol
dcl
assi
fi
cat
ionofcount
ry: 2-
Rest
ri
ctedCoverGroupI:wher
er evol
vi
ngl
imi
ts
ar
eapprovedbyECGC,val
idf
or1year.
ECGCadopt
sasev
enf
oldcl
assi
fi
cat
ion
It updates and publi
shes the count
ry r
isk
classi
fi
cati
ononquar
ter
lybasi
s. 3-Restr
ict
ed Cov er Group II: wher
e specifi
c
approvalis gi
ven,on a case t
o case basi
s,On
mer i
ts.
1-OpenCov
erCat
egor
y:
A1 I
nsi
gni
fi
cantRi
sk
A2 LowRi
sk
B1 Moder
atel
yLowRi
sk
B2 Moder
ateRi
sk
C1 Moder
atel
yHi
ghRi
sk
C2 Hi
ghRi
sk
D Ver
yHi
ghRi
sk

Join CAIIB WITH ASHOK on YouTube & App Joi

nCAI
IBWI
THASHOKonYouTube
BFM MODULE – A
Chapter 7: Risks in foreign trades-Role of EXPORTCREDI
TINSURANCEI
NINTERNATI
ONAL
ECGS (PART-II) TRADE:
What we will study: Export
sgr
owwi
tht
hehel
pofexpor
tfi
nanci
ngby
*What is ECGC banks.
*What is ECGC? *Governments,i
nordertosupportexpor
tsprovi
de
*Policy offered by ECGC cheapfinanci
ngoptionsandprovi
decomf ortt
o
*Guarantee offered by ECGC export
ersandf i
nancingbanks,
bywayofcr edi
t
i
nsurance.
*Countr
ieshavesetupspecial
corpor
ationsto
Turnkey Project:
provi
detheseservi
cesofexportcr
edi
tinsurance.
One of the special modes of carrying out international
business is a turnkey project. It is a contract under I
ndi
a ECGC
which a firm agrees to fully design, construct and
UK ECGD
equip a manufacturing/business/service facility
and turn the project over to the purchaser when it is US EXI
M Bank
ready for operation for a remuneration.

*Somegener ali
nsurancecompaniesalsoprovide
credi
tguaranteeforexport
sli
keinIndi
a,NewI ndia
assurancecompany )off
erexpor
tcredi
tinsurance.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

*Creditinsurancelowerthecostof Obj
ect
iveofECGC:
borrowi ng/
f i
nanci
ng,asthegovernmentagency (
i)Toencour
ageandf
aci
li
tat
egl
obal
izat
ionof
bearst heriskofdefaul
tasperpolicyt
erms. I
ndia'
str
ade.
*
Thei
nsur
ancei
sonr
iskshar
ingbasi
s (i
i)Toassi
stIndi
anexporter
sinmanagi
ngthei
r
ECGCcoversalar
gepartofcredi
tdefaul
t,but credi
tri
sksbyprovi
dingti
melyinfor
mat
ionon
requi
rest
heInsur
edexport
er/fi
nancertobear worthi
nessofthebuyers,
bankersandt
hecount
ri
es.
somepartofthel
oss. (i
ii
)ToprotecttheI ndianexport
ersagainst
unfor
eseenlosses, whi chmayariseduetof ai
lur
e
ofthebuyer,bankorpr obl
emsfacedbyt hecountry
ofthebuyerbypr ov i
dingcosteff
ectiv
ecr edi
t
ECGCLTD: i
nsurancecov er
si nthef or
m ofPolicy.
I
n1957t
heGov
ernmentofI
ndi
aest
abl
ished
Expor
tRi
sksI
nsur
anceCor
por
ati
on(
ERI
C) i
v)I
talsooffer
sguarant
eestobanksandfi
nancial
Toprov
idecreditri
ski
nsur
ancet
oexpor
ter
s,whi
ch i
nst
it
utionstoenabl
eexport
stogetloanoncheap
wast
hentranstormedto i
nst
restrat
e.
Expor
tCr
edi
tGuar
ant
eeCor
por
ati
onLt
d.,
in1964.
*
Insur
ancepol
icyf
orexpor
ter
s
*
Guar
ant
eef
orbanks

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Mai
nAct
ivi
ti
esofECGC: (
vi)Buy
erExposur
ePol
icy
.
1-
Pol
ici
esf
orexpor
ter (
vii
)Consi
gnmentExpor
tsPol
icy
.
2-Guar
ant
eef
orBank (
vii
)Mul
ti
-buy
erExposur
ePol
icy
.
(
ix)I
T-Enabl
edSer
vicesPol
icy
-Si
ngl
eCust
omer
(
SITES).
Pol
ici
esof
fer
edbyECGCt
otheexpor
ter
sar
e:
(
x)Pol
icyForSMESect
or.
(i
)StandardPoli
ciestoexport
erst
opr ot
ectt
hem
againstpaymentrisksi
nvol
vedinexport
sonshort
- Theguar
antees/
pol
i
ciesof
fer
edbyECGCt
othe
ter
m credit
. banksar
e:
i
i)SmallExpor
tersPoli
cybasical
lyaStandar
d (
i)ExportCr
editI
nsur
anceforBanks(Whol
e
Poli
cy,buti
ncorpor
ati
ngcertaini
mpr ov
ementin t
urnover-Packi
ngCredi
t)
-ECIB(WT-PC)
.
ter
msofcov ertoenablet
oencour agesmall (
ii
)Expor
tPr
oduct
ionFi
nanceGuar
ant
ee.
export
ers.
(
ii
i)
ExportCr
editI
nsur
anceforBanks(
Whole
t
urnover
-Postshi
pmentCredi
t)-
ECIB(
wi-
D
(i
ii
)Speci
fi
cShipmentPoli
ciesdesignedtopr
otect
(
iv)Expor
tFi
nanceGuar
ant
ee.
fi
rmsinIndi
a,agai
nstpay
menti nvolvedi
n
shi
pment. (
v)Expor
tPer
for
manceI
ndemni
ty.

(
iv)Expor
ts(
Speci
fi
cBuy
er)Pol
icy
. (
vi)Expor
tFi
nance(
Over
seasLendi
ng)Guar
ant
ee.

(
v)Expor
tTur
nov
erPol
icy
. (
vii
)Tr
ansf
erGuar
ant
ees.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – A Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 7: Risks in foreign trades-Role of
ECGS (PART-III) New I
mportLi
censingrest
ri
cti
onsorcancel
lat
ions
ofaval
idi
mportl
icenseint
hebuyer
scountry
,
What we will study:
I
II
)Pol
ici
esdonotcov
erf
oll
owi
ngr
isks:
*What is ECGC Policy?
(
I)Commer
cialdi
sput
esr
aisedbyt
hebuy
er.
I) Commercial Risks – covering Insolvency of the
Overseas Buyer, Protracted default by the overseas (
II
)Causesi
nher
enti
nthenat
ureofgoods.
buyer to pay for goods accepted by him within a
II
I)Buyer
'sfai
lur
et o obt
ainnecessar
yi mportor
specified period usually 4 months from the due date,
exchange aut
hori
zat
ion from author
it
ies i
n his
Repudiation – Buyers’ failure to accept goods subject
countr
y.
to certain conditions.
I
V)Exchanger
atef
luct
uat
ionr
isk.
(II) Political Risks - which covers imposition of
restrictions on remittance by the Government in V)Fail
ureoftheexpor
tertoful
fi
llthet
ermsoft
he
buyers country or any Government action which may expor
tcontr
actornegl
igenceonhispar
t.
block or delay payment to exporter war, revolution or
Civil disturbances in buyers country.
ECGCPOLI
CIES:
Letusnow gothroughthemainf
eat
uresofsome
ofthepol
ici
esandguarant
ees.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

A.St
andar
dPol
icy
: B.Smal
lExpor
ter
s'Pol
icy
:
TheStandar
dPoliciesofECGC prov
idecov
erf
or SmallExport
er:An expor terwhose ant
ici
pat
ed
expor
ter
sforshor
t-t
erm expor
ts. tot
alexpor
tforper i
odof12mont hsaheadisnot
Thedi
ff
erentt
ypesofpol
ici
esar
e: morethan₹50lacs.(Pr
oject
edExpor
ttur
nover
)

i
)Shipment(
Compr ehensiveRisk)pol
icy-tocover Thi
spol
icyi
sissuedf
oraper
iodof12mont
hs.
bot
hcommercialandpolit
icalr
isksfr
om thedat
eof 3t
hings
shi
pment.
C.Speci
fi
cShi
pmentPol
ici
esShor
t-
Ter
m:
i
i)Shi
pment(Pol
it
icalRi
sks)
-t
ocov
eronl
ypol
it
ical
Shor
t-
ter
m cr
edi
tnotexceedi
ng180day
s.
r
isksf
rom t
hedateofshi
pment.
Cover under t
hese pol
ici
es can be taken for
i
ii
)Cont r
act
s(Comprehensi
verisks)Pol
icy -to
shi
pmentmadeort obemadebyt heexport
ertoa
coverbot
hcommerci
alandpoli
ti
calri
sksf
r om t
he
buyerunderacont
ract
.
dat
eofcontr
act
.
3t
hings
(i
v)Contract
s(Pol
it
icalr
isks)Pol
icytocov
eronl
y
poli
ti
calr
isksfr
om t
hedateofcont
r act
. D.Expor
ts(
Speci
fi
cbuy
ers)Pol
icy
:

Thecov
ergrant
edbyECGConSt
andar
dpol
ici
esi
s Export
s-Buyer
wi se Pol i
cies-Shor
t Ter m (BP-ST)
90%ofthev
alueofexpor
ts. provi
des cov er t o I ndian expor ter
s against
commer ci
alandpol it
icalrisksinv
olvedinexpor
tof
*
3thi
ngs goodonshor t
-term credi
tt oaparti
cularbuy
er.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

E.Buy
erExposur
ePol
icy
:
ThisPol
icyisdesignedforlar
geexpor
ter
stoenable I
TEnabl
edSer
vicesPol
icy
-Si
ngl
eCust
omer(
SITES)
:
them t
ocov ertheirexposureonaparti
cul
arbuyer ITEnabl
edservi
ces(Singl
eCustomer)Poli
cywould
onthebasisofexpectedexposure. be i
ssued i
nr espectofcontractsforrenderi
ng
Twot
ypesofexposur
epol
ici
es: ser
vicef
rom ITEnabledServ
iceexpor
tindust
ry.
*
onef
orcov
eri
ngt
her
isksonaspeci
fi
edbuy
er& Pol
icyf
oronebuy
eri
sissuedf
or12mont
hs.
*anotherf
orcov
eri
ngt
her
isksonal
lbuy
er'
sar
e Ext
entofCov
eri
s80%.
offer
ed. NoCl
aim Bonus(NCB):of5%uptoamaximum of
Asepar
ateBuyerExposur
ePolicyi
sissuedforeach 50%i
savail
able,
subj
ectt
onoclai
m bei
ngl
odged.
buy
ercoveri
ngallportstobemadet ot hebuyer
dur
ingaper
iodof12mont hs.
I
.Pol
icyForSMESect
or:
F.Expor
tTur
nov
erpol
icy
:
ECGC hasintr
oducedaPolicyexcl
usi
vel
yfort
he
Thi
sPol
icyi
sforl
argeexpor
ter
swhocont
ri
but
e SMEsectoruni
tson4thJul
y,2008.
10lacormorethan10lacpery
earaspremium t
o ThePol
icyi
sforaper
iodof12mont
hs.
ECGC.I
tprov
ides foran addi
ti
onaldi
scountin
premi
um Ext
entofcov
eri
s90%.

Thetur
nov
erpol
icyi
sissuedwi
thav
ali
dit
yper
iod
of12mont
hs.

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE – A Joi
nCAI
IBWI
THASHOKonYouTube

Chapter 8: ROLE OF EXIM BANK,

*I
tser v
esasagr owt
hengi
neforindust
ri
esand
RBI, FEMA & FEDAI Guideline
SME'sbyprov
idi
ngawi der
angeofproduct
sand
What will we study? ser
vices.
*What is EXIM Bank? EXI
M BANK:*
Est
abl
ished:i
nthey
ear1981
*What is the Role of EXIM Bank? *
HQ:Mumbai
.
EXIM BANK:
*
Iti
sasubsi
diar
yofRBI
.
The EXIM Bank of India was established in 1981,
Thef unct
ionsandoperati
onsofEXI
M Bankev
olv
e
under the Export Import Bank of India Act 1981.
aroundfoll
owingphi
losophy:
As a principle financial institution for providing
financial assistance and service for institutions 1. To make I ndia'
s exports int
ernat
ional
ly
engaged in financing of export import trade in the competi
ti
ve,by offeri
ng f
inance atcompetit
ive
country especially on a long-term basis. rat
esandcondi
ti
ons.

*It acts as a catalyst and key player in the promotion 2.

Todev
elopal
ter
nat
efi
nanci
ngsol
uti
ons.
of cross border trade and investment. 3.Toprov
idedat
a,inf
ormati
onandadv i
cef
ornew
*It arranges lines of credit to other Governments, for expor
topport
uni
ti
estoIndi
anexpor
ter
s.
promoting exports of goods made in India.
4.Topr ovidesel ecti
veproducti
on,mar
ket
ingand
fi
nancing f or Indian product
s to make them
i
nternati
onallycompet i
ti
ve.
5.To respond t
o export pr
oblems of I
ndi
an
Expor
tersandpur
suepol
icyr
esolut
ions.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

1. Pr
esent
ly,EXI
M Bank of
fer
sthe f
oll
owi
ng *Buy
erscreditpr
ovidedbytheEXI
M Bankcanonl y
Fi
nanci
alPr
oduct
s: beusedfortheexportofI
ndi
angoodsorser
vices.
1-Buy
ersCr
edi
t *Buyer
's cr
editis ext
ended toaf oreign pr
oject
2-
Cor
por
ateBanki
ng company t hat i
ntends to award t he project
execut
iontoanIndianproj
ectexpor
ter
.
3-
LineofCr
edi
t
*I
tisaMedium andl ong-t
ermfinanci
ngfaci
li
tyat
4-
Over
seasI
nvest
mentFi
nance Competi
ti
ve and att
racti
verates ofint
erestfor
5-
Proj
ectExpor
t smoot
hexecutionofproj
ects.
A)Buy
er'
sCr
edi
t:
*Buyer'
sCredi
tisacreditfaci
li
typr
ogr
ammet hat B)Cor
por
ateBanki
ng:
motivat
es Indian export
ers to expl
ore new EXI
M Bankof
fer
sv ar
iousf
inanci
ngpr
oduct
sto
geographi
es. Cor
porat
esasunder:
I
tfaci
li
tat
esexport
sforSMEsbyprovi
dingcredi
tto (a)Resear
ch&Dev
elopmentFi
nancef
orExpor
t
over
seasbuyert
oimportgoodsf
rom I
ndia. Orient
edUnit
s
Throughthisprogramme,t heover
seasbuyercan (
b)Pr
e-Shi
pment
/Post
-Shi
pmentCr
edi
tPr
ogr
amme
opena* "lett
erofcr edi
t"infav
ouroft heIndian
export
erandcani mpor tgoodsandserv
icesfrom (
c)Lendi
ngPr
ogr
ammef
orExpor
tOr
ient
edUni
ts
Indi
aondef er
redpaymentterms. (
d)I
mpor
tFi
nancePr
ogr
amme

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

C.Li
nesofCr
edi
t: D)Over
seasInvest
mentFinance:EXIM Bankhel
ps
Sinceit
sinception,EXI M Bankhavebeenextending i
nenhancingexpor
topport
uniti
esforI
ndiaand
LinesofCr edi
t(LOC)t oenableIndi
anexporter
st o dr
ivi
ngtheeconomicgrowthofthenat
ion.
enternew geogr aphiesorexpandt hei
rbusi
nessi n Theyencourageandf acil
i
tateconditi
onsforI
ndian
exist
ingexportmar ketswi t
houtanypaymentr isk companiestoinvestabroadf orseeki
ngresour
ces,
fr
om ov er
seasimpor ter
s. market
s,eff
ici
enciesandst r
ategi
cAssets.
Theylayspecialemphasisonextendi
ngLOCasan E.Pr oj
ectExports:EXIM Bankhasbeenoneoft he
eff
ecti
vemar ketentrytoolaswellasameansof primedr iv
ersinencouragingproj
ectexpor tsfr
om
marketdi
versif
icat
ionforIndi
anexpor
ter
s. Indiaandhasenabl edIndiancompaniest osecure
EXI
M Bank ext ends LOC' st o overseas financial contractsacrossvar
iousgeographi
esov erthepast
three decades and suppl
ementt he development
i
nstit
uti
ons,regi
onaldev elopmentbanks,sov er
eign
governmentsandot herent i
ti
esoverseas,t oenable objecti
vesofhostcountri
es.
buyersinthosecount r
iest oimportdev elopment al Theyextendf
undedandnon-fundedf
acil
it
iest
othe
andinfr
astruct
ureprojects,equi
pment s,goodsand fol
lowi
ngexportofpr
oject
sandservi
ces:
ser
v i
cesfr
om India,
ondef err
edcreditterms. (
a)Ci
vi
lEngi
neer
ingandConst
ruct
ionPr
oject
s
Theyext end LOC on t
hei
rown and al
so atthe (
b)Tur
nkeyPr
oject
s
behestandwiththesuppor
tofGov
ernmentofI
ndia.
(
c)Techni
calandConsul
tancySer
viceCont
ract
s
(
d)Suppl
ies
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

2.Ot
herSer
vicesandPr
ogr
ammes: B)Expor
tMar
ket
ingFund(
EMP)
:
1-Consul
tancySer
vice EXIM Bankisthenodalagency,desi
gnatedbyt he
2-
Expor
tMar
ketFund(
EMF) Government of Indi
a t o manage the Expor t
Marketi
ng Fund (
EMF)t o accel
erat
et he export
3-
ProductLi
abi
li
tyI
nsur
ance(
PLI
) gr
owt h of tar
get product
s wi t
h industr
ial
ized
4-Expor
tVendorLendi
ng Dev
elopmentPr
ogr
am markets.
(EVLDP) *
EMF-1wasacomponentofWor l
dBankloanto
A)Consul
tancyandt
echnol
ogyser
vices: I
ndi
a ofUSD 250 mi l
li
on f
orI
ndust
ri
alExpor
t
(
Engi
neer
ingpr
oduct
s)proj
ect
.
wher einIndianconsultantsar eassi
stedbywayof
l
ong-t erm f inanci
alassi st
ance,manpowerand *EMF-2, Amount
ing t
o USD 37 mill
ion is a
exper trecruit
ment ,pr
epar at
ionofprojectr
epor
ts, componentofaWorldBankl
oant
oIndi
aforexpor
t
plans, t
ransferoftechnology,etc. devel
opment.
*EXIM Bankhasal
so l
aunchedExportMar
ket
ing
FinanceEMF-
3fr
om i
tsownresour
ces.
Privat
e Sect or Companies and j oint sect or
compani es, who hav e the overal
lr esources,
Capabili
typotenti
al,t
opmanagementcommi tment
and on expor tstrat
egy t
o penetr
ate and retain
presencepar t
icul
arl
yindevel
opedcountrymar kets
areeli
gibleforuseofEMFsupport.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

C)Pr
oductLi
abi
li
tyI
nsur
ance(
PLI
): D)Expor
tVendorDev
elopmentLendi
ngPr
ogr
amme
In dev eloped countr
ies pr oduct l i
abi
lit
y (EVDLP)
:
consci
ousnessoft
hepublici
sv er
yhigh,r
esult
ing Manufact
urer
,expor
tersandtr
adi
ngexpor
thouses
i
nal ar
genumberofl
it
igat
ionandhighawar
ds. sour
cegoodsf r
om vendorsf
orexpor
tonaregul
ar
basi
s.
Thisforcesexport
erstoprot
ectthemsel v
esagainst
ri
skofincidenceofproductl
iabi
li
tythroughpr
oduct Such i
ndirect expor
ts consti
tute a si
gni
fi
cant
l
iabil
it
yinsuranceoff
eredbyinsurancecompanies. componentofthecountr
y'sexport
s.
Ast hecostofPLIpremium i
shigh,
whi
chactsasa TheEVDLP enabl
esexpor
ter
sto suppor
tvendor
deterr
entforI
ndianexport
ers,duetoi
tseff
ecton dev
elopment
.
pri
cecompet i
ti
veness,
Export
ers ar e gr ant
ed Rupee l oans for
EXIM bank'
sPLIprogr
ammeenabl
estheexporter
s' i
mpl ementi
ngstrat
egicvendordevel
opmentpl
ans,
marketentryef
for
tsbyshar
ingt
heinit
ialcost
sof fori
ncreasedsuppl
yofexportabl
egoods.
PLIpremium.
*
Regi
ster
edI
ndi
anexpor
ter
sendeav
ori
ngt
oexpor
t
t
o
OECD( Or
gani
zat
ionf
orEconomi
cCooper
ati
onand
Devel
opment)
countr
ies ar
e el
igi
ble f
or suppor
t under t
he
progr
amme.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

3.EXIM Bankl
ineofcr
edi
tpr
ogr
ammef
orot
her get pre-
shi
pment f i
nance f
or pr
ocur
ement
count
ri
es: /manuf
act
uri
ngofgoods.
Underthi
srout
e,EXIM Bankgrantsli
neofcredi
tto Once shi
pmentis made,documents areto be
gover
nmentsofothercount
ri
esf orsuppor
ti
ngthei
r submit
tedaspertheor
der/LC,andr
eimbur
sement
devel
opmentpl
ans cl
aimedfrom EXI
M Bank,undertheli
neavai
labl
e
wit
hthem.
which all
ows the I
ndian exporterto getinstant
credi
tfrom EXI M Bankupon t heirexport
ing the
goods/servi
ces and submi ssion of expor t
documentst hr
oughtheirr
egularBankers.
Thebenefici
arygov er
nmentgetsal ongtenorof
say3-5yearstopayf orthepr
oduct
sandser vi
ces
thusal
lowi
ngt hem def
err
edpaymentcredi
t.
The exporters,get or der
sf r
om the operat
ing
agencyinthebuy er'
scountry
,whichisi
ssuedunder
theineofcreditnegoti
atedwithEXI
M Bank.
TheEXIM Bankalsoi
ssuesalett
ert
otheExpor
ter
s
aboutavail
abi
li
tyofl
inesfortheor
derr
ecei
vedby
them.
Theexport
erther
eaf
ter
,based on t
heorderand
l
ett
erofl
inesr
ecei
vedfr
om EXI
M bankpr
oceedsto

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE – A Joi
nCAI
IBWI
THASHOKonYouTube

Chapter 8: ROLE OF EXIM BANK,

RESERVEBANKOFINDI
A-ROLEANDEXCHANGE
RBI, FEMA & FEDAI Guideline (PART-II) CONTROLREGULATI
ONSINI
NDI
A:
What will we study? Reser
veBankofIndi
a,bei
ngt
hecent
ralbankoft
he
RBI Guidelines related to international trade. count
ry,
isempowered
Foreign currency accounts of resident *
To cont
roland r
egul
atet
he f
orei
gn exchange
1- Resident Foreign Currency Account RFC r
eser
ves.
2- Resident Foreign currency Account Domestic *
Poli
cies r el
ated t o i nter
nati
onal t
rade,
(RFCD) i
nfl
ow/out
fl
owoft hef
orei
gnexchange.
3- Exchange Earner foreign Currency Account (EEFC) *RBIalsohassupervi
sorypowersovertheper
sons
4- Dimond Dollar Account (DDA) author
izedtodeali
nforei
gnexchange.
*
Ithast
heresponsi
bil
it
yofmai ntai
ningtheexter
nal
v
alueofRupee,andcanthus,issueinst
ructi
onson
t
hesubj
ectofexchangecontr
olfrom ti
met oti
me.
DI
R1935:
(Def
enceofI
ndi
aRul
e)
Exchangecont rolwasintroducedinIndi
a,dueto
severeconstrai
ntsofforei
gnexchangedur i
ng2nd
Wor l
dWar ,wi t
ht heDefenseofI ndi
aRules1935
(DI
R1935)i ssuedaslegi
slati
on.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

FERA1973:(
For
eignExchangeManagementAct
) giv
enunderFEMAorf
ail
uret
ofi
leanyr
etur
nunder
thi
sAct
.
Lateron in 1973 the Rul
es wer
e modi
fi
ed and
i
ntroducedasanAct-FERA1973,whichcameinto I
ncaseofcont
inui
ngcont
rav
ent
ions,anaddi
ti
onal
eff
ectfrom 1.
1.1974. penal
ty,
whi
chmayext
enduptoRs.2,
000perday.
FEMA1999:
(For
eignExchangeManagementAct
) Compi
lat
ionofDat
a:
Furt
her, with t he opening up of t he Anotherimpor t
antt ask handled by t
he Reserve
economy(
Liber
ali
zati
onandGl
obal
izat
ion), Bank ofI ndi
ai s compilati
on ofdatar elat
ed to
theFERA1973wasr epealedandanew ActFEMA export
-i
mpor ttrade,f or
ex mar ket
s,non-resi
dent
1999wasint
roduced,
effecti
ve1.
6.2000. deposit
s,asalsointernat
ionalasset
sandliabi
li
ti
es.
Thedat acollectedbyRBIfrom authori
zeddealers,
goes into compi l
ati
on ofnationalleveldata on
RBIPOWERunderFEMARegul
ati
on: i
nternati
onalt rade,status of for
ex f l
ows,and
As per Secti
on 11(1) ot FEMA 1999,RBI ,is overal
linternati
onalassets and li
abil
it
ies ofthe
empower edtoissueanydi r
ect
ionwithregardto country.
makingpaymentordoingordesistfr
om doingany This data bei ng crucial f
or management of
actr
elat
ingtoforei
gnexchangeorfor
eignsecur
it
y. i
nternat
ionaltraderel
ati
onship,asal sot heval
ueof
Under11( 3)ofFEMA 1999RBImay ,af
tergivi
ng Rupee,i
scal l
edf orbyRBIunderFEMAr egul
ati
ons,
reasonableoppor
tunit
iesofbeinghear
d,I
mposeon andstri
ctpenalactionimposedf ornon- submissi
on,
the authori
zedpersonapenaltywhichmayextend wrongsubmi ssionordelayedsubmi ssion.
to Rs.10,
000 forcont r
avent
ion ofany di
recti
on

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Thedatai
stobesubmitt
edt
oRBIinthefor
m par
tner
shi
pfi
rms,
HUF,
Trust
s,et
c.
ofr
etur
ns/
stat
ement
s,someofwhi
chare: (VI) XOS: hal f
-year
ly exports out standi
ng
i
)RRetur
n:Bank-
widesingl
er et
urnoff
ort
night
ly stat
ements,showing all ov
erdue export
s bill
s
(
15day
s)dat
aonforexoper
ati
ons. remaini
ngunr
eal
ized.

i
i)BALSt
atement-st
atementshowi
ngbal
ancesi
n Pri
ortoMar ch01,2014 XOSwassubmi t
tedhal
f
NOSTRO,
VOSTROaccounts. year
lybasi
sasattheendofJuneandDecember
.

i
ii
)STAT5-dat
aont
ransact
ionsr
elat
edt
oFCNR(
B) (
VII
)BEF:St at
ementshowi ng detai
ls ofimports
deposi
ts. wher
er emi
t t
anceshavebeenef fect
edbutpr oofof
i
mports(bi
llofent
ry)notsubmit
tedbyt heremitt
er.
i
v)STAT8-dat aont
ransact
ionsi
nNREandNRO
deposi
taccount
s.
(V) Statement of Remitt
ances sent under After i nt
roduct
ion of I DPMS(Impor
t Dat a
Liber
ali
zedSchemef
orResi
dents-Mont
hly
. Processi
ngandMoni t
ori
ngSy stem)submissi
onof
BEFstatementhasbeendisconti
nuedand
Undert he RBI
's Liberal
ized Remitt
ance Scheme,
Authorized Dealers can al low remittance by *t
hedataofpendingBi
ll
sofEnt
riesar
eav
ail
abl
eto
resident indi
vi
dual s up t o USD 2, 50,000 per RBI,
thr
oughtheIDPMSsy st
em.
FinancialYear (Apr il
-March) for any permit
ted *As per latest guidel
i
nes allthe ret
urns and
current or capital account t ransact
ion or a statement
s ar e bei ng submi t
ted t o RBI
combi nati
onofbot h. electr
oni
call
ybyAut hori
zedDeal
ers.
The Scheme i
s not av
ail
abl
e t
o cor
por
ates,
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

For
eignCur
rencyAccounti
nIndi
a:
Resi
dentFor
eignCur
rency(
RFC)Account
s:

ResidentI
ndians can maint
ainf
oll
owi
ng f
orei
gn
curr
encyaccount
si nI
ndia: *Returni
ng I
ndians,who were non-r
esidents(
NRI)
earl
ierandarenowr et
urni
ngtoI
ndiaforper manent
sett
lementarepermitt
edtoopenaf or
eigncur r
ency
1-Resi
dentFor
eignCur
rencyAccountRFC
account.
2-Resi
dent For
eign cur
rency Account Domest
ic
Per
mit
tedCr
edi
t:
(RFCD)
*
Tokeept
hei
rfor
eigncur
rencyasset
shel
dout
side
3-
ExchangeEar
nerFor
eignCur
rencyAccount(
EEFC)
I
ndi
a
4-
DimondDol
larAccount(
DDA)
*Anyothermonet
arybenef
it
sfr
om t
heempl
oyer
outsi
deIndi
a.
*
Forei
gnexchangereceived outsi
deIndiaasgif
t
*
Inher
it
ancef
rom apersonresidentout
sideI
ndi
a
*
SB/
CA/
FD/
RD
*
Int
restasperbank

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

3. Exchange Ear
ner
s For
eign Cur
rency (
EEFC)
2.Resi
dentFor
eignCur
rency(Domesti
c)Account
- Accounts:(
CURRENTACCOUNT& NOI NTEREST)
RFCD:(
CURRENTACCOUNT, NOINTEREST) Residentpersons,companiesorfirmscan open
Apersonresi
dentinIndi
aisall
owedt oopenand andmai ntai
nEEFC account s,f
orthepurposeto
tr
ansacti
ngf orei
gnexchangebusiness.(
Basical
l
y
mai
ntainaResi
dentForei
gnCur
rencyaccount
.
personwhoisexportercanopenEEFCaccount)
Per
mit
tedCr
edi
t:
Everyreci
pientoffor
eignexchangeisall
owedt o
Foreignexchangeacquir
edbyhi mintheform of ret
ain100% oft heamountinaf or
eigncur
rency
currencynotes,ort
ravel
ler
scheques,whil
eona account.
vi
sitt o any countr
y outside I
ndi
a (not f
rom
This account i
s non-
int
erest bear
ing cur
rent
business)
.
account
.
*Honorar
ium orgif
tforser
vicer
enderedinIndi
ato
anypersonwhoi snotaresi
dentofIndi
a,andison Thereisnor estr
ict
iononwithdr
awali
nrupeesout
ofbalancesheldinEEFCaccounts.
avisi
ttoIndi
a.
*Unspent f
orei
gn exchange acqui
red f
or t
rav
el
abroad. Payment st owards Curr
entaccountt r
ansact
ions,
*
Theaccountisanon-int
erestbear
ingaccount
,in i
ncludingpay mentforImportofgoodsandservi
ces,
t
henat
ureofcurr
entaccount. and capi t
alaccountt ransacti
ons can be f
reel
y
debit
edt oEEFCaccount s,
upt othel
imit
spermitt
ed
byther espect
iverul
es.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

4.Di
amondDol
larAccount(
DDA)
: *
Large expor
ter
s can open account
s Wi
th mor
e
t
hanoneAD, wit
hamaxi mum of5account
s.
Thefaci
li
tyofopeni
ngDiamondDol l
arAccount
s
hasbeengrant
edt
odiamondexpor
ter
s. Per
mit
tedCr
edi
t:
I
ndi
aimpor
ts:r
oughdi
amondsorr
awdi
amonds 100% oft
heexpor
treal
isat
ioncanbecr
edi
tedi
n
DDA.
I
ndi
aExpor
ts:Pol
isheddi
amonds
Benef
it:
RFC RFCD EEFC
Export
ercanpar ktheirfor
eigncurrencyf undsin
Ret
urnNRI Resi
dent Expor
ter
theseDiamondDollaraccountsandremi tfundsto
reti
ret hei
ri mpor
t bil
ls,without incurr
ing any SF/
CA/
RD/
FD CA CA
exchangerisk. I
nter
est:Asper Ni
l Ni
l
Exper
ience:
AsperRBIgui
del
ines, Bank
Expor
ter
swit
h2y ear
sexper
iencei
nexpor
ttr
adeof Repat
ri
abl
e:Yes YES YES
di
amondscanopenDDAaccounts.
Cur
rency
:For
eign For
eign For
eign
ForS ForS ForS
Lar
geExpor
ter
s:
Whose annualaver
age t
urnoveris equalto or
greatert
han3cr
orei
ntheprecedi
ngthreefi
nanci
al
years.

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE – A Joi
nCAI
IBWI
THASHOKonYouTube

Chapter 8: ROLE OF EXIM BANK,

Resi
dentFor
eignCur
rency(
RFC)Account
s:
RBI, FEMA & FEDAI Guideline (PART-III)
What will we study?
*Returni
ng I
ndians,who were non-r
esidents(
NRI)
Foreign currency accounts of resident earl
ierandarenowr et
urni
ngtoI
ndiaforper manent
1- Resident Foreign Currency Account RFC sett
lementarepermitt
edtoopenaf or
eigncur r
ency
account.
2- Resident Foreign currency Account Domestic
(RFCD)
3- Exchange Earner foreign Currency Account (EEFC) Per
mit
tedCr
edi
t:
4- Dimond Dollar Account (DDA) *
Tokeept
hei
rfor
eigncur
rencyasset
shel
dout
side
I
ndi
a
*Anyothermonet
arybenef
it
sfr
om t
heempl
oyer
outsi
deIndi
a.
*
For
eignexchanger
ecei
vedout
sideI
ndi
aasgi
ft
*
Inher
it
ancef
rom aper
sonr
esi
dentout
sideI
ndi
a
*
SB/
CA/
FD/
RD
*
Int
restasperbank
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

2.Resi
dentFor
eignCur
rency(Domesti
c)Account
- 3. Exchange Ear
ner
s For
eign Cur
rency (
EEFC)
RFCD:(
CURRENTACCOUNT, NOINTEREST) Accounts:(
CURRENTACCOUNT& NOI NTEREST)
Residentpersons,companiesorfirmscan open
Apersonresi
dentinIndi
aisall
owedt oopenand andmai ntai
nEEFC account s,f
orthepurposeto
mai
ntainaResi
dentForei
gnCur
rencyaccount
. tr
ansacti
ngf orei
gnexchangebusiness.(
Basical
l
y
personwhoisexportercanopenEEFCaccount)
Everyreci
pientoffor
eignexchangeisall
owedt o
Per
mit
tedCr
edi
t: ret
ain100% oft heamountinaf or
eigncur
rency
Foreignexchangeacquir
edbyhi mintheform of account.
currencynotes,ort
ravel
ler
scheques,whil
eona This account i
s non-
int
erest bear
ing cur
rent
vi
sitt o any countr
y outside I
ndi
a (not f
rom account
.
business)
.
Thereisnor estr
ict
iononwithdr
awali
nrupeesout
*Honorar
ium orgif
tforser
vicer
enderedinIndi
ato ofbalancesheldinEEFCaccounts.
anypersonwhoi snotaresi
dentofIndi
a,andison
avisi
ttoIndi
a.
Payment st owards Curr
entaccountt r
ansact
ions,
*Unspent f
orei
gn exchange acqui
red f
or t
rav
el i
ncludingpay mentforImportofgoodsandservi
ces,
abroad. and capi t
alaccountt ransacti
ons can be f
reel
y
*
Theaccountisanon-int
erestbear
ingaccount
,in debit
edt oEEFCaccount s,
upt othel
imit
spermitt
ed
t
henat
ureofcurr
entaccount. byther espect
iverul
es.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

4.Di
amondDol
larAccount(
DDA)
: *
Large expor
ter
s can open account
s Wi
th mor
e
Thefaci
li
tyofopeni
ngDiamondDol l
arAccount
s t
hanoneAD, wit
hamaxi mum of5account
s.
hasbeengrant
edt
odiamondexpor
ter
s. Per
mit
tedCr
edi
t:
I
ndi
aimpor
ts:r
oughdi
amondsorr
awdi
amonds 100% oft
heexpor
treal
isat
ioncanbecr
edi
tedi
n
I
ndi
aExpor
ts:Pol
isheddi
amonds DDA.

Benef
it:
Export
ercanpar ktheirfor
eigncurrencyf undsin RFC RFCD EEFC
theseDiamondDollaraccountsandremi tfundsto
Ret
urnNRI Resi
dent Expor
ter
reti
ret hei
ri mpor
t bil
ls,without incurr
ing any
exchangerisk. SF/
CA/
RD/
FD CA CA

Exper
ience:
AsperRBIgui
del
ines, I
nter
est:Asper Ni
l Ni
l
Bank
Expor
ter
swit
h2y ear
sexper
iencei
nexpor
ttr
adeof
di
amondscanopenDDAaccounts. Repat
ri
abl
e:Yes YES YES
Cur
rency
:For
eign For
eign For
eign
Lar
geExpor
ter
s:
ForS ForS ForS
Whose annualaver
age t
urnoveris equalto or
greatert
han3cr
orei
ntheprecedi
ngthreefi
nanci
al
years.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – A Joi
nCAI
IBWI
THASHOKonYouTube

Chapter 8: ROLE OF EXIM BANK, FERA1973:

(For
eignExchangeRegul
ati
onAct
)

RBI, FEMA & FEDAI Guideline (PART-IV)

What will we study? Forei
gnExchangeRegul
ati
onAct1973( FERA,
1973)
regul
atedt
heareaoffor
eignexchange.

*FEMA 1999 FERAhadi

tsorigi
nfr
om DefenceofIndi
aRules
1935.I
twi
lbecomeappl
icablefr
om 1-1-
1974.
*Guidelines of FEMA
*FERA 1973
*Liberalized Remittance Scheme (LRS) Object
iveofFERA:Toconser
vethef
orei
gn
exchangeresour
cesoft
hecount
ry
*How Much forex you can hold in India and for how
many days? *Toensureproperut
il
isati
onoffor
exinthe
i
nterestsoft
heeconomi cdevel
opmentofthe
*How much forex can take while traveling to Nepal or
country
.
Bhutan

Vi
olat
ionofFERA:

UnderFERAanyviol
ati
onoftheprovisi
onsofthe
Actist
obedealtundertheCri
minallaws.Any
off
enceunderi
tisanon-bai
labl
ecriminalof
fence.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
FOREI
GNEXCHANGEMANAGEMENTACT
I
mpor
tantPr
ovi
sionsofFEMA:
(FEMA)1999:FEMA,
1999wasenact edbyt
he
parl
iament
,andwasbroughti
ntof
orcew.e.
f. Reser
veBankofIndia,haspower sdelegaledunder
1.
6.2000 FEMAt oi
ssueguidel
ines,cal
lforreports,
dat a,
as
al
sotoimposepenalti
es,forvi
olati
onofpr ov
isi
ons.
TheFEMAActi sapplicabl
etoal
ltr
ansact
ionsi
n
foreignexchange,undert
akeni
nIndi
aorbypersons Li
ber
ali
zedRemi
tt
anceScheme:
(LRS)
residenti
nIndia. ThelimitofUSD2,50,
000perFinanei
alYear(
FY)
Withtheint
roductionofali
beral
izedregimeunder undertheLiber
ali
zedRemit
tanceSchemef or
FEMA1999, t
herehasbeenaconsi derabl
e resi
dentscanusedfor:
rel
axati
oninr egul
ator
yprovi
sionsrelat
edtoforei
gn 1-
Remi
tancef
orpr
ivat
evi
sit(
2.5LacperFY)
exchangetransacti
ons.
2-Gi
ft
/donat
ion(
2.5LacPerFY)
Obj
ect
iveofFEMA:
3-
Goi
ngabr
oadonempl
oyment(
2.5LacperFY)
Tof
aci
li
tat
eext
ernalt
radeandpay
ment
s
4-Emi
grat
ion(
2.5LacperFY)
*
Topromot et
heorder
lydevel
opmentand
5-Mai
ntenanceofcl
oser
elat
ivesabr
oad(
2.5Lac
mai
ntenanceoff
orei
gnexchangemarket
sinI
ndi
a.
perFY)
6-
Busi
nesst
ri
p(2.
5LacPerFY)
Vi
olat
ionofFEMA:
7-
Medi
calt
reat
mentabr
oad(
2.5Lacandmor
e)
UnderFEMAanyvi
olat
ionoft
hepr ov
isi
onsoft
he
8-
Studi
esabr
oad(
2.5Lacandmor
eperFY)
Acti
stobedeal
tundertheCi
vill
awsonly,
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
HowMuchFor
exAl
lowed:
(Cur
rencynot
es+Coi
n)
FEMAgui
del
inesf
orFor
eignTr
avel
:
Themai
npr
ovi
sionswi
thr
egar
dtoFor
eignt
rav
el Tr
avel
ingTo For
exAl
lowed
are:
I
ran,
Russi
anFeder
ati
on Ent
ir
eAmount
I
raq,
Liby
a USD5000
Al
lot
hercount
ri
es USD3000
*NepalandBhutan:Drawaloff
orei
gnexchangei
s
prohi
bit
edfort
ravelt
oNepalandBhutan.

Howmuchf
orexy
oucanhol
dinI
ndi
a:

Pur
chaseofFor
ex:
(say1USD=50Rupees)
A)Not
es:
(USD2000)
Rupee Dol
lar Pay
ment
Aper sonresidenti
nIndi
acanpossessorr
etai
n
Upt
o50,
000 1000USD I
ncash
for
eigncur r
encynotesuptoUSD2,000ori
ts
Mor
ethan50,
000 1000+ DD,CHEQUE, equi
v alent
.
NEFT/RTGS,Pay
Order
B)Coi
n:(
Nol
imi
t)
Aresi
dentcanpossessf
orei
gncur
rencycoi
ns
wi
thoutanyli
mit
.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
ForBusi
nessVi
sit:
(SameasPr
ivat
eVi
sit
)
Tr
avel
er'
sunspentf
orei
gnexchange:
Thetravel
ershoul
dsur
renderunspentf
orei
gn Whi
chv
isi
tiscal
l
edbusi
nessVi
sit:
exchangewithi
n180daysfr
om thedateofret
urn.
Visi
tsbyi ndivi
dualsi
nconnectionwithattendingof
Or aninternati
onalconference,
semi nar
,special
ised
Theunspentforei
gnexchangecanbedeposi
tedby tr
aining,apprenti
cetrai
ning,
etc.,
aret r
eatedas
BusinessVi si
ts.
theresi
denti
ntheResidentFor
eignCur
rency
Account(RFC).
Forbusinesst
ri
pst oforei
gncountri
es,r
esi
dent
i
ndivi
dualscanavailoffor
eignexchangeuptoUSD
ForPr
ivat
eVi
sit:
(2.
5Lac)
2,
50,000inaFYi r
respecti
veofthenumberofvi
sit
s
undert
akenduringtheyear,
Forpri
vat
evi
sit
sabr
oad,
othert
hant
oNepaland
Bhutan
ForEmpl
oymentorI
mmi
grat
ion:
(2.
5Lac)
anyresidenti
ndiv
idualcanobt
ainf
orei
gnexchange
uptoanaggr egateamountofUSD2,50,
000inany
onefinancial
year Persontr
avel
ingabroad, f
orempl
oyment ,
orf
or
I
rrespecti
veofthenumberofv
isi
tsunder
taken i
mmi grat
ionpurposes,candrawf
oreigner
exchangenotexceedingUSD250,000.
duri
ngt heyear
.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

ForSt
udi
es:
(2.
5Lac,
+) Needmor
ethan2,
50,
000f
ormedi
cal
:

Personsgoi
ngabroadf
orstudi
esabroad,
candraw Author
izedDeal
erscanrel
easef
orei
gnexchange
exchangeuptoUSD250,000peracademi
cyear
. undergener
alper
mission
Howev
er,
bankmayal
lowr
emi
tt
ancesexceedi
ng basedont
heest
imat
efr
om t
he
USD2,
50,
000
doct
ori
nIndi
aorhospi
tal
/doct
orabr
oad.
(
wit
houtseeki
ngpr
iorappr
ovaloft
heRBI
)
basedontheest
imat
erecei
vedf
rom t
hei
nst
it
uti
on
B.Ot
herRemi
tt
ances:
abroad.
FEMAal soal
lowsresi
dent
stomaker
emi
tt
ances
ForMedi
cal:
(2.
5Lac,
+) forf
oll
owingpurposesal
so:
Gi
ftr
emi
tt
ance:
Author
izedDeal
erscanr
eleasef
orei
gnexchange Perremit
ter
/perdonoruptoUSD250,000inone
uptoanamountofUSD2, 50.
000ori
tsequiv
alent fi
nanci
alyear,
torel
ati
ves,
fr
iendset
cabroad.
perFY
Donat
ionRemi
tt
ance:
wit
houtinsi
sti
ngonanyest
imat
efr
om a
hospi
tal
/doctor
. Perremit
ter
/perdonoruptoUSD250,000inone
fi
nanci
alyeart
ocharit
able/
rel
i
gious/
cult
ural
organi
sat
ions.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
I
nter
nat
ionalDebi
t/Cr
edi
tCar
d/ATM Car
d:
Subscr
ipt
iont
oMagazi
nes/
Per
iodi
cal
s:
Resident
scanuset hei
rCredi
t/Debi
torATM cards
whil
eonv isi
tsabr
oad,uptotheenti
tlementof
I
tcanbeal
lowedbyt
heAut
hor
izedDeal
ers,
for
eignexchangeforvi
sit
sabroad.
exceptf
ort
hebanned/
proscr
ibedmagazi
nes.

Consul
tancySer
vices:
I
nfr
ast
ruct
urePr
oject:
Pr
ohi
bit
ionsUnderFEMA:
USD10,
000,
000(
1Cr
)perpr
oject
1-Remitt
anceofincomef
rom r
aci
ng/
ridi
nget
c.,
or
f
oranyconsul
tancyserv
icesi
nrespectof anyotherhobby
.
i
nfr
ast
ruct
ureproject
s
2-Remi
tt
ancef
orpur
chaseofl
ott
eryt
icket
s
Ot
herPr
oject:
3-Remi
tt
ancef
orbannedmagazi
neset
c.
USD1,00,
000(
1Lac)perpr
ojectf
oranyot
her
pr
oject
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 9: INTERATIONAL FINANCIAL SERVICE CENTRE
(IFSC), GIFT CITY (PART-I)
What we will study?
*What is IFSC i.e., International Financial Service Centre?
*What is the scope of IFSC in India?
*What are the opportunities at GIFT city?
*What are the guidelines for setting up of ''IFSC Banking Units
(IBUs)'' by Indian banks?
Join CAIIB WITH ASHOK on YouTube & App
SCOPE OF IFSC IN INDIA:
Banks in International Financial Service Centres operate as
foreign banks in the home country and are not subject to
domestic reserve requirements on deposits.
They seek deposits from non-resident citizens and can extend
loans only to non-residents.
Banks in IFSCs are also permitted to lend in foreign currencies
to both resident corporates (for trade transactions) and non-
residents.
The main objective of the IFSC is to develop a strong global
connect and focus on the needs of the Indian economy as well
as to serve as an international destination for the Corporates
in their financial activities.
The SEZ Act 2005 (Special Economic Zones Act, 2005) allows
setting up an IFSC in an SEZ or as an SEZ after obtaining
approval from the Central Government.
Since India has many restrictions on the financial sector, such
as partial capital account convertibility, high SLR requirements
and foreign investment restrictions, an SEZ can serve as a
testing ground for financial sector reforms before they are
rolled out in the entire nation.
Join CAIIB WITH ASHOK on YouTube & App
INTRODUCTION:
An International Financial Service Centre (IFSC) caters to
customers outside the jurisdiction of the domestic economy.
Such centres deal with flows of finance, financial products and
services across the borders with emphasis on the following:
1- Fund raising services for Individuals, Corporates and
Governments.
2- Asset Management and Global Portfolio Diversification
undertaken by pension funds, insurance companies and
mutual funds.
3- Wealth Management.
4- Global Tax Management and cross border tax liability
optimization, which provides a business opportunity for
financial intermediaries, accountants and law firms.
5- Global and regional corporate treasury management
operations that involve fund-raising, liquidity investment and
management of asset-liability matching.
6- Risk Management operations such as insurance and
reinsurance.
7- Merger and Acquisition activities among trans-national
corporations.
Join CAIIB WITH ASHOK on YouTube & App
Apart from SEZ related incentives, as per the SEZ Act, there is
an exemption from the Securities Transaction Tax levied u/s
98 of the Finance Act, 2004, in case of taxable securities
transactions that are entered into by non-residents through
an IFSC.
With the above global objectives in mind, the Gujarat
International Financial Technology Tec-City (GIFT City) was
established at Gandhinagar, Gujarat and started functioning
from 5th Dec 2019 with 225 companies including 3 PSBs, 9
Private Sector Banks & 3 MNC Banks.
GIFT: Gujarat International Finance Tec-City
OPPORTUNITIES AT GIFT CITY:
1- Access to large hinterland economy.
2- Access to international markets.
3- Connecting 30 million strong Indian diaspora which has a
combined worth of USD 3 trillion to India through the IFSC.
4- Inbound and outbound gateway for international financial
services.
 Join CAIIB WITH ASHOK on YouTube & App
5- Potential to be a leading destination for Global in-house
centers with a globally competitive cost structure.
6- Attracting global talent to the world class fintech hub in Gift
city.
7- Emerging as a leading hub for fund administration.
Key Business Opportunities - (Segment-Wise):
Wholesale banking:
ECB and Trade Finance, Factoring and Forfaiting Services,
Guarantee and Indemnity business, Equipment leasing, Credit
enhancement & Insurance, Risk Participation, Participation in
International trade finance services, Participation in aircraft
leasing, syndicated loans.
Capital Markets:
Merchant banking, trading and clearing members of IFSC
Exchange, funding of alternative investment funds, custodian
of securities.
Retail Banking:
Private banking, wealth management, retail banking products
such as structured deposits, deposit accounts, certificate of
deposits.
Join CAIIB WITH ASHOK on YouTube & App
Licensing:
Eligible Banks interested in setting up IBUs will be required to
obtain prior permission of the RBI for opening an IBU.
For most regulatory purposes, an IBU will be treated on par
with a foreign branch of an Indian bank.
Capital:
The parent bank will be required to provide a Minimum
Capital of USD 20 Million or equivalent in any foreign currency
to its IBU which should be maintained at all times.
Reserve requirements:
The liabilities of the IBU are exempt from, both, CRR and SLR
requirements of RBI.
Resources and deployment:
The funds raised will be from Non-Residents and Overseas
branches of Indian Banks.
Deployment of funds can be with, both, persons resident in
India as well as persons resident outside India.
However, deployment of funds with persons resident in India
shall be subject to the provisions of FEMA 1999.
Join CAIIB WITH ASHOK on YouTube & App
Treasury management:
ALM, Derivatives in Forex, Credit and interest rates,
consolidate group-wise derivative trading, including NDF in
INR and other foreign currencies to manage risk.
ALM: Asset and liability management
NDF: Non deliverable forward
Other Opportunities:
Distributor of MF units, insurance and other financial products,
Investment advisory services, Portfolio Management Services,
trustee and fiduciary services, Regional Administrative Office
(RAD) and Representative office.
GUIDELINES FOR SETTING UP OF ''IFSC BANKING UNITS (IBUs)''
BY INDIAN BANKS:
Eligibility:
Indian banks viz... Banks in the Public Sector and the Private
Sector authorized to deal in foreign exchange will be eligible
to set up IBUs.
Each eligible bank would be permitted to set up only one IBU
in each IFSC.
Join CAIIB WITH ASHOK on YouTube & App
Operational Aspects:
Cash transactions and savings bank accounts are not
permitted.
Deposits can be maintained in current accounts and term
deposits.
Indian KYC-AML and delinquency norms are applicable.
Deposits with IBUs are not insured.
Check Your Progress (A):
Fill in the Blanks in the following sentences.
(a) Banks interested in setting up IBUs will be required to
obtain prior permission from_RBI_.
(b) Provisions of the_SEZ ACT 2005_is to be adhered to for
Banks setting up IBUs in IFSC.
(c) The minimum capital to be brought in by the Parent Bank
for setting up of an IBU in IFSC is_20 Million USD_.
(d) GIFT City at Gandhinagar, Gujarat started functioning
from_05 December 2019_.
(e) The liabilities of the IBU are exempt from_CRR_and_SLR_.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 9: INTERATIONAL FINANCIAL SERVICE CENTRE
(IFSC), GIFT CITY (PART-II)
What we will study?
*What is International Financial Services Centers Authority
(IFSCA)?
*What are the Permissible Activities at IBUs?
*What are the Relaxations Available for FPIs at GIFT City?
Join CAIIB WITH ASHOK on YouTube & App
The Parent Bank is required to satisfy the following conditions:
(a) Maintain necessary regulatory capital subject to a
minimum of USD 20 Million at the Parent Bank level.
(b) Obtain No Objection letter from home country regulator
for setting up an IBU in IFSC.
(c) Letter of comfort from Parent Bank regarding liquidity and
resource support to IBU.
(d) IBUs are not required to maintain SLR and CRR.
(e) IBUs are required to maintain LCR and NSFR at IBU level.
LCR: Liquidity Coverage Ratio
NSFR: Net Stable Funding Ratio
However, the same may be maintained at the parent level
with IFSCA permission.
(f) Leverage ratio for IBUs may be maintained by the Parent
Bank and at the level specified by the home regulator and
subject to the regulations applicable to the parent bank.
(g) IBUs are required to maintain a "retail deposit reserve
ratio" on daily basis at 3% of the deposits raised from
individuals outstanding as at the end of the previous working
day.
Join CAIIB WITH ASHOK on YouTube & App
ROLE OF IFSCA:
International Financial Services Centers Authority (IFSCA) is a
unified authority for the development and regulation of
financial products, financial services and financial institutions
in the IFSC in India.
Prior to the establishment of IFSCA, the existing regulators RBI,
SEBI, PFRDA and IRDAI regulated the businesses in IFSC.
IFSCA has been established on April 27th 2020 under the
IFSCA Act 2019 with headquarters in Gandhinagar, Gujarat.
Since it requires a high degree of inter-regulatory coordination
within the financial sector, the IFSCA has been established as
a unified regulator with a holistic vision in order to promote
ease of doing business in IFSC and provide world class
regulatory environment.
The main objectives of IFSCA are to develop a strong global
connect and focus on the needs of the Indian economy as well
as to serve as an international financial platform for the entire
region and the global economy as a whole.
REGULATORY FRAMEWORK:
Indian and Foreign Banks intending to set up an IBU in IFSC
are required to obtain license from IFSCA.
Join CAIIB WITH ASHOK on YouTube & App
(h) IBUs are required to comply with the prudential directions
and instructions issued by their home regulator unless
otherwise specified by the IFSCA.
PERMISSIBLE ACTIVITIES AT IBUs:
*IBUs can undertake transactions with
Resident entities (for deployment of funds) and
Non-resident entities (for both raising of resources and
deployment of funds)
Other than individuals including HNIs / retail customers.
Means IBUs can't undertake transactions with resident
individuals including HNIs/retail customers
*All transactions shall be in currency other than INR.
*IBUs can deal with WOS/JVs of Indian companies registered
abroad.
WOS: Wholly Owned Subsidiary
JV: Joint Venture
*IBUs are not allowed to open Saving Accounts.
 Join CAIIB WITH ASHOK on YouTube & App
*They can open foreign currency current accounts of units
operating in IFSCs and of Non-resident institutional investors
to facilitate their investment transactions.
*They can open foreign currency current accounts (including
escrow accounts) of their corporate borrowers subject to
FEMA.
*No cheque facility will be available for holders of current
accounts in the IBUs.
*All transactions are to be done through bank transfers.
*IBUs are permitted to undertake factoring/forfaiting of
export receivables.
Join CAIIB WITH ASHOK on YouTube & App
*The IBUs would operate and maintain balance sheet only in
foreign currency and will not be allowed to deal in Indian
rupees except for having a special rupee account for the
purpose of defraying their administrative and statutory
expenses.
Such operations/transactions of these units in INR would be
through the AD (distinct from IBU) which would be subject to
the extant foreign exchange regulations.
*IBUs are not allowed to participate in the Indian domestic
call, notice, term, forex, money and other onshore markets
and domestic payment systems.
*IBUs will be required to maintain separate Nostro accounts
with correspondent banks which would be distinct from
Nostro accounts maintained by other branches of the same
bank.
*IBUs may maintain SNRR (Special Non-Resident Rupee)
accounts with the domestic AD and these accounts must be
funded only by foreign currency remittances through
international channel.
*The loans and advances of IBUs would not be reckoned as
part of the Net Bank Credit of the Parent Bank for computing
priority sector lending obligations.
Join CAIIB WITH ASHOK on YouTube & App
*IBUs shall obtain prior approval of RBI for offering derivative
products.
*IBUs are allowed to open foreign currency Escrow accounts
of Indian resident entities for the purpose of temporarily
subscriptions to GDR/ADR issues, until issuance of receipts.
GDR: Global Depository Receipts
ADR: American Depository Receipts
*IBUs are allowed to act as underwriter/arranger of INR
denominated Overseas bonds issued by Indian entities in
Overseas markets.
*Exposure ceiling for IBUs shall be
5% of the parent Bank's Tier-I Capital in case of Single
borrower and
10% of the parent Bank's Tier-I Capital in the case of a
borrower group.
*All AML/CFT instructions issued by RBI to be followed.
*The IBUs will be regulated and supervised by the RBI.
Join CAIIB WITH ASHOK on YouTube & App
*No liquidity support will be available to the IBUs from the
RBI.
RELAXATIONS FOR THE FPI (FOREIGN PORTFOLIO INVESTORS)
ENTITIES AT GIFT CITY:
SEBI has permitted FPIs registered in India to trade on
exchanges operating in the GIFT City.
FPIs are also allowed to trade in commodity derivatives on
IFSC exchanges.
Companies do not pay securities transaction tax or commodity
transaction costs.
All exchanges operate 22 hours a day and FPIs permitted to
operate without any additional documentation.
Waiver of short-term capital gains tax on derivatives trade.
(at present FPIs pay 30 % as short-term capital gains tax.)
Allowing retail investors to trade to build liquidity in the
market.
Check Your Progress (B):
 Join CAIIB WITH ASHOK on YouTube & App
(a) Companies located in the IBUs pay Zero securities
transaction tax. [TRUE]
(b) IBUs cannot raise liabilities from retail customers including
HNIs. [TRUE]
(c) All IBUs in the GIFT City will have Liquidity support from
the RBI. [FALSE]
(d) Indian and Foreign Banks intending to set up an IBU in IFSC
are required to obtain license from IFSCA. [TRUE]
(e) IBUs are not permitted to undertake factoring/forfaiting of
export receivables. [FALSE]
Join CAIIB WITH ASHOK on YouTube & App
Introduction to Digitization in International Banking:
In the Banking industry, especially with regard to
International Banking, technologies are revolutionizing the
profile of the banking industry and tearing the barriers to
entry and opening doors for new financial service providers.
Competition from the startups, internet giants and the
financial service providers from outside of banking, along with
the increased regulations are forcing banks to accelerate their
digital revolution.
Building a truly digital bank:
Rethinking customer experiences and developing efficient,
effective operating models that facilitate an open ecosystem.
The participants are enabled by the underlying processes,
technologies and organizational structures.
Many of the Banks who started with technology have started
reengineering their architecture in order to support the
updated developments in the field of digital banking,
especially with regard to international banking.
Banks need to space out their architecture based on their
specific strategy and readiness to compete in the digital
arena.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 10: Technology in International Banking (PART-I)
What we will study?
* All about digitization in International Banking?
*All about evolution of technology in International Banking?
Join CAIIB WITH ASHOK on YouTube & App
Their efforts will need to be strategic in order to reach the
objectives with available capital and within an acceptable
time frame, thereby increasing the customer's experiences in
all the areas of international banking in which the customer is
involved with.
Digital strategy is based on a Bank's specific goal, vision and
mission.
The competitive content and target business model needs to
be identified for digital reinvention.
Bank need to upgrade their platform in alignment with the
existing platforms and the changes required to support the
desired digital maturity.
The entire process of re-engineering should involve traditional
systems of engagement and also the current digital enablers
used in the front-office, back office and the other operational
systems so that the experience of the customers, post
advancement, will increase thereby leading to increased
business growth.
Once the go-ahead is decided, the digital re-engineering
roadmap with the operating model, target architecture,
bank's budget plan, resources and the risk appetite need to be
 Join CAIIB WITH ASHOK on YouTube & App
defined along with the timelines, costs, resources, risks and
the expected returns.
The following may be broad thoughts on upgrading the bank's
digital re-engineering plans:
(a) Making the bank more relevant to customers with more
flexible financial and non-financial products.
(b) Relative benefits of speed vis-à-vis in-house talent.
(c) Developing the digital eco-systems and platforms that
deliver traditional and non-traditional products to customers.
(d) Organization readiness to re-assigning, re-training and, if
need be, recruiting additional resources.
(e) Becoming pro-active and agile to customers responses and
market request.
(f) Self-assessment and driving team work to react to the
changing market conditions and monitoring the progress at
regular intervals and not simply following a plan.
Join CAIIB WITH ASHOK on YouTube & App
Though the need for borrowing was prevalent, many of the
customers were unable to reach out to the Banks and hence
the lending by the financial intermediaries were the norm of
the day who used to charge higher rates of interest for their
lending.
The country saw rapid progress through the nationalized
banks and by 1980, the Banking Sector witnessed tremendous
growth and appetite towards savings by the population who
had surplus monies and borrowing by the community who
had shortage of funds for their businesses increased.
1980 started the 2nd phase of nationalization wherein an
additional 6 Banks were brought into the fold of the GOI.
The hunger for technology in banking started during this
period wherein the Banking sector wanted to take advantage
of the technological developments that were witnessed across
the global developed countries.
There is no turning back since then and there has been good
progress both in terms of business growth and the
technological advancements in the banking space.
Join CAIIB WITH ASHOK on YouTube & App
Evolution of Technology in International Banking:
Technology has transformed the entire banking landscape in
the past 5 decades and following is a brief takeaway on the
stages in evolution of banking technology in India.
Pre-nationalization period most of banking activities were
manual in view of the fact that the country's population was
illiterate.
To take advantage of the increased savings habits and also the
need for borrowing funds for the economic development, the
customers increased their visit to the Bank's Branches for
utilizing the manual services provided by the then Banks.
To take advantage of the increased savings habits and also the
need for economic development of the country and reaching
the banking services to the nook and corner of the country,
the Government under the Nationalization of Banks Act,
nationalized 14 Banks into government banks in 1969.
1969 onwards - post-nationalization period - most of banking
activities were centered around investment of surplus savings
available with the population.
Join CAIIB WITH ASHOK on YouTube & App
What started as ALPMS (Advanced Ledger Posting Machine) in
the 1980s got converted into the data entry machines which
resulted into introduction of computers in Banking.
To take advantage of Internet Banking, 1990s witnessed Banks
taking strides into internet banking, ATMs, Credit Cards and
the Debit Cards, slowly the activities turned to on-line
banking.
What happened next is history and the current trends have
revolutionized the make-up of the society and it is now digital
banking.
Benefits and Limitations of Technology in International
Banking:
Benefits include accuracy, speed, lower transaction costs, ease
of doing business, compliance, reduction in manpower,
regulatory requirement, management Information system,
continuity in business, etc.
Limitations includes costs in Infrastructure, technical glitches,
creating awareness amongst customers because of the
widespread reach, putting in control limits for withdrawal and
deposits may pose inconveniences to customers, customers
service gets affected at times, security issues, cybercrime is on
the increase and added to this is the frauds by external
sources.
 Join CAIIB WITH ASHOK on YouTube & App
Check Your Progress: (A)
1. Which of the following characteristics are evident in
adoption of technology in Banking?
(a) Speed and Accuracy
(b) Ease of doing business
(c) Reduction in manpower
(d) All of the above. [Ans]
2. When we look back into the banking practices earlier and
today, the basic differentiating factor in modern banking vis-à-
vis traditional banking is?
(a) Traditional banking was mainly manual in nature whereas
modern banking is completely based on technological
advancements.
(b) Traditional banking relied heavily on compliances whereas
modern banking is relying on business.
(c) Traditional banking was bureaucratic whereas modern
banking is liberal.
(d) Traditional banking mainly relied on manual processes
whereas modern banking relies on both automated processes
and to some extent manual processes. [Ans]
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - A
Chapter 10: Technology in International Banking
(PART-II)
What we will study?
*All about Inward Remittances Online Portal?
*All about Outward Remittances Online Portal?
*All about Trade Finance Portal?
*All about Foreign Exchange Rate Portal?
*All about Export Data Processing and Monitoring System
(EDPMS)?
*All about Import Data Processing and Monitoring System
(IDPMS)?
*All about FIRMS Portal?
FIRMS: Foreign Investments received by the Investee
Companies
Join CAIIB WITH ASHOK on YouTube & App
3. Which of the following factors are mainly influential and
matter the most for banks in undertaking digitizing their
services?
(a) Readiness to re-assigning, re-training and if need be,
recruiting additional resources.
(b) Making the bank more relevant to Customers with flexible
financial products and services. [Ans]
(c) Becoming pro-active and agile to market sentiments and
competition.
(d) Driving the team towards increased businesses and to
market conditions.
Join CAIIB WITH ASHOK on YouTube & App
Digital Platforms in International Banking:
Some of the technology platforms used in International Trade,
with a brief introduction to the concepts of those
technologies, are described below:
Inward Remittances Online:
A secured portal for on-line inward remittances from across.
The Overseas Online Money transfer from across the globe, by
the NRIs from their country of location or any Overseas Bank
from any country (FATF compliant countries) to any Bank
account in India.
*FATF Compliant Country: FATF Country means any country
that is a member of the Financial Action Task Force on Money
Laundering.
NRIs to get registered on the Internet Banking Platform of
their bank and get the log-in id and the password from the
bank subject to adhering to the internal guidelines of the bank
relating to registration.
Register the receiver details, Bank details of the receiver, keep
the receiver informed and book the transaction and the
transfer the money.
Purpose code details to be filled in and many Banks only allow
current account transactions.
 Join CAIIB WITH ASHOK on YouTube & App
Benefits:
(a) Quick and seamless transfers from any country.
(as long as the country is FATF compliant)
(b) Fixed and fair exchange rates.
(c) 24/7 customer support.
Outward Remittances Online:
A quick and seamless on-line portal for outward remittances.
Residents and NRIs, on request through an application form
and subject to Bank's internal guidelines, will get on-boarded
by the Bank for International Digital Banking.
Log in ID and password generated by the Bank to the
Customer's registered email-ID.
Process flow - Select the Forex Tab on the Internet Banking
Portal of the Bank - Add Beneficiary - Begin payment by
initiating Select Beneficiary from the list of beneficiaries -
select the purpose code and depending on the purpose code,
additional details need to be filled.
Banks may provide an internal control limit up to which the
outward remittances can be initiated online which would be
well below the overall limit as per regulatory guidelines.
Join CAIIB WITH ASHOK on YouTube & App
A web based online trade portal of the Bank for the trade
finance transactions which enables customers of the Bank to
initiate, authenticate, authorize trade finance transactions in a
paperless environment making it a sustainable trading service.
Anywhere, anytime banking for International trade
transactions available on-line.
All trade transactions relating to Imports (including Buyer's
credit) and all trade transactions relating to Exports (including
Pre-shipment and Post-shipment) may be handled on-line
through the trade portal.
Benefits:
• Templated transactions and in compliance with the
provisions relating to International Trade.
• Bulk upload facility available.
• Approval of the transactions by the corporate online
through maker-checker facility.
• Copies of advices, ready reference to debit and credit
entries, SWIFT copies available online.
• Details on limits sanctioned (LC/BG limits), limit
availability, limits utilized, etc., available online.
• Role based dashboards, overview of pending actionable
items viz., IDPMS, EDPMS, Forward contract
confirmations, etc., available for different users.
Join CAIIB WITH ASHOK on YouTube & App
Status of the transaction initiated may be checked by the
customer on-line including generating the MT 103. (Customer
to Customer SWIFT transfer)
Benefits:
(a) Fast, easy and convenient way of outward remittances.
(b) Secure facility for transfer of money (in permissible
currencies) via internet banking.
(c) All purposes as permissible under Schedule III remittances
as per the provisions of FEMA and subject to the permissible
limits under the relevant provisions.
(d) Education, Family Maintenance, Self-transfer, Health
services, NRE repatriation, etc., can be sent directly in
beneficiary home currency (subject to permissible currencies)
and facility available 24/7.
(e) The inward remittance (remitters) and the outward
remittances (beneficiaries) to comply with the US/UN/FATF
sanction and related guidelines will also be complied by bank
through these online portals.
Trade Finance Portal:
Web based online portal for International Trade transactions
viz., Imports and Exports.
Join CAIIB WITH ASHOK on YouTube & App
Foreign Exchange Rate Portal:
Portal provided to the Corporates who meet the criteria set
up by the Bank for getting on-boarded after getting the log-in
ID and the password, as per the internal guidelines.
Enables the corporates to directly log on to the Bank's
Internet Banking Platform and access the Foreign Exchange
Rate Portal.
Corporates allowed to access the dealing room on a real-time
basis for booking their foreign exchange requirements
including Cash, TOM, SPOT and forward contracts.
Corporates confirming the deals through the portal are under
obligation to comply with the regulatory guidelines with
regard to submission of underlying documents.
Non-compliance in respect of submission of documents will
result in the deal automatically getting cancelled by the Bank
and losses are recovered from the Corporate in this regard.
Banks insist for executing a one-time Indemnity agreement
while on-boarding to indemnify the Bank for any losses that
could arise from non-compliance of regulatory guidelines.
Benefits:
(a) Seamless interaction through the portal with the Bank's
dealing room on rate movements.
(b) Advisory from the Bank's dealers on the Inter-Bank
markets and the latest developments on the exchange front.
 Join CAIIB WITH ASHOK on YouTube & App
(c) Real time basis quotation.
Export Data Processing and Monitoring System (EDPMS):
The Reserve Bank of India (RBI) operationalized the Export
Data Processing and Monitoring System (EDPMS)
w.e.f. March 1, 2014 wherein the
Data pertaining to
1.Export Declaration Forms (EDF)
2.Shipping Bills (SB)
3.SOFTEX
would flow from the Customs/STPI/SEZ to the EDPMS
Software and AD Banks were required to report lodgment and
realization of these EDF/SB/SOFTEX in EDPMS.
STPI: Software Technology Parks of India
SEZ: Special Economic Zone
What is "SOFTEX"?
SOFTEX is a form that needs to be filed by every software
exporter within 30 days from the date of invoice.
Join CAIIB WITH ASHOK on YouTube & App
Import Data Processing and Monitoring System (IDPMS):
In order to enhance ease of doing business and facilitate
efficient data processing for payment of import transactions
and effective monitoring thereof, IDPMS has been developed
in consultation with the customs authorities and other
stakeholders.
Based on the AD Code declared by the importer, the Banks
shall download the BoE (Bill of Entry) issued by EDI Ports
(Electronic Data Exchange) from the BoE Master in the IDPMS.
For non-EDI ports, AD Bank of the importer shall upload the
BoE data in IDPMS as per message format "Manual BoE
reporting" on a daily basis on receipt of BoE from the
Customer/Customs office.
AD Banks will enter the BoE details for ORM (Outward
Remittance Message) associated with the advance payment
for import transactions as per the message format "BoE
Settlement".
In case of payment after receipt of BoE, the AD Bank shall
generate ORM (Outward Remittance Message) for import
payment made by its importer as per the message format
"BoE Settlement".
Multiple outward remittances can be settled against single
BoE and multiple BoE can be settled against one Outward
Join CAIIB WITH ASHOK on YouTube & App
Additional features of EDPMS:
(a) Reporting of advance remittances related to exports.
(b) Reporting realization of EDF/SB/SOFTEX against inward
remittances reported.
(c) System based caution listing of exporters whose
EDF/SB/SOFTEX were outstanding beyond 2 years and where
extension of due date was not granted by AD Bank/RBI.
(d) Issuance of e-BRC was introduced w.e.f. 16th Oct 2017, as
a result of which AD Banks were to update the EDPMS with
data of export proceeds on "as and when realized basis" to
facilitate AD Banks to issue e-BRC only from the data available
in the EDPMS.
(e) However, the export transactions relating to Service
Exports are not supported under the EDPMS Platform.
What is e-BRC?
An Electronic Bank Realization Certificate (e-BRC) is a vital
digital certificate for export businesses.
A bank issues the e-BRC to confirm that the buyer made
payment to the exporter against the export of services or
goods. The BRC is the proof of realization of payment against
exports.
Join CAIIB WITH ASHOK on YouTube & App
remittance.
In case of Import of services, the IDPMS platform does not
facilitate reporting of such transactions or remittances routed
through the AD Banks.
The AD Bank need to follow up with the Importer(for services)
till such time the remittance towards which service imports
are requisitioned are completed.
"FIRMS Portal" for online filing of the
Foreign Investments received by the Investee Companies:
*FIRMS: Foreign Investment Reporting and Management
System.
*Advance Remittance Form (ARF) used by the companies to
report the Foreign Direct Investment (FDI) inflows to RBI.
*FC-GPR: Foreign Currency - Gross Provisional Returns: FC-GPR
is applied when entity receives foreign investment, and
against such investment, the entity allots shares to the foreign
investors.
If the same happens, then the entity should file details of such
allotment of shares with the RBI within 30 days under the RBI
compliances for FDI.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
With the objective of integrating the extant reporting 2. Which of the following activities are not supported under the
structure of various types of foreign investments in India, the EDPMS Platform?

Single Master Form (SMF) was introduced and a window was (a) Reporting of Realization of export bills.

provided between June 28th 2018 to July 20th 2018, to the
Public (Investees) to update investments received under the
Foreign Investments route, on an on-line basis.
With the implementation of SMF, a consolidated reporting
merging the ARF and the FC-GPR was introduced w.e.f.
1st Sept 2018 through a single revised FC-GPR.
(b) Reporting of Submission of export documents to the AD Bank.
(c) Reporting of Overdue Export bills.
(d) Reporting of Service Exports.
3. Which of the following import transactions are not supported
under the IDPMS Platform?
(a) Direct remittances towards Imports of goods.

(b) Remittances towards Imports on goods Collection basis

(c) Remittances towards Service Imports.

(d) Remittances towards Import of goods under Documentary Credits.

Check Your Progress: (B)

1. Under the digitized platform, filing of transactions relating to equity

investments (FDI) by overseas Investors into Indian companies is
handled through?

(a) EDPMS Portal

(b) IDPMS Portal

(c) FIRMS Portal

(d) ODI Portal

Join CAIIB WITH ASHOK On YouTube & APP Join CAIIB WITH ASHOK On YouTube & APP
Fintech and Evolution of Fintech in International Banking:
BFM MODULE- A Meaning and understanding FINTECH:-
Chapter 10 : Technology in International Banking
(PART- III) Fintech refers to the synergy between finance and technology.

What we will study ? It can take the form of a software, a service or a business that
provides technologically advanced ways to make financial
processes more efficient by disrupting traditional methods.
*What is Fintech ? Fintech is the digitization of financial services, normally
*All about Fintech and AI ? provided by Banks, Credit Card Companies, Credit Unions,
Investment Banking and other businesses within the financial
*All about Fintech and Blockchain ? services industry.
Fintech has been used to automate investments, insurance,
trading, banking services and risk management.
It is used to describe new technology that seeks to improve
and automate the delivery and use of financial services.
Fintech is equipping the banking industry with tools that
makes it more efficient than before.
 Join CAIIB WITH ASHOK On YouTube & APP
Banking Institutions are using tools like the chat bots, to
enhance customer experiences, mobile applications, etc to
give the customers real time looks into their bank accounts
and machine learning to secure against frauds.
Fintech is a new Financial & technology Industry used to
improve financial services activities.
Join CAIIB WITH ASHOK On YouTube & APP
1967 - Though financial services were strongly connected with
technology, the financial services remained mostly analogue
i.e. using signals, codes until the first ATM machine by
Barclays was introduced thereby switching from Analogue
mode to the Digital mode.
This came to be known as the beginning of Modern FINTECH
i.e. FINTECH Version 2.0

FINTECH is any innovative idea that improves financial service

processes by proposing technological solutions according to 1967 - First digital stock exchange and SWIFT was established.
different business situations, while the ideas could also lead Internet and Computers were brought into on-line banking.
to new business models or even new businesses.

SWIFT: (Society for Worldwide Inter-Bank Financial

Evolution of FINTECHS - A Snapshot:
1866- The first transatlantic cable was successfully laid
between New York and London providing fundamental
infrastructure for the period of intense financial globalization.
This is know as FINTECH Version 1.0
1918 - FEDWIRE, the first electronic funds transfer with the
help of telegraph and Morse Code
1950- Diners Club and Amex Cards
Telecommunication.
2008- brought in FINTECH Version 3.0 as a result of the
financial crisis that erupted across the globe where people
start distrusting traditional banking services.
2009 - Bitcoin introduced followed by other different crypto
currencies. Google and Apple Pay introduces payment
systems.

Join CAIIB WITH ASHOK On YouTube & APP Join CAIIB WITH ASHOK On YouTube & APP
South East Asian FINTECH companies have increased Venture
Capital funding from USD 35 Mn to USD 679 Mn in 2018 and
2010- FINTECH Version. 3.5 mainly by the Asian countries
to USD 1.14 Billion in 2019.
where Entrepreneurs, Investors, Consumer businesses and
Banks were introduced to FINTECH and FINTECH business
applications.
FINTECH and India:-
India has the highest FINTECH adoption rate globally.
FINTECH - Global Perspective:-
Of the 2100+ FINTECH companies existing in India today, over
Global investments in FINTECH increased by more than 2200% 67 % have been set up in the last 5 years.
from USD 930 Million in 2008 to more than USD 22 Billion in
Of the 2100+ FINTECH companies in India as of August 2020,
2015.
17% of the FINTECH companies are into digital payments, 17%
In Europe, USD 1.5 billion was invested in FINTECH in 2014 of them are into lending, 14 % into wealth, making India the
with London based companies receiving USD 539 Mn, second largest FINTECH hub after USA.
Netherland based companies receiving USD 306 Mn, Sweden
receiving USD 266 Mn, etc.
Fintechs are set to grow from USD 66 Billion in 2019 to USD
133 Billion by 2023.
FINTECH companies in USA raised USD 12.4 billion in 2018.
As the country with second largest base of internet users,
Sydney is the biggest FINTECH center and contributes 9 % to
India has quickly adopted to the world of FINTECH.
the country's GDP.
Monetary Authority of Singapore has pledged to spend USD
225 Mn in FINTECH in the next 5 years.
 Join CAIIB WITH ASHOK On YouTube & APP
DELIVERY CHANNELS UNDER FINTECH IN INTERNATIONAL
BANKING:-
FINTECH and Artificial Intelligence:-
Artificial intelligence is the simulation of human intelligence
processes by machines which combines computer systems
and robust databases to enable problem solving in the
Banking space.
The following are some of the scenarios where AI may be
used:
(a) Identify customers better - prospecting, sourcing,
underwriting – on boarding of Customers, both Importers,
Exporters, etc., who are involved in international trade with
the Overseas buyers and suppliers.
Join CAIIB WITH ASHOK On YouTube & APP
(g) Fraud detection by fixing through threshold limits,
regulatory compliance - working in tandem with the
regulators, etc.
FINTECH and Big Data & Data Analytics:-
Big data analytics describes the process of uncovering trends,
patterns, and correlations in large amounts of raw data to
help make data-informed decisions.
Data analytics helps stakeholders in International Trade to
create new portfolios by using historical data and analyzing
past trends and patterns in terms of international
geographies, which are more prone to volatile movements of
rates, exploring opportunities with countries with political
stability, countries with robust infrastructure development,
etc.
Big data is the use of advanced analytic techniques against
very large, diverse data sets that includes both structured,
semi-structured and raw data where refining these data helps
in coming out with desired analysis.
Join CAIIB WITH ASHOK On YouTube & APP
(b) Source business better – Cash flows, business models,
structures and managing global value chains, change in
consumer demand and to better manage risks involved in
international trade.
(c) AI has the potential to be used to improve outcome from
the international trade negotiations analyzing the economic
trajectories of each economic partner under different
assumption.
(d) Identify the needs of the Customers and analyzing their
inward and outward volumes, their overseas counterparties,
periodicity of payments, collections, etc.
(e) Business Intelligence of the Clients viz., processing ability,
recovery analysis (credit management) understanding the
maturity profile of receivables (Exports) and payables
(Imports)
(f) Credit Scoring - check on the credit worthiness of the
Clients - lending is all about availability of data through which
willingness/ability to repay can be analyzed, assessing
financial statements and analysis, etc.
Join CAIIB WITH ASHOK On YouTube & APP
The following are some of the application areas to big data
analysis:-
(a) Data on customers is of high value to FINTECH Companies
(b) Data on markets is of high value to FINTECH Companies
(c) Consumer Preferences, spending habits, investment
behavior can be extracted and used to develop predictive
analysis.
(d) Predictive analysis- refers to how consumers are likely to
behave using past information and a mathematical algorithm.
(e) Data helps in formulating marketing strategies.
(f) helps in fraud detection algorithm.
 Join CAIIB WITH ASHOK On YouTube & APP
FINTECH and Robotic Process Automation (RPA):
Robotic Process Automation (RPA) refers to the process of
assigning manual repetitive tasks to robots instead of humans
in order to streamline workflows in financial institutions.
The most widespread applications are:
(a) Statistics and data collection
(b) Regulatory compliances management
(c) Communication and marketing through emails and chat bots
(d) Transaction management.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – B
Chapter 11: RISK AND BASIC RISK
MANAGEMENT FRAMEWORK
What will we study?
*What is Risk?
*What is Financial Risk?
*What is risk free or zero risk investment?
*How are Capital, Risk and returns related to each
other?
Join CAIIB WITH ASHOK On YouTube & APP
FINTECH and Block Chain Management:
Blockchain is a system of recording information in a way that
makes it difficult or impossible to change, hack, or cheat the
system.
A Blockchain is essentially a digital ledger of transactions that
is duplicated and distributed across the entire network of
computer systems on the Blockchain.
Adopted at a large scale in the financial industry, primarily
due to its ability to securely store transaction records and
other sensitive data.
Each transaction is encrypted and the chances of cyber-attacks
are relatively low when block chain technology is employed
and has created tremendous strides in the area International
Trade Finance.
Some of the advantages of Block Chain Technology has been
that is has disrupted Banks Trade Finance Technologies quite
like the manner in which internet disrupted the media earlier.
It is a very highly secure and transparent digital ledger and
relatively economical to operate without intervention of any
third party and also creates a permanent record of all the
trade transactions thereby creating a valid audit trail.
Join CAIIB WITH ASHOK on YouTube
WHAT IS RISK?
In most cases, we observe that there is deviation in what
we achieve from what we had planned or what we had
expected.
This unpredictability of future is due to uncertainties
associated with the steps that we undertake in the
process
or
various external factors that influence theprocesses
that are necessary to achieve our planned objective.
Example:
Say we have to attend an interview for bank job that is very
important and we have to reach in time for it.
In order to reach for interview, one has to1-
Get ready well in time
2- Arrange a transport and
3- Travel the distance to the place of interview.
 Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

All these factors are inseparable associated with the
process of reaching the place of interview.
There are uncertainties associated with all of them. 1-One
may get ready early or be delayed
2- Transport may become available well in time or there
may be difficulty and delay in getting it.
3- there may be traffic jam or traffic disorder or traffic flow
may be very smooth
4- the vehicle may breakdown on the way or it maybe a
trouble-free drive.
If everything goes well, one would reach well in time.
The uncertainties associated with the factors do not hurt
him.
But these uncertainties may also become instrumental in
one's failing to reach in time.
In other words, there is the risk of reaching late forthe
interview, which is due to the uncertainties associated
with factors mentioned above.
These factors are the risk elements or contributorsto the
uncertainty.
Risk would arise when these uncertainties affect
adversely.
We may define Risk as:
"Risks as uncertainties resulting in adverse outcome,
adverse in relation to planned objective or expectations.
Financial Risks: Financial Risks are uncertaintiesresulting
in adverse variation of profitability or outright losses.
As far as profit or loss of business depends upon the net
result of all cash inflows and cash outflows.
Net Cash flow = Cash inflow - Cash Outflow (Profit)Or
Net Cash flow = Cash Outflow - Cash Inflow (Loss)

Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

*Uncertainties in cash inflows and outflows also create
uncertainties in net cash flow or profits.
*Factors that are responsible for creating uncertainties
in cash outflows and cash inflows arethe risk elements.
Cash out flow: From Purchase of goods andtransport
cost etc.
Uncertainty in purchase price and transport cost,
Administration cost etc. would create uncertainty incash
outflow.

Example 1:
Trade Business Mango Earlier Today Tomorrow

Cash inflow: From sale of goods Volume 100 Kg 100 Kg 100 Kg

Variation in sales flow and unit price of goodswould create Unit Price 12 Rs/Kg 8 Rs/Kg 20 Rs/Kg
uncertainty in cash inflow. Transport 200 Rs 100 Rs 500 Rs
Administrative 600 Rs 500 Rs 800 Rs

Mango Earlier Today Tomorrow Outflow 2000 Rs 1400 Rs 2300 Rs

Volume 80 Kg 100 Kg 50 Kg
Unit Price 12 Rs/Kg 20 Rs/Kg 10 Rs/Kg Uncertainties in both, cash outflows and inflows would
result in uncertainties in net cash flow or profits.
Inflow 960 Rs 2000 Rs 500 Rs
 Join CAIIB WITH ASHOK on YouTube
This can affect profits favorably or unfavorably.
When we get profit:
If sales price or sales volume are more than whatwas
expected or
purchase price declines or other expenses incurred are less,
it will result in higher profit or even outright losses.
Example 2:
In the same example suppose that the trader engages in
trading of a commodity where demand fluctuates wildly
or prices also change substantially over a short period, as
is observed in case of trading in shares.
In such cases if everything moves favorably thetrader
can earn very high profits. if everythingmoves
adversely the trader occur huge loss.
Join CAIIB WITH ASHOK on YouTube
The cash flow associated with the said investment, as we all
know, does not have any uncertainty associated with it.
In other words, this is a risk-free or zero-risk
investment for the period it is invested.
Zero-Risk would imply no variation in net cash flow.
Return on zero-risk investment would be low as
compared to other opportunities available in the market.
LINKAGES AMONG RISK, CAPITAL AND RETURN:
Linkage between Risk & Capital:
In simple terms, minimum capital required for a business
should be such that it is able to meet themaximum loss
that may arise from the business to avoid bankruptcy.
Join CAIIB WITH ASHOK on YouTube
In other words, variability in net cash flow would be high in
such cases and because of that it may result in higher
profits or in adverse situations, higher losses. We call
such a business with higherrisk.
Similarly, if variability in net Cashflow is lower, itwill result in
lower profit and lower losses.
Lower risk implies lower variability in net cash flow with lower
upside and downside potential.
Higher risk would imply higher upside and downside
potential.
Risk-free or Zero-risk investment :
We may also consider another case where say a retired
person has invested
Rs. 1 lakh @ 6.50% (interest payable half yearly) inRBI bond
that has a maturity of 5 years.
The gentleman would receive interest of Rs. 3,250every half-
year and would receive back the principal after the maturity
period is over.
Join CAIIB WITH ASHOK on YouTube
business with higher risk: A business with wide variations
in net cash flow would be a business with higher risk.
The profit potential and lose possibilities would behigher in
such businesses due to higher variability of net cash flow.
Capital requirements would be higher because of
possibilities of higher losses.
business with low risk:
Similarly, a business with lower variation in net Cash flow
would be a business with low risk.
The profit potential as well as loss possibilities would be
lower in such businesses due to low variability of net cash
flow.
Capital requirements would be lower because of
possibilities of lower losses.
This is the basic linkage between risk and capital.
 Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

Low Risk: Low Capital RequirementHigh Year Investment 1 Investment 2

Risk: High Capital Requirement 1 6 3
2 6 9
Linkage between Risk, Return & Capital:
3 6 5
The return expected from a business would be in relation to
4 6 -2
the risks associated with the business.
To understand risk and return linkage, let us take an example. 5 6 15
Let us say there are two investment opportunities before Total = 30 30
you Cash flows from both these investments over a five-
Return= 60% 60%
year period are givenbelow.
R per Year 12% 12%

Total initial Investment =50000 Rs.

From the return-on-investment point of view view,both
the investments are equal,
One is more likely to prefer Investment 1.
This is because of the steady stream of cash flow
associated with it.

Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

Risk Premium:
Investment 2 would have a chance to become equally
acceptable provided return on it is higher than what it is
now say @14% p.a. simple.
This 2% additional return is the risk premium or cost of risk.
Higher the risk is higher would be this premium.
The Risk Adjusted Return happens to be the key factor for
investment decision of investors.
Therefore, the key driver in managing a business isseeking
enhancement in risk-adjusted return on capital (RAROC).
The higher the RAROC, the higher is the reward to
investors/shareholders and more preferable such
investment would be to the market.

Risk Adjusted Return on investment: The higher the risks in a business model, the higherwould be
the capital requirement and the return expectations.
When we compare two investment options,
comparing the return on investment may not lead us to a The reverse is also true.i. e
correct conclusion as risks associated with these The lower the risks in a business model, the lower would be
investments may differ. the capital requirement and the return expectations.
It would be desirable to account for risks as well. This is the linkage between risk, return and capital.
Returns net of risk would be the proper basis of
comparing investments.
In other words, risk in a business or investment isnetted
against the return from it.
This is called Risk Adjusted Return on investment.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – B
Chapter 11: RISK AND BASIC RISK
MANAGEMENT FRAMEWORK (PART -II)
What will we study?
*Why do we need to manage risk?
*What is risk management framework?
*Organization of risk management?
*Risk Identification?
WHY RISK NEEDS TO BE MANAGED??
If in a business, due to any reason the cash flows are
badly affected then losses may be high enough to
wipe out the capital employed in the business
resulting in its bankruptcy.
Such a situation may be avoided if loss potential of a
business can be controlled.
Join CAIIB WITH ASHOK on YouTube
revenue model but also estimates the probability of loss
associated with such risks.
It may be noted that this process is critical as
overestimation of loss on account of risks may result in
overpricing resulting in loss of business.
Underestimation of losses, on the other hand, may result
in lowering of profits, which would affect planned RAROC.
BASIC RISK MANAGEMENT FRAMEWORK:
The basic consideration while designing a risk
management framework in an organization are following:
1. Management of risk is a major concern for thetop
management.
Successful implementation of risk management process
start from the top management and the main challenge
centres on facilitating the implementation of risk and
business policies simultaneously in a consistent manner.
Join CAIIB WITH ASHOK on YouTube
The loss potential of a business is strongly correlated to
the uncertainties of business factors.
In other words, the lose potential of a business is
correlated to the risks in the business, and
therefore, the risk exposure of a business needs to be
managed so as to limit the potential losses inadverse
situations to a level that can be absorbed by the
organization without affecting its continuity.
For managing the risk organization need to develop
methods to measure risk so that an organization is aware of
the risk it is carrying for its business, i.e.,
it has a measure of its potential losses in severely adverse
situations and may ensure adequate capital availability
for its continuance or limit its risk exposure to the extent of
the capital available.
There is a probability of loss associated with all risks. This is
factored into pricing. This is another aspect of the risk
management processes which not only identifies various
risks in the business or
Join CAIIB WITH ASHOK on YouTube
Modern best practices consist of setting risk limits based
on economic measures of risk while ensuring the best risk
adjusted return keeping in view the capital that has been
invested in the business.
It is a question of taking a balanced view on risksand
returns and that too within the constraints of available
capital.
2. Management of risks begins with their identification
and quantification.
It is only after risks are identified and measured, that we
may decide to accept the risks or to acceptthe risks at a
reduced level by undertaking steps tomitigate the risks,
either fully or partially.
3. Risk management happens to be a job thatrequires
special skills and has an objective which ismore orientated
towards the control aspect of the business, it requires a
separate setup in the organization.
 Join CAIIB WITH ASHOK on YouTube
Risk management framework in an organizationconsist of
following:
1-Organization for Risk Management2-Risk
Identification
3-Risk Measurement4-
Risk Pricing
5-Risk Monitoring and Control6-
Risk Mitigation
Organization for Risk Management:
Usually, risk management organization consists of: 1-The
Board of Directors
2-The Risk Management Committee of the Board3-The
Committee of senior-level executives
4-The Risk management support group.
Join CAIIB WITH ASHOK on YouTube
Risk management support group analyses, monitor and
reports the risk profile to the committee of senior-level
executives.
Risk Identification: Nearly all transactions undertaken
would have one or more of the major risks, i.e., liquidity risk,
interest rate risk, market risk, default or credit risk and
operational risk.
Although all these risks are contracted at the transaction
level, certain risks such as liquidity risk and interest rate risk
are managed at the aggregate or portfolio level.
Risks such as credit risk, operational risk and
market risk arising from individual transactions are taken
cognizance of, at the transaction-level as well as at the
portfolio-level (aggregated level). Aggregated risk
determines capital needs.
In essence, risk identification consists of identifying
various risks associated with the risk taking at transaction
level and examining theirimpact on the portfolio and on
capital requirement.
Join CAIIB WITH ASHOK on YouTube
The board of Directors has the overall responsibility for
management of risks. The board articulates risk
management policies, procedures, aggregate risk limits,
review mechanisms and reporting and auditing
systems.
The risk management Committee:
It is a Board level Sub-Committee.
The responsibilities of Risk Management
Committee:
(1) Setting guidelines for risk management and
reporting.
(2) Ensure that risk management processes
confirm to the policy.
(3) Ensure proper manning for the processes.
The Committee of senior-level executives is responsible
for implementation of risk andbusiness policies
simultaneously in a consistent manner and decides on
the business strategy to achieve these objectives.
Join CAIIB WITH ASHOK on YouTube
Risk identification is best explained by taking an example.
Say Branch A has extended a loan of ₹1crore in
accordance with the corporate policy and guidelines for
a period of 5 years at a rate of interest 1% over BPLR
(Benchmark Prime LendingRate) of the bank, BPLR being
10%.
The loan is to be repaid in equal quarterly instalments
with one-year moratorium. Funding of the loan is to be
done from a deposit of the sameamount (3 years FD)
interest rate on it being 6%.
What are the risks associated with the transaction?
The deposit would become payable at end of 3 yrs
whereas the loan would stand repaid to the extent of 50%
only. At the end of three years, the bank will face funding
risk or liquidity risk associated with the transaction.
 Join CAIIB WITH ASHOK on YouTube & App
Join CAIIB WITH ASHOK on YouTube BFM MODULE – B
Chapter 11: RISK AND BASIC RISK
The interest on loan is linked to BPLR of the bank
MANAGEMENT FRAMEWORK (PART -III)
whereas the deposit is carrying a fixed rate of interest.
bIf BPLR was reduced during the first 3 out five-year period What will we study?
Basis Risk would arise.
After the three-year period when the question of funding What is risk measurement?
the loan would arise, deposit rate may not remain same. *How is risk measurement done?
So the transaction would face gap or mismatch risk at the *What is sensitivity?
end ot three-year period.
*What is Volatility?
As the loans get repaid, the repayment proceeds have to *What is risk pricing?
be deployed elsewhere. The rate at which this may be done
may not be at par with the interest rate being charged on Risk Measurement:
the loan amount. As a result, the bank would face Risk management relies on quantitative measures of
Reinvestment Risk. risk.

There would always be a possibility that the loan amount The risk measures seek to capture variations in
is prepaid or the deposit amount is withdrawn Earnings/Market value/Losses due to default etc.
prematurely adding to the risk asEmbedded Option (Referred to as target variables), arising out of
Risk. uncertainties associated with various risk elements.

Join CAIIB WITH ASHOK on YouTube

Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

Quantitative measures of risks: Face Value Interest Present Value of

Based on Sensitivity Rate Bond
1000 9% 924
Based on Volatility
1000 10% 900
Based on Downside Potential.1-
1000 11% 878
Sensitivity:
Sensitivity captures deviation of a target variable due to
unit movement of a single market parameter. Other Examples of market parameters could beexchanging
rates and stock prices.
Only those market parameters, which drive the value of
the target variable are relevant for the purpose. *The interest rate gap is sensitivity of the interestrate
margin of the banking book.
For example, change in market value due to 1% change
in interest rate would be a sensitivity-based measure. *Duration is the sensitivity of investment portfolioof
trading book.
Example: 3 years Bond withFace
Drawback of Sensitivity analysis:
value =1000 Rs and Coupon
1-It is only with reference to one market parameter and
Rate =6%
doesn't consider the impact of other parameters, which
What will be present value? may also change simultaneously.
2-The analysis depends on the prevailing conditions and it
changes as the market environment changes.
 Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

2- Volatility: Month Share Mean Deviation Squareof

It is possible to combine sensitivity of target variables Price Dev
with the instability of the underlying parameters. 1 100 114 -14 196

The volatility characteries the stability or instabilityof any 2 110 114 -4 16

random variable. 3 90 114 -24 576
Volatility is the standard deviation of the values ofthese 4 120 114 +6 36
variables.
5 150 114 +36 1296
It is feasible to calculate historical volatility usingany set of
Total= 570 Total = 2120
historical data, whether or not they follow a normal
distribution. Avg : 424

The calculation of historical mean and volatility requires Sqrt 20.59

time series.
Defining a time series requires the period ofobservation
and frequency of observation.

The calculation of historical Volatility based on time series is

given in table:

Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

Computation of Historical Volatility Based onDefined
Time Series:
Defining a time series requires defining the period of
observation and the frequency of observation.
For instance, if we have to determine volatility of agiven
stock price period of observation could be taken as one
year and frequency of observation could be daily closing
price of stock.
We can also compute daily volatility by changing the
frequency of observation from weekly to daily or can
compute the monthly volatility, based on monthly
observation.
Conversion of daily volatility into weekly or monthly
volatility:
We use square root of time rule.The
For example, if the daily volatility of a stock were,say 1.5%,
the monthly volatility would be 1.5 x 5.48 (Square root of
30) or 8.22.
Here It is 30 days as the time horizon is one month.
It may be noted that volatility would be higher, if the time
horizon is more than one month.
Volatility helps us to capture possible variations around
the average of target variable, both upsideand down Side.
Using historical observations on the target variable,it is
possible to estimate upside and downside potential of
the target variable with a reasonable accuracy.

equation is given below.

Volatility over a time horizon "T" =Daily
Volatility x square root of 'T'
 Join CAIIB WITH ASHOK on YouTube
3- Downside Potential:
Risk materialise only when earnings deviate adversely.
Volatility captures both upside and downside deviation.
Downside potential only captures possible losses ignoring
the profit potential.
It is the adverse deviation of a target variable.
The downside potential has two components potential
losses and probability of occurrence.
Potential losses may be estimated but the difficulty lies in
estimating the probabilities.
Hence the downside risk measures require prior
modelling of the probability distribution of potential losses.
Worst case scenario serves to quantify extremelosses but
has low probability of occurrence.
Downside potential is the most comprehensive measure
of risk as it integrates sensitivity and volatility with the
adverse effects of uncertainties.
Join CAIIB WITH ASHOK on YouTube
Secondly, there is a probability of loss associated with all
risks.
This also needs to be factored into pricing.
To explain this, let us take the case of a bank that has 100
credit accounts with say Level 2 risks according to some
measure.
Say, historical observation indicates that there is an
average loss of 10% on Level 2 accounts.
This loss is the cost associated with such risk.
This is to be factored into the pricing, The intentionis to
defray the possible losses across similar transactions. In
this case, risk premium of 10% may be added in pricing.
Risk pricing implies factoring risks into pricing through
capital charge and loss probabilities.
This would be in addition to the actual costs incurred in
the transaction.
Join CAIIB WITH ASHOK on YouTube
This is the measure that is most relied upon by banking
and financial service industry as also the regulators.
Risk Pricing:
Risks in banking transactions impact banks in twoways.
Firstly, banks have to maintain necessary capital,
at least as per regulatory requirements.
The capital required is not without costs.
The cost of capital arises from the need to pay investors
in banks equity in the form of dividends and for internal
generation of capital necessary forbusiness growth.
Each banking transaction should be able to generate
necessary surplus to meet these costs.
The pricing or transaction must take into account factors
discussed in this para.
Join CAIIB WITH ASHOK on YouTube
The actual costs incurred will include cost of funds that
has gone into the transaction and the costs incurred in
giving the services, which are incurred by way of
maintaining the infrastructure, employees and other
relevant expenses.
Pricing, therefore, should take into account the following:
1. Cost of Deployable Funds
2. Operating Expenses
3. Loss Probabilities
4. Capital Charge
5. Profit Margin or Return on net worth.
It should also be mentioned here that the cost offunds
should correspond to the term for which it is deployed.
This is because five-year funds may have a different
cost than one-year funds due to time value of money.

Join CAIIB WITH ASHOK on YouTube
It may be noted that pricing is transaction-based.
This is one of the key reasons for riskmeasurement at
transaction level.
Join CAIIB WITH ASHOK on YouTube
Join CAIIB WITH ASHOK on YouTube
view the capital that has been invested in business.
It is a question of taking a balanced view on risksand
returns and that too within the constraints of available
capital.
In order to achieve the above objectives, banks put in
place the following:
1.An organizational structure 2. Comprehensive risk
measurement approach.
3. Risk management Policies adopted at the corporate
level, which are consistent with the broader business
strategies, capital strength, management expertise and risk
appetite.
4. Guidelines and other parameters used to govern risk
Is this enough for risk management?
It is not enough to put in place a structure for the
purpose. It is equally important to ensure that the
organization functions in a manner it has been planned.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – B
Chapter 11: RISK AND BASIC RISK
MANAGEMENT FRAMEWORK (PART -IV)
What will we study?
*Risk Monitoring and control
*Risk Mitigation
Risk Monitoring and Control:
The key driver in managing a business is seeking
enhancement in risk-adjusted return on capital
(RAROC).
Therefore, the approach to risk management cannot
be in isolation or in stand-alone mode.
The approach to risk management centers on
facilitating implementation of risk and business
policies simultaneously in a consistent manner.
Modern best practices consist of setting risk limits
based on economic measures of risk while ensuring
the best risk adjusted return, keeping in.
Join CAIIB WITH ASHOK on YouTube
Feedback : A feedback of the actual functioning is,
therefore, necessary for the purpose of control.
Monitoring of Feedback:
In addition to that, the feedback received on the actual
performance requires monitoring also to ensure that the
divergence between the planned performance and the
actual performance is kept atthe level that is acceptable.
To keep risk at acceptable level bank requires thefollowing:
1. Strong Management Information System (MIS) for
reporting, monitoring and controlling risk.
2. Well laid out procedures, effective control and
comprehensive risk reporting framework.
3. Separate risk management framework independent of
operational departments with clear delineation of
responsibility for management of risk.
4. Periodical review and evaluation.
 Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

Role of Board of Directors: Risk Mitigation:

The banks board of directors has a responsibility to ensure Since risks arise from uncertainties associated withthe risk
that management establishes a system for assessing elements, risk reduction is achieved by adopting
various risks, develops a system to relate risk to the strategies that eliminate or reduce the uncertainties
banks’ capital level, and establisheda method for associated with the risk elements.
monitoring compliance with internal policies. This is called Risk Mitigation. Example of a
Bank's internal control structure :
trading business:
The banks internal control structure is essential to the
Cash inflow: From sale of goods
process.
Mango Earlier Today Tomorrow
Effective control of the process includes an independent
review and, where appropriate, the involvement of internal Volume 80 Kg 100 Kg 50 Kg
or external audits. Unit Price 12 Rs/Kg 20 Rs/Kg 10 Rs/Kg
Board committee on Risk Management: Inflow 960 Rs 2000 Rs 500 Rs

The board should regularly verify whether it's system of

internal controls is adequate to ensure well-ordered and Cash out flow: From Purchase of goods andtransport
prudent conduct ot business. cost etc.
This is normally carried out through a separate board
committee on Risk Management.

Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

Mango Earlier Today Tomorrow counterparty to keep his commitment.

Volume 100 Kg 100 Kg 100 Kg It may also be noted that while entering into various
Unit Price 12 Rs/Kg 8 Rs/Kg 20 Rs/Kg contracts the trader would also foreclose his optionto take
advantage of any rise in sales price or reduction in
Transport 200 Rs 100 Rs 500 Rs
purchase price.
Administrative 600 Rs 500 Rs 800 Rs
In other words, upside potential of profits would also get
Outflow 2000 Rs 1400 Rs 2300 Rs reduced.
While risk mitigation strategies help in reducing adverse
Business man may like to enter into a sale and purchase impact on the business (probability of getting losses), it
contract. Since a sale contract would specify volume limits upside potential as well, i.e., chances of getting super
and reduce the price the uncertainties associated with profit would also be limited.
purchase price. Nevertheless, one achieves stability in his net cash flow
One may also have contract with transport services and risks stand reduced.
provider and eliminate risks in his trading businessto a Risk Mitigation in Banking:
large extent provided his contract counterparties keep
In banking, we come across a variety of financial
their commitment.
instruments and number of techniques that can be used to
It may be noted that in the process he would bring in mitigate risks.
another risk element, namely the uncertainty
associated with the ability of the contract
 Join CAIIB WITH ASHOK on YouTube Join CAIIB WITH ASHOK on YouTube

The techniques to mitigate different types of risk are
different.
Mitigation of Credit Risk:
For mitigating credit risk banks have been using traditional
techniques, such as collateralizations by first priority claims
with cash or securities or landed properties, third party
guarantees, etc.
Mitigation of Interest rate risk:
For mitigating interest rate risk banks use interest rate
swaps, forward rate agreements.
Mitigation of Forex Risk:
Similarly, for mitigating forex risks banks use forex forward
contracts, forex options or futures. Risk mitigation
measures aim to reduce downside variability in net cash
flow but these measures alsoreduce the upside potential
simultaneously.
In fact, risk mitigation measures reduce the variability in
net cash flow.
Counter Party Risk:
In addition, risk mitigation would involve counterparty
and it will always be association withcounter-party risk.
Mitigation of counter party risk:
It may also be stated here that markets have responded
to the counter-party risk by establishing "Exchanges' such as
stock exchange, commodity exchanges, futures and
options exchanges.
Such 'Exchanges' take up the role of counterparty and have
established rules for risk minimization.
As a result, when we enter in to a contract with
exchange as counterparty, counterparty risk remains but it
is reduced very substantially since exchange act as the
central counterparty.
Join CAIIB WITH ASHOK on YouTube

Join CAIIB WITH ASHOK on YouTube & APP

Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE-B
Chapter11: RISK AND BASIC RISK Year Cash Mean Dev
iat
ion Squar
e
MANAGEMENT FRAMEWORK (PART-V) Fl
ow ofDev

What we will study? 1 10 7.

2 -
2.8 7.
84
2 3 7.
2 -
4.2 17.
64
3 4 7.
2 -
3.2 10.
24
*Risk Mitigation through diversification.
4 8 7.
2 +0.
8 0.
64
5 11 7.
2 +3.
8 14.
44
Risk Mitigation through Diversification and
Tot
al= 36 Tot
al= 50.
8
Portfolio Risk:
Av
g: 10.
16
Risks can be mitigated through Diversification
SD= Sqr
t 3.
19
Example:- Say Mr .A has a business business
A-that had the following net cash Inflows in
SDt
omeanper
cent
:3.
19/
7.2*
100=44%(
appr
ox)
Last 5 years.

The business had v

ari
ati
ons i
n cash f
low and
ther
efor
er i
sks.
Theri
skint
hiscasemaybemeasur edusi
ngmean
andst
andar
ddeviat
ionofpastper
for
mance.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

The r
atio ofstandar
d deviati
on to mean i
sa Ifwest udyther ati
oofst andarddev iati
ont omean
measureofcompari
ngrisksassoci
atedwi
thsi
milar ofal lhisbusi nesses,thesai drati
oi sdiff
erentfor
cashf
lows. dif
fer entbusinesses,t hemaxi mum andmi nimum
Thesai
drat
ioi
ncaseofBusi
nessAi
s0.
44or44%. being61%and36%r especti
vely.I
tmayhowev er,be
noticedt hatther at
ioofst andarddev i
ati
ont omean
But.Mr
.Xsayhasanotherfourbusi
nessesandnet i
ncaseoft otalportfoli
oisonl y0.25or25%,whi ch
cashfl
owsfrom t
hesebusinessesalongwit
hthat i
sl ess than t he mi ni
mum obser ved in case of
ofBusi
nessAaretabul
atedbel
ow. i
ndiv i
dualbusi nesses.
Netcashfl
owofallt
hebusi
nessesofMr.X,whi
ch
i
st hesum tot
alofnetcash fl
owsfrom allt
he
busi
nesses i
s also shown in the fol
lowi
ng This obser
vat
ion i
s att
ributed tot he f
actt hat
tabl
e.(
seet
abl
e) var
iat
ionsinnetcashfl
owsar i
singoutofallt
hese
busi
nessesarenotuni
dir
ectional.
Whil
e,cashinf
lowsi ntheyear2haddecr easedi
n
r
espectofbusinessesAandCov ert
hatinyear1,
t
hesamehasi ncreasedinrespectofbusi
nessesB,
DandEi nt
heyear2ov eryear1.
As a resul
t,v
ari
ation i
n netcash i
nfl
ow oft
he
por
tfol
iohasbeenless.
Thi
siscal
leddi
ver
sif
icat
ionofr
isks.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Because ofthisreason,risk associ

ated wit
ha Ri
sks in these accounts wil
l not mater
ial
ize
port
fol
ioisalwayslessthanthewei ght
edav er
age si
mult
aneouslyt
herebyreduci
ngthepor
tfol
ior
isk.
ofri
sksofindi
vi
dualitemsintheportf
oli
o. Thi
swoul
dbet
ruef
oral
lty
pesofr
isks.

Banki
ngBusi
nessExampl
e:
Joi
nCAI
IBWI
THASHOKonYouTube
I
nbanki
ngbusi
nesst
hesameconceptpr
evai
ls.
Supposethatabranchhast
akenacreditexposure
onaborrowerthathasri
skatl
evel2sayaccording
tosomemeasureofr i
sk.
Li
kewisethesaidsever
alotherbranchestoget
her
havealso t
akenlevel2creditexposuresonsay
anot
her99borrower
s.
Now theportf
oli
oconsi
stsof100account
swi
th
l
evel2ri
sks.
Thepor
tfoli
ori
sklev
elwouldnotbealev
el2r
isks.
It
woul
dhav ealowerr
iskl
evelt
hanlev
el2.
Again,thi
swoul dbeduet oeffectofdi
ver
sif
icat
ion
as allthese 100 accounts wil
lnotbehavei na
uni
directi
onalmanner.
 Join CAIIB with ASHOK YouTube & App
BFM MODULE - B
Chapter 12: RISK IN BANKING BUSINESS (PART-I)
What we will study?
*What is Credit Risk?
*What is Liquidity Risk?
* What is Operational Risk?
* What is Strategic Risk?
* What is Reputation Risk?
Liquidity risk:
The liquidity risk of banks arises mainly from
funding of long-term assets by short-term liabilities
thereby making the liabilities subject to rollover or
refinancing risk.
Liquidity Risk is defined as inability to obtain funds
to meet cash flow obligations at a reasonable
rate.
For banks, funding liquidity requirement is
crucial
Join CAIIB with ASHOK YouTube & App
c: Call Risk:-
This arises due to crystallization of contingent
liabilities since customers are not meeting their
commitments on due dates.
This may also arise when a bank may not be able to
undertake profitable business opportunities when
it arises.
Default or Credit Risk:
Credit Risk is most simply defined as the potential
of loss by a borrower or counterparty failto meet
its obligations in accordance with agreed terms.
For most banks, loans and corporate bonds are
the largest and most obvious source of credit risk.
a: Counterparty Risk:
This is a variant of credit risk and is related to non-
performance of the trading partners due to
counterparty's refusal and or inability to perform.
Normally such defaults happen in call money
borrowing between banks since it is purely
unsecured.
Join CAIIB with ASHOK YouTube & App
and therefore, any liquidity shortfall has to be met
at times at a cost which is more than planned or
normal costs.
At the extreme, banks may even fail to fund the
liquidity gap resulting in default with serious
consequences.
The liquidity risk in banks may be of the following
types:
a: Funding Risk:-
This arises from the need to replace net out flows
due to unanticipated withdrawal/non-renewalof
deposits (wholesale and retail), premature closure
of term deposits.
b: Time Risk:-
This arises from the need to compensate for non-
receipt of expected inflows of funds i.e., performing
assets turning into non-performing assets; or
borrowers not repaying their installments (EMI's)
on due dates.
Join CAIIB with ASHOK YouTube & App
Call Money: lending for only one day
Notice Money: lending for 2 days to 14 days Term
Money: lending for more than 14 days
b: Country Risk:
This is also a type of credit risk where non-
performance by a borrower or counter-party arises
due to constraints or restrictions imposed bya
country.
In this case, the reasons for non-performance are
external factors on which the borrower or the
counterparty has no control.
Operational Risk:
Operational risk is the risk of loss resulting from
inadequate or failed internal processes, people and
systems or from external events.
Strategic risk and Reputation risk, though in the
nature of operational risk, are not covered under
the definition of operational risk by BCBS.
 Join CAIIB with ASHOK YouTube & App
Operational risk may loosely be comprehended as
any risk, which is not categories as market or
credit risk.
The scope of operational risk is very wide.
Two of these risks, viz. transaction and compliance
risk which are frequently used - have been defined
below:
BCBS: Basel Committee on Banking Supervision
a: Transaction Risk:-
Transaction risk is the risk arising from fraud, both
internal and external, failed business processes and
the inability to maintain business continuity and
manage information.
b: Compliance Risk:-
Compliance risk is the risk of legal or regulatory
sanction, financial loss or reputation loss that a
bank may suffer as a result of its failure to comply
with any or all of the applicable laws, regulations,
codes of conduct and standards of good practice.
Join CAIIB with ASHOK YouTube & App
In short, this risk calls for whether there is a gap
between the strategy aimed at and implemented.
If there is a gap, then the strategy is not
implemented in letter and spirit.
Reputation Risk:-
Reputation Risk is the risk arising from negative
public opinion. This risk may expose the institute to
litigation, financial loss, or a decline in customer
base.
Join CAIIB with ASHOK YouTube & App
It is also called integrity risk since a bank’s
reputation is closely linked to its adherence to
principles of integrity and fair dealing.
Nowadays, regulators including RBI attach lot of
importance for this risk and hence are looking for
compliance culture in the carrying out the
business by the banks.
We have mentioned above that strategic risk and
reputation risks fall outside the definition of
Operational risk given by BCBS.
These are defined as:
Strategic Risk:-
Strategic Risk is the risk arising from adverse
business decisions, improper implementation of
decisions or lack of responsiveness to industry
changes.
This risk is a function of the compatibility of an
organization’s strategic goals, the business
strategies developed to achieve those goals, the
resource deployed against these goals and the
quality of implementation.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - B
Chapter 12: RISK IN BANKING BUSINESS (PART-II)
What we will study?
Mark to Market (MTM):
Mark to market is an accounting practice that
involves adjusting the value of an asset to reflect
its value as determined by current market
conditions.
The market value is determined based on what a
company would get for the asset if
it was sold at that point in time.
 Join CAIIB WITH ASHOK on YouTube & App
Accrual system of accounting:-
Interest is accounted when they occur rather than
when they are actually received.
From the risk management point of view, banking
business lines may be grouped broadly under the
following major heads.
1- The Banking Book
2- The Trading Portfolio
3- Off-Balance Sheet Exposure
THE BANKING BOOK:
The banking book includes all advances, deposits and
borrowings, which usually arise from commercial and
retail banking operations.
All assets and liabilities in banking book have the
following characteristics:
i) They are normally held until maturity.
ii) Accrual system of accounting is applied.
Join CAIIB WITH ASHOK on YouTube & App
2.Mark-to-Market system is followed and the difference
between the market price and book value is taken to
profit and loss account.
The trading book mostly comprises of fixed income
securities, equities, foreign exchange holdings
commodities, etc., held by the bank on its own account.
Derivatives that are held for trading in the market or
over the counter (OTC) and for hedging exposures under
the trading book would also form a part of the trading
book.
Trading book is mainly exposed to
market risk
default or credit risk
operational risk
Join CAIIB WITH ASHOK on YouTube & App
iii) They are not subject to MTM (mark to market)
exercise.
iv) They attract capital charge on credit risk and noton
market risk.
The banking book is mainly exposed toliquidity
risk
interest rate risk
default or credit risk
operational risks.
THE TRADING BOOK:-
The trading book includes all the assets that are
marketable, i.e., they can be traded in the market.
Contrary to the characteristics of assets and liabilities
held in the banking book, the trading book assets have
the following characteristics:
1. They are normally not held until maturity and
positions are liquidated in the market after holding
the assets for a certain period.
Join CAIIB WITH ASHOK on YouTube & App
OFF-BALANCE SHEET EXPOSURES:-
Off-balance sheet exposures are contingent in nature.
Where banks issue guarantees, committed or backup
credit lines, letters of credit, etc., banks face payment
obligations contingent upon someevent.
These contingencies adversely affect the revenue
generation of banks.
Banks may also have contingent assets (for example, a
bank may have purchased insurance to protect against
certain negative events).
Contingent exposure may become a fund-based
exposure. Such exposures may become a part of the
banking book or trading book, depending upon the
nature of off-balance sheet exposure.
Therefore, off-balance sheet exposures may have
liquidity risk, interest rate risk, market risk, default or
credit risk and operational risk.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – B
Chapter 12: RISK IN BANKING BUSINESS (PART-III)
What we will study?
*What is interest rate risk?
*What is market rate risk?
Interest Rate Risk:
Interest Rate Risk (IRR) is the exposure of a Bank's
revenue to adverse movements in interest rate.
Interest Rate Risk (IRR) refers to potential adverse
impact on Net Interest Income (NII) or Net
Interest Margin (NIM) caused by changes in
market interest rates.
It may be defined as risk of changes in the
financial value of assets or liabilities (or
inflows/outflows) because of fluctuations in
interest rates.
Join CAIIB WITH ASHOK on YouTube & App
An example of basis risk would be to say in a
rising interest rate scenario asset interest rate
may rise indifferent magnitude than the interest
rate on corresponding liability creating variation in
net interest income.
c: Yield Curve Risk:-
In a floating interest rate scenario, banks may
price their assets and liabilities based on
differentbenchmarks, i.e., treasury bills' yields,
fixed deposit rates, call money rates, MIBOR, etc.
An example would be when a liability raised at a
rate linked to say 91 days T Bill is used to fund
an asset linked to 364 days Treasury Bills.
In a rising interest rate scenario, 91 days and 364
days Treasury bills may increase but not equally
due to non-parallel movement or yield curve
creating variation in net interest earned.
Join CAIIB WITH ASHOK on YouTube & App
For example, the risk that future investment may
have to be made at lower rates and future
borrowings at higher rates.
a: Gap or Mismatch Risk:-
A gap or mismatch risk arises from holding assets
and liabilities and off-balance sheet items with
different principal amounts, maturity dates or re-
pricing dates, thereby creating exposure to
unexpected changes in the level of market
interstates.
An example of this risk would be where an asset
maturing in two years at a fixed rate of interest
has been funded by a liability maturing in six
months or a liability maturing over a period but
getting re-priced periodically.
b: Basis Risk:-
The risk that the interest rate of different assets,
liabilities and off-balance sheet items may
changing different magnitude is termed as basis
risk.
Join CAIIB WITH ASHOK on YouTube & App
d: Embedded Option Risk:-
There would always be a possibility that the loan
amount is prepaid or the deposit amount is
withdrawn prematurely adding to the risk as
Embedded Option Risk.
e: Reinvestment Risk:-
Uncertainty with regard to interest rate at which
the future cash flows could be reinvested is called
reinvestment risk.
Any mismatches in cash flows would expose the
banks to variation in NII as the market interest
rates move in different directions.
f: Net Interest Position Risk:-
Where banks have more earning assets than
paying liability, Interest rate risk arises
when market interest rates adjust
downwards.
Such banks will experience a reduction in NII as
the market interest rate declines and increases
when interest rate rises.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App

Market Risk:- b: Market Liquidity Risk:-

Market risk is the risk of adverse deviations of the Market liquidity risk arises when a bank is unable
mark-to-market value of the trading portfolio, due to conclude a large transaction in a particular
to market movements, during the period of instrument near the current market price.
holding.
This results from adverse movements of the
market prices of interest rate instruments,
equities, commodities and currencies.
Market Risk is also refered as Price Risk.
Price risk occurs when assets are sold before their
stated maturities.

a: Forex Risk:-
Forex risk, also termed as Exchange Risk, is the risk
that a bank may suffer losses as a result of adverse
exchange rate movements during a period in which
it has an open position, either spot or forward or a
combination of the two or in any individual foreign
currency.

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

BFM MODULE – B In 1988, the Basel Committee published a set of

Chapter 13: Risk Regulation in Banking Industry(PART-I) minimal capital requirements for banks, known
as the 1988 Basel Accord.
What we will study?
These were enforced by law in the G-10 countries
*What is BASEL - I? in 1992.
The Japanese banks were permitted an extended
BASEL I: THE BASEL CAPITAL ACCORD:- transition period.

The period 1980 was the post-deregulation era
(in India deregulation started in nineties).
Deregulation inspired competition indeed
resultedin increasing the risks of the banks.
In the early 1980s, the onset of the Latin
Americandebt crisis heightened the Committee's
concerns that the capital ratios of the main
international banks were deteriorating at a time
of growing international risks.
This outlined the need for risk control and linking
banking risks with banks' capital.
The 1988 Basel Accord primarily sought to put
inplace a framework for minimum capital
requirement for banks that was linked to credit
exposure.
Keeping in view different accounting practices in
vogue across the world, it also defined the
capital for the purpose of capital adequacy.
The 1988 Accord called for a minimum ratio of
capital to risk-weighted assets of 8% to be
implemented by the end of 1992.
Ultimately, this framework was introduced not
onlyin member countries but also in virtually all
countries for the active international banks.
 Join CAIIB WITH ASHOK on YouTube & APP
The present minimum ratio of capital to risk-
weighted assets as prescribed by RBI is 9%.
(excluding Capital Conservation Buffer)
Bank assets were classified into five, buckets, i.e.,
grouped under five categories according to credit
risk carrying risk weights of 0, 10, 20, 50 and 100%.
Assets were to be classified into one of these
riskbuckets based on the parameters of counter
party (sovereign, banks, public sector enterprises
or others), collateral (e.g., mortgages of
residential property) and maturity.
Generally, government debt was categorized at 0%,
bank debt at 20%, and other debt at 100%.
Off-balance sheet exposures such as
performanceguarantees and letters of credit
were brought into the calculation of risk-
weighted assets using the mechanism of variable
credit conversion factor.
Banks were required to hold capital equal to 8%
ofthe risk-weighted value of assets.
Join CAIIB WITH ASHOK on YouTube & APP
Salient features of the amendment are given below:
1. Allows banks to use proprietary in-house
modelsfor measuring market risks.
2. Banks using proprietary models must
computeVAR daily, using a 99th percentile, one-
tailed confidence interval with a time horizon
of ten trading days using a historical
observation periodof at least one year.
3. The capital charge for a bank that uses a
proprietary model will be the higher of the
previousday's VAR and three times the average
of the daily VAR of the preceding 60 business
days.
4. Allows banks to issue short-term
subordinated debt subject to a lock-in clause
(Tier 3 capital) to meet a part of their market
risks.
5. Alternate standardized approach using the
building block’ approach where general market
riskand specific security risk are calculated
separately and added up.
Join CAIIB WITH ASHOK on YouTube & APP
Since 1988, this framework has been
progressively introduced not only in member
countries but also in almost all other countries
having active international banks.
The accord provided a detailed definition of capital.
Tier 1 or core capital, which includes equity and
disclosed reserves, and Tier 2 or supplementary
capital, which could include undisclosed reserves,
asset revaluation reserves (which is part of Tier 1
capital in India), general provisions and loan-loss
reserves, hybrid (debt/equity) and debt capital
instruments.
1996 AMENDMENT TO INCLUDE MARKET RISK:
In 1996, BCBS published an amendment to the
1988 Basel Accord to provide an explicit capital
cushion for the price risks (market risk) to which
banks are exposed, particularly those arising
fromtheir trading activities.
This amendment was brought into effect in 1998.
Join CAIIB WITH ASHOK on YouTube & APP
6. Banks to segregate trading book and mark
to market all portfolio/position in the trading
book.
7. Applicable to both trading activities of banks
andnon-banking securities firms.
An important aspect of the Market Risk
amendmentwas that banks were, for the first
time, allowed to use internal models (value-at-risk
models) as a basis for measuring their market
risk capital requirements, subject to strict
quantitative and qualitative standards.
Does BCBS have powers to enforce? No-
The Committee does not possess any formal
supervisory authority, and its conclusions do
not,and were never intended to, have legal
force.
Rather, it formulates broad supervisory
standardsand guidelines and recommends,
statements of best practice in the expectation
that individual authorities will take steps to
implement them through detailed arrangements
– statutory or otherwise which are best suited
to their own national systems.
 Join CAIIB WITH ASHOK on YouTube & APP
One important objective of the Committee's
workhas been to close gaps in international
supervisorycoverage in pursuit of two basic
principles:
that no foreign bank establishment should escape
supervision;
and that supervision should be adequate.
Join CAIIB WITH ASHOK on YouTube & APP
Both would be placed in 100% risk weight
categoryalthough, risks associated with them
would be quite different.
2. It promotes financial decision-making on the
basis of regulatory constraints rather than on
thebasis of economic opportunities.
Capital requirement for all corporate accounts
being the same, it encouraged financing of
assetswith more risks for higher returns.
3. It did not recognize the role of credit risk
mitigants, such as credit derivatives,
securitization,collaterals and guarantees in
reducing credit risk.
4. It did not take into account operational risk
ofbanks.
The fundamental objective to revise the 1988
Accord has been:
1. To develop a framework that would
strengthenthe soundness and stability of the
international banking system.
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE – B
Chapter 13: Risk Regulation in Banking Industry(PART-II)
What we will study?
*What is BASEL-II?
BASEL-II ACCORD – NEED AND GOALS:
Linking of risks with capital in terms of the Basel I
Accord needed a revision for the following reasons:
1. Credit risk assessment under Basel I was not risk
sensitive enough.
Capital need assessment under the Basel I accord
was not being able to differentiate between
banks with lower risks and banks with higher
risks.
For example, exposure on a company with AAA
rating and a company with B rating were
treatedidentically for the purpose of capital
adequacy.
Join CAIIB WITH ASHOK on YouTube & APP
2. To ensure that it does not become a source of
competitive inequality among internationally
activebank and yet have a capital adequacy
regulation that is sufficiently consistent.
3. To help promote the adoption of stronger
risk management practices by the banking
industry.
BASEL – II ACCORD:
In June 1999 the committee issued a proposal
for anew capital adequacy framework to replace
the 1998 accord.
This revised framework comprised three pillars:
1. Minimum Capital Requirement which sought to
develop and expand the standardized ruleset
out inthe 1988 Accord.
2. Supervisory review of an institution’s
capitaladequacy and internal assessment
process.
3- Effective use of disclosure as leave to strengthen
market discipline and encourage sound banking
practices.
 Join CAIIB WITH ASHOK on YouTube & APP
The new framework was designed to improve
the way regulatory capital requirement reflect
underlying risk and too better address the
financialinnovation that had occurred in recent
year.
The framework’s publication in June 2004 followed
almost 6 year of intensive preparation.
During this period the BASEL committee consulted
extensively with banking sector representatives,
supervisory agencies, Central banks and outside
observers in order to develop significantly more risk
sensitive capital requirement.
Following the June 2004 release which focused
primarily on the banking book the committee
turnedits attention to the trading book.
In close cooperation with the International
Organization for Securities Commissions
(IOSCO)
the international body of securities regulators, the
committee published in July 2005 a consensus
document governing the treatment of bank trading
books under the new framework.
Join CAIIB WITH ASHOK on YouTube & APP
To help address this issue, the Committee
issuedguidance on in 2006, followed by advice
on supervisory cooperation and allocation
mechanisms in the context of the advanced
measurement approaches for operational risk.
As stated above the Basel II Accord is based on
three pillars :
1. Minimum Capital Requirement
2. Supervisory Review Process
3. Market Discipline
Structure of Basel-II
Pillar 1 - Minimum Capital Requirement
1. Capital for Credit Risk:
1. Standardised Approach
2. Internal Ratings Based (IRB)
FoundationApproach
3. Internal Ratings Based (IRB) Advanced Approach
Join CAIIB WITH ASHOK on YouTube & APP
For ease of reference this new text was
integratedwith the June 2004 text in a
comprehensive document released in June 2006:
Basel II : International convergence of capital
measurement and capital standards: A revised
framework - Comprehensive version .
Committee members and several non-members
agreed to adopt the new rules albeit on varying
timescales.
One challenge that supervisor worldwide faced
under Basel II was the need to approve the use
of certain approaches to risk measurement in
multiplejurisdiction.
While this was not a new concept for the
supervisory community - the market risk
amendment of 1996 involved a similar
requirement
- Basel II expended the scope of such approvals
and demanded an even greater degree of
cooperation between home and host
supervisors.
Join CAIIB WITH ASHOK on YouTube & APP
2. Capital for Market Risk:
1. Standardised Approach (Maturity Method)
2. Standardised Approach (Duration Method)
3. Internal Models Method
3. Capital for Operational Risk:
1. Basic Indicator Approach
2. Standardised Approach
3. Advanced Measurement Approach
Pillar 2 – Supervisory Review Process
1. Evaluate risk assessment.
2. Ensure soundness and integrity of banks'
internalprocess to assess the adequacy of
capital.
3. Ensure maintenance of minimum capital -
withPCA (Prompt Corrective Action) for
shortfall.
4. Prescribe differential capital, where necessary
–i.e., where the internal processes are slack.
 Join CAIIB WITH ASHOK on YouTube & APP
Pillar 3 – Market Discipline
1. Enhance disclosure
2. Core disclosures and supplementary disclosures
3. Timely disclose - semi annual
Banks in India were required to maintain a
minimum Capital to Risk-weighted Assets Ratio
(CRAR) norm of 8 % on an ongoing basis up to
theyear ending 31 March 1999.
With effect from the year ending 31 March 2000,
banks are required to maintain minimum CRARs
of 9 % on an ongoing basis.
Join CAIIB WITH ASHOK on YouTube & APP
Responding to these risk factors, the Basel
Committee issued Principles for sound liquidity
riskmanagement and supervision in the same
month (September, 2008) that Lehman Brothers
failed.
In July 2009, the Committee issued a further
package of documents to strengthen the Basel
IIcapital framework, notably with regard to the
treatment of certain complex securitisation
positions, off-balance sheet vehicles and trading
book exposures.
These enhancements were part of a broader
effort to strengthen the regulation and
supervision of internationally active banks, in the
light of weaknesses revealed by the financial
market crisis.
In September 2010, the Group of Governors and
Heads of Supervision (GHOS) announced higher
global minimum capital standards for
commercialbanks.
This followed an agreement reached in July, 2010
regarding the overall design of the capital and
liquidity reform package, now referred to as “Basel
III”.
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE – B
Chapter 13: Risk Regulation in Banking Industry(PART-III)
What we will study?
*How BCBS moved towards BASEL III?
TOWARDS BASEL III:
Even before Lehman Brothers collapsed in
September 2008, the need for a fundamental
strengthening of the Basel II framework had
become apparent.
The banking sector entered the financial crisis
withtoo much leverage(using debt insted of
equity for giving loan or creating assets) and
inadequate liquidity buffers.
These weaknesses were accompanied by poor
governance and risk management.
The dangerous combination of these factors
wasdemonstrated by the mispricing of credit
and liquidity risks, and excess credit growth.
Join CAIIB WITH ASHOK on YouTube & APP
In November 2010, the new capital and liquidity
standards were endorsed at the G20 Leaders'
Summit in Seoul and subsequently agreed at
theDecember 2010 Basel Committee meeting.
The proposed standards were issued by the
Committee in mid-December 2010 (and have
beensubsequently revised).
The December 2010 versions were set out in
BaselIII:
International framework for liquidity risk
measurement, standards and monitoring and
BaselIII: A global regulatory framework for more
resilientbanks and banking systems.
The enhanced Basel framework revised and
strengthened the three pillars established by
BaselII.
It also extended the framework with several
innovations:
 Join CAIIB WITH ASHOK on YouTube & APP
*an additional layer of common equity – the
capital conservation buffer (CCB) – that, when this
layer isbreached, restricts payouts to help meet
the minimum common equity requirement.
*a countercyclical capital buffer, which places
restrictions on participation by banks in system-
wide credit booms with the aim of reducing
theirlosses in credit busts.
*a leverage ratio -(a measure of the ratio of
assets to owners equity) a minimum amount of
loss- absorbing capital relative to all of a bank's
assets and off-balance sheet exposures
regardless of riskweighting.
*liquidity requirements – a minimum liquidity
ratio, the Liquidity Coverage Ratio (LCR),
intended to provide enough cash to cover
funding needs over a30-day period of stress; and
a longer-term ratio, theNet Stable Funding Ratio
(NSFR), intended to address maturity mismatches
over the entire balance sheet.
Join CAIIB WITH ASHOK on YouTube & APP
At the same time, the Basel Committee, its
governing body and the G20 Leaders have
emphasised that the reforms will be introduced
in away that does not impede the recovery of the
realeconomy.
To reflect these concerns, a set of transitional
arrangements for the new standards was
announced in September 2010, although
national authorities are free to impose higher
standards andshorten transition periods where
appropriate.
The strengthened definition of capital will be
phased in over 5 years:
the requirements were introduced in 2013 and
should be fully implemented by the end of 2017.
Capital instruments that no longer qualify as
Common Equity Tier 1 capital or Tier 2 capital
willbe phased out over a 10-year period,
beginning 1 January 2013
Turning to the minimum capital requirements,
thehigher minimums for Common Equity and Tier
1 capital were phased in from 2013, and became
Join CAIIB WITH ASHOK on YouTube & APP
*additional proposals for systemically
importantbanks(SIB) (SBI,HDFC,ICICI), including
requirements for supplementary capital,
augmented contingent capital and strengthened
arrangements for cross-border supervision and
resolution.
In January 2012, the Group of Governors and
Headsof Supervision (GHOS) endorsed a
comprehensive process proposed by the
Committee to monitor members' implementation
of Basel III.
The Regulatory Consistency Assessment
Programme (RCAP) consists of two distinct but
complementary work streams to monitor the
timelyadoption of Basel III standards, and to
assess the consistency and completeness of the
adopted standards including the significance of
any deviations from the regulatory framework.
These tightened definitions of capital,
significantlyhigher minimum ratios and the
introduction of a macro prudential overlay,
represent a fundamentaloverhaul for banking
regulation.
Join CAIIB WITH ASHOK on YouTube & APP
effective at the beginning of 2015.
The schedule is as follows:
Year Common Equity Tier I
Earlier 2% 4%
2013 3.5% 4.5%
2014 4% 5.5
2015 4.5% 6%
The 2.5% capital conservation buffer, which will
comprise common equity and is in addition to
the4.5% minimum requirement, will be phased
in progressively starting on 1 January 2016, and
willbecome fully effective by 1 January 2019.
The leverage ratio(a measure of the ratio of
assetsto owners equity) will also be phased in
gradually.
The test (the so-called “parallel run period”)
beganin 2013 and will run until 2017, with a view
to
 Join CAIIB WITH ASHOK on YouTube & APP
migrating to a Pillar 1 treatment on 1 January 2018
based on review and appropriate calibration.
The exposure measure of the leverage ratio was
finalised in January 2014.
The Liquidity Coverage Ratio (LCR) will be
phased in from 1 January 2015 and will require
banks to hold a buffer of high-quality liquid
assets(HQLA) sufficient to deal with the cash
outflows encountered in an acute short-term
stress scenarioas specified by supervisors.
To ensure that banks can implement the LCR
without disruption to their financing activities,
the minimum LCR requirement began at 60% in
2015, rising in equal annual steps of 10
percentage pointsto reach 100% on 1 January
2019.
The other minimum liquidity standard introduced by
Basel III is the Net Stable Funding Ratio (NSFR).
This requirement, which takes effect as a
minimumstandard by 1 January 2018, will
promote longer- term funding mismatches and
provide incentives for banks to use stable
funding sources.
Join CAIIB WITH ASHOK on YouTube & APP
Also act together to raise capital standards, to
implement strong international compensation
standards aimed at ending practices that lead to
excessive risk-taking, to improve the over the-
counter derivatives market and to create more
powerful tools to hold large global firms to
accountfor the risks they take.
For all these reforms, the leaders set for
themselves strict and precise timetables.
Consequently, the Basel Committee on Banking
Supervision (BCBS) released comprehensive reform
package entitled
“Basel III: A global regulatory framework for more
resilient banks and banking systems”
( known as Basel III capital regulations) in
December 2010.
Basel III reforms strengthen the bank-level
regulation, with the intention to raise the
resilienceof individual banking institutions in
periods of stress.
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE – B
Chapter 13: Risk Regulation in Banking
Industry(PART-IV)
What we will study?
*What is BASEL III?
BASEL III CAPITAL REGULATIONS IN INDIA:
Basel III reforms are the response of Basel
Committee on Banking Supervision (BCBS) to
improve the banking sector's ability to absorb
shocks arising from financial and economic
stress,whatever the source.
Thus reducing the risk of spill over from the
financial sector to the real economy.
During Pittsburgh summit in September 2009,
theG20 leaders committed to strengthen the
regulatory system for banks and other financial
firms.
Join CAIIB WITH ASHOK on YouTube & APP
These new global regulatory and supervisory
standards mainly seek to raise the quality and
level of capital to ensure banks are better able to
absorb losses on both a going concern and a
gone concernbasis.
Increase the risk coverage of the capital
framework,(introduce leverage ratio to serve as a
backstop to the risk-based capital measure)
Raise the standards for the supervisory review
process (Pillar 2) and public disclosures (Pillar 3)
etc.
The macro prudential aspects of Basel III are
largely enshrined in the capital buffers.
Both the buffers i.e., the capital conservation
bufferand the countercyclical buffer are intended
to protect the banking sector from periods of
excess credit growth.
Reserve Bank issued Guidelines based on the
BaselIII reforms on capital regulation on May 2,
2012, to the extent applicable to banks operating
in India.
 Join CAIIB WITH ASHOK on YouTube & APP
The Basel III capital regulation has been
implemented from April 1, 2013 in India in
phasesand it will be fully implemented as on
March 31, 2019. It was postponed to March
2020.
In light of the corona virus pandemic, the RBI
decided to defer the implementation of Basel
norms till April 2021.
Approach to Implementation and Effective Date:
The Basel III capital regulations continue to be
based on three-mutually reinforcing Pillars, viz,
1- Minimum capital requirements,
2- Supervisory review of capital adequacy,
and3- Market discipline
Under Pillar 1, the Basel III framework will
continue to offer the 3 distinct options for
computing capitalrequirement for credit risk and
3 other options for computing capital
requirement for operational risk.
Join CAIIB WITH ASHOK on YouTube & APP
Approach for credit risk, Basic Indicator
Approachfor operational risk by March 2009 and
banks should continue to apply the Standardised
DurationApproach (SDA) for computing capital
requirement for market risks.
Banks were advised to undertake an internal
assessment of their preparedness for migration
to advanced approaches and take a decision
with the approval of their Boards, whether they
would like tomigrate to any of the advanced
approaches.
Based on bank’s internal assessment and its
preparation, a bank may choose a suitable date
toapply for implementation of advanced
approach.
Besides, banks, at their discretion, would have
theoption of adopting the advanced approaches
for one or more of the risk categories, as per
their preparedness, while continuing with the
simpler approaches for other risk categories,
and it wouldnot be necessary to adopt the
advanced approaches for all the risk categories
simultaneously.
Join CAIIB WITH ASHOK on YouTube & APP
These options for credit risk, operational risks are
based on increasing risk sensitivity and allow
banksto select an approach that is most
appropriate to the stage of development of
bank's operations.
The options available for computing capital for
credit risk are:
1- Standardised Approach,
2- Foundation Internal Rating Based
Approach 3- Advanced Internal Rating Based
Approach.
The options available for computing capital for
operational risk are:
1- Basic Indicator Approach (BIA),
2- The Standardised Approach (TSA) and
3- Advanced Measurement Approach (AMA).
Keeping in view the Reserve Bank's goal to have
consistency and harmony with international
standards, it was decided in 2007 that all
commercial banks in India (excluding Local Area
Banks and RRBs) should adopt Standardised
Join CAIIB WITH ASHOK on YouTube & APP
However, banks are required to invariably
obtain prior approval of the RBI for adopting/
migrating any of the advanced approaches.
Effective Date:
The Basel III capital regulations are being
implemented in India with effect from April 1,
2013.
Banks have to comply with the regulatory limits
andminima as prescribed under Basel III capital
regulations, on an ongoing basis.
To ensure smooth transition to Basel III,
appropriate transitional arrangements have
been provided for meeting the minimum Basel
III capitalratios, full regulatory adjustments to
the components of capital etc.
Consequently, Basel III capital regulations have
to be fully implemented as on March 31, 2019. It
was postponed to March 2020.
In light of the corona virus pandemic, the RBI
decided to defer the implementation of Basel
norms till April 2021.
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

Scope of Application: BFM MODULE – B

A bank is required to comply with the capital
adequacy ratio requirements at two levels, viz.
(a) The consolidated (“Group”) level after
consolidating the assets and liabilities of its
subsidiaries/joint ventures/associates etc.,
exceptthose engaged in insurance and any non-
financial activities; and
(b) The standalone (“Solo”) level based on
itsstandalone capital strength and risk
profile.
The overseas operations of a bank through its
branches are covered in both the above
scenarios.
Chapter 13: Risk Regulation in Banking Industry
(PART-V)
What we will study?
*What is BASEL III continue?
Composition of Regulatory Capital:
Banks are required to maintain a minimum
Capitalto Risk-weighted Assets Ratio (CRAR) of
9% on anon-going basis (other than capital
conservation buffer and countercyclical capital
buffer etc.).
The Reserve Bank will take into account the
relevant risk factors and the internal capital
adequacy assessments of each bank to ensure
thatthe capital held by a bank is commensurate
with the bank's overall risk profile.
This would include, among others, the
effectiveness of the bank's risk management

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

systems in identifying, assessing/measuring, A bank should compute Basel III capital ratios in the
monitoring and managing various risks including following manner:
interest rate risk in the banking book, liquidity
risk,concentration risk and residual risk.
The residual risk is the amount of risk or danger
associated with an action or event remaining after
natural or inherent risks have been reduced by risk
controls
Accordingly, the Reserve Bank will consider
prescribing a higher level of minimum capital * RWA= Risk weighted Assets;
ratiofor each bank under the Pillar 2 framework
# Capital to Risk Weighted Asset Ratio
on the basis of their respective risk profiles and
their riskmanagement systems. Start In India

Further, in terms of the Pillar 2 requirements, BASEL 1 1988 1992

banksare expected to operate at a level well BASEL 2 2006 2008
above the minimum requirement.
BASEL 3 2010 2013

BASEL 3 (LAST) 31.03.2019 31.03.2020

30.09.2020 1.04.2021
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

Elements of Regulatory Capital and the Criteria
fortheir Inclusion in the Definition of Regulatory
Capital:
Components of Capital:
Total regulatory capital will consist of the sum of
the following categories:
Rural Banks) operating in India shall maintain a
minimum total capital (MTC) of 9% of total risk
weighted assets (RWAs) i.e. capital to risk weighted
assets (CRAR).
This will be further divided into different
components as described hereunder.

(i) Tier 1 Capital (going-concern capital)
(a) Common Equity Tier 1
(b) Additional Tier 1
(ii) Tier 2 Capital (gone-concern capital)
From regulatory capital perspective, going-
concerncapital is the capital which can absorb
losses without triggering bankruptcy of the bank.
Gone-concern capital is the capital which will
absorb losses only in a situation of liquidation
ofthe bank.
Limits and Minima:
(i) It has been decided that scheduled
commercialbanks (excluding Local Area Banks
and Regional
(ii) Common Equity Tier 1 (CET 1) capital must
beat least 5.5% of risk-weighted assets (RWAs)
i.e. forcredit risk + market risk + operational risk
on an ongoing basis.
(iii) Tier 1 capital must be at least 7% of RWAs
onan ongoing basis.
Thus, within the minimum Tier 1 capital,
Additional Tier 1 capital can be admitted
maximum at 1.5% of RWAs.
iv) Total Capital (Tier 1 Capital plus Tier 2 Capital)
must be at least 9% of RWAs on an ongoing
basis.
Thus, within the minimum CRAR of 9%, Tier 2
capital can be admitted maximum up to 2%.
(v) If a bank has complied with the minimum

Join CAIIB WITH ASHOK on YouTube & APP

Common Equity Tier 1 and Tier 1 capital ratios,
thenthe excess Additional Tier 1 capital can be
admittedfor compliance with the minimum CRAR
of 9% of RWAs.
(vi) In addition to the minimum Common
Equity Tier1 capital of 5.5% of RWAs, banks are
also required to maintain a capital conservation
buffer (CCB) of2.5% of RWAs in the form of
Common Equity Tier 1capital.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - B
Chapter 13: RISK REGULATION IN BANKING INDUSTRY
(PART-VI)
What we will study?
*What is horizontal disallowance?
*What is vertical disallowance?
*How to calculate capital charge for market risk?

Thus, with full implementation of capital ratioss

and CCB the capital requirements as on 31st March,
2019 will be as follows:
(i) Tier 1 Capital (going-concern capital) : 7%
(a) Common Equity Tier 1 : 5.5%
(b) Additional Tier 1 : 1.5%
(ii) Tier 2 Capital (gone-concern capital): 2%
(iii) Total Capital = T1 + T2 = 7% + 2% = 9%
(iv) CCB = 2.5%
(v) Total Capital including CCB = 9% +2.5% = 11.5%.
 Join CAIIB WITH ASHOK on YouTube & App
CAPITAL CHARGE FOR MARKET RISK:
The capital requirements for general market risk are
designed to capture the risk of loss arising from changes
in market interest rates.
The capital charge for market risk is the sum of four
components:
(i) the net short* or long position in the whole trading
book;
*Short position is not allowed in India except in
derivatives and Central Government Securities
(ii) a small proportion of the matched positions in each
time-band (the "vertical disallowance");
(iii) a larger proportion of the matched positions across
different time-bands (the "horizontal disallowance");
and
(iv) a net charge for positions in options, where
appropriate.
Join CAIIB WITH ASHOK on YouTube & App
This is the basis risk and is accounted for in capital
computations by way of vertical disallowance of netted
position.
The extant guidelines provide for 5% disallowance of
amount netted within a given maturity band.
Where the netting takes place across various maturity
bands and changes in interest rates across various
maturities are rarely same.
This is accounted for in capital computations by way of
horizontal disallowance of position netted across
maturity bands.
The extant guidelines provide for 30% to 100%
disallowance of amount netted across maturity bands.
Horizontal disallowances prescribed for the purpose are
given in the Table 18.
The following example would clarify the adjustments
required that would arise if a portfolio has short
positions.
Join CAIIB WITH ASHOK on YouTube & App
Derivatives create short positions in the portfolio and
provide interest rate risk mitigation.
Short positions created on account of exposures on
derivatives get netted of in the process of algebraic
addition while computing capital charge for market risk.
This has the effect of reducing the capital charge for the
portfolio.
However, changes in interest rate for assets and that for
liabilities are rarely same even for any given maturity,
impact of interest rate changes is not off-set fully.
Join CAIIB WITH ASHOK on YouTube & App
Under extant regulatory directives short positions may
arise only through derivatives as short sale of securities
is not yet permitted in India.
Let us assume that a portfolio consists of
1. Long position in securities with remaining maturity of
2 years and general market risk capital charge of Rs. 100
Crores.
2. Long position in securities with remaining maturity of
5 years and general market risk capital charge of Rs. 450
Crores.
3. Derivatives creating short position with remaining
maturity of 6 months and general market risk capital
charge of Rs. 100 Crores.
4. Derivatives creating short position with remaining
maturity of 2 years and general market risk capital
charge of Rs. 50 Crores.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Position Maturity General market risk Capital Charge Position Maturity Zone General market risk
Capital Charge
Long 2 years +100 Cr
Long 2 years Zone 2 +100 Cr
Long 5 years +450 Cr
Long 5 years Zone 3 +450 Cr
Short 6 months -100 Cr
Short 6 months Zone 1 -100 Cr
Short 2 years -50 Cr
Short 2 years Zone 2 -50 Cr

Computation of Capital charge for general market risk of the

portfolio would be algebraic sum of general market risk *We need to make sure that there is no short position
capital charge for all these items subject to adjustments
required for vertical and horizontal disallowance. in books after making the adjustments.

Sum of general market risk capital charge for all these items
equals Rs. 400 crores (100+450-100-50= 400). Zone Capital Charge Remarks
Zone 1 - 100
Zone 2 +100 Same time band means Vertical
disallowance
-50
Zone 3 +450

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Vertical disallowance: Zone Net New Net Amount Horizontal
Position Position
Zone Capital Net Position Amount Vertical Netted disallowance
Charge Zone 1 - 100 -100+50 -50 50 Cr 40% of 50 Cr
Netted disallowance
Zone 1 - 100 - 100 =20 Cr

Zone 2 +100 +50 50 Cr 5% of 50 Cr Zone 2 +50 0 0

-50 = 2.5 Cr Zone 3 +450 +450 +450

Zone 3 +450 +450

Zone Net New Net Amount Horizontal

Position Position
Vertical disallowance = 2.5 Cr Netted disallowance
Zone 1 - 50 -50+50 0 50 Cr 100% of 50 Cr

Horizontal disallowance: =50 Cr

*Different time band means Horizontal disallowance Zone 2 0 0 0

* We need to adjust the short position with nearest Zone 3 +450 +400 +400

zone which have long position

Total horizontal disallowance = 20+50 = 70 Cr
 Join CAIIB WITH ASHOK on YouTube & App
The capital charge for general market risk of the BFM MODULE - B
portfolio would be algebraic sum of general market risk Chapter 13: RISK REGULATION IN BANKING INDUSTRY(PART-VII)
capital charge for all these items (Rs. 400 Crores) plus
adjustments required for vertical disallowance (Rs. 2.50 (HAIR CUT METHOD )
Crores) and horizontal disallowance (Rs. 70 Crores) What we will study?
totaling Rs 472.50 Crores.
* What is hair cut method ?

Allowable Reduction = E * He – [C x (1-Hc- Hf) * Mf]
Subject to a maximum of Exposure amount and minimum
of Zero (i.e.,
Where allowable reduction is more than amount of
exposure allowable reduction would equal to amount of
exposure.
Further , where allowable reduction is negative; it should
be taken as Zero.)
Example 1 :-
An exposure of Rs. 100 lakhs is backed by financial
collateral of A+ debt security of Rs. 30 lakhs issued by
others.
The tenor of the exposure is 3 years. The residual maturity
of the financial collateral is 2 years.
Example 2: An exposure of Rs.100 lakhs is backed by line on
fixed deposit of Rs. 30 lakhs. There is no maturity
mismatch.
Example 3: An exposure of Rs. 100 lakhs is backed by
guarantee of state government for the full amount.
There is not maturity mismatch.
Join CAIIB WITH ASHOK on YouTube& App
BFM MODULE -B
CHAPTER-13 RISK REGULATION IN BANKING INDUSTRY
(HAIR CUT CASE STUDY) PART - VIII
What We Will Study ?
 Case Study on hair Cut method ?
Deposits under Lien:-
In case of loans and advances secured by bank deposits
under lien allowable reduction in exposure is to be
determined using the following formula.
Allowable Reduction : C * [ 1 –Hfx] * Mf
Subject to maximum of Exposure amount (i.e.,
Where allowable reduction is more than amount of
exposure, allowable reduction would equal to amount of
exposure)
Approved Financial Collaterals :-
In case of loans advances secured by eligible financial
collaterals other than bank deposits (enclosure 4),
allowable reduction in exposure is to be determined using
the following formula.
Example 4 :An exposure of Rs. 100 lakhs is backed by
financial collateral in the form of NSCs of Rs. 30 lakhs and
eligible A+ debt securities issued by others of Rs. 50 lakhs.
The residual tenor of the exposure is 3 years and the
residual maturity of both the collaterals is 3 years.
Hair-Cut
*
E = max [ 0 , E – C* ]
 i.e. subject to a maximum expanses and minimum of zero
i.e. if value came negative then take Zero.
C* = C x ( 1- Hc - Hfx) x Mf
 C* can be maximum = E
 If C* is negative then take = 0
Ex- C= 100₹ E = 200₹
*
(I) C = -60 ₹
Then C* = 0
(II) C*= 250 ₹
Then C*= 200
For lien
Hc= 0 %

C* = c x ( 1 – Hfx) x Mf C* = C X ( 1-Hc – Hfx ) X Mf

30 0.06 0 3=2
Case study 1:- [ ₹=₹ ] &c= 2
An expenses Rs. 100 lakhs is backed by financial
t–025
collateral as A+ debt security of Rs. 30 lakhs issued by other. So Mf= t–0.25
The tenor of exposure is 3 years. The residual maturity of the
financial collateral is 2 years. Now calculate not exposure t–0.25
C* = C x ( 1 -H c–Hfx) X
quailing for capital adequacy ? T–0.25
2–0.25
Solution C* = 30 X ( 1- 0.06 – 0 ) X ( )
3–0.25
C* = C X (1 – H –H ) M ) X M
c fx f f
1.75
C* = 30 X 0.94 X
2.75
* *
E = Max [ 0, E- C ]
C* = 28.2 X 0.636
Given -
C* = 17.9352
E = 100 , C = 30 , A+ , c ( currency ) = ₹
T = 3 , t = 2 , E ( currency ) = ₹ C* = 17.94 lac 17.95 lac
Now for At Security hair cut is 6% = 0.06 C* = 17.95

Now Hc = 0
E* = Max [ 0, E –C* ]
= Max [ 0, 100 – 17.95] Now
E* = Max [ 0, 82.05 ] C*= C x (1- Hc– Hfx ) X Mf
E* = 82.05
30 0 0 1
So not expenses quality for capital adequacy

= 82.05 lac Ans. C* = 30 X ( 1-0-0) X1

= 30 X 1 X 1
Case Study – 2 C* = 30
An expired of Rs. 100 lakhs in booked by line on fixed deposit
as Rs. 30 lakhs. There is no maturity mismatch. Now calculate E* = Max (0, E-C* ) = Max ( 0,70 ) = 70 lakh
net expanses qualifying for capital adequacy.?

Solution
E = 100 C = 30
(₹) (₹)

Hfx = 0

 No maturity mismatch

Mf = 1

 C in FD of bank so hair cut = 0%

 C*1 = 30 X ( 1-0 –0) X 1 = 30
Case Study – 3 C*1= 30
An exposure of Rs. 100 lakh in backed by financial
collateral in the form of NSC Of Rs. 30 lakhs and eligible A+ debt
security issued by them of Rs. 50 lakhs. The residual tenor of C*2= C2 X ( 1-Hc2–Hfx2 ) X Mf2
exposure is 3 years and residual maturity of both the collateral
in 3 years. Now calculate next exposure analyzing for capital 50 6% 0 1
adequacy. 0.06 [ ₹=₹] [ 3y = 3y ]

Solution ∗2 = 50 X (1-0.06 -0) X 1

2
C = C1 + C 2
= 50 X (0.94)
NSC A+
C*2 = 47
30 50
C* = C*1 + C*2
Hc 0% 6%
C* = 30 + 47
*
C = C x ( 1- Hc – Hfx ) X Mf
C* = 77

C*1 = C1 X ( 1- Hc1 – Hfx1 ) X Mf1 E*= Max [0, E2– C*]

30 0% 0 1 [ 3y = 3y] = Max [ 0, 100 – 77 ]

=0 [ ₹=₹]
= Max [ 0, 33 ]

E* = 33 lakhs Hc = 0% [ As state Gov in so virgin , guarantee of Gov on

eligible for capital risk mitigation ]

Net exposure qualifying for capital adequacy = 33 lakhs C* = C x ( 1- Hc– Hfx ) x Mf

Case study -4 100 0 0 1

An exposure of 100 lakh is backed by guarantee
of study Gov for full value. There is no maturity mis match. C*= 100 X ( 1-0-0 ) X 1 = 100
Calculate.?
C* = 100 lakhs
Solution
E = 100 lakh ₹ E* = Max [ 0, E C* ] = Max [ 0, 100 – 100]

C = 100 lakh ₹ = Max [ 0, 0 ] = 0

No maturity mis match Hfx = 0

E* = 0 exposure eligible for capital adequacy = Zero
Mf= 1
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

BFM MODULE - B
Chapter 14 : MARKETING RISK (PART-I)
What we will study ? Share No Total Share New New Loss
*What is market risk? Price of Capital Price Share Capital
shar drop Price
*What is market risk in Banking?
e
100 100 10000 5% 95 9500 500
1000 100 100000 5% 95 95000 5000

MARKET RISK CONCEPT: -

The best way to understand the market risk is to
be in the market. Say Mr. X has raised a capital of
Rs. 10,000 and invests in the shares of ABC Ltd.
being quoted at Rs.100. He buys 100 shares.
He has a portfolio valued at Rs 10,000 against his
capital of Rs. 10,000.
Say he is allowed to borrow 9 times his capital.
Now Mr. X has Rs 10,000 as capital and Rs. 90,000
as borrowings.
Due to adverse movement of market price and
his capital would have been reduced by 50%.
In other words, he would have lost half the capital.
Please note that we have not taken into account
any transaction costs or cost of borrowing into
account. If we take these into account, Mr. X
would lose much more.

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

Mr. X has in fact faced the following risks by Mr. X, before he enters this business should
taking an exposure on a security that is being have a framework that provides him with
traded in the market: (a) an approach to manage the risks, and
1- Risk of adverse movement in the price - Price (b) a measure of risk that can tell him about the
Risk possible downside potential.
2. Risk of reduced liquidity in the market for a MARKET RISK IN BANKS : Banks also have several
specific security - Asset Liquidity Risk activities and undertake transactions that result in
3. The risk of poor market liquidity - Market market exposure. They are not immune to these
Liquidity risk risks and have to face them too.

Of course, Mr. X would have made profits if the All such transactions are reflected in the trading
price had moved favourably and that had been the book.
motivation for him to be in the market in the first 1-A trading book consists of a bank's proprietary
place, but then these are the risks that he is positions in financial instruments covering —
taking the moment he invests in market traded • Debt Securities
securities.
• Equity
Imagine what would have happened if share of
• Foreign Exchange
ABC Ltd. had fallen by 10%. Well, his entire capital
would have been wiped out resulting in him being • Commodities (not permitted in our country
out of this business. presently)

It would be better if he had some measure of • Derivatives held for Trading

possible downside potential of the share price.
 Join CAIIB WITH ASHOK on YouTube & APP
2. The trading book also includes positions in
financial instruments. The proprietary positions
are held with trading intent and with the intention
of benefiting in the short-term, from actual and/or
expected differences between their buying and
selling prices or hedging other elements in the
trading book.
A bank's trading book exposure has the following
risks, which arise due to adverse changes in the
market variables such as interest rates, currency
exchange rate, commodity prices, market liquidity,
etc., and their volatilities impact the bank's
earnings and capital adversely
1-Market Risk
2-Liquidity Risk
(a) Asset Liquidity Risk
(b) Market Liquidity Risk
Join CAIIB WITH ASHOK on YouTube & APP
In general, the liquidation period varies with the
type of instrument. It could be short (1 day) for
foreign exchange and much longer for 'exotic'
derivatives.
Note:-
Market risk does not refer to market losses due to
causes other than market movements.
Any deficiency in the monitoring of the market
portfolio might result in market values deviating
by any magnitude until liquidation finally occurs.
This risk is an operational risk, not a market risk.
2. Trading Liquidity Risk:-
Trading liquidity is the ability to freely transact in
markets at reasonable prices. Trading liquidity is
ability to liquidate positions without —
1. Affecting market prices
2. Attracting the attention of other market
participants
Join CAIIB WITH ASHOK on YouTube & APP
3-Credit and Counterparty risks
Note: The market risk is different from funding the
liquidity risk that arises due to asset-liability
mismatch and is a subject matter of Asset Liability
management.
Market Risk-
Market risk is the risk of adverse deviations of the
mark-to-market value of the trading portfolio, due
to market movements, during the period required
to liquidate the transaction.
The period of liquidation is critical to assess such
adverse deviations. If the period of liquidation
of the position gets longer, the possibilities of
larger adverse deviations from the current market
value also increase.
It is possible to liquidate tradable instruments or
to hedge their future changes of value at any
time. This is the rationale for limiting market risk
to the liquidation period.
Join CAIIB WITH ASHOK on YouTube & APP
Trading liquidity allows one to transact without
compromising on counter-party quality.
Liquidation involves asset and market liquidity
risks.
Price volatility is not the same in high-liquidity and
poor-liquidity situations. When liquidity is high,
the adverse deviations of prices are much lower
than in a poor-liquidity environment, within a
given horizon.
'Pure' market risk, generated by changes of market
parameters (interest rates, equity indexes,
exchange rates), differs from market liquidity risk.
Asset liquidation risk refers to a situation where a
specific asset faces lack of trading liquidity.
Market liquidation risk refers to a situation when
there is a general liquidity crunch in the market
and it affects trading liquidity adversely.
 Join CAIIB WITH ASHOK on YouTube & APP
3. Credit and Counterparty Risks:
Market consider the value of credit risk of
issuers and borrowers and it reflects in prices.
Credit risk of traded debts, such as bonds and
debentures and commercial papers, etc., is
indicated by 'Credit Rating' given by rating
agencies.
Credit rating indicates the risk level associated
with the instruments and is factored into as add-
ons to the risk-free rate of the corresponding
maturity. The lower the risk level, the lower is
the spread over risk
-free rate.
Credit risk may arise either on account of default
of the issuer/borrower or because of rating
migration.
When rating of a financial instrument is
lowered, the spread over the risk-free rate
increases as themarket demands higher yield on a
higher risk instrument. This results in decline in
price of the instrument.
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - B
Chapter 14: MARKETING RISK (PART-II)
What we will study ?
*What is Market risk management framework?
*What is market risk management organization
framework?
*About Market risk identification?
Join CAIIB WITH ASHOK on YouTube & APP
Settlement Risk:
In a market transaction, there is one party that
pays money and receives a given quantity of
financial papers. The other party or the
counterparty does the opposite.
The counterparty receives the money and parts
with the given quantity of financial papers. If
any one of the transacting parties defaults in
completing the settlement, the other party suffers.
This is known as settlement risk. This risk may
lead to systemic risk and therefore monetary
authorities usually take steps to put in place a risk
free settlement system to obviate the risk.
In India, the Reserve Bank of India has since put in
place 'Real Time Gross Settlement System' (RTGS)
for the purpose.
In markets like government securities, foreign
exchange, etc., where RTGS cannot be used for
settlement, central counter parties such as the
Clearing Corporation of India, are used to
mitigatethe settlement risk.
Join CAIIB WITH ASHOK on YouTube & APP
MARKET RISK MANAGEMENT FRAMEWORK
Market risk management involves finding answer
to four key questions.
A. What are the risks?
B. What is the quantum? How much could the
price change? What would be the effect on profit
and loss?
C. How can we monitor and control price risk?
D. Can we reduce the risk? And, if so, then how?
Management processes for market risk
management are designed essentially to answer
these questions.
Accordingly, management processes are sub-
divided into the following four parts:
1. Risk Identification
2. Risk Measurement
3. Risk Monitoring and Control
4. Risk Mitigation
 Join CAIIB WITH ASHOK on YouTube & APP
An effective market risk management framework
in a bank comprises of risk identification, setting
up of limits and triggers, risk monitoring, models of
analysis that value positions or measure market
risk, risk reporting, etc.
Note:
Financial instrument take their price from the
market and that depends upon the interaction of
market variables. Hence, market risk management
processes do not have a risk pricing process.
But, management of market risk needs an
organization structure in place that can carry out
the functions required for the purpose.
Join CAIIB WITH ASHOK on YouTube & APP
Usually, Market Risk Management organization
would consist:
• The Board of Directors
• The Risk Management committee
• The Asset-Liability Management
Committee(ALCO)
• The ALM Support Group/Market Risk Group
• The Middle Office
1-Board of directors :
The board of directors has overall responsibility for
management of risks. The Board articulates the
market risk management policies and procedures,
the aggregate limits, the review mechanisms and
the reporting and auditing systems.
The Board should decide the risk management
policy of bank and set limits for liquidity, interest
rate, foreign exchange and equity-price risks.
Join CAIIB WITH ASHOK on YouTube & APP
ORGANISATION STRUCTURE :-
Management of market risk is a major concern
of the top management of banks. Successful
implementation of risk management process
emanates from the top management in the bank.
The main challenge centres on facilitating
implementation of risk and business policies
simultaneously in a consistent manner.
Modern best practices consist of setting risk limits
based on economic measures of risk while
ensuring the best risk adjusted return keeping in
view the capital that has been invested in the
business.
It is a question of taking a balanced view on
risks and returns and within the constraints of
available capital.
Join CAIIB WITH ASHOK on YouTube & APP
2- Risk Management Committee :
The risk management committee is a Board level
sub committee. The responsibility of Risk
management committee is following :
1. Setting guidelines for market risk management
and reporting
2. Ensuring that market risk management processes
conform to the policy
3. Setting up prudential limits and their periodical
review
4 Ensuring robustness of measurement of risk
models.
5.Ensuring proper manning for the processes
3- Asset-Liability Management Committee (ALCO) :
ALCO is responsible for implementation of risk and
business policies simultaneously in a consistent
manner and decides on the business strategy to
achieve these objectives.
 Join CAIIB WITH ASHOK on YouTube & APP
1. Product pricing the deposits and advances
2. Maturity profile and mix of incremental
assets and liabilities
3. Articulating interest rate view of the bank
4. Funding policy
5. Transfer policy
6. Balance sheet management
4- ALM SUPPORT GROUP :
The ALM Support Groups analyses, monitors and
reports the risk profiles to the ALCO. It also
examine the effects of various possible changes
in market variables and recommends action
needed.
5- Middle Office :
Middle office is responsible for the critical
functions of independent market risk monitoring,
measurement, analysis and reporting to ALCO.
Middle Office provides the independent risk
assessment which is critical to ALCO's key-function
of controlling and managing market risks in
Join CAIIB WITH ASHOK on YouTube & APP
Product programme defines procedures,limits and
controls for all aspects of the product. The product
programme also specifies market risk
measurement at an individual product level and at
aggregate portfolio level.
• New products or non-standard products may
operate under a 'Product Transaction
Memorandum' on a temporary basis while a full
Market Risk Product programme is being
prepared.
Products approved at corporate level shall
providefor screening procedures, appropriate
safeguards, product-wise limit on exposure, and
necessary guidelines on risk taking.
Join CAIIB WITH ASHOK on YouTube & APP
accordance with the mandate established by the
Board/Risk Management Committee.
RISK IDENTIFICATION :-
All products and transactions should be analyzed
for risks associated with them. While, various risks
associated with a standardize product stand
analyzed, the risks in case of a non-standard
product need to be analyzed.
Therefore, the approach to deal in standard and
non
-standard products differs.
We have seen under the general approach to risk
management that the guidance for risk taking at
the transaction level comes from the corporate
level. It applies to the management of market risk
too.
• Usually all standard products would have
'Product Programme' for each of them. All Risk-
Taking Units operate within an approved 'Product
Programme'.
Join CAIIB WITH ASHOK On YouTube & APP
BFM MODULE - B
Chapter 14: MARKETING RISK (PART-III)
What We Will Study ?
*How Market risk measurement is done?
*What is sensitivity?
*What is Basis Point Value (BPV)?
*What is Macaulay's Duration?
RISK MEASUREMENT:-
Market risk management framework is heavily
dependent upon the quantitative measures of risk.
The market risk measures seek to capture variations in
market value arising out of uncertainties associated with
various risk elements.
 Join CAIIB WITH ASHOK On YouTube & APP

These provide an objective measure of market risk

in a transaction or of a portfolio.

Market risk measures are based on:

 Sensitivity

 Downside Potential

1. Sensitivity:-

Sensitivity, captures deviation of market price due

to unit movement of a single market parameter.

Example of Market Parameter :- Supply-demand position,

interest rate, market liquidity, inflation,
exchange rate, stock prices, etc., are the market
parameters, which drive market values.

For example, change in interest rate would drive the

market value of bonds and forward foreign exchange held
in a portfolio.

If liquidity in the market increases, it may result in

increased demand which in turn may increase the
market price.
 Join CAIIB WITH ASHOK On YouTube & APP

BFM MODULE- B

Chapter 14 MARKETING RISK (PART-IV)

What we will Study ?

*What is VaR (Value at Risk) ?

Value at Risk(VaR) :-

Management of market risk is concerned with the

question- How much can we lose ?

The answer is that there is a possibility that we can

lose everything, although it may have a very low probability.

VaR attempts to create a more useful answer by

altering the question –

How much can we expect to lose ? or , what is the

loss potential ?
Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

BFM MODULE - B
Chapter 14 :MARKETING RISK (PART-V)
What we will study ?
*What is Risk Monitoring?
*What is Risk Mitigation?
*What is Risk Reporting?

RISK MONITORING AND CONTROL:-

Risk monitoring and control calls for
implementation of risk and business policies
simultaneously. It consists of setting the market
risk limits or controlling the market risk, based
on the economic measures of risk while ensuring
the best risk adjusted return.
Controlling market risk means keeping the
variations of the value of a given portfolio within
the given boundary values through actions on
limits.
This is achieved through the following:
 Join CAIIB WITH ASHOK on YouTube & APP
1. Policy guidelines limiting roles and authority
2. Limits structure and approval process
3. System and procedures to unbundle
productsand transactions to capture all risks
4. Guidelines on portfolio size
5. System for estimating portfolio risk
undernormal and stressed situations
6. Defined policy for mark-to-market
7. Limit monitoring and reporting
8. Performance Measurement and Resource
Allocation
Join CAIIB WITH ASHOK on YouTube & APP
RISK MITIGATION:-
Market risk arises due to volatility of financial
instruments. The volatility of financial
instruments is instrumental for both profits and
risk.
Risk mitigation in market risk, i.e., reduction in
market risk is achieved by adopting strategies that
eliminate or reduce the volatility of the portfolio.
However, there are couple of issues that are also
associated with risk mitigation measures.
1- Risk mitigation measures aim to reduce
downside variability in net cash flow but it also
reduces the upside potential or profit potential
simultaneously.
2- In addition, risk mitigation strategies, which
involve counterparty, will always be associated
with counterparty risk. Of course, where
counterparty is an established 'Exchange' or a
central counterparty counter party risk gets
reduced very substantially.
Join CAIIB WITH ASHOK on YouTube & APP
RISK REPORTING :
Risk reporting should enhance risk communication
across different levels of the bank, from trading
desk to the CEO. In order of importance, senior
management reports should be —
• Regular and in time
• Reasonably accurate
• Including highlights of portfolio risk
concentrations & exceptional events
• Containing written commentary
• Concise.
Join CAIIB WITH ASHOK on YouTube & APP
Risk Mitigation Strategies:-
Volatility of individual instruments is market
determined. But, volatility of two or more different
financial instruments would have a different
volatility. As a result, a portfolio of financial
instruments can be created with desirable volatility
characteristics.
Strategies to achieve it are discussed below:
Strategies Using Sensitivity Measures:-
Say a portfolio has two bonds A and B with BPVs of
Rs. 675 and Rs. 205 respectively. The BPV of
the portfolio would be the weighted average of
BPVs ofall the bonds in the portfolio.
The portfolio BPI: will be (675 + 205)/2 = 440.
Now if we intend to reduce the risk of this
portfolio, we may add another bond in the
portfolio such that its BPV is less than 440. Say we
add one more bond B(205) in the portfolio.
 Join CAIIB WITH ASHOK on YouTube & APP
BPV of the portfolio will get reduced to
(675+205+205)/3=Rs. 361.70
Similar strategies are possible using another
sensitivity measure - duration. Portfolio duration
may be increased by adding higher duration
instruments or by reducing low duration
instruments.
Similarly portfolio duration can be reduced by
selling higher duration instruments or by adding
low duration instruments.
Strategies Using Correlation Measures:-
Prices of two financial instruments that have
perfect negative correlation would move exactly
in the opposite direction. If the financial
instruments have negative correlation and it is not
perfect, then also the prices would move in
opposite direction but the movement will not be
exact. In such a case, the price volatility of the
portfolio would exist, but it will be considerably
low.
Join CAIIB WITH ASHOK on YouTube & APP
explains that if price changes by 1%, he would
have an impact of Rs. 6,000.
But since the price is expected to fluctuate 3%
daily (daily volatility —figure estimated from past
data), he estimates the daily potential loss to be
Rs. 41,868:
Mr. X's position analysis using risk terminology will
be:
1. Market factor — Stock price
2. Market Factor Sensitivity — Rs. 6,000 (1% of
total position)
3. Volatility (Daily) : 3%
4. Defeasance period - 1 day (i.e., to sell the stock)
5. Defeasance factor - at 3% volatility it is 3 x
2.326= 6.978% (at 99% Confidence level)
6. Value at Risk (VaR) - Rs. 41,868 - This is also the
potential loss amount under normal market
conditions.
Join CAIIB WITH ASHOK on YouTube & APP
For example, a portfolio is long on a stock A and
short in stock future of stock A.
If the price of stock moves up say by Rs. 10,
the stock future would also go up, may not be
exactly by Rs 10 say by Rs. 9.
The portfolio will gain Rs. 10 on account of the
long position on stock A, but will lose Rs. 9 on
account of the short position in stock future.
Reverse would also be true. The portfolio volatility
however, stands reduced or portfolio market risk
stands mitigated.
Risk Terminology in Risk Measurement:
Say Mr. X takes a position in stock 'A' and wants to
explain to his 'Boss' about the market position.
He can explain the position in three possible ways:
1- He tells his Boss that he purchased 1,000 shares of
stock 'A' at Rs. 600 per share
2- He tells his Boss that he has taken a Rs. 600,000
position in stock 'A'
3- He tells his Boss that he invested in stock 'A'. He
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE–B
Chapter15: CREDIT RISK
*What is Credit Risk?
*What is Credit Risk frame work?
*What is Credit Risk Identification?
Credit Risk:
Conceptually credit risk is easily understandable.
We all know that credit risk arises from lending
Activities of a bank.
It arises when a borrower does not pay interest
and/or instalments as and when it falls due or in
case where a loan is repayable on demand, the
borrower fails to make the payment a sand when
demanded.
Banks follow up for the payments and more often
Then not end up in receiving less than the amount
That is due.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Theshor t
fal
linpaymentiswrit
tenoffevent
uall
yto CREDI
TRI
SKMANAGEMENTFRAMEWORK:
thedebitofprof
itandlossaccount.Thi
sistheri
sk
thatar
isesfr
om lendi
ngacti
vit
ies. Asi nthecaseofmar ketri
skmanagement,cr
edi
t
ri
skmanagemental soinv
olvesf
indi
nganswerto
Credi
tRi skinbanksnotonl yari
sesi ncourseof fourkeyquest
ions.
di
rectlendingwhenf undsar enotr epai
d,i
tal so
ar
isesint hecourseofissui
ngguaranteesorlet
ters (
a)Whataretherisks?
ofcreditwhenf undswi l
lnotbeforthcomingupon (
b)Which,whenandhow muchr isktoacceptt hat
cr
y st
all
isati
onoft hel
iabi
li
ty, r
esul
tsi
nimpr ovi
ngbot tom-
li
ne.
(
c)Howcanwemoni t
orandcontrolcr
editr
isk?
orint hecourseoftransact
ionsinvol
vi
ngtreasury (
d)Canwer educetherisk?And,
ifso,thenhow?
productswhenser i
esofpay mentsduef r
om t he
counterpar
tyceaseorarenotfor
thcoming, Managementpr ocessesaredesignedessenti
all
yto
answerthesequestions.Accor
dingl
y,cr
editr
isk
orincaseoft
radi
ngofsecur
it
ies,i
fset
tl
ementi
s management pr ocesses ar e sub-divi
ded into
notef
fect
ed fol
lowi
ngf ourpar
ts.

orin case ofcross-borderexposur

e wheref
ree 1.Cr
edi
tRi
skI
denti
f i
cation
tr
ansf
erofcurrencyisrestr
ict
edorceases. 2.Cr
edi
tRi
skMeasur ement
3.Cr
edi
tRi
skMonitoringandCont
rol
Thel
isti
s,howev
er,
notexhaust
ive. 4.Cr
edi
tRi
skMit
igation

Managementofcr edi
triskneedsanorgani
zat
ion
struct
urei
nplacet
hatcancarr
youtthef
uncti
ons
requir
edfort
hepurpose.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

ORGANI
SATI
ONSTRUCTURE: TheRiskManagementCommi tt
eei saBoar dlevel
Sub-
Committee.Theresponsi
bil
it
iesofRi sk
Organizati
onforcreditri
skmanagementi screat ed ManagementCommi tteewithregardt ocreditri
sk
withtheobject
iveofachiev i
ngcompat
ibi
li
tyinrisk managementaspectsincl
udethef ol
lowing:
and busi ness policies and t o ensure t heir
si
mul taneous implement ati
on in a consist ent • Set t
ingguidel
inesforcr
edi
triskmanagement
manner . andreport
ing
• Ensuri
ngthatcredi
tri
skmanagementpr
ocesses
Usuall
y, Cr edi
t Ri sk Management or conf
ormt othepol
icy
wouldconsistof:
• TheBoardofDi r
ect
ors CreditPoli
cyCommi t
tee(CPC),also cal
led Credit
• TheRiskManagementCommi tt
ee Controlcommi t
tee/
CreditRi
skManagement
• Credi
tPolicyCommitt
ee(CPC) Commi tted (
CRMC)deal swithissuesr el
ati
ngt o
• Credi
tRiskManagementDepart
ment credit pol
icy and procedures and t o analyse,
manage and cont r
olcreditriskon a bankwi de
basis.

TheBoar dofDir
ector
shast heoveral
lresponsibi
li
ty
formanagementofr i
sks.TheBoardarticulat
es Cr
edi
tRi
skManagementDepar
tment(
CRMD)
,
credi
tr i
sk management pol i
cies, pr ocedur
es,
aggregaterisk li
mits,revi
ew mechani sms and Whichisi
ndependentoft
heCreditAdmini
str
ation
report
ingandaudit
ingsystems. Depart
ment,enfor
cesandmoni t
orscomplianceof
theri
skpar
ametersandprudent
iall
imi
tssetbyt he
CPC/CRMC.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

The CRMD al so lay

s down r i
sk assessment Cr
edi
tSpr
eadRi
skorDowngr
adeRi
sk:
systems, monitors quali
ty of loan por tf
oli
o,
i
dent i
fi
es problems and corrects defi
cienci
es, I
fabor r
owerdoesnotdefault
,thereissti
llr
iskdue
developsMISandundertakesl
oanrevi
ew/audit. toworseni
ngincredi
tqual
it
y.Thisresul
tsinthe
possi
blewideni
ngofthecr
edit-
spread.

RI
SKI
DENTI
FICATI
ON: Thisi
scredit-
spr
eadrisk.Usual
lyt
hisisr
efl
ect
ed
thr
ough rat
ing downgrade.Itis nor
mal
lyfir
m-
Creditri
skar i
ses f
rom potent
ialchanges i
nthe speci
fi
c.
credi
tquali
tyofaborrower
.
Ithastwocomponents: Loans ar e not usual l
y mar ked-
to-
market
.
Consequentl
y,theonlyi
mportantf
actori
swhether
1-
Defaul
tri
sk ornottheloani si
ndefaul
ttodaysincethi
sisthe
2-
Credi
tspreadr
isk. onl
ycr edi
tev entthatcanlead t
o animmediate
l
oss).
DefaultRisk:
Defaultriskisdr i
venbythepotenti
alf ailur
eofa Risksassociat
edwi t
hthecreditportf
oli
oas
borrowert omakepr omi
sedpayments,eitherpar
tly awhol ear etermedpor t
foli
or isks.Port
fol
ior
isk
orwhol ly
.I nt
heev entofdef
ault
,af ractionofthe hastwocomponent s
obli
gationswillnormalbepai
d.Thisisknownas •Sy stematicorI
ntri
nsi
cRisk
therecovery. •Concent rati
onRisk

Syst
ematicorInt
rinsi
cRisk:
As we know por t
fol
ior i
sk i
sr educed due to
di
versi
fi
cati
on.Ifapor t
foli
oisful
lydiver
sif
ied,i
.e.
di
versi
fi
ed acr oss geogr aphi
es, i ndustri
es,

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

borrowers, markets, etc.

, equit
abl
y,t hen the CreditRisk:
portfol
iori
skisr educedt oami ni
mum level
.This 1-TransactionLevelRi
sk
minimum levelcorrespondstor i
skineconomyi n 2-Por t
foli
oLevelRisk
whichitisoperati
ng.Thisissystemat
icorintr
insi
c
ri
sk. 1-
Transact
ionLev
elRi
sk:

Concentr
ationRi sk: a-
Def
aultRisk
I
ftheportfoli
oi snotdiver
sif
iedt
hatisi
thashi gher b-
DowngradedRi
sk
weightinr espectofabor r
owerorgeogr aphyor
i
ndustry
,etc.,theportf
oli
ogetsconcent
rat
ionrisk. 2-
Por
tfol
ioLev
elRi
sk:

Counterpart
yRisk: a-
Syst
ematicRisk
A variant of credi
tri
sk is'Counter
part
y Risk' b-
Concent
rati
onRisk
Thecount er
partyri
skar
isesf
rom non-
perf
ormance
oftr
adingpar t
ners.

The counterpar
tyrisk i
s general
lyviewed as a
transi
entfinanci
alr i
sk associ
ated wit
ht r
ading
rathert
hanthestandardcr
editri
sk.

CountryRi
sk:isalsoatypeofcredi
tri
skwherenon-
perf
ormancebyabor r
owerorcounter
par
tyari
ses
becauseofrestr
icti
onsimposedbyasoverei
gn.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE–B
Chapter15: CREDIT RISK (PART-II)
Cr
edi
tRat
ing—Whyi
sitNecessar
y?
What we will study?
CreditRati
ngofanaccounti sdonewiththepri
mary
*What is Risk Measurement? objecti
vetodet ermi
newhet hertheaccount,
aft
er
*What is Credit Rating? the expiry ofa gi ven period,wouldr emaina
performingasset ,i
.e.
,itwillconti
nuet omeetits
*What is Risk Rating Migration? obli
gationtoitscredit
ors,
includi
ngBankandwoul d
notbei ndefault.
RISKMEASUREMENT:
Measurement of credit risk consists of In otherwords,cr editrati
ng exer
cise seeks t
o
(a) Measurement of risk through credit predi
ct whether the bor r
ower would hav ethe
capabili
tyto honouri t
sf i
nanci
alcommi tmentin
rating/scoring.
futur
et other
estoft heworld.
(b) Quantifying the risk through estimating
Expected loan losses, A Cr editRat i
ng depictsthecr edi
tqual
it
yofthe
borroweranddepi ctshi
sdef aul
t.
i.e., the amount of loan losses that bank would Acr editr at
ingpr ocessnormallywoul
dconsi
stof
experience over a chosen time horizon (through thefollowingpar ameters:
tracking portfolio behaviour over 5 or more years) •Fi nancialPar ameter.
•ManagementPar amet er
.
•I ndust r
yPar ameter.
and unexpected loan losses i.e., the amount by •Busi nessPar ameter.
which actual losses exceed the expected loss.
Thereis no mat
hematical/econometr
ic/
empi r
ical
model,
whichcanpredi
ctthef ut
urecapabi
li
tyofa
borr
owertomeeti
tsfi
nancialobli
gati
onsaccuratel
y.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Nev ert
heless,lendersinfinanci
almar ket
,allover So lendersinfinanci
almar ketr at
e accountsto
the wor l
dr elyon some model ,which seeks to determinetheclasstowhi chabor rowerbelongs.
predictthef ut
urecapabili
tyofaborrowert omeet And based ont hepastr ecord ofdef aul
tofthe
i
tsfinancialobli
gations. borrowersbel
ongingtothesamecl ass,
theyhav eaf ai
restimateofpossi blenumberof
Thisisbecausebehav i
ourofagr oupofbor rowers default
samongt heborr
ower sbelongingtothesai
d
having si
mi l
arr at
ing,intermsoft hei
rf ai
lur
et o class.
meetf i
nancialobl i
gati
ons i.
e.hav ing defaul
ted
fi
nanciall
y,hasbeenf oundtobe,withinbounds. I
not herwor ds,ifabanksayhas200bor rowers
Thisisexplainedbelow. whohav ebeenr ated'A'i
ntheirport
fol
ioandifpast
record shows t hat1% ofsuch bor rowers have
A borr
ower,ev enthoughheisr at
ed'C',maynot defaul
t edeveryy ear,t
hebankwoul dest
imatethat
defaul
taf t
era gi ven per
iod of say one y
ear, 2bor rowersamongt hese'A'ratedaccount
smay
whereas,anotherborr
owerrat
ed'A'maydefaultat defaul
tatt heendofay ear.
theendofgi v
enper i
od.
Thisint ur
n,hel
pst hebankt oassessit
scostof
Thist
ypeofappar
ent
lypar
adoxi
calsi
tuat
iondoes defaul
t,andisbui
ltint
ot hel
oanprici
ngsothatt
he
ari
seandt
hatt
oonoti
nfr
equent
ly. costofdefaul
tisrecover
ed.

Howev er
,if100'C'ratedborrowersaretrackedover Similarl
y,ifthebankhas400bor rowerswhohav e
aper iodofsayoney ear andsay10bor r
owers beenr ated'B'intheirport
foli
oandi fpastrecords
defaultin meet i
ng t hei
rf i
nanci
alobl i
gations,as show t hat5% ofsuchbor r
owershav edef aul
ted
againstthat100' A'ratedborrowers,i
ftrackedover everyy ear,the bank woul d esti
matet hat 20
thesameper iod,onlyonebor rowermaydef aul
tin borrower samongt hese`B'ratedaccountsmi ght
meet i
nghi sfi
nancialobligat
ion. defaultattheendofay ear
.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Thist
henistobebui
lti
ntotheloanpri
cingfor'B' Thisi s because where uncer
tai
nty of revenue
rat
edaccountssot
hatcostofdefaul
tisrecovered. generat
ioninabusi nessi
shigh,chancesoffaili
ng
i
nkeepi ngfinanci
alcommit
mentst otherestofthe
Becauseofhi
gherr
ateofdef
aul
t,'
B'r
atedaccounts worldarealsohigh.
wouldbepri
cedatlev
elhi
ghert
hanthatof'A'r
ated
account
s. Whererevenuegenerat
ionisstabl
eov eragi v
en
per
iod,
theuncer
tai
ntyorri
skassoci
atediszer
o.

CreditRat i
ng—Appr oachtoit Forexample,cashgenerati
onfrom aninv est
ment
In order t o develop our capabilit
yt o activel
y i
nGov ernmentSecurit
iesisabsol
utel
yst ableand
manageourcr editportfol
io,onemusthav einplace hencetheriskassoci
atedwithsuchinvestmentis
thefollowing: al
sonon-exi
stentorzero.
• Cr editRat i
ng Model( ormodelsf ordiff
erent
categor i
esofloansandadv ances) Thiswoul dal someant hatan' A'r
atedborr
ower
• Dev elopandmai ntainnecessarydataondef ault
s woul dhavemor est abl
er ev
enuegenerati
ont han
ofbor r
ower srati
ngcat egory,wi
se,i
.e.,'
Rat
ing thatofa ' B'r ated bor
rowerand an `A++'rated
Migration'. borrower'
sr evenue generati
on would be mor e
stablet
hant hatof'A'rat
edbor r
ower.

Cr
edi
tRat
ingModel
: I
tmayalsobeclari
fi
edt
hatr
ati
nghasnot
hingt
odo
wit
hpr
ofit
abi
li
ty.
A credi
tr ati
ng modelessential
ly di
ffer
ent
iat
es
borr
owers,
basedont hedegr
eeofstabi
li
tyint
erms Ahighlyprof
itabl
ecompanymayhav ehigherl
evel
oftopli
ne( e.
g.,sal
es)andbott
om-li
ne(netprofi
t) of uncertai
nties in revenue gener
ation and
rev
enuegeneration. ther
efor
emayber at
edlowerthanaborr
owerwitha
rel
ati
vel
ylowerpr of
it
abi
li
tybuthavi
ngmor establ
e

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

r
evenuegener
ati
on.
Asincaseofrati
ngofbor
rower,r
ati
ngmi gr
ati
onof
Tocit
et heexampleofGover
nmentSecur
it
iesagai
n, asingl
eaccountal
sodoesnotconveymuch.It
weallknowt hatret
urnsonthem ar
equi
telowbut becomesusefulwhenmigrat
ionofal ar
genumber
theyareratedhighestasstabi
li
tyi
ncashf l
ow i
s ofaccount
sofsimil
arr
ati
ngisobserved.
absol
ute.
Say
,wehav e100'A'ratedborrower
sason31st
Rat
ingMi
grat
ion: March2016.Whentheseaccountsarer
atedagai
n
ason31stMarch2017,i
.e.
,af
teroneyear
,typi
cal
l
y
wemayf i
ndnewrat
ingsasgivenbel
ow.
Thestandar
dofr
ati
ngisassessedi
nthemar
ket
thr
oughrati
ngmi
grat
ion.
Lastr
ati
ngof100Account
s=A
Rat
ing migrat
ion i
s change i
nthe r
ating ofa
bor
roweroveraper i
odoft i
mewhenratedonthe
samestandardormodel. Pr
esentRating NoofAccount
A++ 1
A+ 1
Forexample,sayaborrowerM/ s.XYZLtd.israt
ed A 79
asB+basedoni t
sposi t
ionason31- 3-2016.The B+ 10
same company is againrated as on 31-3-
2017 B 4
basedoni tsposi
ti
onasont hatdate,it
sr ati
ng, C 3
basedonthesamemodel ,saycomest oB. Defaul
t 2
Total= 100
Thenwesayt hatther
ati
ngoftheaccounthas
migr
atedf
rom B+t
oBoveroney
earper
iod.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Thismigrat
iontableimpliesthat'A'rat
edbor r
ower Cr
edi
tRi
skModelExampl
e:
wouldhave2%def aultprobabil
it
y.Thisisbased
on one-y
eardat a only
.When t hi
sobser vati
on i
s • TheAl t
man'sZScor eforecaststhepr obabi
li
tyof
col
lat
edov eranumberofy ears,wewoul dhav ea acompanyent eri
ngbankr uptcywi thi
na12- month
fai
rl
yreasonabl
eest i
mat i
onoft heprobabil
it
y. period.Themodelcombi nesf i
v ef i
nancialrati
os
using the r
eported accounting information and
Thismi grat
ionpatt
ernof'A' r
atedbor rowersshould equityval
uestopr oduceanobj ecti
vemeasur eof
al
socompar ewellwit
hst andardmi gr
ati
onpat t
erns theborrower
'sfi
nancialhealt
h.
publishedbyr ati
ngagenci es.Thi smeanst hati f
usually'A'r at
ed borrower s show 0. 2% def ault • J. P.Mor ganhasdev el
opedapor tfoliomodel
probabili
tyi nterms oft he st andard migrati
on `CreditMet r
ics'f orev aluati
ng creditr isks.The
patternobserved,andr ati
ngmi grati
onaspert he modelbasi call
yfocusesonest imatingt hev olat
il
ity
modelr ecords2%defaultfor'A'categoryborrowers, i
nt hev alueofasset scausedbyv ariationsi nthe
qualit
yofasset s.
t
hent heregulator
yaut
hori
ti
es,rat
ingagenci
esand The v olat i
li
ty i s comput ed by t racking t he
marketwillassumealowerrati
ngf oral
lbor
rower
s probabi l
ityt hatt hebor rowermi ghtmi gratef r
om
r
ated'A'underthatmodel
. one r ating cat egor yt o another( downgr ade or
upgrade) .Thus,t hev alueofl oanscanchangeov er
Therati
ngequival
entwouldbeconsi der
edsayB+, ti
me,r eflecting mi gr
ation oft he borrower st oa
i
fdefaul
tprobabi
li
tyofB+ratedborrowershappens dif
ferentr iskgr ade.
tobe2%i nt
ermsofthestandardrati
ngmodels.
Thi
sisknownasmappi ngwithmar ketst
andards. • Cr edi
tSuissedevelopedastatisti
calmethodf or
measur i
ngandaccount i
ngforcreditri
sk,whichis
knownasCr editRi
sk+.Themodeli sbasedont he
actuari
alcal
culati
onoftheexpecteddef aul
trates
andt heunexpectedl
ossesfrom default
.

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE - B Joi
nCAI
IBWI
THASHOKonYouTube

Chapter 15: CREDIT RISK (PART-III)

Consequent
ly,
credi
triskcontr
olandmonitor
ingi
s
What we will study? di
rect
edbothattransacti
onlevelandpor
tfol
i
olev
el.

Itmustbement i
onedherethatanappr
opriat
e
*What is Risk Monitoring? credi
tinf
ormati
onsystem i
sthebasicprer
equisi
te
*What is Risk Mitigation? foref
fecti
vecontr
olandmoni t
ori
ng.
*What is Risk Reporting? Acomprehensi
veanddetai
ledMIS(Management
CREDIT RISK CONTROL AND MONITORING: I
nformat
ionSyst
em)andCI S(Cr
editI
nfor
mati
on
Syst
em)isthebackbonef
oraneffect
iveCRM
Risk taking through lending activities needs to be Syst
em.
Supported by a very effective control and
Monitoring mechanism, firstly because this activity CREDI
TRISKPOLI
CIESANDGUI
DELI
NESAT
Is widespread, and secondly, because of very high TRANSACTI
ONLEVEL:
Share of credit risk in the total risk-taking activity of
A bank. Theinst
rumentsofCr edi
tRi
skManagementat
tr
ansacti
onlevelare:
Active portfolio management is •Cr edi
tAppraisalPr
ocess
Required to keep up with the dynamics of the •RiskAnal y
sisProcess
economy. It is also necessary to monitor it. •Cr edi
tAuditandLoanRev i
ew
•Moni t
oringProcess

Thereisaneedtoconst antl
yimprovetheeffi
ciency
foreachoftheseprocessesinobjecti
vel
y
i
dentif
yingt
hecr edi
tqualit
yofborrowers,
enhancingt
hedef aul
tanalysi
s,captur
ingtheri
sk
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

el
ementsadequat
elyf
orfutureref
erenceand The' Grid'or'
Commi ttee'
,compr i
singatleast3or4
pr
ovi
dinganearl
ywarningsignalf
ordeter
ior
ati
on officers,mayappr ovethecreditfaci
li
ti
esabov ea
i
nthecredi
tri
skofborr
ower s. speci f
iedlimitandinvari
ablyoneof f
icershoul
d
representt heCRMD, whohasnov ol
umeandpr of
it
Credi
trisktaki
ngpol i
cyandguidel
inesat targets.
tr
ansactionlev
el shoul
dbeclearl
yarticul
atedint
he
Bank'sLoanPol i
cyDocumentappr ovedbyt he Cr
edi
tAppr
aisal
:
Board.
Creditapprai
salgui deli
nesi ncludebor rower
Standardsandgui del
inesshoul
dbeoutl
inedby standards,procedur esforanal yzi
ngcr edit
Boardf or requir
ement sandr i
skfact ors,
pol i
cieson
• Delegati
onofPower s standardsforpr esentati
onofcr editproposal
s,
• CreditApprai
sals fi
nancialcovenant s,rat
ingst andardsand
• RatingStandardsandBenchmarks(deri
vedf
rom benchmar ks,etc.Thi sbringsauni f or
mi t
yof
theRiskRatingSy st
em) approachincr editri
skt akingact i
vityacrosst
he
•Pr i
cingStrat
egy organisat
ion.
•LoanRev i
ewMechani sm
Prudent
ialLi
mits:
Cr
edi
tAppr
ovi
ngAut
hor
it
y: Prudent
iall
imit
sservethepurposeofli
mit
ingcredit
ri
sk.Therearesever
alaspectsforwhi
chprudenti
al
EachBankshouldhav eacarefull
yformulated l
imitsmaybespeci f
ied.Theymayincl
ude:
schemeofdelegati
onofpower s.Thebanksshoul
d
alsoev
olvemulti
-ti
ercredi
tapprovingsystem (a)Prudenti
alli
mitsforfi
nancialandprofi
tabil
ity
wheretheloanproposalsar
eappr ovedbyan rati
ossuchascur rentrat
io,
debtequityandr eturn
'
ApprovalGri
d'ora'Commi t
tee'. oncapitalorret
urnonasset s,
debtservice
coveragerati
o,etc.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

(b)Prudent
iall
imit
sf orcredi
texposure RiskPricing:
(c)Pr
udenti
alli
mitsforassetconcentrat
ion Thepricingst r
ategyf orcr
editpr
oductsshoul
d
(d)Prudenti
alli
mitsforlargeexposures mov etowar dsrisk-basedpri
cingtogener
ate
(e)Pr
udenti
alli
mitformat uri
typrof
il
eoft hel
oan adequat eriskadjustedret
urnsoncapital
.
book.
Inari
sk-r
etur
nsetti
ng,bor
rowerswithweak
Rat
ingSt
andar
dsandBenchmar
ks: fi
nanci
alposi
tionhavehi
ghcreditr
iskst
akeand
shoul
dbepr i
cedhigh.
Thecr editr
iskassessmentexer ciseshoul dbe
repeatedbi-annuall
y( orevenatshorterinter
val
sfor Prici
ngofcreditri
skshouldhaveabearingonthe
l
owqual i
tycustomer s)andshouldbedel i
nked probabi
li
tyofdefault
.Sinceprobabi
l
ityofdef
aulti
s
i
nv ar
iablyfr
om t heregularrenewalexercise. l
inkedtoriskrati
ng,pr
icing
ofloansnormallyshouldbeli
nkedtorati
ng.
Theupdat i
ngofcr editr
atingsshoul
dbeundertaken
normallyatquart
er l
yinter
v al
soratl
eastathal
f-
year
lyinter
vals,i
nor dertogaugetheassetquali
ty CREDI
TCONTROLANDMONI
TORI
NGAT
atperi
odicinter
vals. PORTFOLI
OLEVEL:

Not e:Banksshouldundert
akeacompr ehensive Creditcontr
olandmonitoringatportf
oli
olevel
studyonmi gr
ati
on(upward—lowert ohigherand dealswiththeriskofagivenportf
oli
o,expected
downwar d-hi
ghertol
ower)ofborrowersinthe l
osses, r
equirementofri
skcapital
,andimpactof
rati
ngst oaddaccuracytotheexpectedloanloss changingthepor t
fol
iomixonr i
sk,expect
edlosses
calcul
ations. andcapi t
al.

Theact
ivi
ti
esincl
ude—
•Ident
if
icat
ionofpor
tfol
iocr
edi
tweaknessi
n
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE–B
Chapter 15: CREDIT RISK (PART-IV)
• Evaluat
ingexposur
edist
ri
buti
onov err
ati
ng What we will study?
categori
esandstipul
ati
ngquant
it
ati
veceili
ngson
aggregateexposurei
nspeci
fi
edrati
ngcategori
es. *What is Altman's z score model?
Altman's model for U.S. manufacturing firms is a
• Eval
uati
ngrati
ng-wi
sedist r
ibuti
oninvar
ious
i
ndustr
iesandsetti
ngcorrespondingexposure Model that expresses the measure of the default.
l
imit
stocontainconcent
rationrisk.
It forecast the possibility of a firm entering into
Somemeasur est omaintaint hepor tfoli
oquali
ty Bankruptcy within 12 months period.
are:
1.Quant i
tativ
ecei li
ngonaggr egat eexposur ei
n The model is based on various accounting ratios.
specifi
edr ati
ngcat egori
es. The risk class of a borrower is:
2.Ev al
uati
onofr ati
ng-wisedi stributionof
borrowersi nv ari
ousindustries, businesssegment s, Z=1.2X1+1.4X2+3.3X3+0.6X4+1.0X5
etc.
3.Industry-wiseandsect or-wi semoni tori
ngof
exposureper formance.Wher epor tfolioexposureto
asingleindust ryisbadlyperf ormi ng, thebanks
mayi ncreaset hequalit
yst andar dsf ort hatspeci
fi
c
i
ndust r
y.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Wher
eX1=NetWor ki
ngcapi
tal/
Totalasset
srat
io I
fZ<1.
81:Hi
ghr
isk(
Higherchanceofbankr
upt
cy)
X2=Ret
ainedear
ning/Tot
alassetsr
atio I
fZ>1.
81&Z<3:Medi
um Ri
sk(Medi
um chance)
X3=Ear
ningbef
orei
nter
estandt
axes/
Tot
alasset
s I
fZ>1.
81:LowRi
sk:(
Notl
ikel
ytobankr
upt
)
rat
io
X4=Mar ketval
ueofequi
ty/
Bookv
alueofl
ong
ter
m debtrat
io
X5=Sal
es/
Tot
alasset
s

Accordi
ngtoAltman'
sabovemodel,afi
rm wi
thaZ-
scoreofl
essthan1.81shoul
dbeclassi
fi
edasa
highri
sk-
borr
owerwhichmeansthat
thehigherthev
alueofZ,
thel
owert
hebor
rower
's
defaultr
isk.
I
fZ<1.
81:Hi
ghr
isk
I
fZ>1.
81:LowRi
sk
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – B
Chapter 15: CREDIT RISK (CASE STUDY)

What we will study?

*Altman’s z score case study?

Z= 1.2 X1 + 1.4 X2 +3.3 X3 + 0.6X4 + 1.0x5

 Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - B
Chapter 16 : OPERATIONAL RISK
AND
INTEGRATED RISK MANAGEMENT(PART:-I)
What we will study ?
*What is Operational Risk?
*Classification Of Operational Risk?
OPERATIONAL RISK - GENERAL Operational risk is
one area of risk that is faced by all organisations.
The more complex an organization is the more
would be its exposure to operational risk.
Operational risk would arise due to deviations
from normal and planned functioning of systems,
procedures, technology and human failures of
omission and commission.
Join CAIIB WITH ASHOK on YouTube & APP
OPERATIONAL RISK - CLASSIFICATION
Before we classify operational risk into various
categories, we must understand the nature of the
operational risk.
Operational risk arises literally from all the
activities undertaken and consequently it is
present everywhere in an organization.
Impact of various forms of operational risk on the
organization may vary in degree i.e., some risks
may have more potential of causing damages
while some may have less potential, some may
occur more frequently while some may occur less
frequently.
The Second Consultative Paper of Basel II
suggested classification of operational risks based
on the 'Causes' and 'Effects'.
Classifications based on 'Causes' and 'Effects' are
listed below.
Join CAIIB WITH ASHOK on YouTube & APP
Results of deviation from normal functioning are
reflected in the revenues of the organization,
either by way of additional expenses or by way of
loss of opportunities that would e otherwise
feasible.
Operational risk may also arise due to inherent
faults in systems, procedures and technology of an
organization, which may also impact its revenues
adversely.
The Basel Committee has defined Operational
Risk as follows: "The risk of loss resulting from
inadequate or failed internal processes, people
and systems, or from external events":
Criticality of operational risk has been recognized
in Basel II, which requires specific capital allocation
accounting for operational risk.
Join CAIIB WITH ASHOK on YouTube & APP
Cause-based
1. People oriented causes – negligence,
incompetence, insufficient training, integrity.
2. Process oriented (Transaction based) causes –
business volume fluctuation, organizational
complexity, product complexity, and major
changes.
3. Process oriented (Operational control based)
causes – inadequate segregation of duties, lack of
management supervision, inadequate
procedures.
4. Technology oriented causes – poor technology
and telecom, obsolete applications, lack of
automation, information system complexity, poor
design, development and testing.
5. External causes – natural disasters, operational
failures of a third party, deteriorated social or
political context.
 Join CAIIB WITH ASHOK on YouTube & APP
Effect Based :
1. Legal liability
2. Regulatory, compliance and taxation penalties
3. Loss or damage to assets
4. Loss of recourse
However, the Third Consultative Paper
recommended event based classification. They
arelisted below.
Event Based :
1.Internal Fraud
2.External Fraud
3.Employment practices and workplace safety
4.Clients, products and business practices
5.Damage to physical assets
6.Business disruption and system failures
7.Execution, delivery and process management
Join CAIIB WITH ASHOK on YouTube & APP
Damage to Physical Assets: Losses arising from
loss or damage to physical assets from natural
disasters or other events.
Business Disruption and System Failures: Losses
arising from disruption of business or system
failures.
Execution, Delivery and Process Management:
Losses from failed transaction processing or
process management, from relations with
tradecounter parties and vendors.
Join CAIIB WITH ASHOK on YouTube & APP
OPERATIONAL RISK CLASSIFICATION BY EVENT
TYPE - DEFINITIONS
Internal Fraud: Losses due to acts of a type
intended to defraud, misappropriate property or
circumvent regulations, the law or company policy,
excluding diversity/discrimination events, which
involve at least one internal party.
External Fraud: Losses due to acts of a type
intended to defraud, misappropriate property or
circumvent the law, by a third party.
Employment Practices and Work Place Safety:
Losses arising from acts inconsistent with
employment, health or safety laws or agreements
from payment of personal injury claims, or from
diversity discrimination events.
Clients, Products and Business Practices: Losses
arising from an unintentional or negligent failure
to meet a professional obligation to specific clients
(including fiduciary and suitability requirements),
or from the nature or design of a product.
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - B
Chapter 16 : OPERATIONAL RISK
AND
INTEGRATED RISK MANAGEMENT(PART:-II)
What we will study ?
*What are Operational Risk Management Practices?
OPERATIONAL RISK MANAGEMENT PRACTICES
As referred in the Basel II document, the Basel
Committee on Banking Supervision had outlined a
set of principles that provided a framework for the
effective management and supervision of
operational risk, for use by banks and supervisory
authorities when evaluating operational risk
management policies and practices in February,
2003.
These principles have since been replaced by
'Principles for the Sound Management of
Operational Risk and the Role of Supervision'
issuedin June, 2011.
 Join CAIIB WITH ASHOK on YouTube & APP
The revised principles are as under:
Fundamental principles of operational risk
management :-
Principle 1
The board of directors should take the lead in
establishing a strong risk management culture.
The board of directors and senior management
should establish a corporate culture that is
guided by strong risk management and that
supports and provides appropriate standards and
incentives for professional and responsible
behaviour.
Principle 2
Banks should develop, implement and maintain a
Framework that is fully integrated into the bank's
overall risk management processes.
The Framework for operational risk management
chosen by an individual bank will depend on a
range of factors, including its nature, size,
complexity and risk profile.
Join CAIIB WITH ASHOK on YouTube & APP
Senior Management
Principle 5
Senior management should develop for approval
by the board of directors a clear, effective and
robust governance structure with well defined,
transparent and consistent lines of responsibility.
RISK MANAGEMENT ENVIRONMENT
Identification and Assessment
Principle 6
Senior management should ensure the
identification and assessment of the operational
risk inherent in all material products, activities,
processes and systems to make sure the inherent
risks and incentives are well understood.
Join CAIIB WITH ASHOK on YouTube & APP
GOVERNANCE
The Board of Directors
Principle 3
The board of directors should establish, approve
and periodically review the Framework.
The board of directors should oversee senior
management to ensure that the policies, processes
and systems are implemented effectively at all
decision levels.
Principle 4
The board of directors should approve and review
a risk appetite and tolerance statement for
operational risk that articulates the nature, types,
and levels of operational risk that the bank is
willing to assume.
Join CAIIB WITH ASHOK on YouTube & APP
Principle 7
Senior management should ensure that there is an
approval process for all new products, activities,
processes and systems that fully assesses
operational risk.
MONITORING AND REPORTING
Principle 8
Senior management should implement a process
to regularly monitor operational risk profiles and
material exposures to losses. Appropriate
reporting mechanisms should be in place at the
board, senior management, and business line
levels that support proactive management of
operational risk.
Control and Mitigation
Principle 9 Banks should have a strong control
environment that utilizes policies, processes and
systems; appropriate internal controls; and
appropriate risk mitigation and/or transfer
strategies.
 Join CAIIB WITH ASHOK on YouTube & APP
Business Resiliency and Continuity
Principle 10
Banks should have business resiliency and
continuity plans in place to ensure an ability to
operate on an ongoing basis and limit losses in the
event of severe business disruption.
Principle 11
A bank's public disclosures should allow
stakeholders to assess its approach to operational
risk management.
Join CAIIB WITH ASHOK on YouTube & APP
Basel II has recognise the difficulties in
measurement of operational losses.
Consequently, it has provided options in the
measurement of operational risk for the purpose
of capital allocation purposes.
They are:
1. The Basic Indicator Approach (BIA)
2. The Standardized Approach (TSA)
3. Advanced Measurement Approaches (AMA)
Of these, the Basic Indicator and the Standardized
Approaches are based on the income generated.
The Advance Measurement Approach is based
onoperational loss measurement.
A brief description of the Basel II prescriptions
under these approaches is given below.
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - B
Chapter 16 : OPERATIONAL RISK
AND
INTEGRATED RISK MANAGEMENT(PART:-III)
What we will study ?
*What is Operational Risk Quantification?
*What is Basic Indicator Approach (BIA) ?
*What is The Standardized Approach (TSA) ?
*What is Advanced Measurement Approach (AMA)?
OPERATIONAL RISK QUANTIFICATION
This is by far the most difficult of all risk
measurements.
The behaviour pattern of operational risk does not
follow the statistically normal distribution pattern
and that makes it difficult to estimate the
probability of an event resulting in losses.
Join CAIIB WITH ASHOK on YouTube & APP
The Basic Indicator Approach
Banks using the Basic Indicator Approach must
hold capital for operational risk equal to the
average over the previous three years of a fixed
percentage (15%) of positive annual gross
income.
Figures for any year in which annual gross
income is negative or zero should be excluded
from both the numerator and denominator
when calculating the average.
Gross income is defined as net interest income
plus net non-interest income.
The Standardised Approach:
In the Standardised Approach, banks' activities
aredivided into eight business lines:
Corporate finance,
Trading and sales,
Retail banking,
Commercial banking,
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

Payment and settlement, Advanced Measurement Approach (AMA) :

Agency services, Under the AMA, the regulatory capital
requirement will be equal to the risk measure
Asset management,and
generated by the bank's internal operational risk
Retail brokerage. measurement system using the quantitative and
The capital charge for each business line is qualitative criteria for the AMA discussed below.
calculated by multiplying gross income by a factor Use of the AMA is subject to supervisory
(denoted beta) assigned to that business line (Beta approval.
Factors).
Business Lines Beta Factors: A Generic Measurement Approach:

Corporate finance - 18% The first step in measurement approach is

operation profiling(OP).
Trading and sales – 18%
The steps involved OP Profiling are:
Payment and settlement - 18%
1. Identification and quantification of operational
Commercial banking - 15%
risks in terms of its components.
Agency services – 15%
2. Prioritisation of operational risks and
Asset management - 12% identification of risk concentrations hot spots
Retail brokerage - 12% resulting in lower exposure.

Retail banking - 12% 3. Formulation of bank's strategy for operational

risk management and risk based audit

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

Estimated level of operational risk depends on Estimated Potential Financial Impact:

Estimated probability of occurrence
Estimated potential financial impact
Estimated impact of internal controls
This will be based on severity of historical
impact and estimated severity of impact from
unforeseen events. Probability is mapped on a
scale of 5 as mentioned above.

Estimated Probability of Occurrence :

This will be based on historical frequency of Estimated Impact of Internal Controls:
occurrence and estimated likelihood of future
This will be based on historical effectiveness of
occurrence.
internal controls and estimated impact of internal
Probability is mapped on a scale of 5 say where controls on risks.
1. implies negligible risk This is estimated as fraction in relation to total
2. implies low risk control, which is valued at 100%.
3. implies medium risk Estimated level of operational risk = Estimated
probability of occurrence * Estimated potential
4. implies high risk
financial impact * Estimated impact of internal
5. implies very high risk controls

In case of a hypothetical example where

 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

BFM MODULE - B
Probability of occurrence = 2 (Medium)
Chapter 16 : OPERATIONAL RISK
Potential financial impact = 4 (very high)
AND
Impact of internal controls = 50%
INTEGRATED RISK MANAGEMENT(PART:-IV)
Estimated level of operational risk =
What we will study ?
[(2 x 4 x (1 – 0.50] ^0.5 = 2.00
*What is Integrated Risk Management?
*Necessity of Integrated Risk Management?
*What is the approach for Integration Risk?

INTEGRATED RISK MANAGEMENT:

Integrated risk management is managing all risks
that are associated with all the activities
undertaken across the entire organization.
In the context of banking industry , risks that are
associated with it are liquidity risk, interest rate
risk, market risk, credit risk and operational risks in
their various forms.
The common factor in all these risks lies in their
possible downside impact on the revenues of an
organization.

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

1- Aligns the strategic aspects of risk with day-to-

THE NECESSITY OF INTEGRATED day operational activities.
RISKMANAGEMENT
Risk Management is a basic necessity for financial 2- Facilitates greater transparency for investors and
institutions of all sizes, and ultimately central to regulators.
their success and survival.
3- Enhances revenue and earnings
An integrated approach to risk management
growth.
centralizes the process of supervising risk
exposure so that the organization can determine 4- Controls downside risk potential.
how best to absorb, limit or transfer risk.
It is an ongoing business process that calls for
standard definitions and methods to identify
measure and manage risk across all business
units.
This information can then be analyzed to
determine the overall nature of organizational risk
exposures, including their correlation,
dependencies andoff sets.
When properly implemented, Integrated Risk
Management:
 Join CAIIB WITH ASHOK on YouTube & APP
INTEGRATED RISK MANAGEMENT - APPROACH
The process of Integrated Risk Management
consists of
Strategy: Integration of risk management as a key
corporate strategy.
Organization: Establishment of the Chief Risk
Officer position with his/her accountability to the
board of directors.
As part of effective risk management, RBI has
advised banks, inter-alia, to have a system of
separation of credit risk management function
from the credit sanction process.
However, RBI has observed that the banks follow
diverse practices in this regard.
Join CAIIB WITH ASHOK on YouTube & APP
Organization Structure:
The board of directors through the Risk
Management Committee is the apex body
responsible for the entire risks of the Bank. Risks
are not seen in silos and are managed at the
apexlevel in an integrated manner.
Policies and Procedures:
Risk management and related policies and
procedures must be developed using a top down
approach to ensure that they are consistent with
one another and appropriately reflect the strategic
objectives and the overall risk appetite of the
bank.
Integrated Risk Limits:
A ‘Best Practices' limit structure would
communicate risk appetite throughout the
organization, assist in maintenance of overall
exposures at acceptable levels and enable
delegation of authority.
Join CAIIB WITH ASHOK on YouTube & APP
In order to bring uniformity in approach followed
by banks, as also, to align the risk management
system with the best practices, RBI has advised
Banks vide its guidelines of April, 2017 as under:
1- Banks should appoint a Chief Risk Officer.
2- Banks should lay down a Board-approved policy
clearly defining the role and responsibilities of the
CRO.
3- CRO has to control and co-ordinate the
functions of the Risk Management Department of
the Bank.
4- Because of the importance RBI gives to this post,
RBI has made CRO to report directly to the MD or
CEO of the Bank.
Process: The process of identifying, assessing,
controlling and financing risk must be common
across the whole enterprise.
Systems: Risk management systems must be
developed to provide information and analytical
tools to support the Enterprise Risk Management
functions.
Join CAIIB WITH ASHOK on YouTube & APP
It would also involve adoption of a common
language of risk across all risk categories through
risk quantification methodologies across all risk
categories.
Integrated Risk Reporting:
In an integrated risk management framework,
the top management should have a holistic view of
all risks.Bank wide risk reports are used to quantify
sources of risk across the bank and to estimate
total exposure to financial markets.
Integrated Systems:
An integrated risk management framework
needs to be supported by an information
technology architecture that is consistent with
such integration.
The impetus of integrated risk management is
Basel III. Capital requirement could reduce
significantly if a bank takes advantage of the more
sophisticated internal measurement options
offered under the new accord.
 Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - B
Chapter 17: LIQUIDITY RISK MANAGEMENT (PART-I)
What we will study?
* What is Liquidity Risk Management?
INTRODUCTION:
Liquidity is a bank's capacity to fund, increase in assets and
meet both expected and unexpected cash and collateral
obligations at reasonable cost and without incurring
unacceptable losses.
Liquidity risk is the inability of a bank to meet such obligations as
they become due, without adversely affecting the bank's
financial condition.
Effective liquidity risk management helps ensure a bank's ability to
meet its obligations as they fall due and reduces the probability of an
adverse situation from developing.
Join CAIIB WITH ASHOK on YouTube & APP
However, in the context of Liquidity Risk Management,
we need to look at this issue from the point of maturing
liabilities and maturing assets; a maturing liability is an outflow
while a maturing asset is an inflow.
The need for Liquidity Risk Management arises on account of the
mismatches in maturing assets and maturing liabilities.
Mismatching, as we all know, is an inherent feature of banking.
It's said and said very well too, that the crux of banking is
managing mismatches.
That is why Banks are presently called as ‘Maturity Transformation Agents’.
More the knowledge of the depositors, the tenor of the deposits
would be come down/shrink whereas the tenor of the
advances would be long.
A simple housing loan has to be given for a period of 10 to 20
years.
Join CAIIB WITH ASHOK on YouTube & APP
This assumes significance on account of the fact that liquidity
crisis, even at a single institution, can have systemic implications.
To put it in plain vanilla terms, liquidity is having enough cash to
meet the current needs and liquidity risk is the current and
prospective risk to a bank's earnings and equity arising out its
inability to meet the obligations when they become due.
Thus, effective liquidity risk management is the management of
liquidity by raising sufficient funds either by increasing liabilities or
by converting assets promptly and at a reasonable cost.
It has now become imperative for banks to have an adequate
liquidity risk management process commensurate with it's size,
complexity and liquidity risk profile as one size does not fit all.
Liquidity problems arise on account of the mismatches in the
timing of inflows and outflows.
Liabilities being the sources of funds are inflows while the assets
being application of funds are outflows.
Join CAIIB WITH ASHOK on YouTube & APP
Hence, if banks were to have perfectly matched portfolios they
would neither make money nor need treasury managers to run
their business. Anyone can manage banks.
LIQUIDITY RISK MANAGEMENT - NEED &
IMPORTANCE:-
A bank is said to be solvent if it's net worth is not negative.
To put it differently, a bank is solvent if the total realizable value
of its assets is more than its outside liabilities .
As such, at any point in time, a bank could be
(i) Both solvent and liquid or
(ii) Liquid but not solvent or
(iii) Solvent but not liquid or
(iv) Neither solvent nor liquid.
The need to stay both solvent and liquid therefore, makes effective
liquidity management crucial for increasing the profitability as also
the long-term viability/solvency of a bank.
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

disruptions on either side of a bank's balance sheet but can also

This also highlights the importance of the need of having the
best Liquidity Risk Management practices in place in Banks.
We can very well imagine what could happen to a bank if a
depositor wanting to withdraw his deposit is told to do so later or the
next day in view of non- availability of cash.
This would create Reputational Risk or negative publicity for the
Bank.
The consequences could be severe and may even sound the
death knell of the bank.
Any bank, however, strong it may be, would not be able to survive
if all the depositors queue up demanding their money back.
A Liquidity problem in a bank could be the first symptom of
financial trouble brewing and shall need to be assessed and
addressed on an enterprise-wide basis quickly and effectively,
as such problems can not only cause significant
transcend individual banks to cause systemic disruptions.
Banks play a significant role as liquidity providers in the financial
system and to play it effectively they need to have sound liquidity
risk management systems in place.
With greater opening up of the world economies and easier
cross border flows of funds, the repercussions of liquidity
disturbances in one financial system could cause ripples in
others.
The recent sub-prime crisis in the US and its impact on others,
stands ample testimony to this reality.
Liquidity Risk Management, thus, is of critical importance not
only to bankers but to the regulators as well.
Some Key Considerations in Liquidity Risk
Management include:
1- Availability of liquid assets,
2- Extent of volatility of the deposits,

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

3- Degree of reliance on volatile sources of funding, 5- The efficacy (effectiveness) of the processes in place to
ensure successful execution of the solutions in times of
4- Level of diversification of funding sources,
need.
5- Historical trend of stability of deposits,
6- Quality of maturing assets, POTENTIAL LIQUIDITY RISK DRIVERS:
7- Market reputation,
8- Impact of off balance sheet exposures on the balance
sheet, and

9- Contingency plans.
Some of the issues that need to be kept in view while managing
liquidity include:

1- The extent of operational liquidity, reserve liquidity and

contingency liquidity that is required.

2- The impact of changes in the market or economic condition on

the liquidity needs.

3- The availability, accessibility and cost of liquidity.

4- The existence of early warning systems to facilitate
prompt action prior to surfacing of the problem and
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

BFM MODULE - B PRINCIPLES FOR SOUND LIQUIDITY RISK

Chapter 17: LIQUIDITY RISK MANAGEMENT (PART-II) MANAGEMENT:

What we will study?
* What are the different types of liquidity risk?
* What are the principle of sound liquidity risk management ?
After the global financial crisis, in recognition of the need for banks
to improve their liquidity risk management, the Basel Committee
on Banking Supervision (BCBS) published
“Principles for Sound Liquidity Risk Management and
Supervision” in September 2008.

The broad principles for sound liquidity risk management by

TYPES OF LIQUIDITY RISK:
banks as envisaged by BCBS are as under:
Banks face the following types of liquidity risk:

(1) Funding Liquidity Risk – the risk that a bank will not be able to
meet efficiently the expected and unexpected current and future
cash flows and collateral needs without affecting either its daily
operations or its financial condition.

(2) Market Liquidity Risk - the risk that a bank cannot easily
offset or eliminate a position at the prevailing market price
because of inadequate market depth or market disruption.

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP
 Join CAIIB WITH ASHOK on YouTube & APP
Join CAIIB WITH ASHOK on YouTube & APP
Ideally, the organisational set up for liquidity risk management should be as
under:
A-The Board of Directors (BOD).
B. The Risk Management Committee.
C. The Asset-Liability Management Committee (ALCO).
D: The Asset Liability Management (ALM) Support Group.
A-The Board of Directors (BOD):
The BOD should have the overall responsibility for management
of liquidity risk.
The Board should decide the strategy, policies and procedures of the bank to
manage liquidity risk in accordance with the liquidity risk tolerance/limits.
The risk tolerance should be clearly understood at all levels of
management.
The Board should also ensure that it understands the nature of the
liquidity risk of the bank including liquidity risk profile of all branches,
subsidiaries and
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - B
Chapter 17: LIQUIDITY RISK MANAGEMENT (PART-III)
What we will study?
* How bank govern Liquidity Risk Management?
* What is Liquidity Risk Management Policy?
GOVERNANCE OF LIQUIDITY RISK MANAGEMENT:
The Reserve Bank had issued guidelines on Asset Liability
Management (ALM) system, covering liquidity risk management
system, in February 1999 and October 2007.
Successful implementation of any risk management process
has to emanate from the top management in the bank with the
demonstration of its strong commitment to integrate basic
operations and strategic decision making with risk management.
Join CAIIB WITH ASHOK on YouTube & APP
associates (both domestic and overseas).
B. The Risk Management Committee:
The Risk Management Committee, which reports to the Board,
consisting of Chief Executive Officer (CEO)/Chairman and
Managing Director (CMD) and heads of credit, market and
operational risk management committee should be responsible
for evaluating the overall risks faced by the bank including
liquidity risk.
The potential interaction of liquidity risk with other risks should also
be included in the risks addressed by the risk management
committee.
C. The Asset-Liability Management Committee (ALCO):
The Asset-Liability Management Committee (ALCO) consisting of
the bank's top management should be responsible for ensuring
adherence to the risk tolerance /limits set by the Board as well as
implementing the liquidity risk management strategy of the bank
in line with bank's decided risk management objectives and risk
tolerance.
 Join CAIIB WITH ASHOK on YouTube & APP
D. The Asset Liability Management (ALM) Support Group:
The ALM Support Group consisting of operating staff should be
responsible for analysing, monitoring and reporting the liquidity risk
profile to the ALCO.
The group should also prepare forecasts (simulations)
showing the effect of various possible changes in market
conditions on the bank's liquidity position and recommend
action needed to be taken to maintain the liquidity
position/adhere to bank’s internal limits.
LIQUIDITY RISK MANAGEMENT POLICY, STRATEGIES AND
PRACTICES:
The first step towards liquidity management is to put in place an
effective liquidity risk management policy, which, should spell out
the liquidity risk tolerance, funding strategies, prudential limits,
system for measuring, assessing and reporting/reviewing liquidity,
framework for stress testing, liquidity planning under alternative
Join CAIIB WITH ASHOK on YouTube & APP
The tolerance should ensure that the bank manages its liquidity
in normal times in such a way that it is able to withstand a
prolonged period of, both institution specific and market wide
stress events.
They may also be subject to sensitivity analysis.
The risk tolerance could be specified by way of fixing the tolerance
levels for various maturities under flow approach depending upon
the bank's liquidity risk profile as also for various ratios under stock
approach.
Risk tolerance may also be expressed in terms of minimum
survival horizons (without Central Bank or Government
intervention) under a range of severe but plausible stress
scenarios, chosen to reflect the particular vulnerabilities of the
bank.
The key assumptions may be subjected to a periodic review by
the Board.
Join CAIIB WITH ASHOK on YouTube & APP
scenarios/formal contingent funding plan, nature and
frequency of management reporting,, etc.
The policy should also address liquidity separately for individual
currencies, legal entities like subsidiaries, joint ventures and
associates, and business lines, when appropriate, and should place
limits on transfer of liquidity keeping in view the regulatory, legal
and operational constraints.
The Board of Directors or its delegated committee of Board
members should oversee the establishment and approval of
policies, strategies and procedures to manage liquidity risk, and
review them at least annually.
Liquidity Risk Tolerance:
Banks should have an explicit liquidity risk tolerance set by the
Board of Directors.
The risk tolerance should define the level of liquidity risk that the
bank is willing to assume, and should reflect the bank's financial
condition and funding capacity.
Join CAIIB WITH ASHOK on YouTube & APP
Strategy for Managing Liquidity Risk:
The strategy for managing liquidity risk should be appropriate for
the nature, scale and complexity of a bank’s'activities.
In formulating the strategy, banks/banking groups should take
into consideration its legal structures, key business lines, the
breadth and diversity of markets, products, jurisdictions in which
they operate and home and host country regulatory
requirements, etc.
Strategies should identify primary sources of funding for
meeting daily operating cash outflows, as well as expected and
unexpected cash flow fluctuations.
MANAGEMENT OF LIQUIDITY RISK:
A bank should have a sound process for identifying, measuring,
monitoring and mitigating liquidity risk as enumerated below:
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

Identification: While the stock approach helps up in looking at liquidity from

A bank should define and identify the liquidity risk to which it is
exposed for each major on and off balance sheet position,
including the effect of embedded options and other contingent
exposures that may affect the bank's sources and uses of funds
and for all currencies in which a bank is active.
Measurement of Liquidity Risk:
one angle, it does not reveal the intrinsic liquidity profile of a
bank.
The flow approach, on the other hand, forecasts liquidity at
different points of time.
It looks at the liquidity requirements of today, tomorrow, the
day thereafter, in the next seven to 14 days and so on.

There are two simple ways of measuring liquidity,one is the The maturity ladder, thus, constructed helps in tracking the cash
stock approach and the other, flow approach. flow mismatches over a series of specified time periods.

The stock approach is the first step in evaluating liquidity.

Under this method, certain ratios, like liquid assets to short term
total liabilities, purchased funds to total assets, core deposits to
total assets, loan to deposit ratio, etc., are calculated and
compared to the benchmarks that a bank has set for itself.

Join CAIIB WITH ASHOK on YouTube & App

Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE–B
Chapter 18: BASEL III FRAMEWORK ON LIQUIDITY forf
undingl
iquidi
tytoachievet
wosepar
atebut
complement
ar yobject
ives.
STANDARDS(PART-I)
*Whil
etheLCRpr omot esshort
-ter
mr esi
li
enceof
What we will study?
bankstopotent
iall
iquidi
tydisr
uptionsbyensuri
ng
*What is LCR? thatt
heyhavesuffi
cienthighquali
tyli
quidasset
s
*What is Objective of LCR? (HQLAs)tosurv
iveanacut estressscenari
olast
ing
for30days.
*What is Scope of LCR?
*TheNSFRpr omotesresi
li
enceoverl
onger-
ter
m
ti
mehor izonsbyrequi
ri
ngbankstofundthei
r
INTRODUCTION: acti
vi
tieswithmorestablesour
cesoffundi
ngonan
*With the objective of promoting a more resilient ongoingbasis.

Banking sector, the ‘Basel III international I

naddi
ti
on,asetoff i
vemoni t
ori
ngtool
stobeused
f
ormonit
ori
ngtheliquidit
yri
skexposur
esofbanks
Framework for liquidity risk measurement,
wasal
soprescr
ibedint hesai
ddocument.
Standards and monitoring was issued in December
2010.
Obj
ect
ive:
*The Basel Committee prescribed two minimum
TheLCRst andardai
mst oensurethatabank
Standards viz. maint
ainsanadequatelevelofunencumbered
1-Liquidity Coverage Ratio (LCR) and HQLAst hatcanbeconvert
edintocashtomeetits
l
iqui
dit
yneedsf ora30calendardaytimehori
zon
2-Net Stable Funding Ratio (NSFR)
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
underasi
gni
fi
cant
lysever
eli
qui
dit
yst
ressscenar
io LI
QUI
DITYCOVERAGERATI
O(LCR)
:
speci
fi
edbysuper
visor
s. TheLi
qui
dit
yCov
erager
ati
oiscomput
edasunder
:
Atami nimum,thestockofli
quidasset
sshould LCR=StockofHighQuali
tyLi
qui
dAsset
s(HQLAs)
enablethebanktosurvi
veuntilday30ofthest
ress /TotalNetCashOutf
lowsovert
henext30cal
endar
scenari
o,bywhichti
mei ti
sassumedt hat
days
appropri
atecor
rect
iveacti
onscanbet aken.
LCR=HQLA/
CASHOUTFLOW(
Next30day
s)
LCR>=100%
TheLCRr equirementisbindi
ngonbanksf r
om
January1,
2015.Howev er
,toprovideatransi
ti
on
Scope: ti
mef orbanks, Reserv
eBankofI ndiahasPermit
ted
Tostartwith,theLCRandmoni t
ori
ngtool
swould agradualincreaseintherati
ostarti
ngwitha
beapplicableforI
ndi
anbanksatwholebanklevel minimum 60%f orthecal
endaryear2015aspert he
onl
yi.e.onast and-
alonebasi
sincl
udi
ngov er
seas ti
me-li
negi v
enbel ow:
oper
at i
onst hr
oughbranches.
However
,banksshouldendeav
ortomoveovert
o Januar
y Januar
y Januar
y1 Januar
y Januar
y
meet
ingthestandar
datconsoli
dat
edl
evelal
so. 1 12016 2017 12018 12019
Forf
oreignbanksoperat
ingasbr anchesinIndi
a, 2015
thef
ramewor kwouldbeapplicabl
eonst and-al
one Mini
m 60% 70% 80% 90% 100%
basi
s(i
.e.forI
ndianoper
ationsonly). um
LCR

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
(
a)t
her
un-
offofapr
opor
ti
onofr
etai
ldeposi
ts;
Banksshould,howev er
,st
riv
etoachi
eveahi
gher (b)apart
iall
ossofunsecur
edwhol
esal
efundi
ng
rat
iothanthemi ni
mum prescri
bedabov
easan capaci
ty;
eff
orttowardsbetterli
qui
dit
yri
skmanagement
. (
c)apart
iall
ossofsecured,short
-t
ermfinanci
ng
Witheffectfr
om January1,2019,i.
e.af t
erthe wit
hcer
taincol
lat
eralandcounterpar
ti
es;
phase-i
nar r
angementsarecompl ete,theLCR (d)addit
ionalcontr
actualoutf
lowsthatwoul dari
se
shouldbemi nimum 100%(i.
e.thest ockofHQLA
from adowngr adeinthebank’spubl
iccreditrat
ing
shouldatleastequalt
ototalnetcashout fl
ows)on byupt othreenotches,i
ncludi
ngcollat
eralposti
ng
anongoi ngbasis
requi
rement s;
Dur
ingaperi
odoff
inanci
alst
ress,
however
,banks
(e)increasesi nmarketvolat
il
iti
esthati
mpactt he
mayusethei
rst
ockofHQLA,andther
ebyfal
li
ng qualityofcollater
alorpotenti
alfut
ureexposureof
bel
ow100%. deri
v ati
v epositi
onsandthusr equi
relar
ger
Banksshal lber
equi
redtoimmedi at
elyr
eportt
o coll
at eralhai
rcutsoraddit
ionalcol
later
al,
orleadto
RBI(DepartmentofBankingOperati
onsand otherl i
quidit
yneeds;
DevelopmentasalsoDepartmentofBanking
(f
)unschedul
eddr awsoncommi tt
edbutunused
Supervisi
on)suchuseofstockofHQLAal ongwit
h
credi
tandli
quidi
tyfacil
it
iest
hatt
hebankhas
reasonsforsuchusageandcorrecti
vesteps provi
dedtoit
sclients.
i
niti
atedtorecti
fyt
hesituati
on.
Thestressscenar
iospecif
iedbytheBCBSent
ailsa
combinedidi
osyncrat
ic(Bank-
speci
fi
c)andmarket
-
wideshockthatwouldresulti
n:
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE–B
Chapter 18: BASEL III FRAMEWORK ON LIQUIDITY monet
izedandt
het
imef
rameconsi
der
ed.

STANDARDS (PART-II) Nevert

heless,
therear
ecertai
nasset
st hatare
morelikel
ytogenerat
efundswit
houtincurri
ng
What we will study?
l
argediscountsduetofi
re-
sal
esevenint i
mes
*What is HQLA? ofstr
ess.
*What are the types of HQLA? b) Whi lethef undament al characteristicsof
*What is FALLCR? theseasset si ncludelowcr editandmar ketri
sk;
easeandcer t
aintyofv aluat i
on; l
owcor r
elat
ion
High Quality Liquid Assets (HQLAs):
wi t
hr i
skyasset sandl istingonadev elopedand
a) Liquid assets comprise of high quality recognizedexchangemar ket,themar ket
assets that can be readily sold or used as relatedchar acterist
icincludeact i
veandsi zabl
e
collateral to obtain funds in a range of stress mar ket,presenceofcommi ttedmar ketmaker s,
scenarios. lowmar ketconcent rationandf li
ghtt oqual i
ty
They should be unencumbered i.e., without legal (tendenciest omov eintot heset ypesofasset s
, regulatory or operational impediments. inasy stemi ccr i
sis).
Assets are considered to high quality liquid c)Ther earetwocat egoriesofasset
swhi
chcan
assets, if they can be easily and immediately beincludedinthest ockofHQLAsbasedonthe
basisoftheirpr
ice-volati
li
ty.
converted into cash at little or no loss of value.
Lev
el1&Lev
el2
The liquidity of an asset depends on the
Level1:i
ncl
udescashandnearcash
Underlying stress scenario, the volume to be
equival
ent
sandhencenohair
cutappli
edon

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
t
heseasset
s. Faci
li
tyt
oAv ai
lLi
qui
dit
yforLi
qui
dit
yCov
erage
Lev
el2asset
sar
esub-
div
idedi
nto Rati
o(FALLCR):
Banks, witheff
ectJanuar y1,2015,
arepermit
tedto
Lev
el2A
availli
quidit
yfacil
it
yagainstsuchsecuri
ti
esunder
Lev
el2B aspeci alfaci
li
tycall
ed'Facil
it
ytoAvai
lLiqui
dit
yfor
Level2A:lessl
iqui
dassetsandhenceahai
rcut Liquidit
yCov er
ageRat i
o( FALLCR),
essenti
al
of15%i sappli
edforconv
ersionoft
hese featuresofwhi charegivenbelow:
asset
si nt
ocash i
. Eli
gibi
li
ty:Avail
ingofli
quidityagai
nstsuch
Level2B:Conver
sionofasset
sincashismore securi
ti
eswoul dbeper mittedtobanksonly
di
ffi
cultf
ortheseasset
sandahaircutof50%is underthecondi ti
onsofstressasdescribed
appli
ed. byRBIgui del
ine,andafterutil
i
zati
onofall
otherHQLAs( i
ncludi
ngsecur i
ti
espermitt
ed
Assetstobeincludedineachcategory(
Level
1
underMSF) .
,Level2A,
Level2B)arethosethatthebank
holdi
ngont hefi
rstdayofstr
essper i
od. Bankswil
lberequi
redtof
urni
shadeclarat
ion
thatt
heyhaveexhaust
edthei
ral
lother
Ideal
lyint
hef i
rstdayofst
ressper
iod,
it
HQLAsbeforeavai
li
ngoftheFALLCR.
expectedthatt
heBankholdsmor eofLevel1
HQLA. i
i. Tenor
:Thi
sfaci
li
tycanbeavai
led/
rol
led
ov
eruptoamaximum peri
odof90days.
i
ii
. Hair
cut:Li
quidit
yagainstsecuri
ti
esunder
FALLCRwi l
lbeav ai
labl
eafterappl
yi
ng
hai
rcut
sasst ipul
atedforMSF.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE–B
i
v. Faci
lit
yrat
e:Rateofi nt
erestonthefunds Chapter 18: BASEL III FRAMEWORK ON LIQUIDITY
avai
ledundert
hisf acil
it
ywillbe200bps
STANDARDS (PART-III)
abovetheprev
aili
ngLAFr eporat
e,uptoa
peri
odof90day s,orasdeci dedbytheRBI What we will study?
fr
om timetoti
me. *What are 5 Liquidity Risk Monitoring Tools?
*What is NSFR?
LIQUIDITY RISK MONITORING TOOLS:
In addition to the two liquidity standards, the Basel
Cal
cul
ati
onofLCR: III framework also prescribes five monitoring tools/
Asstatedinthedefi
nit
ionofLCR,iti
sarati
ooftwo Metrics for better monitoring a bank’s liquidity
fact
ors,vi
z.theSt
ockofHQLAandt heNetCash
position.
outf
lowsov ert
henext30calendardays.
These metrics along with their objective and the
Therefore,
computat
ionofLCRofabankwi ll
requir
ecalcul
ati
onsofthenumeratorand Prescribed returns are as under:
denomi nat
orofther
ati
o,asdet
ailedintheRBI (a)Contractual Maturity Mismatch:
Circul
ar.
The contractual maturity profile identifies the gaps
Between the contractual inflows and outflows of
Liquidity for defined time bands.
These maturity gaps indicate how much liquidity a

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
bankwoul dpotent
iall
yneedtor
aisei
neachof unencumber
edasset
s.
thesetimebandsifallout
fl
owsoccurr
edatt
he Theseassetshavethepotentialt
obeusedas
earl
iestpossi
bledate. coll
ater
altorai
seaddit
ionalsecuredf
undingin
Thismetri
cpr ov
idesi
nsi
ghti
ntotheext
entt
owhich secondarymarket
sand/ orfr
om centr
albanks.
thebankrel
iesonmat ur
it
ytr
ansf
ormati
onunderi
ts
(
d)LCRbySi
gni
fi
cantCur
rency
:
curr
entcontract
s.
Whil
etheLCRst andar
disrequir
edtobemeti none
(
b)Concent
rat
ionofFundi
ng:
si
nglecur
rency,
inordertobett
ercaptur
epotenti
al
Thismet ri
cismeantt
oidenti
fyt hosesourcesof cur
rencymismatches,t
heLCRi neachsigni
fi
cant
fundingthatar
eofsuchsigni
ficancethatthe cur
rencyneedstobemoni t
ored.
withdrawalofwhi
chcoul
dt ri
ggerl i
qui
dit
ypr obl
ems.
(
e)Mar
ket
-r
elat
edMoni
tor
ingTool
s
Themetrict
husencour
agesthediv
ersi
fi
cat
ionof Thi
sincl
udeshighfrequencymar ketdat
at hatcan
fundi
ngsourcesr
ecommendedi nt
heBasel
ser
veasearlywarni
ngi ndi
cator
si nmonitori
ng
Commi t
tee’
sSoundPri
nci
ples.
pot
enti
all
iquidi
tydi
ffi
culti
esatbanks.
Thismetricsaimst oaddressthefunding
concent
rat i
onofbanksbymoni tor
ingt hei
rfunding
fr
om eachsi gnif
icantcounter
party
, eachsignif
icant
product
/instrumentandeachsi gni
ficantcurrency. BaselI
IILi
qui
dit
yRet
urns:
(
c)Av
ail
abl
eUnencumber
edAsset
s:
Thismetr
icpr
ovi
dessuper
v i
sorswi
thdataonthe
quant
it
yandkeychar
acter
isti
csofbanks’
avai
labl
e
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
S.
No.NameoftheBasel Frequency TimePer i
od LCRDi
scl
osur
eSt
andar
ds:
I
IILi
qui
dit
yRet
urn of bywhich Banksarerequi
redtodiscloseinfor
mationonthei
r
(
BLR) Submi ssi
on Requi
redto LCRi nt
hei
rannualfinanci
alstatementsunder
beReport
ed NotestoAccounts,star
ti
ngwi t
ht hefi
nanci
alyear
1 Stat
ementon Mont
hly Wit
hin15 endingMarch31,2015.
Li
quidi
tyCover
age day
s I
nt hest
arti
ng(whenLCRwasi nt
roduced)t
heLCR
Rati
o(LCR)-
BLR-1 r
elatedi
nformati
onneedstobefurni
shedonlyf
or
2 Stat
ementof Mont
hly Wit
hin15 t
hequarterendi
ngMar ch31,
2015.
Funding day
s However,i
nsubsequentannualfi
nanci
alstat
ement,
Concentrat
ion– t
hediscl
osureshouldcoveral
lthefourquart
ersof
BLR-2 t
herelev
antfi
nancialy
ear.
3 StatementonOther Mont
hly Wit
hin15
Informati
onon day
s
NETSTABLEFUNDI
NGRATI
O(NSFR)
:
Liquidi
ty–BLR-
5
Thi
sr at
ioai
mspromoti
ngmedium t
olongt
erm
4 LCRbySignif
icant Mont
hly Wi
thi
na
st
ructur
efundi
ngofasset
sandacti
vi
ti
esofthe
Cur
rency-BLR-4 mont
h
Banks.
5 Stat
ementof Quar
ter
ly Wi
thi
na
BCBSai
mstotri
alt
hisrat
iofr
om 2012andmakes
Avai
labl
e mont
h
i
tmandat
oryi
nJanuary2018.
Unencumbered
Assets-
BLR-
3 RBIrel
easedi
tsDr
aftgui
del
inesi
nNSFRonMay28,
2015.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Theobject
ivesofNSFRistoensur ethatbanks Cal
cul
ati
onofNetSt
abl
eFundi
ngRat
io(
NSFR)
:
maint
ainast abl
efundi
ngprofi
leinrelat
ionofthei
r NSFR=Avail
abl
eSt
abl
eFundi
ng/
Requi
redSt
abl
e
asset
sandof f–balancesheetacti
viti
es. Fundi
ngxI00
Asust ai
nabl
ef undi
ngst r
uctureisintendedto NSFR=ASF/
RSFx100
reducet heprobabili
tyoferosionofabank’ s
l
iquidityposit
ionduet odisrupti
onsini t
sregular NSFR>=100%
sour cesoffundingthatwoul dincr
easet heri
skif
i
tsf ail
ureandpot enti
all
yleadt obroadersystemic
stress.
TheNFSRl i
mi tsov err
eli
anceonshor t–term
wholesalef
undi ng,encouragesbett
erassessment
offundi
ngriskacr ossallon–andof f–balance
sheetit
ems, andpr omotesf undi
ngstabi
li
ty.
TheReserveBankpr
oposest
omakeNFSR
appl
icabl
etobanksi
nIndi
afr
om Januar
y1,
2018.
(SourceRBI)
.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 19: INTRODUCTION TO TREASURY CRR:Treasurywasresponsibl
eforhol
ding
MANAGEMENT (PART-I) mini
mum cashbalancesr equi
redasperCash
Reser
veRat i
o(CRR)withReserveBankofIndi
a.
What we will study?
SLR:Treasurywasresponsi
blef
orinvest
ingf
unds
i
nappr ovedsecuri
ti
estotheext
entrequi
redunder
*What is Treasury Management? Stat
utoryLiqui
dit
yRati
o(SLR).
*What is Integrated Treasury Management? Thus,
theTr
easur
yfunct
ionwasessent
ial
l
yli
qui
dit
y
management
.
What is Treasury Management? Servi
ceCent
re:f
rom anor
gani
zat
ionalpoi
ntofv
iew,
Conventionally, the Treasury function was confined Treasur
ywasconsi
deredasaser
vicecent
er.
To funds management: Tr
easur
ydoesLi
qui
dit
yManagement
:
1-Maintaining adequate cash balances to meet day- Todat
e,l
iqui
dit
ymanagementcont
inuest
obean
to-day requirements. i
mport
antfunct
ionofTr
easur
y.
2-Deploying surplus funds generated from Howev er,owingt
oeconomi cref
ormsand
operations. deregulati
onofmarketswhichbegani
nIndi
aint
he
90'
s, t
hescopeofTr easur
yhasexpanded
3-Sourcing funds to bridge occasional gaps in cash
considerably
.
flow.
Tr
easur
yAsPr
ofi
tCent
re:
4-In the context of a bank, the Treasury is also
Tr
easur
yhassinceevolvedasaprofi
tcent
er,
wit
h
Responsible to meet the reserve requirements i.e.
i
tsowntradi
ngandinvestmentact
ivi
ty.
CRR & SLR.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Treasur
yconnectst
hecor
eact
ivi
tyofabankwi
th I
nvestmenti
nsecur
it
iesandf
orei
gnexchange
thefi
nanci
almarket
s: busi
ness:
Tr easuryconnect sthecoreactivi
tyofabank Til
llat
e90's,thei
nvest
mentinsecuri
ti
esand
(deposi ttakingandlendi
ng)wi ththefinancial for
eignexchangebusinessconst
it
utedtwo
mar kets–whi chisalsotrueofthecor porate separatedepart
mentsinmostoftheIndi
anbanks.
treasur i
esinnon-bankingcompani es–by
Butthesetwofuncti
onshavenowbecomepar
tof
cont inuouslyaccessingthemar ketsforlending, anintegrat
edTreasur
y,t
husaddi
nganew
bor rowing,invest
ingandt radi
nginf i
nancialassets.
di
mensi ontot
het r
easur
yacti
vi
ty.
Tr
easur
yManagi
ngMar
ketRi
sk:
Si
ncet r
easuryinteractwit
hmarket
s,managi
ng
Tr
easur
ydeal
swi
thshor
t-
ter
mfunds:
marketriskfortheentir
ebankhasbecomean
i
ntegralpartofTreasury. Treasuryessent
ial
lydeal
swithshor
t-t
ermf unds-
fl
ow( i
.e.wit
hlessthanoneyearmaturi
ty)
,wi t
hthe
Treasur
y’sr
olei
nAsset
-Li
abi
li
tyManagement
excepti
onthataspartoftheSLRrequir
ement ,
(ALM):
i
nv est
mentinsomesecur i
ti
esisheldtomat uri
ty
TheTreasur yplay
sanact iveroleinAsset-Li
abil
it
y exceedingoneyear.
Management( ALM) ,andwithit
sconstantexposur e Ri
skmanagementf
unct
ionoft
reasur
y:
tomar ket
s, i
swellplacedtoadv iset
he
managementoft hebankf ortakingi
nternal Riskmanagementfunct
ion,
cover
stheunderly
ing
deci
sions,sayinpr oductpri
cingandstrategic asset
sandliabi
li
ti
esacr
ossshort
,medium and
i
nvestment s. l
ong-t
erm matur
iti
es.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
ConceptofCur
rentaccountandCapi
talaccount
: FUNCTI
ONSOFI
NTEGRATEDTREASURY:
Thebalanceofpaymentsaccount,whichisa I
ntegrat
edTreasury
,inabankingset
-up,
ref
ersto
stat
ementofalltr
ansact
ionsmadebet weena i
ntegrat
ionofmoneymar ket,
secur
it
iesmarketand
countr
yandtheout si
deworl
d,consist
soft wo f
oreignexchangeoperat
ions.
accounts—currentandcapi
talaccount.
I
ntegratedTreasury,
intheIndiancont ext,i
sthe
Whilethecur
rentaccountdealsmainl
ywithimpor
t di
rectresul
tofreformsinthef inancialsector
,the
andexportofgoodsandser v
ices,t
hecapit
al mostimpor t
antreformsbeingder egul
ationof
accountismadeupofcr oss-
bordermovementof i
nterestrat
esandpar ti
alconver t
ibil
it
yofRupee.
capit
albywayofinvestmentsandloans. Rupeei salreadyfreelyconv er
tibleoncur r
ent
Currentaccountconverti
bil
it
yreferstothefreedom account ,andtoal ar
geext ent,alsoconv ert
ibl
eon
toconv er
tyourrupeesintootherinter
nati
onally capitalaccount,owingt omaj orrelaxationsallowed
acceptedcurrenci
esandv iceversawithoutany byt heReser veBank,inthear eaoff oreigndi r
ect
rest
rict
ionswhenev ery
oumakepay ments. i
nv estment( FDI)
,externalcommer cialborrowings
Si
milar
ly,
capit
alaccountconver
ti
bil
it
ymeansthe (ECB)andov erseasdirectinvestment( ODI ).
fr
eedom toconductinvest
menttr
ansact
ions Bankshav eal
sobeenall
owedlar
geli
mits,
in
wit
houtanyconstrai
nts. proport
iontothei
rnetwor
th,
forover
seas
borrowi
ngandi nv
estment
.
Bankshavegainedwi deraccesst oforei
gn
curr
encyfundsthroughtheiroff
-shoreoperati
ons,
NRIdeposit
s,resi
dentforeigncurrencyaccounts
suchasEEFCandf undsfrom externalcommercial

Join CAIIB WITH ASHOK on YouTube & App

Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE - C
bor
rowi
ngs(
ECB)
. Chapter 19: INTRODUCTION TO TREASURY
Theprocessofglobal
izat
ionhascont
ri
but
edt
o MANAGEMENT (PART-II)
i
ntegr
ationoft
reasuri
es. What we will study?
Int
egratedTreasury
,therefore,i
sinaposit
iont o
operateacr
ossv ari
oussect orsandacrossthe
*What is Merchant business?
curr
encymar kets,
eitherinsearchofhi
gherr etur
ns,
orinordertomobili
zel owcostf undsf
orli
qui di
ty
*What are 3 distinctive roles of Treasury
needs. Management?
Justascashfl
owi sacashf lowirrespecti
veofthe
curr
encyinwhichitisdenomi nat
ed, t
herisk Merchant Business:
att
achedtomar ketoperat
ionsalsoneedsa Large corporate clients now prefer to deal with
commonappr oachcutti
ngacr ossdiffer
entmarkets.
Treasury directly, rather than through bank
Whenweoper ateindi
ffer
entcurr
enciesanddeal
Branches or through other functional departments.
wi
thdiff
erentsegmentsofdebtandequi t
ymarket
s,
wegeneratecurr
encyandinter
estrateri
sksor The Treasury's transactions with customers are
pr
iceri
sk,whichtoget
herisgener
allyref
erredt
oas Known as merchant business, as distinct from
marketr
isk. bank's own trading and investment business.
Itishenceimperat
ivethatInt
egrat
edTreasuryis Many corporate customers have their own treasury
alsofull
yinvol
vedinri
skmanagement ,i
nparticul
ar,
departments, and they expect to receive an
managementofmar ketri
sk,oft
enusi
ngder i
vativ
e
products.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

i
ntegr
atedservi
cef r
om thebank, i
nareassuchas 4-
Opti
mi si
ngprof
itbyexpl
oit
ingmar
ket
hedgi
ngexportreceivabl
es,r
aisingfor
eigncur
rency oppor
tunit
iesi
n
l
oansandov er
seasi nvest
ment s. For
exmar
ket
Moneymar
ket
Wemaynowr est
atet
hedr
ivi
ngf
orceofI
ntegr
ated Securi
ti
esmar
ket(
debt
,equi
tyandcr
edi
tder
ivat
ive
Tr
easur
yas: markets)
1-
Int
egr
atedCashFl
owManagement 5-
Riskmanagement
,i.
e.,
managi
ngt
hemar
ketr
isk
2-
Int
erestAr
bit
rage oft
hebank/ent
it
y
3-
Accesst
ogl
obalr
esour
ces 6-
Assi
sti
ngbankmanagementi
nALM.
4-
Cor
por
atedemandf
orhi
gh-
endser
vices,
and Treasuryact
ivi
tythusencompassesfund
5-
RiskManagement management ,i
nvestment,f
orexoper
ati
ons,tr
ading
andriskmanagementser vi
cesinamulti
-cur
rency
Wemaysummar
izet
hef
unct
ionsofI
ntegr
ated envir
onment.
Tr
easur
yas:
1-
Meet
ingr
eser
ver
equi
rement
s(CRRandSLR)
3di
sti
nctr
olesofTr
easur
y:
2-
Global
cashmanagement
(
a)Li
qui
dit
yManagement
:
3-Ef
fi
cientmerchantser
vices,whi
chincludef
orei
gn
exchange(f
orex)andadvisoryser
vices Treasur
yisresponsi
blef
ormanagi
ngshor
t-
term
fundsacrosscurr
enci
es,andal
sof
orcomply
ing

Join CAIIB WITH ASHOK on YouTube & App

Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE - C
Chapter 19: INTRODUCTION TO TREASURY
wi
thr
eser
ver
equi
rement
s(CRRandSLR)
.
MANAGEMENT (PART-III)
(
b)Pr
opr
iet
aryPosi
ti
ons: What we will study?
Tr
easurymaytr
adeincurr
encies,secur
it
iesand *How treasury work as a profit center?
ot
herfi
nanci
ali
nstr
uments,i
ncludingderi
vat
ives,
in
*What are the sources of profit for treasury?
or
dertocont
ri
butetoBank'
spr of
its.
(
C)Ri
skManagement
:
EVOLVINGROLEOFTREASURYASPROFIT
Treasurywil
lai
dManagementi nbri
dgingasset-
CENTRE:
l
iabil
it
ymismatches( ALM),wil
lprov
ideder i
vati
ve
toolstomanagerisksincli
ent'
sbusiness,andwi l
l By convention, Treasury was a service center,
alsomanager i
sksinherenti
nitsownpr opri
etar
y primarily intended to attend the cash flow
positi
ons. requirements of the bank, and hence operated only in
money market
Merchant business was attended through the foreign
Themul t
ipl
erolesnecessitateTreasuryt
omanage exchange department, while bank’s investment assets
anALM Bookf orinter
nalriskmanagement ,a were managed through a separate department.
MerchantBookf orcli
ent-
relat
edcur r
encyand
der
ivat
ivetr
ansact i
ons,andaTr adingBookfor
managingitspropri
etarypositi
ons.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Thustherewereeff
ecti
v el
ythree“treasuri
es” Thi
rd:
operat
inginthr
eedif
ferentmar kets,whichhave Oper
ati
onalcostsi
nTreasur
yarelowascompared
beenintegr
atedandint
egratedt r
easurywas t
obranchbanking,
whetherr
etai
lorwhol
esal
e.
for
med.
TheTreasur
yisrunbyaf ewspecial
istst
aff,
Thewiderscopeofintegr
atedtr
easuryhasoffer
ed
engagedinhi
gh-val
uetransact
ions,
pertransact
ion
banksanopportuni
tytogenerat
esurpluses,
to si
zegeneral
lynotbeingbelowRs.50mi l
li
on(5Cr )
.
suppl
ementprofit
sfrom i
tscorebankingacti
vi
ty.
TheTreasur
yalsot
radesi
nnarr
owspr
eads,hence
prof
iti
sgenerat
edfr
om hi
ghvol
umesofbusiness.
Treasurypr
ofi
tshav
ebecomeat
tract
ivef
ort
hree Treasurypr
ofi
tsar
egener
atedf
rom t
hef
oll
owi
ng
reasons: sources:
Fi
rst
: Conv
ent
ionalSour
ces:
Treasur
ylar
gel
yoperatesininter
-bankmarket
s 1-For
eignExchangeBusi
ness
whichareal
mostfreeofcreditri
sk,andhence
requi
resver
yli
tt
lecapi
talall
ocati
on. 2-MoneyMar
ketDeal
s

Second: 3-I
nvest
mentAct
ivi
ty

Thetr
easur
yacti
vit
yishighl
ylever
aged(mor
e Cont
empor
arySour
cesofpr
ofi
t:
debt
sthanequi
ty)andhence,ther
etur
noncapi
tal 1-I
nter
estAr
bit
rage
maybequit
ehigh.
2-Tr
adi
ng
3-Tr
easur
yPr
oduct
s

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
1-
For
eignExchangeBusi
ness: changefrom momenttomoment ,hencet
he
Buyi
ngandsel
li
ngf or
eigncurr
encytocust
omers deal
ersarecaref
ultomaint
ainonlyalimi
ted
consti
tut
esamajorsourceofotheri
ncomefort
he posit
ionduri
ngthedayti
meal so)
.
banks. Concept
:
Thedi
ff
erencebet
weenbuyrat
e&sellr
atewhichi
s Tr
ansf
erPr
iceMechani
sm:
knownas“spr
ead”-i
sthepr
ofi
tfort
hebank. Thebasicfunctionofabankbr
anchistoaccept
Thebanksbuyforei
gncur
rencyfr
om cust
omers deposi
tsforlendingsoever
ybranchi
sexpectedto
(mai
nlyexpor
ter
s)andsel
lthesameinint
er-
bank serv
easapr ofitcent
re.
market
. Butpracti
call
yitmaynotbepossibl
ebecause
Thebanksal
sosel
lfor
eigncurr
encytocustomers somebr ancheshavemorebusinessofdepositt
han
(i
mport
ers)
,whi
chtheybuyfrom i
nter
-bankmarket
. advancesandsomebr ancheshavemoreadv ances
thandeposit.
Banksgenerall
ydonotmaintai
nast ockoffor
eign
curr
encyforthepurposeofmerchantbusi
ness,as Asthismaynotr efl
ectat ruepict
ureandto
i
tismoreconv eni
enttobuyandsellfr
om i
nter- compensat ef
orthel ossthesebranchesarepaidin
bankmarket. theform ofHOinterestreceivabl
e.TheseBranches
OpenPosi
ti
on: wil
lshowapr ofi
tafteraddi ngHOI nt
erest
.
Li
kewi
se,f
ortheadvancesgiv
en,br
ancheshav
et o
Anyr esidual posi
ti
onofabankattheendofday–
payHOint
erestt
reat
ingitasmoneyborr
owedfrom
overboughtorov ersol
d–i
sknownasopenposi t
ion,
whichi nvolvesexchanger
isk,
asthev al
ueof HO.
for
eigncur rencymaychangeov er
night(mayi
nfact, Suchbr
ancheshav
ingconcent
rat
ioni
nAdv
ances
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
wil
lhavetopayHOfort
hef
undsdepl
oyedf
rom t
he 3-
Inv
est
mentAct
ivi
ty:
i
nterestear
nedbyt
hem. Bankshavealwaysbeeninvest
ingingov ernment
Thei
rPr
ofi
taf
terHOi
nter
estwi
llcomedown. secur
iti
estosati
sfytheSLRrequi
rement ,but
Thi
siscal
ledt
heTr
ansf
erPr
iceMechani
sm. other
wisewerenotv er
yact
iveininvest
ingi nnon-
governmentsecur
iti
es.
Incomefrom r
isk-
freei
nvestment
swasnot
2-
MoneyMar
ketDeal
s: consider
edtobesignif
icant
.
Conventi
onalbankingoperati
oninmoneymar
ket Bankshavealsobeeninvest
ingi
nstrategi
casset
s
wasconfinedtolendingsurplusf
undsand –suchassubsidiaryandassoci
atecompanies–
bor
rowingfundswhenr equi
red. whereret
urnsoninvestmentwereonlyof
I
nt er
estonfundslentinthemarketi
sasour ceof secondar
yimportance.
i
ncome, butitcanhardlybecall
edprof
it-assuch Thedevelopmentofcorpor
atedebtmar keti
nfact
,
fundscomef rom deposit
s,wherei
nter
estcostis i
sarecentphenomenon, whichf
ollowedremovalof
highert
hanthei nt
erestearnedi
nmoneymar ket
. RBIr
estri
ctionsonbankinv
estment s,
and
Toov ercomethi
s,Bankscomeoutwi t
haTr ansfer demater
iali
sati
onofsecuri
ti
esinthelate90'
s.
Prici
ngMechanism sothattheTreasurycomest o Cont
empor
arysour
cesofpr
ofi
t:(
nextl
ect
ure)
knowt hecostofthefundswhichtheyrecei
vef r
om
branches. 1-I
nter
estAr
bit
rage

Til
lfai
rl
yrecentl
y,bankswerecir
cumspecti
n 2-Tr
adi
ng
borrowi
ngfundsininter-
bankmarketonl
yfort
he 3-Tr
easur
yPr
oduct
s
purposeoflendi
ngwi t
hapr of
it
.

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE - C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 19: INTRODUCTION TO TREASURY Cont
empor
arysour
cesofpr
ofi
t:
MANAGEMENT (PART-IV) 1-I
nter
estAr
bit
rage
What we will study? 2-Tr
adi
ng
*What are contemporary sources of profit of 3-Tr
easur
yPr
oduct
s
treasury? Buyi
ngandsel l
ingforei
gnexchangetocust
omer s
andinter
estoninvestmentsandmoneymar ket
Treasury profits are generated from the following l
ending,cont
inuestobet hepr
imarysour
ceof
i
ncomef orbanktreasuri
es.
sources:
Conventional Sources: Howev er,Treasur
ypr ofi
tsar eincreasi
ngl yderi
ved
from mar ketoperations,i
nv olvi
ngbuy ingand
1- Foreign Exchange Business
selling,orborrowingandl ending,orinv esti
ngin
2- Money Market Deals tradableasset s,t
akingapr oprietaryposi t
ion-not
3- Investment Activity wi t
ht heintenti
onofmeet i
ngcust omer
requi r
ement s,orformeet i
ngReser verequi r
ements
Contemporary Sources of profit:
oft hebank, butonlytogener atepr ofi
ts.
1- Interest Arbitrage
Atthesametimet
her
angeofservicest
hebank
2- Trading
of
ferstocust
omer
shasalsowidenedwith
3- Treasury Products i
ntr
oducti
onofnewpr
oducts.
TheTreasuryprofi
tsari
semai
nlyf
rom t
hef
oll
owi
ng
cont
empor arysources:
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
I
nter
estAr
bit
rage: cer
ti
fi
catesofdeposi
t,t
reasur
ybi
l
lsandCBLOt
o
TheTreasuryoperat
esacrossthecur
rencyand opt
imizeret
urnonfunds.
secur
it
ymar kets;
henceiti
sinaposit
iontofind
wheretheinter
estdi
ffer
enti
alsar
einit
sfavour. Tr
adi
ng:
TheTreasur
ymayborrowinUSDandl endinRupee Tradi
ngisaspeculat
iveacti
vi
ty,
wher eprofi
tsar
ise
i
nter
-bankmarket
,orv
iceversa,dependingonthe outoffav
orablepr
icemov ementsduringthe
domesti
candforei
gnint
erestrat
es. i
nterv
albetweenbuyingandsell
ing.
Or,
theTreasurymayborr
owinmoneymar ketand Curr
encyt
radi
ngsincelonghasbeenatthecor
eof
i
nvestshort
-t
ermfundincommer
cialpaperorT- for
exdeal
ingact
ivi
tyi
nbankt r
easur
ies.
bi
ll
s.
BanksholdingAD1(
Authori
zedDealer1)li
cense
Bankswi t
hgoodcr edi
tstanding,maybor rowlarge ar
eper mit
tedbyRBIt
otradeincur
rencieswithi
n
amountsi nmoneymar ketandl endtootherbanks, pre-
setli
mits.
hi
ghlyratedcor
poratesandot herinsti
tut
ions,using
marketinstr
uments,atmar gi
nallyhi
gherrates. Treasurymaygol ong(buycurr
ency)orshort(sel
l
currency)oncurr
enci
est ogetprof
itf
rom exchange
Ast hefut
uresmarketconti
nuestodevelop, ratemov ements.
Treasuryal
sohastheoppor t
unit
ytoarbitr
age
betweenOTC( ov
er-the-
counter
)andfutures Treasurymayal soswapcur r
enci
es,buy
ingand
mar ket
s. sell
ingcurr
enciesatdif
ferentpoi
ntsofti
me,to
benefitf
rom changesinforwardrat
emov ements.
Tr
easur
ytodayusesavar
iet
yofmoneymarket
i
nstr
uments,
suchascommer ci
alpaper
, TheTr
easurymaytakesi
milarpr
opriet
aryposit
ion
i
nsecuri
ti
es,wher
e,i
narisi
ngmar ket,
securi
ti
es

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
areboughtandsol
dwi
thapr
ofi
twhent
hey
iel
ds Anotherar
eawhi
chi
salmostexclusi
vetobanki
ng
fal
l. sect
oristr
adi
ngi
ncredi
tinst
ruments.
Bankt r
easur
iesarefair
lyaggressivei
nbuy i
ngand Theinstr
ument sav ai
lablei
nt hissegmentar e
sell
ingGovernmentsecurit
ies(G-sec)
,asthebanks securi
ti
zedcreditreceivabl
esandot herassets,
i
nanycaseneedt oholdapprovedsecurit
ies,i
n commonl yknownaspass- throughcer t
if
icates,
excessoftheirSLRrequir
ement ,i
norderto i
ssuedbyspeci alpurposev ehicles(
SPV)f orthe
managet hei
rliqui
dit
y. speci
ficpurposeofsecur it
izati
on.
G-secsconsti
tutethemostliqui
dsegmentofdebt Whi l
etradingincurrenci
esandsecuri
ti
es,
mar ketandar
et r
adedonwhol esaledebtmar
ket Treasuriesareopent omarketr
isk,
orpriceri
sk,
(WDM)ofNat ionalStockExchange. wher etheymayi ncurlossi
fpri
ceofthecurrency
(exchanger at
e)orthesecuri
tymovesadv er
sely.
Treasur
iesov
erthelastdecade,
hav
eal
sobecome
acti
veinequi
tymarkets. Inordertomini
mizesuchl
osses,bankt
reasuri
es
aresubjectt
ostri
ctr
iskmanagementcontr
ols.
Equit
ytradingi
shighl
yprofi
tableinri
singstock
markets,despi
tet
hev ol
ati
li
tyofequitypri
ces,as Bankshavealsobeenpermitt
edtotr
adeinsomeof
I
ndianeconomyhasbeenwi tnessi
ngast eady thederi
vati
veproduct
s,andsomeofthelar
ger
growth. bankshavebeenmar ketmakersi
nopti
onsand
However,i
ntermsofv olume,banksparti
cipat
ioni
n i
nterestr
ateswaps.
st
ockmar keti
sper i
pheral
,asRBIrestr
ict
sbanks' Deri
vati
veshaveaddedtotherangeofpr
oducts
di
rectandindi
rectexposuretocapi
talmarketsby avai
labl
etotheTreasur
yfortr
ading,
aswellasri
sk
i
mposinglimit
s. management.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE - C
Tr
easur
yPr
oduct
s: Chapter 19: INTRODUCTION TO TREASURY
Treasurysel
ls,i
naddit
iont
oforei
gnexchange MANAGEMENT (PART-V)
servi
ces,der
ivati
vesandst
ruct
uredpr
oductsto What we will study?
corporat
ecustomers.
*The Organization structure of Treasury.
Largecorpor
ateshav
eanappet it
ef ornewpr oduct
s
i
nor dert
ohedgetheircur
rencyandi nterestrate
ri
sks,andatti
mes,al
sot oreducetheirinterest
ORGANIATION OF TREASURY:
costs. The Treasury is organized either as a Department of
the bank, or as a Specialised Branch under direct
Forinstance,
acompanymaybuyf rom t
heTr easur
y
control of the bank’s head office.
aFor wardRateAgr eement(FRA)tofi
xinterestr
ate
forcommer cialpapertheyplant
oissueafter3 In either case, the Treasury functions with a degree of
mont hs. autonomy, with its own accounting system.
The branch status is preferred as the books of
TheTr easur ymayofferacurr
encyswapt oa
accounts of Treasury can be maintained
corporatecust omertoconver
ttheirfloat
ingrat
e
independently (with its own P&L and GL accounts.)
USDl oani ntoRupeeloancarr
y i
ngfixedinter
est
rat
e,sot hatt hecust
omernol ongerhascur r
ency On the other hand, the department from has the
ri
skori nterestrat
eri
sk. advantage of easier coordination with related
department at head office (such as Central
Theratesoff
eredbyTreasuryf
orsuchproduct
s
al
way shaveabuil
t-i
nprofi
tmargi
n,or“
abuy -
sell
spr
ead' i
nbank’sf
avour.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Account
sandPl
anni
ngDepar
tment
s). TheTreasur
yissegr
egat
edi
ntot
hreemai
n
Treasuryasaspeci ali
zedbr anchenjoysan di
vi
sions:
additi
onal advantage,ast heBranchcanactas TheDeal
ingRoom (
or,
FrontOf
fi
ce)
,
AuthorisedDeal erforforeignexchangebusiness TheBackOf
fi
ce(
or,
Treasur
yAdmi
nist
rat
ion)and
andcanpar ti
cipateinclearingandsettl
ement
systemsdi rectl
y,whileHeadOf fi
ceDepart
mentcan TheMi
d-of
fi
ce(
orRi
skManagement
).
onlyactt hroughabr anchf orit
sbusiness
operati
ons.
Deal
ingRoom orFr
ontOf
fi
ce:
Wemayt her
eforeconcl
udethati
nthecont extof
Thedeal
ingr
oom i
sheadedbyChi
efDeal
er,
whoi
s
i
ntegr
atedtr
easuryoper
ati
ons,aTreasuryBranch
i
nchargeoft
hefr
ontoff
ice.
shoul
dbetheprefer
redfor
m oforganisat
ion.
TheDealer
swor
kingunderhi
m,buyandsel
lint
he
Whocanbeheadoft
reasur
y?
market
s.
TheTreasuryi
sheadedbyaseni ormanagement
EachDealerspeci
ali
zesinoneoft hemarkets,i.
e.
per
son–AGener alManager(GM) ,Chi
efTreasury
for
eignexchange,moneymar ketorsecur
iti
es
Off
icer(
CTO) ,
Vice-Presi
dentoranyotheroff
ici
al
market,
although,
inanintegrat
edtreasur
y,the
wit
hasi mil
ardesignati
on.
deal
ersaregenerall
yfamil
iarwithal
lthemar ket
s.
Tr
easurybei
ngakeyact
ivit
yofthebank,
Headof
Dependingont hesi
zeofoperations,
theremaybe
Tr
easuryshoul
dbeapersonwhowoul dr
epor
t
dealersdedicat
edtomajorcurr
encies,ordeal
ers
di
rectt
otheCFOorCEOoft hebank.
speciali
zingonl
yinfor
wardmar ketsorderi
vat
ives.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Iti
salsocommont ohav easeparatecor
por
ate
dealer
,excl
usi
velytoatt
endtomaj orcor
por
ate Thedealsarever
if
iedonthebasisofdeal
slips
customers/merchantbusi
ness. prepar
edbythedealer
sandal sofr
om t
he
I
nlargerbanks,
Treasur
ywi
llal
sohav
eanALM confi
rmati
onrecei
vedfrom t
hecounter
part
ies.
desk,t
oexclusi
vel
ymanageBank'
sALM r
isks.
Theback-off
iceconf i
rmst hedealsindependent
ly
TheSecur
it
iesMar
keti
snor
mal
lydi
vi
dedi
ntot
wo wit
hthecount erpart
ies(banksandot her
par
ts: i
nsti
tut
ions)ov erphoneandv er
if
iesthe
Pr
imar
yandsecondar
ymar
ket
s. aut
henti
cityoft heconfi
rmationdocument .

Thesecuri
ti
esdeal
erdeal
sonl
ywithsecondary TheBackoff
icet
akescar
eofallrelat
edbook-
market,
i.
e.buyi
ngandsel
li
ngofsecur
it
iesalr
eady keepi
ngandsubmissi
onofper
iodicalret
urnst
oRBI
.
avai
labl
einthemarket
. Back-off
icealsomai ntai
nsNost r
oaccount s
Onbehalfofthebank,t
hedealermayalso (f
oreigncurrencyaccountswi t
hcorrespondent
part
ici
pateinauct
ionofgovernmentsecur
it
iesand banks),f
undingandsecur it
yaccount swithRBI
,and
Demataccount swi thdeposit
oryparti
cipant
sand
T-bi
ll
s,conduct
edperi
odical
lybyRBI.
ensuresthatadequat emarginmoneyi sheldwit
h
Clear
ingCor porati
onofIndia(CCIL)forRupeeand
TheBackOf
fi
ceorTr
easur
yAdmi
nist
rat
ion: doll
arsettl
ement s.
Set
tl
ementi
sakeyfunct
ionofBack-of
fi
ce,
asall
pay
mentsandr
ecei
ptsmusttakeplaceonval
ue
Theback-
off
icei
sresponsibl
eforv
eri
fi
cati
onand
dat
e.
set
tl
ementthedeal
sconcludedbythedeal
ers.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Anydelayinsett
lementwouldnotonl yr
esulti
n management
.
fi
nanci
allosstothebank,butdelay
si npaymentar
e AsperRBIguideli
nes, t
heMidOf f
iceshould
consi
deredasadef aul
tbythebank, sever
ely compri
seofexper t
sinmar ketri
skmanagement ,
aff
ecti
ngthebank'sreput
ation.
economist
s,stati
sti
ciansandgeneralbankersand
Iti
smandatorythatFr
ontoffi
ceandBackOff
ice maybefunctionall
yplaceddir
ectl
yundertheALCO.
aretot
all
ysegregat
ed,repor
ti
ngtotwodi
ff
erent
TheMi dOf
ficeshoul
dalsobesepar
atedfr
om
managers. Treasur
yDepartmentandshoul
dnotbeinvol
vedi
n
TheMi
d-of
fi
ce(
RiskManagement
): thedaytodaymanagementofTreasury
.
Ri
skmanagement ,Middl
eoffi
ce(Mid-
off
ice)i
s TheMidOf fi
ceshoul
dapprisethetopmanagement
cr
eatedexcl
usi
velytoprovi
deinf
ormati
ontothe /ALCO/Treasur
yaboutadherencetoprudent
ial
/ri
sk
management(MIS)andtoimplementri
sk parameter
sandalsoaggregatethetot
almarket
managementsystems. ri
skexposuresassumedbyt hebankatanypointof
ti
me.
Mid-
off
icemonitorsexposur
eli
mitsandst
oploss
l
imit
sofTreasuryandreport
stothemanagement Wheneverasui
tableofferi
sreceived,t
he
onkeyparametersofperf
ormance. Depar
tmentwouldputupani nv
estmentproposal
andobtai
nappr
ov alatappropri
atelev
el.
Tr
ansferPr
ici
ngMechani
sm mayalsobe
i
mplementedthr
oughMid-
off
ice. Mini
mum mar ketabl
einvestmentbeingRs.5crore,
thei
nvestmentproposalsarescr
uti
nizedclosel
y
I
nsmal l
erbanks,Mid-of
ficemayalsofuncti
onas
andaregeneral
lyconsider
edbyanI nvestment
ALM SupportGroup,asthebalancesheetri
sk
managementiscloselyconnectedtoTreasuryr
isk Commi t
tee,bef
orethesanctioni
sobt ai
nedat
appr
opriat
elevel
.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 20: TREASURY PRODUCTS (PART-I) Currenci
eswhicharenotfull
yconvert
ibl
e,have
What we will study? l
imiteddemandandmaynotbet radedactiv
ely
,but
theymayalsoenjoyhighli
quidi
ty,
dependingonthe
*What are various products of FX market?
sizeandstageofdevelopmentofdomesticmarket
.
*What is spot trade?
*What are Forward Rates?
Forinstance,IndianRupee(I
NR)isonl
yparti
all
y
*What are Swaps?
converti
ble,butthemar ketf
orUSD/I
NRi sf
airl
y
PRODUCTS OF FOREIGN EXCHANGE MARKET: l
iquid,owingtol argedomesti
cmarketandhigh
Characteristics of FOREIGN EXCHANGE MARKET: growthr at
eoft heeconomy .
1- Most Liquid Market:
Foreign exchange (forex) market is the most liquid 2-MostTr
anspar
entMar
ket
:
Market as free currencies (major currencies which ForeignExchangeMar keti
sal
sothemost
Are fully convertible, e.g., USD, EUR, GBP, JPY etc.) transpar
entmar ketasmostofthet
ransact
ions
Can be readily bought and sold here. takeplace‘onl
ine’acr
ossthet
imezonesin
electr
onicmedium.
Free currencies belong to those countries, whose
Markets are highly developed and where exchange
Controls are practically dispensed with. 2-Vi
rt
ualMar
ket
:
I
tisavir
tualmarket,
withoutphysicalboundar
ies,
theonl
yli
mitat
ionforcurrencytr
adesbei ng
domesti
cregul
ationorconv er
ti
bil
ity.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Ther
eareal
soi
nter
netsi
teswhi
chpr
ovi
det
radi
ng 01-
04-
2020=t
radedat
e:TODRat
e
pl
atf
orms. 02-
04-
2020:TOM Rat
e
Severalbankshav
ethei
rownsiteswhere
03-
04-
2020:SPOTRat
e
customerscandeali
nforei
gnexchangeon-
li
ne.

Al
ltheexchanger atesquot
edonthescreen,ori
n
1.SpotTr
ades:
pr
int,
aref orspottr
adebydefaul
t,unl
essother
wise
Curr
enci
esar
emost
lyboughtandsol
dinspot mentioned.
tr
ades.
Spotset
tl
ementtakespl
acetwoworki
ngday
sfr
om TheTODandTOM r atesar
egenerall
yquotedata
thet
radedat
e,i
.e.onthet
hir
dday.
discounttot
hespotrate)i
.e.t
herateisl
ess
favourabl
etothebuyerofthecur
rency.
01-
04-
2020=t
radedat
e
02-
04-
2020 Inanintegr
at edmar ket
,thepremium ordiscount
03-
04-
2020 spotset
tl
ementdat
e chargedont hecurrencyisreall
ydecidedbyt he
demandandsuppl yofbasecur rency(i
nourcasei t
i
sUS$)andov er
nightinter
estratediff
erent
ialsof
Currencymayal sobeboughtandsold,wit
h thecurr
enciesboughtandsol d.
sett
lementont hesameday ,
i.
e.today
(TOD/ Cash/Ready),
or,
onthenextday,i
.e.
tomorrow( TOM) .
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
2.For
war
dRat
es: Treasur
ymayalsoenteri
ntof
orwar
dcontract
s,
Whil
espottraderef
erstocur
rentt
ransact
ion, purelyf
ort
hepurposeofmaki
ngprofi
toutofpri
ce
f
orwardsrefert
opurchaseorsal
eofacurrencyon mov ement
s.
afut
uredate. Forwardexchanger
atesarenotexchangerates
for
ecastintot
hefut
ure;i
notherwords,theydonot
ref
lectpr
oject
edrat
emov ementsinthemar ket
.
Theexchangeratesforfor
wardsaleorfor
ward
purchasear
equot edtoday
;hencesuch Forwardexchangeratesarearr
ivedatonthebasi
s
tr
ansacti
onsarerefer
redtoasforwardcontr
act
s ofint
erestr
atedif
ferenti
alsoft
wocur r
encies,
betweenthebuyerandsell
er. addedordeductedfrom spotexchangerat
e.

Treasur
ymayent erint
oforwardcont
ract
swith Theinter
estr atediff
erentiali
saddedt othespot
customers(merchantbusi
ness)orwi
thbanks(i
nter rateforl
ow- i
nterestyiel
dingcur r
ency(repr
esent
ing
-bankmarket)ascounter
part
ies. forwardpremi um)anddeduct edfrom t
hespotrate
forhighi
nt er
esty i
eldi
ngcur rency(repr
esenti
ng
Customers,
i.
e.impor t
ers,expor t
ersandother
s, forwarddiscount).
whoexpectpay mentsorr eceiptsinf
orei
gn
curr
ency,
covertheircurrencyr i
skbyenter
ingint
o
for
wardcontractswiththeirrespecti
vebanks. Howev er,f
orwardratesful
lyref
lecti
nter
estr
ate
Treasuryin-
tur
ncov er
sit
scustomerexposur
eby dif
fer
ential
sonlyinperfectmarkets,
wherethe
taki
ngr ev
erse/opposi
teposi
ti
onsinthei
nter
-bank curr
enciesarefull
yconv er
ti
bleandwherethe
marketsarehighlyl
iquid.
mar ket
.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
SinceRupeei snoty
etful
lyconvert
ibl
e,thedemand Theswapr out
eisgeneral
lyusedf
orfundi
ng
forforwardcontr
actsi
nfl
uencestheforward requi
rements,
butther
eisalsoaprof
itoppor
tuni
ty
exchanger at
esmorethantheinter
estrate from i
nter
estr
atearbi
tr
age.
diff
erenti
als.
Whenwehav eUSDf unds, butweneedRupeef unds
toinvesti
nacommer cialpaperfor3months,we
mayent eri
ntoaUSD/ INRswapdeal–t osellUSD
3.Swaps:
atspotrate(conver
ti
ngi ntoRupeefunds)and
Thespotandfor
wardtr
ansact
ionsar
ethepr
imar
y buyingbacktheUSD3mont hsforwar
d(withRupee
product
sinf
orei
gnexchangemarket
. fundsonmat uri
tyoftheCP) .
Acombinat
ionofspotandforwardtr
ansact
ions,
or I
fthei
nterestearnedonCPishi
ghert
hanthecost
acombi
nati
onoftwof orwar
dt r
ansacti
onsi
scall
ed ofUSDfunds,theswapresul
tsi
naprofi
t.
aswap.
ThecostofUSDf
undsconsi
stsofi
nter
estat
Aswapt ransact
ionisal
sodescr
ibedasan marketr
atepl
usf
orwar
dpremium f
orthe3-mont
h
exchangeofcashf l
ows. per
iod.
Buyi
ngUSD( wi
thRupees)i
nthespotmarketand Howev
er,i
nter
estar
bit
rageexist
sonlywhenoneof
sel
li
ngthesameamountofUSDi nthef
orward t
hecurr
enci
esexchangedisnotful
lyconv
ert
ibl
e.
market
,orvi
cever
sa,const
it
utesaUSD/INRswap.
Theswapisother
wiseusedtoel
imi
nat
ecur
rency
Simil
arl
y,si
multaneouspurchaseandsal
eof andi
nter
estratemismat
ches.
curr
encyont woforwarddates(f
orwar
dtofor
war
d)
i
salsoaswap.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 20: TREASURY PRODUCTS (PART-II)
What we will study? 1-
Cal
lMoney
:
*What is Money Market? Lendi
ngandbor
rowi
ngf
or1day
.
*What are money market instruments? 2-
Not
iceMoney
:
*What is Call Money, Notice Money & Term Money?
Lendi
ngandbor
rowi
ngf
or2day
sto14day
s.
3-
Ter
m Money
:
MONEY MARKET PRODUCTS:
Lendi
ngandbor
rowi
ngf
or15day
sto1y
ear
.

What is money Market?

Cal
lMoney
:

Money Markets refer to raising and deploying short- Callmoneyref

erst
ooverni
ghtpl
acements,i
.e.
fundsborr
owedbybanksneedtoberepaidonthe
Term resources, with maturity of funds generally not
nextworki
ngday.
Exceeding one year.
Callmoneyr
atesi
ndi
cat
eli
qui
dit
yav
ail
abl
eint
he
The inter-bank market is sub-divided into call i
nter-
bankmarket
.
money, notice money and term money market. OvernightMumbaiI nterbankOffer
edRate(
O/N
MIBOR)i stheindicati
verateforcal
lmoney
,fi
xed
dai
lyint hemorning,usedwi del
yasabenchmark
rat
ef oroverni
ghtinterestrat
eswaps.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Thecal
lmoneymar
keti
spur
elyani
nter
-bank Theprudenti
alli
mi t
sinrespectofbothoutst
anding
market
. bor
rowingandl endingt
ransacti
onsincall
/noti
ce
Non-bankplayer
s,suchasfi
nanciali
nsti
tut
ionsand moneymar ket:
mutualfunds,werephasedoutofcallmoney
marketw.e.f6August2005.
ForSchedul
edcommer
cialbanks:
Onlybanks,
pr i
marydeal
ersandco-oper
ati
vebanks
(ot
herthanlanddevel
opmentbanks)can
part
ici
patei
nt hecal
lmoneymarket. MaxAv
glendi
ngi
naf
ort
night
:
I
tcanbeupt o25%ofcapi
talf
und(
TIER-
I&TI
ER-
II
)
oft
helendi
ngbank.
Pr
imar
yDeal
ers:
Butonanypar
ti
culardayofthefort
nightl
endi
ng
PDisafi
rmthatbuysgov
ernmentsecur
it
ies
canbemaximum 50%oft hecapit
alfundofl
endi
ng
di
rect
lyf
rom gov
ernment
.
bank.

Not
iceMoney
: MaxAv
gbor
rowi
ngi
naf
ort
night
:
Undercallmoneymar ket,
fundsaretr
ansact
edon
I
tcanbemaximum 100%ofcapit
alf
und(
TIER-
I&
anoverni
ghtbasis,
wher easundernoti
cemoney
TI
ER-I
I)oft
hebor
rowingbank.
market
, f
undsaretransactedforaperi
odbetween2
daysand14day s. Butonanypar
ti
culardayoft
hefor
tnightbor
rowi
ng
canbemaximum 125%ofthecapi
talfundof
borr
owi
ngbank.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Lendi
ng:25% Forpr
imar
ydeal
ers(
PDs)
:
Maxi
naday
:50%
Bor
rowi
ng:100% MaxAv
eragebor
rowi
ng:
Maxi
naday
:125% PDscanborrowondail
yaver
agebasi
supto225%
Forco-
oper
ati
vebank: thei
rNetOwnedFunds(NOF)att
heendofMarch
ofthepr
evi
ousfi
nanci
alyear
.

MaxAv
eragebor
rowi
ng:
MaxAv
erageLendi
ng:
PDscanlendincal
l/
noti
cemoneymar ketondail
y
Borrowingf orStat
eCo-Operati
vebanks/ Di
str
ict aver
agebasisupto25%thei
rNetOwnedFunds
centralCo-operati
vebanks/UrbanCo-operati
v e (NOF)att
heendofMarchoftheprev
iousf i
nanci
al
banksi ncallmoney /
noti
cemoneymar ket,
ona year
.
dail
ybasisshoul dnotexceed2%oft heiraggregat
e
depositattheendofMar chofthepr
ev i
ous
fi
nancialyear. Ter
m Money
:

MaxAv
erageLendi
ng:Nol
imi
t. Term moneymarketisforpl
acementoffundswi
th
banksforper
iodsinexcessof14days,
butnot
exceedi
ng1y ear
.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Typi
cal
lyt
erm moneyplacementsr
angefr
om 1 Treasuryi
nvestssur
pluscashi
nmoneymar ket,
monthto6months,andplacement
sforl
onger af
t ermeeti
ngtheCashReserveRati
o(CRR)and
peri
odsar
enotverycommon. Statut
oryLi
quidit
yReserv
eRatio(
SLR)sti
pulat
ed
byRBI .
Int
er-bankmar
ket
sareatt hefor
efrontoff
inanci
al
marketsandaret
hefir
sttosignalanychangesin Curr
entl
ytheCRRi
s3%ofbank'
sdemandandt
ime
moneysupplyandtheresult
antl
iquidi
tyi
nthe l
iabi
li
ti
es.
system. CRRisanimport
antmonetarypol
icyi
nst
rumentof
Onanypart
icul
arday
, t
hecallmoneytr
ansact
ions RBIt
oinf
luencel
iqui
dit
yinthemarket
.
ref
lectt
hel
iqui
dit
yavail
abl
einthesyst
em.
TheRBIdoesnotpayi
nter
estonCRRbal
anceshel
d
Int
er-
bankmarketi
sconsi
der
edtobear i
sk-
free bybanks.
market,t
houghi
nreal
it
y,t
hebanksdocarr
y
counter
part
yri
sk.
Banktreasur
iest
ypicall
ydeali
ninter
-bankmarkets,
Howev er,
forpract i
calpur
poses,i
nter-
bankmar
ket
butt
reasuryoper
ationsnowextendt oshort
-t
erm
carr
ieslowestrisk,hencetheint
erestrat
es
i
nvestmentpaperissuedbygovernment,fi
nanci
al
prevai
li
ngininter-bankmarketconsti
tute
i
nsti
tuti
onsandcompani esinpubli
candpr i
vat
e
'
benchmar k’r
ates.
sect
ors.
Thecal
lmoneyr ate,asindicatedbyt heoverni
ght
Mumbai I
nter-
bankOf f
eredRat e( O/NMI BOR)isthe
mostwidelyacceptedbenchmar krateforfl
oati
ng
rat
edebtpaper,asalsof orovernightint
erestr
ate
swaps(OIS).
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE – C
Fol
lowi
ngarethesecur
it
iesmainl
ydeal
twi
thf
or Chapter 20: TREASURY PRODUCTS (PART-III)
pl
acementofshor
t-t
ermfunds. What we will study?
1-Tr
easur
yBi
ll
s *What is Treasury bill?
2-
CashManagementBi
ll
s(CMBs) *What is CMB?
3-
Commer
icalPaper(
CP) Bank treasuries typically deal in inter-bank markets,
But treasury operations now extend too short-term
4-
Cer
ti
fi
ateofdeposi
t(CD)
Investment paper issued by government, financial
5-
Repo Institutions and companies in public and private
6-
LAF sectors.
Following are the securities mainly dealt with for
7-
MSF
Placement of short-term funds.
8-
CBLO( Cent
ral
izedBor
rowi
ngandLendi
ng
Obl
igat
ion) 1-Treasury Bills
2-Cash Management Bills (CMBs)
3-Commercial Paper (CP) 4-Certifiate of deposit
(CD)
5-Repo 6-LAF 7-MSF
8-CBLO (Centralized Borrowing and Lending
Obligation)

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Tr
easur
yBi
ll
s: Theaucti
onhowev erisopent oal
lplayer
sinthe
Thesear
eissuedbyGovernmentofI
ndi
athr
ough fi
nanci
almarkets,i
ncludingfi
nanci
alinst
it
uti
ons,
Reser
veBankformatur
it
iesof mutualf
unds,corporates,ot
herbusi
nessentit
ies,
asalsoi
ndiv
iduals.
91-
day
s,
T-
bil
lsarei
ssuedonf
ixeddat
esandf
orpr
e-f
ixed
182day
sand amounts.
364-
day
s, Cur
rent
ly,91-
dayT-
bil
lisi
ssuedweekl
yoneach
f
orpr
e-det
ermi
nedamount
s. Wednesday,
Theint
eresti
sbywayofdi
scount
,sot
hebi
ll
sar
e 182-dayT-
bil
lisi
ssuedf
ortni
ghtl
yonWednesday
pri
cedbelowRs.100. precedi
ngthenon-r
epor
ti
ngFriday,
and
364-
dayT-bi
lli
salsoissuedfort
nightl
yon
Wednesdayprecedi
ngr epor
ti
ngFr i
day.
Yi
eldofTBi
ll
:(FV-
MV)
*365/
91
Forbanktr
easury,
investmentinT- bi
ll
si sa
Forexample,T-
bil
lof91day si
spricedat99.26,
conveni
entwayofparkingshort-t
er m surpl
usesi
na
yi
eldi
nginter
estat2.97%p.a.{
(100–
ri
skfreei
nvestment,yi
eldi
nginterestgenerall
y
99.
26)*365/91)
,whichisknownasi mpli
city
ield.
hi
gherthantheoverni
ghtcallmoneyr ates.
T-bi
ll
shavealiqui
dsecondarymarketandtheT-
bil
l
Thepri
ceofT-bi
ll
sisdeterminedt
hroughan yi
eldsconst
it
uteav al
idbenchmar
kr at
efordebt
auct
ionpr
ocesswher ebanksandpri
marydeal
ers paper.
aret
hemainparti
cipant
s.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
FIMMDA( FixedIncomeMoneyMar ketand theproposedCashManagementBi
l
ls(
CMB)
Deri
vati
vesAssoci ati
onofIndia)andReut ers dependsuponthetemporar
ycashr
equir
ementof
coll
aborat
et opublishbenchmar kT-bil
lyi
eldsfor theGovernment.
oneweekt ooney earbasedont her esi
dual
Howev
er,
thetenur
eoft
hepr
oposedBi
ll
sisl
ess
maturi
tyofT- bi
ll
sincircul
ati
on. t
han91days.
TheT-bi
ll
,l
ikeot
hergov
ernmentsecur
it
ies,
isi
n (b)TheBill
sareissuedatdiscountt
othefaceval
ue
el
ect
ronicfor
m andi
stobeheldinaSGLaccount
. throughaucti
ons,asinthecaseoftheTreasur
y
Secondar
ymar ketsett
lementofT-bi
ll
stakesplace Bil
ls.
thr
oughClear
ingCor porat
ionofI
ndiaLtd.(
CCIL). (c)
.Theannouncementoftheaucti
onoftheBil
lsi
s
CashManagementBi
ll
s(CMBs)
: bemadebyt heReser
veBankofI ndi
athr
ough
TheGov er
nmentofI ndia,
inconsul
tat
ionwit
hthe separat
ePressRel
easeissuedonedaypriort
othe
RBI
,haddeci dedtoissueanewshor t
-ter
m dateofauct
ion.
i
nstrument,knownasCashManagementBi l
ls,
to (
d)Theset
tl
ementoft
heauct
ioni
sonT+1basi
s.
meetthetempor ar
ycashf lowmismatchesofthe
(e)TheNon-Competit
iveBiddi
ngSchemef
or
Government. Treasur
yBil
lsisnotextendedtoCMBs.
CMBsinI
ndiaarenon-
standar
d,di
scount
ed (f)TheBill
saretradableandqual i
fyforready
i
nst
rument
sissuedformaturi
ti
esl
essthan91day
s. forwardfacil
it
y(Repo,MSFandRev er
seRepo
CMBshav
ethegener
icchar
act
erofTr
easur
yBi
ll
s. facil
it
y).
Invest
mentint heproposedBi l
lsis
CMBshav
ethef
oll
owi
ngf
eat
ures: reckonedasanel igi
bleinv
estmenti nGov ernment
Securit
iesbybanksf orSLRpur pose.
(
a)Thet
enur
e,not
if
iedamountanddat
eofi
ssueof

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE – C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 20: TREASURY PRODUCTS (PART-IV) TheissueofCPi sgov er
nedbyguidelinesi
ssuedby
What we will study? RBIandmar ketpract
icesprescr
ibedby
FI
MMDA( Fi
xedIncomeMoneyMar ketand
*What is Commercial Paper (CP)?
Deri
vati
vesAssociati
onofIndia)
.
*What is Certificate of Deposit (CD)?
Commercial Paper (CP):
AsperRBIgui
del
ines,t
heprinci
palrequi
rement
s
This is a short-term debt market paper issued by
fori
ssui
ngCommer ci
alPaperare:
corporates, with a minimum maturity of 7-day sand
maximum maturity of 1 year.
1-
t hei
ssuingcompanyhavemi
nimum cr
editr
ati
ng
Minimum Maturity: 7 Days ofA3aspert herat
ingsy
mbolanddef
ini
ti
on
Maximum Maturity: 1 Year prescr
ibedbySEBI.
2-t
het angi
blenetwor
thoft
hecompanyasperl
ast
balancesheetmustnotbebel
owRs.4cr.
Corporates, primary dealers and financial
Institutions are eligible to issue commercial paper· 3-
thecompanyshoul
dhavebeensanct
ioned
Minimum Amount of CP: 5 Lac worki
ngcapi
tall
imi
tbybank/
sorFlsand

Then Multiple of 5 Lac. 4-t

heborr
owalaccountofthecompanymustbe
undert
hestandar
dassetclassi
fi
cat
ionoft
he
fi
nanci
ngbank/i
nsti
tut
ion.
TheissueofCPshoul
dbeforami
nimum amount
ofRs.5lacsandmult
ipl
est
her
eof
.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Banksarepermitt
edt
oinvestinCPonlyifi
tisi
n v
alueofRs.100.
dematform hencemostoftheCPsareissuedi
n TheCPisanegot
iabl
einst
rumentandhasaf
air
ly
dematform. act
ivemar
ket
.
CPistobeissuedthroughanI
PA(i
ssui
ngand CPisissuedinDematf or
m, hencethepurchase
pay
ingaut
hor i
ty)whomustbeabank.
andsaleofCPisef f
ectedthroughthedeposit
ory
ThetotalamountofCPpr oposedtobei
ssued par
ti
cipant(DP)accountsofinvest
ors.
shouldberai
sedwithi
naper iodoftwoweeksfr
om Bankst
endt
oinv
esti
nCPst
hrought
het
reasur
y,as
thedateonwhichtheissueropensthei
ssuefor
subscri
pti
on. (a)Credi
tri
ski
srel
ati
vel
ylowandl
imi
tedt
oashor
t
peri
od
CPmaybei ssuedonasingl
edateorinpartson
dif
fer
entdat
esprovi
dedthati
fissuedinpart
sthen (
b)Yi
eldonCPishi
ghert
hani
nter
-bankmoney
eachCPshallhavet
hesamemat urit
ydate. mar
ketyi
eldand

Ever
yissueofCP,andever
yrenewalofaCP,
shal
l (
c)CPbeingatr
adabl
einst
rument
,ther
eisno
betr
eatedasafreshi
ssue. l
iqui
dit
yri
sk.

TheCPcar r
iesrel
ati
vel
ylowcr
editri
sk,
owingt
oit
s SecondarymarketforCPsisfai
rl
yact
iveandt
he
short
-ter
m natur
eandmi ni
mum cr
editr
ati
ng i
ndexedreturnonCPi susedasabenchmarkr
ate
requi
rement. forshor
t-
term advances.

TheCPi sissuedint
heform ofapromi
ssorynot
e Al
lOTCtradesi
nCPshal lbereport
edwithin15
fordiscountedamount,i
.e.pri
ceofCPi
slessthan mi
nutesofthet
radet
ot hereporti
ngplatf
orm of
thefacev alue,andt
hepricei
squotedf
orface Cl
earcor
pDeali
ngSystem (Indi
a)Ltd.(
CDSI L)
.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Thesett
lementcy
clef
orOTCt
radesi
nCPshal
l appr
ovedcr
edi
trat
ingagency
.
ei
therbeT+0orT+1. CDismeantpri
maril
yforhi
ghnetworthindi
vi
dual
s,
Buy
backofCP: themi
nimum amountofthedeposi
tbeingRs.1l
ac
(
a)I
ssuer
scanbuybackt
heCP, i
ssuedbyt
hem t
o andmult
ipl
esther
eof.
t
hei
nvest
ors,
bef
orematuri
ty. Mi
nimum AmountofCD:1Lac
(
b)BuybackofCPshallbet
hroughthesecondar
y ThenMul
ti
pleof1Lac
mar
ketandatprev
ail
ingmarketpri
ce. Theperiodofmatur
it
yofCD,
issuedbybanks,
can
(
c)TheCPshouldnotbeboughtbackbefor
ea rangebetween7daysand1yearfr
om t
hedateof
mini
mum per
iodof7daysfr
om thedateofissue. i
ssue.
FIscanhoweveri
ssueCDsf oraperi
odnotl
ess
than1yearandnotexceedi
ng3y ear
sfr
om the
Cer
ti
fi
cat
esofDeposi
t(CD)
:
dateofi
ssue.
Thisi
sadebtinstr
umentsimil
art
ocommer ci
al
paper,
buti
sissuedbybanksorotherel
igi
ble
fi
nanci
ali
nsti
tut
ion(FI
)agai
nstdeposi
toffunds. Mi
nimum Mat
uri
ty:7Day
s
Unli
keadepositrecei
pt,CDisanegotiable Maxi
mum Mat
uri
ty:1Year
i
nstrumentandgenerall
ybearsint
erestrateshi
gher
CDscanbeissuedeit
heri
ndematf
orm,
ori
n
thanregul
ardeposit
soft hebank. phy
sicalf
orm aspr
omissor
ynot
es.
Iti
salsomoreexpensiv
etothebank,astheCD
Bankscani
ssueCPandCDonl
yint
hef
ormatgi
ven
att
ractsst
ampduty,andisgener
all
yrat
edbyan
byRBI.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE – C
SinceCDisnegot
iabl
e,i
tisal
soaninv
est
ment Chapter 20: TREASURY PRODUCTS (PART-V)
vehicl
eforcor
por
atesandbanks. What we will study?
Bankscannotsanct
ionanyloanagai
nstCDsor *What is the security market products?
permi
tprematurecl
osureofCDs.
Secondar
ymarketforCDmar keti
snotver
yacti
ve SECURITIES MARKET PRODUCTS:
andbanksfi
nditat
tract
ive,
onlywhenli
qui
dit
y
condi
ti
onsaret
ight
.
Investment Business is an important part of
CDsmaybei
ssuedatadi
scountonf
acev
alue.
Integrated treasury and is composed of buying and
Bankshavet omaintai
nappropri
atereser
ve Selling products available in Securities Market.
requir
ements,i
.e.
,CashReserv
eRat i
o(CRR)and Following are the security market products:
Statut
oryLi
quidit
yRatio(
SLR),ontheissuepr
iceof 1-Government securities
theCDs.
2-Corporate Debt Paper
AllOTCtradesi
nCPshal lbereportedwithi
n15
3-Debentures and Bonds
minutesofthetr
adetotheFinancialMarketTr
ade
Reporti
ngandConfi
rmationPlatform(F-TRAC)of 4-Convertible Bonds
Clear
corpDeali
ngSystem (I
ndia)Ltd.(
CDSIL). 5-Equities
AllOTCtradesinCDsshallnecessar
il
ybeclear
ed
andsettl
edunderDVPImechani sm thr
oughthe
author
isedclear
inghouses.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Gov
ernmentSecur
it
ies: BankofIndia(SI
DBI
)andNational
Bankfor
St
atut
oryLi
qui
dit
yRat
io(
SLR)
: Agri
cul
turalandRur
alDev
elopment(NABARD)
.
However,
thenumberofeligi
blebondsfort
his
Treasuryinv
estspri
mar i
lyinGover
nmentSecuri
ti
es
tocompl ywiththereser
verequi
rementofthebank, pur
poseisbei
ngcurtai
ledandbanksmost l
yinvest
i
ngovernmentsecur
iti
esforthepurposeofSLR.
i
.e.Statut
oryLiqui
dityRati
o(SLR),
whichis
presentl
yat18%ofbank' sdemandandt i
me Bankscanalsohol
dcashorgol
dtof
ulf
il
lSLR
l
iabil
it
ies(DTL). requi
rement
.
RBI,
atitsdi screti
on,canincreaseordecreasethe Whoi
ssueGov
ernmentSecur
it
ies?
SLR,subjectt oacap( max)of40%, i
norderto GovernmentSecuri
ti
esar
eissuedbyPubl
icDebt
cont
rolmoneysuppl yinthemar ket–infactt
he
Off
iceofReserveBankofI
ndiaonbehal
fof
SLRhasbeengr aduall
yreducedt o18%,from a GovernmentofIndi
a.
peakof38. 50%i nSeptember ,1990.
Stat
egover
nmentsalsoi
ssueSt
ateDev
elopment
SLRMax=40% & SLRMi
n=0%(
ear
li
er25%)
Bondst
hroughRBI.
TheBankingRegulati
onActof1949wasamended GovernmentSecuri
ti
esar
esol
dthr
oughauct
ions
i
n2007t oall
owRBIt ost
ipulat
eSLRbel
ow25%
conductedbyRBI.
(whichwastheearli
ermini
mum SLRlev
el
sti
pulat
edundertheAct.
) Bonds:

Tosati
sfySLRrequi
rement,bankscanalsoinvest Thei nt
eresti
spaidonthef aceval
ueofthebonds
i
notherapprov
edsecurit
ies,suchaspr
iori
tysector (expressedas%; mi
nimum v al
ueofbondsisRs.
bondsi
ssuedbySmal lI
ndustri
esDevel
opment 10,000)atcouponrate,butthepri
ceoft
hebondsis
determinedintheaucti
onconductedbyRBI.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
RBIarr
ivesatacut-
offpr
icebasedonthebids RBIisthei
ssuingandpayi
ngagencyf
or
submitt
edbybanksandpr i
marydealer
sandthe governmentsecur
it
ies.
pri
cemaybehi gherorl
owerthanthefacev
alueof RBIal
sousesgovernmentsecur i
ti
esasapol
icy
Rs.100.
i
nstr
umenttocontroll
iquidit
yint
hemarketi
norder
Governmentsecuri
ti
esareactivel
ytradedin toi
nfl
uencet
heinterestrates.
secondar
ymar ket
;hencethepriceandy i
eldofthe RBImayabsorbliqui
dit
ybysell
ingthesecuri
ti
esin
bondswouldbeconst ant
lychangingdependingon themarketandmayi nf
usel
iqui
ditybybuyingback
thedemandforbonds. thesecur
it
iesfr
om thepubl
ic.
Theyiel
donbondsi
sther
efor
edi
ff
erentf
rom Theseareknownasopenmar
ketoper
ati
ons(
OMO)
couponrat
eofi
nter
est
. ofthecent
ralbank.
Forinst
ance,
10-yearG-sec,
mat uri
nginJanuar
y Ty
pesofGov
ernmentSecur
it
y:
2020andcarryi
ngacouponof6. 35%iscur
rent
ly
pri
cedatRs.90.60giv
ingay i
eldof7.72%. 1-Hel
dtil
lMat
uri
ty(
HTM)
:Banki
ngBook
(I
nvest
ment)
Thepr
iceoft
hebondsandt
hey
iel
donbondsmov
e
i
nopposit
edi
rect
ion. 2-
Avai
labl
eforSal
e(AFS)
:Tr
adi
ngBook(
Trade)

OpenMar
ketOper
ati
ons(
OMO)
: 3-
Hel
dforTr
adi
ng(
HFT)
:Tr
adi
ngBook(
Trade)

TheGov ernmentofIndi
aborrowsfr
om publi
cby Bank'
sinvest
ment sar
eclassi
fi
edintoHeldti
ll
i
ssueofsecur i
ti
es,tofi
nanceit
sdefi
cit–whichi
s Matur
ity(
HTM)–consi stofsecuri
ti
esmainlyfor
thedif
ferencebetweenGovernment
'sincomeand i
nvest
mentpur poseandhenceplacedunderthe
expenses. Banki
ngBook,

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Avail
ableforSale(AFS)andHeldf
orTradi
ng(HFT) InDecember ,
2013,RBIal
lowedIRFsder
ivi
ngv al
ue
consistoftr
adablesecuri
ti
esandhencepl
aced from t
hefoll
owingunderl
yingonther
ecognised
undertheTradingBook. stockexchanges:
Secur i
ti
esunderHFTar
eacti
velytr
adedandare (
i)91-
DayTr
easur
yBi
ll
s;
mar ked-t
o-market(
MTM)r
egularl
yforaccount
ing
(i
i)2-
year
,5-
yearand10-
yearcouponbear
ing
purpose.
noti
onalGov
ernmentofI
ndiasecuri
ty.
Banksandinsti
tut
ionali
nvest
orsactiv
elybuyand
RBIalsousest
heG-
secmar
kett
odev
elopdebt
sel
lgovernmentsecuri
ti
esinanti
cipat
ionofpri
ce markets.
changes.
G-secyi
eldssetbenchmarkratesforcorporat
e
Thev i
ewonpr i
ces/
int
erestr
atei
sbasedont he
bonds;RBIissuebondsf
orvariousmat uri
ti
es
rat
eofi nfl
ati
on,GDPgrowthandothereconomic rangi
ngfrom 1y eart
o30years.
i
ndicators.
RBIhasalsoissuedavar
iet
yofbonds,
withstep-
up
Theyiel
dsandpri
cesofsecur
it
iesmov
ei nt
he
couponsorcouponsli
nkedtoi
nfl
ati
onindex,
or
opposit
edi
rect
ion–pri
cesfal
lwhenyi
elds(
int
erest
fl
oati
ngratecoupons.
rat
es)ri
se,
andv i
cever
sa.
STRI
PS:
I
nterestratefut
ur esmar kethasal sobeenacti
vated
byRBIwi ththetradinginI nt
erestRateFutures Cur r
entpr oposalsincludeissueofSTRI PS
(I
RFs)onanot i
onal couponbear ing10-Year (Separ ateTradingofRegi steredInterestand
GovernmentofI ndia(Gol )Securi
tyint
roducedin PrincipalSecuriti
es),wheret heprincipaland
August,2009onst ockexchanges. i
nterestar etradedassepar atezero-coupon
securities.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 20: TREASURY PRODUCTS (PART-VI) Theyar ealsoref
erredtoasnon- SLRsecuri
ti
es,
to
What we will study? dist
inguishthecorporat
edebtpaperf rom
governmentsecur i
ti
esandot herapproved
*What is Corporate Debt Paper?
securi
ties,whi
char eeli
gibl
eformeetingSLR
*What are Debentures and Bonds? requir
ementofbanks.
Tier-
2capit
albondsi
ssuedbybanksal
sof
allunder
SECURITIESMARKETPRODUCTS: thiscat
egory.
Following are the security market products: Treasuri
esfindcor
poratedebtpaperasan
1-Government securities (see Part-V) attr
acti
veinvest
ment,asyiel
dsonbondsand
2-Corporate Debt Paper debenturesarehi
gherthantheyi
eldongover
nment
securi
ti
es.
3-Debentures and Bonds
Nowt hatmostofthecorporatedebtpaperis
4-Convertible Bonds
i
ssuedi ndematform,t
herei sfai
rl
yacti
ve
5-Equity secondarymarketandthebondsi ssuedbytop
Corporate Debt Paper: corporat
esarehighl
yli
quid.(Banksareall
owedto
Corporate debt paper refers to medium and long- i
nvestonlyindematsecurit
ies.
)
Term bonds and debentures issued by corporates Yiel
dsoncorporatedebtpaperdiffer
sf r
om
And financial institutions, which are tradable. i
nstrumenttoinstr
ument,dependingont hecredi
t
quali
ty,
thati
s,highert
hecreditr
isk,higheri
sthe
yi
eld.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Mostoft
hedebti
ssueshavecredi
trat
ingbyoneof I
npr acti
ce,CompanyLawr equir
esthatdebentur
es
t
hesevencr
edi
trat
ingagenci
esinthecount
ry. i
ssuedbycompani esarealwayssecured;hence
Globalr
ati
ngsar
enecessar
yi ft
hedebtpaperi
s debenturesaregeneral
lysecuredbymor tgageor
wit
haf loati
ngchargeoral ienonassets.
beingi
ssuedint
hei
nternat
ionalmar
kets.
Bonds,
thoughissuedbypubli
csectorcompanies,
Treasur
ycaninvestFCNRdeposi
tf undsandother
donotimplyguarant
eebythegover
nment ,
unlessit
forei
gncur
rencysurpl
usesi
nglobaldebtpaperas
perpoli
cygui
deli
nesapprov
edbyt hemanagement . i
ssoment i
onedspecifi
cal
lyi
nthetermsofthe
i
ssue.
Debentur
esaregov
ernedbyrel
evantpr
ovi
sionsof
Debent
uresandBonds: CompanyLawandar etr
ansf
erabl
eonlyby
InIndia,
conventi
onall
y,debenturesaredebt regi
str
ati
on.
i
nst r
ument si
ssuedbycor poratesinpr
ivat
esector
, Bondsont
heot
herhandarenegot
iable
whilebondsareissuedbyi nsti
tuti
onsinpubl
ic i
nstr
ument
sgover
nedbylawofcontracts.
sector,t
hisdi
sti
ncti
onr eal
lyhasnomeani ngin
Debent
uremaybeconv erti
bleornon-conv
ert
ibl
e.
i
nternati
onalmarket.
Conver
ti
bledebent
uresmaybeconv ert
edint
o
Thesear
edebtinst
rument
s,i
ssuedbycorpor
ate equi
tyasperter
msofi ssue.
bodi
es,l
i
ter
all
ywithachar
geonspecif
icasset
s.
Ther
eisnopract
icaldif
fer
encebet
weennon-
Theli
teralmeaninghasbeenl
ostinpr
acti
ceand conv
ert
ibl
edebentures(NCD)andbonds.
debenturesandbondsmaybeissuedwit
hor
wit
houtsecurit
y.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Asamat terofconveni
ence,weusebondas Conv
ert
ibl
eBonds:
commonnomencl at
urefornon-
conver
ti
ble Thesear eami xofdebtandequity
,wherethebond-
corpor
atedebtpaper,wit
horigi
nalmat
uri
tyof1 holdersaregivenanoptiontoconvertt
hedebtint
o
yearandabove.
equityonafixeddate,orduri
ngaf i
xedper
iod,and
Wher
ethedebentur
esandbondsareconvert
ibl
ein theconversi
onpr i
ceispredeter
mined.
t
oequit
y,t
heyaresomenti
onedspeci
fical
ly
. I
ft heissuercompany '
sstockpriceishi
ghert
han
Bondsmaybei ssuedwit
hdifferi
ngstr
ucturesin theprefixedconversi
onprice,t
heinvest
orswoul
d
ordert
oenhancet hemarket
abili
tyoft
he prefertoconvertthedebtintoequit
y.
i
nstrument
sasal sotor
educet hecostofissue. Thebenefitt
othecompanyi
sthatther
eisnodebt
Thevariat
ionsi
ncludeput
/cal
lorconvert
ibi
li
ty repaymentandatt
hesametimeitsequit
ybasei
s
opti
ons,zerocouponbonds,f
loat
ingrat
ebonds, strengt
hened.
deepdiscountbondsandinst
rumentswithstepup Thecoupononconvert
iblebondisgeneral
l
ylower
coupons.
thanthecoupononnon-conver
ti
blebondofsimi
lar
Bondswhicharenotsecuredbymor t
gages,but credi
tstandi
ng.
secur
edbystocksorothercoll
ater
al,ar
ealso Incasethebondisconv
ert
edi nt
oequi
ty,
theequity
ref
err
edtoascoll
ateral
isedobl
igati
ons. holdi
ngsoftheexi
sti
ngsharehol
der
sgetdil
uted.
Fi
nally,t
herearealsobondswit
hput/callopti
on
andst epupcoupons,withthei
ncent
iveofhigher
i
nt er
estfornon-
redemptionoft
hebondsi nearl
y
stages.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Equi
ti
es: Theder i
vativeproductsavai
lableinthemar ket
,vi
z.
Banksarepermitt
edt oinvesti
nequit
ies(
shar
esof i
ndexf utures,i
ndexopt i
ons,stockfuturesand
l
ist
edcompani es)subjecttoali
mitoncapi
tal stockopt i
onshav esincebecomehi ghlypopularf
or
ri
skmanagementaswel lasf orspeculati
on.
marketexposure,setbyRBI.
Majori
nvestorsindomest i
cmarketi
ncludefor
eign
Equit
iesaretr
adedonst ockexchangeandthe
i
nsti
tut
ionalinvest
ors,mutualf
unds,
insurance
stockpri
cesareinfl
uencedbyf undamental
s
(f
inanci
alposi
tion)ofthecompanyasal sovari
ous companiesandpr i
vatefundmanagers.
macro-economicfactors. Banktreasuri
eshav enotbeenleadinginvestor
sin
stockmarkets,asthestockpricesarehighly
Inv i
ewoft her
isksinv
olvedi
nequityt
radi
ng,bank
treasuri
esaregeneral
lycaut
iousi
ninvest
ing volat
il
e,bankspref
erlowr i
skinv est
mentsandar e
alsoboundbyt heprudenti
alceil
inggiv
enbyRBIon
surplusfundsi
nt hestockmarket
.
capit
almarketexposures.
However,wemustment ionthatI
ndianstock
marketisoneoftheoldesti
nAsiaandt he
i
nsti
tuti
onalst
ructur
eiswelldevel
oped,withSEBI
ast
heRegul at
or.
BombaySt ockExchangeandNat i
onalStock
Exchangearethetwol eadi
ngstockexchanges,
wherethetradi
ngisdoneonanel ectr
onicplat
for
m
(al
socall
edscreen-basedtradi
ng).
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - C
Chapter 21: International Equity and Debt Products
(PART-I)
What we will study?
*What is FDI?
*What is FPI?
Join CAIIB WITH ASHOK on YouTube & App
Foreign Direct Investments (FDI):
As the name suggests, it refers to investing directly in another
country. A foreign company based in another country invests
in India by setting up a wholly-owned subsidiary or getting
into a joint venture with some company occupied in India and
then operates its business in India.
There are two routes in FDI:
Automatic route:
This route allows FDI without prior approval by India’s
Government or Reserve bank (RBI).
Government route:
Prior approval by the government is needed across this route.
The application needs to be made through the Foreign
Investment Facilitation Portal, facilitating the single-window
consent of the FDI application under the approval route.
Foreign Portfolio Investments (FPI):
It is akin to FDI. It is also a direct investment but investments
in only financial assets such as bonds, stocks,shares etc., on a
company located in another country.
Join CAIIB WITH ASHOK on YouTube & App
FEW TERMS:
Capital Instruments means equity shares, debentures,
preference shares and share warrants issued by an Indian
company.
Post issue paid up capital refers to the paid-up share capital of
the Company after issuance of shares being discussed. For
example, if the paid up share capital of a company is INR
100,000, and Mr. X invests an amount of INR 30,000 and gets
3000 shares of INR 10 each, then the post issue paid up share
capital after Mr. X’s investment shall be INR 1,30,000.
Fully diluted basis means the total number of common shares
of a company that will be outstanding and available to trade
on the open market after all possible sources of conversion,
such as convertible bonds and employee stock options, are
exercised.
Foreign Direct Investments (FDI) & Foreign Portfolio
Investments (FPI):
In a developing country like India, the total capital
requirements cannot be met with internal sources alone, so
foreign investments become important in supplying capital.
The two most regular foreign investments are FDI and FPI.
Join CAIIB WITH ASHOK on YouTube & App
Foreign Institutional Investors (FII):
It is an investor group that brings FPI’s, such institutional
investors include hedge funds, mutual funds and pension
funds.
They engage in the secondary market of the economy.
To participate in the markets, the FII needs to get registered
with SEBI.
REGULATORY ENVIRONMENT FOR FOREIGN INVESTMENT:
Foreign Investment in India is regulated in terms of Section 6
sub-section 3 clause (b) and Section 47 of the Foreign
Exchange Management Act, 1999 (FEMA) read with Foreign
Exchange Management (Transfer or Issue of a Security by a
Person resident Outside India) Regulations, 2017.
Foreign Direct Investment (FDI) is the investment through
capital instruments by a person resident outside India.
(a) in an unlisted Indian company; or
(b) in 10% or more of the post issue paid-up equity capital on
a fully diluted basis of a listed Indian company.
 Join CAIIB WITH ASHOK on YouTube & App
Note: If an existing investment by a person resident outside
India in capital instruments of a listed Indian company falls to
a level below 10% of the post issue paid-up equity capital on a
fully diluted basis, the investment will continue to be treated
as FDI.
Join CAIIB WITH ASHOK on YouTube & App
Note: Any Foreign Institutional Investor (FII) or a sub account
registered under the SEBI (Foreign Institutional Investors)
Regulations, 1995 and holding a valid certificate of
registration from SEBI shall be deemed to be a FPI till the
expiry of the block of three years from the enactment of the
Securities Exchange Board of India (FPI) Regulations, 2014.

Foreign Portfolio Investment (FPI) is any investment made by

a person resident outside India in capital instruments where
such investment is
(a) less than 10% of the post issue paid-up equity capital on a
fully diluted basis of a listed Indian company or
(b) less than 10% of the paid-up value of each series of capital
instruments of a listed Indian company.
Explanation: The 10% limit for foreign portfolio investors shall
be applicable to each foreign portfolio investor or an investor
group as referred in SEBI Regulations, 2014.
Foreign Portfolio Investor (FPI) is a person registered in
accordance with the provisions of Securities Exchange Board
of India (Foreign Portfolio Investors) Regulations, 2014.
Foreign Investment is any investment made by a person
resident outside India on a repatriable basis in capital
instruments of an Indian company or to the capital of an
Limited Liability Partnership (LLP).
Prohibited Sectors/Persons:
Investment by a person resident outside India is prohibited in
the following sectors:
1. Lottery Business including Government/ private lottery,
online lotteries.
2. Gambling and betting including casinos.
3. Chit funds.
4. Nidhi company.
5. Trading in Transferable Development Rights (TDRs).

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
6. Real Estate Business or Construction of Farm Houses. BFM MODULE - C
7. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, Chapter 21: International Equity and Debt Products
of tobacco or of tobacco substitutes. The prohibition is on (PART-II)
manufacturing of the products mentioned and foreign
investment in other activities relating to these products. What we will study?

8. Activities/sectors not open to private sector investment viz., *All about GDR?

(i) Atomic energy and *All about IDR?

(ii) Railway operations

9. Foreign technology collaboration in any form including
licensing for franchise, trademark, brand name, management
contract is also prohibited for Lottery Business and Gambling
and Betting activities.
Any investment by a person who is a citizen of Bangladesh or
Pakistan or is an entity incorporated in Bangladesh or Pakistan
requires prior Government approval.
A person who is a citizen of Pakistan or an entity incorporated
in Pakistan can, only with the prior Government approval,
invest in sectors/ activities other than defence, space, atomic
energy and sectors/activities prohibited for foreign
investment.
 Join CAIIB WITH ASHOK on YouTube & App
GLOBAL DEPOSITORY RECEIPTS (GDRs):
GDRs represent Receipts that entitle the holder to convert
into specified number of equity shares of Indian Company.
The Receipts are issued by a Depository abroad and are traded
in overseas markets. GDR are negotiable Receipts.
The underlying shares, issued by the Indian Company, are held
by an Indian Custodian on behalf of the Overseas Depository.
GDR are denominated in foreign currency.The exchange risk
on the GDR is borne by the overseas investor.
Join CAIIB WITH ASHOK on YouTube & App
Reissuance of ADR/GDR would be permitted to the extent of
ADRs/GDRs that have been redeemed into underlying shares
and sold in the domestic market.
As such, the total outstanding shares under the GDR issuance
remains at same level of original issue for which approval
would have been obtained from Ministry of Finance.
American Depository Receipts (ADRs) few points:
American Depository Receipts (ADRs) are traded only in US
while GDRs are traded in other overseas markets too.
Soliciting investors for ADRs can be done only from US and the
disclosure standards of the document must comply with US
GAAP accounting standards.
GAAP: Generally Accepted Accounting Principles.
INDIAN DEPOSITORY RECEIPTS (IDRs):
Issue of IDRs:
Companies incorporated outside India may issue IDRs through
a Domestic Depository, to a person resident in India and a
person resident outside India.
Join CAIIB WITH ASHOK on YouTube & App
The equivalent number of equity shares is fixed as per pricing
norms of SEBI.
On issuance of GDR, the equity of the issuing company
increases. Therefore, its Debt Equity Ratio is not adversely
affected.
The debt-to-equity ratio (D/E ratio) shows how much debt a
company has compared to its assets. It is found by dividing a
company's total debt by total shareholder equity. A higher
D/E ratio means the company may have a harder time
covering its liabilities.
Dividend is paid out in Rupees to the Depository.
The Depository is entitled to voting rights as it holds the
equity shares on behalf of the GDR holders.
Two-Way Fungibility Scheme:
Two-way fungibility means investors can freely convert ADRs
(American Depository Receipts) /GDRs (Global Depository
Receipts) into underlying domestic shares and vice versa.
A limited two-way fungibility scheme is in operation by
Government of India for ADRs / GDRs.
Under this, a SEBI registered Stock Broker can purchase the
shares from the market for conversion into ADRs/ GDRs.
Join CAIIB WITH ASHOK on YouTube & App
The issue of IDRs should comply with the Companies
(Registration of Foreign Companies) Rules, 2014 and the
Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009.
Any issue of IDRs by financial/banking companies having
presence in India, either through a branch or subsidiary, shall
require prior approval of the sectoral regulator.
IDRs shall be denominated in Indian Rupees only.
The proceeds of the issue of IDRs shall be immediately
repatriated outside India by the companies issuing such IDRs.
Purchase/Sale of IDRs:
An FPI or an NRI or an OCI may purchase, hold or sell IDRs.
NRIs or OCIs may invest in the IDRs out of funds held in their
NRE/ FCNR(B) account, maintained in accordance with the
Foreign Exchange Management (Deposit) Regulations, 2016.
There would be an overall cap of USD 5 billion for raising of
capital by issuance of IDRs by eligible foreign companies in
Indian markets.
This limit would be monitored by SEBI.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Transfer, Redemption and Two-Way Fungibility of IDRs: BFM MODULE - C
Redemption/conversion of IDRs into underlying equity shares Chapter 21: International Equity and Debt Products
of the issuing company shall comply with the Foreign (PART-III)
Exchange Management (Transfer or Issue of any Foreign
Security) Regulations, 2004. What we will study?

IDRs shall not be redeemable into underlying equity shares *All about ECB?
before the expiry of one year from the date of issue.
Limited two-way fungibility of IDRs is permissible.
(a) Listed Indian companies may either sell or continue to hold
the underlying shares subject to compliance with the Foreign
Exchange Management (Transfer or Issue of any Foreign
Security) Regulations, 2004.
(b) Indian Mutual Funds, registered with SEBI may either sell
or continue to hold the underlying shares subject to
compliance with the Foreign Exchange Management (Transfer
or Issue of any Foreign Security) Regulations, 2004.
(c) Other persons resident in India including resident
individuals are allowed to hold the underlying shares only for
the purpose of sale within a period of 30 days from the date
of conversion of the IDRs into underlying shares.
The FEMA provisions shall not apply to the holding of the
underlying shares, on redemption of IDRs by the FPIs.

Join CAIIB WITH ASHOK on YouTube & App
EXTERNAL COMMERCIAL BORROWINGS:
External Commercial Borrowings are commercial loans raised
by eligible resident entities from recognized non-resident
entities and should conform to parameters such as minimum
maturity, permitted and non-permitted end-uses, maximum
all-in-cost ceiling, etc.
The comprehensive guidelines are given below:
Description ECB in Foreign currency (FCY)
Currency Any freely convertible foreign currency
Instrument Loans including bank loans; floating/ fixed
Type rate notes/ bonds/ debentures (other than
fully and compulsorily convertible
instruments); Trade credits beyond 3 years;
FCCBs; FCEBs.
FCCB: Foreign Currency Convertible Bonds
FCEB: Foreign Currency Exchangeable Bonds.
ECB in Indian Rupee
(INR)
Indian rupee
Loans including bank loans;
floating/ fixed rate
notes/bonds/ debentures/
preference shares (other than
fully and compulsorily
convertible instruments);
Trade credits beyond 3 years;
and Financial Lease.
Also, plain vanilla Rupee
denominated bonds issued
overseas, which can be either
placed privately or listed on
exchanges as per host country
regulations
Join CAIIB WITH ASHOK on YouTube & App
Eligible a) All entities eligible to receive FDI. a) All entities eligible to raise
Borrower FCY ECB and
Further following entities are also eligible to
raise ECB: b) Registered entities engaged
in micro-finance activities, viz.,
i. Port Trust
Registered Not for Profit
ii. Units in SEZ companies, Registered
Societies/ Trusts/ cooperatives
iii. SIDBI
and Non-Government
iv. EXIM Bank of India Organizations.
Recognised The lender should be resident of FATF or IOSCO compliant country. However,
lenders
a) Multilateral and Regional Financial Institutions where India is a member
country will also be considered as recognized lenders;
b) Individuals as lenders can only be permitted if they are foreign equity
holders or for subscription to bonds/debentures listed abroad; and
c) Foreign branches / subsidiaries of Indian banks are permitted as recognised
lenders only for FCY ECB (except FCCBs and FCEBs).
Foreign branches / subsidiaries of Indian banks, subject to applicable
prudential norms, can participate as arrangers/underwriters/ market
makers/traders for Rupee denominated Bonds issued overseas.
However, underwriting by foreign branches/subsidiaries of Indian banks for
issuances by Indian banks will not be allowed.
Minimum MAMP for ECB will be 3 years.
Average
Call and put options, if any, shall not be exercisable prior to completion of
Maturity
minimum average maturity.
Period
(MAMP) However, for the specific categories mentioned below, the MAMP will be as
prescribed therein:
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Sr.No. Category MAMP All-in-Cost For existing ECBs linked to LIBOR whose Benchmark Rate + 450 basis
ceiling per benchmarks are changed to ARR: Benchmark points
(a) ECB raised by manufacturing companies up to USD 1 year
annum Rate plus 550 bps spread.
50 million or its equivalent per financial year.
For new ECBs: Benchmark rate plus 500 bps
(b) ECB raised from foreign equity holder for working 5 years spread
capital purposes, general corporate purposes or
All-in-cost ceiling has been temporarily
for repayment of rupee loans.
increased by 100 bps for ECBs raised till
(c) ECB raised for 10 years December 31, 2022.

(i) working capital purposes or general corporate The enhanced all-in-cost ceiling shall be
purposes available only to eligible borrowers of
investment grade rating from Indian Credit
(ii) on-lending by NBFCs for working capital
Rating Agencies (CRAs). Other eligible
purposes or general corporate purposes
borrowers may raise ECB within the existing
(d) ECB raised for 7 years all-in-cost ceiling as hitherto.

(i) repayment of Rupee loans availed domestically
for capital expenditure
(ii) on-lending by NBFCs for the same purpose
(e) ECB raised for
(i) repayment of Rupee loans availed domestically
for purposes other than capital expenditure
(ii) on-lending by NBFCs for the same purpose
For the categories mentioned at (b) to (e)-
(i) ECB cannot be raised from foreign branches / subsidiaries of Indian
banks
Other Costs Prepayment charge/ Penal interest, if any, for default or breach of covenants,
should not be more than 2% over and above contracted rate of interest on the
outstanding principal amount and will be outside the all-in-cost ceiling.
Negative List The negative list, for which the ECB proceeds cannot be utilised, would include
10 years
for end use the following:
a) Real estate activities.
b) Investment in capital market.
c) Equity investment.
d) Working capital purposes, except from foreign equity holder.
e) General corporate purposes except from foreign equity holder.

(ii) the prescribed MAMP will have to be strictly complied with under all f) Repayment of Rupee loans, except from foreign equity holder.
circumstances.
g) On-lending to entities for the above activities.

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Exchange Rate Change of currency of FCY ECB into INR ECB can be done For conversion to b. Tenor and rollover:
at the exchange rate prevailing on the date of the Rupee, the
A minimum tenor of one year for the financial hedge
agreement for such change between the parties exchange rate shall
would be required with periodic rollover, duly ensuring
concerned or at an exchange rate, which is less than the be the rate
that the exposure on account of ECB is not unhedged at
rate prevailing on the date of the agreement, if prevailing on the
any point during the currency of the ECB.
consented to by the ECB lender. date of settlement.

Hedging The entities raising ECB are required to follow the Overseas investors
Provisions guidelines for hedging issued, if any, by the concerned are eligible to Change of Change of currency of ECB from one freely convertible Change of currency
sectoral or prudential regulator in respect of foreign hedge their Currency of foreign currency to any other freely convertible foreign from INR to any
currency exposure. exposure in Rupee Borrowing currency as well as to INR is freely permitted. freely convertible
through permitted foreign currency is
Infrastructure space companies shall have a Board
derivative products not permitted.
approved risk management policy.
with AD Category I
Further, such companies are required to mandatorily banks in India.
hedge 70% of their ECB exposure in case the average
The investors can
maturity of the ECB is less than 5 years.
also access the Limit and leverage:
The designated AD Category-I bank shall verify that 70% domestic market
hedging requirement is complied with and report the through branches Under the aforesaid framework, all eligible borrowers can raise ECB
position to RBI through Form ECB 2. of Indian banks up to USD 750 million or equivalent per financial year under the
abroad or branches automatic route.
The following operational aspects with respect to
of foreign banks.
hedging should be ensured: Further, in case of FCY denominated ECB raised from direct foreign
a. Coverage: equity holder, ECB liability-equity ratio for ECB raised under the
automatic route cannot exceed 7:1. However, this ratio will not be
The ECB borrower will be required to cover the principal
applicable if the outstanding amount of all ECB, including the
as well as the coupon through financial hedges.
proposed one, is up to USD 5 million or its equivalent.
The financial hedge for all exposures on account of ECB
should start from the time of each such exposure (i.e. Further, the borrowing entities will also be by the guidelines on debt
the day the liability is created in the books of the equity ratio, issued, if any, by governed the sectoral or prudential
borrower). regulator concerned.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
The automatic route limit stands increased from USD 750 million or BFM MODULE - C
equivalent to USD 1.5 billion or equivalent.
Chapter 21: International Equity and Debt Products
This relaxation is available for ECBs to be raised till December 31,
2022. (PART-IV)
What we will study?
Issuance of Guarantee, etc. by Indian banks and Financial Institutions: * All about TRADE CREDITS?
Issuance of any type guarantee by Indian banks, All India Financial
Institutions and NBFCs relating to ECB is not permitted.

Further, financial intermediaries (viz., Indian banks, All India Financial

Institutions, or NBFCs) shall not invest in FCCBs/ FCEBs in any manner
whatsoever.

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Supplier's Credit: Depending on the source of finance, such TCs include
suppliers' credit and buyers' credit from recognized lenders.
TC for imports into India can be raised in
➢ Any freely convertible foreign currency
(FCY denominated TC). or
➢ Indian Rupee (INR denominated TC)
As per the framework given below:
Buyer's Credit:

Forms of TC:
Buyers’ credit and suppliers’ credit.
Eligible borrower:
Person resident in India acting as an importer.

TRADE CREDITS: Amount under Automatic Route:

Trade Credits (TC) refer to the credits extended by the
overseas supplier, bank, financial institution and other
permitted recognized lenders for maturity (as prescribed in
this framework) for imports of capital/non-capital goods
permissible under the Foreign Trade Policy of the Government
of India.
➢ Maximum Amount Per Import Transaction:
• $50 Million
• $150 Million for oil/gas refining & marketing, airline and
shipping companies
➢ Above $50 Million, RBI Approval required.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Recognized lenders: ii Exchange rate Change of currency of FCY TC For conversion to
into INR TC can be at the Rupee, exchange rate
1. For suppliers' credit: Supplier of goods located outside India. exchange rate prevailing on shall be the rate
the date of the agreement prevailing on the date
2. For buyers' credit: Banks, financial institutions, foreign between the parties of settlement.
equity holder(s) located outside India and financial concerned for such change or
institutions in IFSCs located in India. at an exchange rate, which is
less than the rate prevailing
Further, foreign branches of Indian banks are permitted as on the date of agreement, if
consented to by the TC lender.
recognized lenders only for FCY TC.
iii Hedging The entities raising TC are The overseas investors
Period of TC: provision required to follow the are eligible to hedge
guidelines for hedging in their exposure in
Maximum Period from the date of shipment:
respect of foreign currency Rupee through
➢ For non capital Goods : Up to 1 year or operating cycle exposure. permitted derivative
products with AD
which ever is less. Such entities shall have a
Category I banks in
board approved risk
➢ For Capital Goods: Up to 3 years. India.
management policy

➢ For shipyards / shipbuilders: for import of non-capital iv Change of Change of currency of TC from Change of currency
currency of one freely convertible foreign from INR to any freely
goods : Up to 3 years.
Borrowing currency to any other freely convertible foreign
Sr. Parameters FCY denominated TC INR denominated TC convertible foreign currency currency is not
as well as to INR is freely permitted.
i All-in-cost For new TCs: Benchmark rate Benchmark rate + 250
permitted.
ceiling per + 300 bps spread. bps spread.
annum
For existing TCs linked to
LIBOR whose benchmarks are
changed to ARR.

Benchmark Rate + 350 bps

spread.

Join CAIIB WITH ASHOK on YouTube & App

Join CAIIB WITH ASHOK on YouTube & App BFM MODULE – C
RUPEE DENOMINATED BONDS: Chapter 22: FUNDING AND REGULATORY
RBI, vide circular dated November 3, 2016, permitted banks to ASPECTS (PART-I)
issue Rupee Denominated Bonds overseas for the following What we will study?
purposes.
*What is CRR & SLR?
• Perpetual Debt Instruments (PDI) qualifying for inclusion
as Additional Tier I capital under the Basel III Capital *What is role of treasury in managing the CRR &
Regulations. SLR?
• Debt capital instruments qualifying for inclusion as Tier II RESERVE ASSETS: CRR AND SLR:
capital under the Basel III Capital Regulations.
Money multiplier effect:
• Financing of infrastructure and affordable housing.
The Reserve Bank of India is the Note Issuing
Authority, that is, the currency in circulation is
The "eligible amount" for purpose of issue of PDIs in foreign
Directly controlled by RBI.
currency shall be, as on March 31 of the previous financial
year, the higher of: However, the currency is only cash component of
(a) 1.5% of Risk Weighted Assets (RWAs) and Money in circulation, and in that, it is only a small
(b) Total Additional Tier 1 Capital. Part of the total money.
The cash deposited in banks in turn is lent by the
Not more than 49% of the "eligible amount" can be issued in banks, which increases supply of money.
foreign currency and/or in rupee denominated bonds
overseas.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
I
fpartofthemoney ,sobor
rowed,i
shel
dina ThesourcesofM3i ncl
udecredi
tavai
ledbyt
he
deposi
taccountwiththebank,
thechai
nof publi
candthegovernmentandnetforei
gncur
rency
rel
endi
ngandcr eat
ingnewdeposit
swil
lcont
inue. assetsofRBIandthebanki
ngsystem.
Iti
snotonlycash,
butnearcashinst
rumentsl
ike Thecashcomponent(
orM1)for2016–17wasj
ust
chequesandcredi
tcardsal
soaddt othemoney around21%oft
hemoneysupplyasindi
cat
edby
suppl
y( e.
g.moneyspentoncredi
tcardis M3.
deposit
edwithabank,addi
ngfurt
hermoney). MoneyMul
ti
pli
er:
Cr
eati
onofmoneyint hi
sfashi
oni
scal
ledt
he MoneyMul
ti
pli
er=M3/
M1
moneymult
ipl
ieref
fect.
Duri
ngtheperi
od2006–07to2016-
17,
themoney
multi
pli
er(
whichisM3divi
dedbyM1)movedwi
thi
n
Br
oadMoney(
M3)
: arangeof3.4to4.8t
imes.
Themoneyi ncir
culati
onisindicatedby‘Broad Mult
ipl
ieref
fectr
educest
hei
mpor
tanceof
Money '
orM3, whichincl
udescur rencyin cur
rencyinci
rcul
ati
on.
ci
rculat
ion,
demandandt i
medeposi tswit
hbanks Ai
m ofMonet
aryPol
icy
:
andpostoffi
cesav i
ngdeposits.(M1i scal
led
NarrowMoneyorcashcomponentof) Themonet arypolicyofRBIisaimedatcontr
oll
ing
therat
eofi nfl
ati
on( pr
iceri
se)andensuri
ng
M1=CURRENCYWI
THPUBLI
C+DEMAND stabi
li
tyoffinanci
almar ket
s(incl
udi
ngforei
gn
DEPOSI
TEWITHBANK+OTHERDEPOSI
TEWI
TH exchangemar kets).
RBI
Inor
dertoachiev
et hetwi
nobj
ect
ives,
RBImust
M3=M1+TI
MEDEPOSI
TEWI
THBANK exer
cisef
ullcont
rolovert
hemoneysuppl
y(M3)
.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Reser
veMoney
: Howev er
,anamendmenttotheActi
n2006
Reserv
emoneyisthemoneyi mpoundedbyRBIby removedthefl
oorandcei
li
ngli
mitswefApri
l2007,
meansofcashreser
verat
io(CRR)whichis enabl
ingRBItost
ipul
atet
heCRRatitsdiscr
eti
on.
i
ntendedt
oreducethemulti
pli
ereff
ect. Now
Reser
veAsset
s: CRRMi
nimum :NoLi
mit
Reserveassetsrefertothecashdepositedby CRRMaxi
mum :NoLi
mit
scheduledcommer ci
albankswithRBItocompl y Mi
nandMaxSLR:
withCashReserv eRat i
o(CRR)requi
rement,and
fundsinvest
edingov ernmentsecuri
tiesandother SLRisdef
inedunderBanki
ngRegul
ati
onActof
approvedsecuri
tiestocompl ywit
htheSt at
utor
y 1949.
Liqui
dit
yRatio(SLR)r equi
rement. Mini
mum SLR=25%ofdemandandt
imel
iabi
li
ti
es
Ther eser
veassetsenabl
eRBItocontr
olt
he (
DTL)oft
hebank.
l
iquidit
yinthesyst
em, t
hought
heyalsoser
veother Maxi
mum SLR=40%ofDTLoft
hebank.
purposeslikepr
ovidi
ngacushi
ontothebanks.
Anamendmentt otheActhasr
emovedthe
Mi
nandMaxCRR: mini
mum requir
ementwefJanuar
y2007,al
lowi
ng
CRRisdef
inedunderReser
veBankofI
ndi
aActof gr
eaterf
lexi
bil
it
ytoRBI.
1934. Now
Mini
mum CRR=3%ofdemandandt
imel
iabi
li
ti
es SLRMi
nimum :NoLi
mit
(
DTL)oft
hebank.
SLRMaxi
mum :40%
Maxi
mum CRR=20%ofDTLoft
hebank.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
RBIasaLenderofLastResor
t: RBIneedstocalibr
atethemov ementofi
nter
est
Hypotheti
cal
ly
,theCRRandSLRprescr
ipt
ionsar
e ratesandexchangeratesandadoptapoli
cy
i
ntendedtoprovideacushi
ont
othebank'
s stance,
consi
stentwit
ht hepr
oject
edgrowthrat
eof
theeconomy .
operat
ions.
RBII
nst
rumentt
ocont
rolMoneySuppl
y:
Asal enderofl
astresort,t
heRBIwouldcomet o
therescueofabank, i
fitisindi
str
essonaccount TheCRRandSLRarethetwomosti
mportant
ofshortageofli
quidi
ty,i
.e.ifi
tdoesnothave i
nstr
umentsi
nthehandsofRBIt
odi
rect
lycontr
ol
enoughcasht orepaythedepositobl
igat
ions. moneysuppl
y.
However,i
tisonlyanextremecasewheretheRBI Ef
fectofI
ncr
easeordecr
easeofCRRandSLR:
hastostepin,
ast hebankswhicharenotsol
vent Anincreasei
nCRRandSLRr equi
rement(t
oget
her
ei
thergoint
oliquidat
ionorar
et akenov
erbya ref
erredtoasreser
verati
os)wouldimpl
y
heal
thi
erbank. i
mpoundi ngofcashresour
ces,orabsor
pti
onof
l
iquidi
tybyRBI.
Excessorshor
tageofLi
qui
dit
y: AdecreaseinCRRandSLRr equi
rement
swould
Li
quidi
tyr
efer
stosurplusfundsavail
ablewi
th amounttoreleaseofpartofthei
mpoundedf
unds,
banks,
whichi
sanindicatorofmoneysupplythat or
,inf
usionofliqui
dit
y.
hasnotbeenabsor
bedbyt herealeconomy.
Anexcessofli
quidit
ymayleadtoinfl
ati
on,whil
ea Tr
easur
y’sr
oleandr
esponsi
bil
it
yforCRRandSLR:
short
ageofl
iquidit
ymayresulti
nhighint
erest Treasur
y'spri
maryresponsi
bil
it
yistomeett
heCRR
rat
esanddepreciati
onofRupeeexchangerate. andSLRr equi
rementsofthebankfull
y.

Join CAIIB WITH ASHOK on YouTube & App

Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE - C

Tr
easuryback-of
fi
ceshouldr eporttherelev
ant CHAPTER 22: FUNDING AND REGULATORY

i
nformati
ontoRBIinthefortnightl
yr et
urn(For
m A)
, ASPECTS (PART-II)
whichneedstobesubmi t
tedst r
ictl
ywi t
hinthe
pr
escri
bedtimeschedule. What we will study?
Anydefaul
torshort
fal
linmeet ingt
herequirements
wouldnotonl
yattr
actseriouspenalt
iesfrom the
RBI,
butwouldalsoref
lectont hevi
abil
it
yoft he *What are the components of NDTL?
bankanddamagei t
sreput at
ion.
NDTL : Net Demand Time Liability

Cur
rentCRRandSLR:
Curr
ently
,theCRRis3%ofNDTLandSLRi s18%of
NDTLofbanks, cal
cul
atedasofthel
astFr
idayof
thesecondprecedi
ngfort
night
.
(
itkeepchangi
ngsopl
easecheckRBIwebsi
tef
or
l
atestr
ates)
 Join CAIIB WITH ASHOK on YouTube & App
Main components of DTL are:
*Demand deposits (held in current and savings accounts,
margin money for LCs, overdue fixed deposits etc.).
*Time deposits (in fixed deposits, recurring deposits,
reinvestment deposits etc.).
*Overseas borrowings.
*Foreign outward remittances in transit (FC liabilities
net of FC assets).
*Other demand and time liabilities (accrued interest,
credit balances in suspense account etc.).
Scheduled Commercial Banks are exempted from
maintaining CRR on the following liabilities:
*Liabilities to the banking system in India as computed
under clause (d) of Section 42(1) of the RBI Act, 1934.
[CRR]
Join CAIIB WITH ASHOK on YouTube & App
The following liabilities are NOT to be included for NDTL
stipulation (or CRR or SLR stipulation):
*Paid-up capital, reserves, retained profits, refinance
availed from RBI, and apex financial institutions like
NABARD and SIDBI.
*Net income tax provision.
*Claims received from DICGC, ECGC, Insurance
Company ,Court Receiver etc.
*Liabilities arising on account of utilization of limits
under Bankers' Acceptance Facility (BAF).
*District Rural Development Agency (DRDA) subsidy
kept in Subsidy Reserve Fund account in the name of
Self-Help Groups.
*Subsidy released by NABARD under Investment
Subsidy Scheme for Construction/Renovation/
Expansion of Rural Godowns.
Join CAIIB WITH ASHOK on YouTube & App
*Credit balances in ACU (US$) Accounts. [CRR]
ACU: Asian Clearing Union
*Demand and Time Liabilities in respect of their
Offshore Banking Units (OBUs). [CRR]
*Minimum of Eligible Credit (EC) and outstanding long-
term Bonds (LB) to finance Infrastructure Loans and
affordable housing loans. [CRR & SLR]
*Liabilities in respect of the bank’s International
Financial Services Centre (IFSC) Banking Units (IBUs).
[CRR & SLR]
*Funds Borrowed under market repo against
Government securities. [CRR & SLR]
Join CAIIB WITH ASHOK on YouTube & App
*Net unrealized gain/loss arising from derivatives
transaction under trading portfolio.
*Income flows received in advance such as annual fees
and other charges which are not refundable.
*Subsidy released by Central/ State Government which
is kept in zero per cent fixed deposit account.
*Bill rediscounted by a bank with eligible financial
institutions as approved by RBI.
What is Bankers' Acceptance Facility (BAF)?
Banker's acceptance Facility (BAF) is a negotiable piece
of paper that functions like a post-dated check. A bank,
rather than an account holder, guarantees the payment.
Banker's acceptances (also known as bills of exchange)
are used by companies as a relatively safe form of
payment for large transactions.
 Join CAIIB WITH ASHOK on YouTube & App
What is a Bill Rediscounting?
A rediscount occurs when a short-term negotiable debt
instrument is discounted for a second time.
Time Line for CRR:
The CRR is to be calculated on the basis of DTL, with a
lag of one fortnight, i.e., on the reporting Friday, the
DTL as at the end of previous fortnight will form the
basis for CRR calculation.
This is to allow banks enough time to collect relevant
information from the branches.
Banks have to maintain cash balances with RBI to meet
the prescribed CRR on average during the fortnight,
subject to daily cash balances not falling below 90% of
the amount required for CRR.
This will allow some flexibility to the banks for
mobilizing cash resources.
Join CAIIB WITH ASHOK on YouTube & App
in ACU (US$) Accounts; and demand and time liabilities
in respect of their Offshore Banking Units (OBU) is not
applicable for the purpose of computation of SLR.
The SLR is to be maintained in the form of the following
assets:
*Cash balances (excluding balances maintained for CRR).
*Gold (valued at price not exceeding current market
price).
*Approved securities valued as per norms prescribed by
RBI.
Approved securities include:
*Dated securities of the Government of India issued
from time to time
*Treasury Bills of the Government of India
Join CAIIB WITH ASHOK on YouTube & App
RBI does not pay interest on deposits held by banks to
meet the CRR, even if the deposits are in excess of
minimum required by RBI.
CRR, therefore, effectively increase cost of deposits to
the banking sector.
SLR:
The SLR requirement is to be computed similarly, as of
the last Friday of the second preceding fortnight.
The procedure to compute total NDTL for the purpose
of SLR is broadly similar to the procedure followed for
CRR.
The liabilities excluded from CRR stipulation do not
form part of liabilities for the purpose of SLR also.
However, the exemption for the purpose of CRR
available to the Scheduled Commercial Banks in case of
liabilities to the banking system in India, credit balances
Join CAIIB WITH ASHOK on YouTube & App
*State Development Loans (SDLs) of the State
Governments.
*Any other instrument as may be notified by the RBI
General Guideline on CRR & SLR:
RBI may, from time to time, change the components of
DTL for calculation of CRR and SLR, as also securities
permitted under the approved category.
Any default in maintaining CRR and SLR will, apart from
attracting heavy penalties from RBI, affect reputation of
the bank, hence banks are extremely cautious in
complying with the reserve requirement.
As stated earlier, the CRR and SLR are the principal tools
available to RBI for liquidity management.
An increase in the reserve ratios will reduce money
supply (excess liquidity) and reduction in the reserve
ratios will increase the money supply.

Join CAIIB WITH ASHOK on YouTube & App
For instance, 0.5% reduction in CRR requirement
currently results in a cash inflow of approx. Rs. 50000-
55000 crore into the money market, and the additional
resources will flow into bank credit or investment in
debt/equity securities.
The money supply, in turn, influences the interest rates
and the exchange rate of Rupee.
The monetary policy of RBI is dictated by the need for
maintaining price stability (control inflation) and
stability of financial markets (control wild fluctuations
in interest rates and exchange rates).
Current CRR & SLR:
CRR : 4.50%
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C
Chapter 22: FUNDING AND REGULATORY ASPECTS
(PART-III)
What we will study?
*What is LAF?
THE LIQUIDITY ADJUSTMENT FACILITY (LAF):
The Liquidity Adjustment Facility is monetary policy
Tool of RBI to manage liquidity in market.
While CRR and SLR help changes in liquidity
Position on a more permanent basis, LAF is used to
Monitor day-to-day liquidity in the market.
LAF refers to RBI lending funds to banking sector
Through Repo instrument.
RBI also accepts deposits from banks under
Reverse Repo.

SLR : 18%

In September 2022 (keep changing so refer RBI website

for latest rate)

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Repo: backt
hesecur
it
iesaf
teraf
ixedper
iod.
Theprocessofpurchaseofgov er
nmentsecuri
ti
es, Thedif
ferenceinsal
eandpurchasepr
ices
withanagreementtosell
-back,wi
thi
na const
it
utesinter
estr
ecei
vedbyRBI.
predet
erminedper
iodiscalledRepotr
ansacti
on. Incaseofexcessl
iquidi
ty,
banksl
endfundstoRBI
Rev
erseRepo: underRever
seRepoi nsimil
armannerandr
ecei
ve
Theprocessofsaleofgovernmentsecur
it
ies,
wit
h i
nterest
.
anagreementtorepur
chase, wi
thi
na Allt
hesecuri
ti
esareheldi nt
heSGLaccount
predet
erminedperi
odiscall
edReverseRepo (Subsi
diar
yGeneralLedger)ofthebankwit
hRBI
,
tr
ansacti
on. hencenophysicalt
ransferofsecur
it
iest
akespl
ace
eit
herway.

Whilebankscanengagei nrepotr
ansact
ionswit
h RBIconduct
sRepo/
rev
erseRepoauct
ionsdai
lyf
or
over
nightf
unds.
otherbanks/i
nsti
tut
ions,LAFref
ersexcl
usiv
elyt
o
repotransact
ionswithRBI. RBImayconductRepoauct
ionst
wiceort
hri
cea
Bidshavetobesubmi
tt
edf oramini
mum amount day.
ofRs.5croreandi
nmulti
plesofRs.5cr
ore
ther
eaft
er. Inordert ohelpbanks,towadethr
ought
hel
iqui
dit
y
constraints,RBIhastakent
hefoll
owi
ngmeasur
es
RBI,aslenderofl
astresort
,prov
idesl
iqui
ditytothe onFebr uar y
,3,2015:
banksthroughRepoauct i
on,whereRBIpurchases
securi
ti
esf r
om bankswithanagreementtosell
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
1-RBIconti
nuestopr ov
idel
iqui
dit
yunderover
night i
nt er
estbankscanear nonexcessfunds,andthe
repos(fi
xedraterepo)of0.
25%ofbank-wiseNDTL Repor at
ewoul dl
aytheuppersi
deofthecorridor
attheLAFr eporate. (4%asonMar ch12,2017asthemaximum rateof
i
nt er
estatwhi chbankscanborr
owov erni
ghtfunds
2-
Var
iabl
eRat
eRepo(
Ter
m Repo)
:
from RBI.(whenfundsarenotavai
labl
eininter-
RBIint
roducedanewwi
ndowcal
ledVar
iabl
eRat
e bankmar ket
).
Repo.
1-
Cal
lMoney
:
Underthi
swi
ndowli
qui
ditywoul
dbepr
ovi
dedf
or7
days,
14daysand28days. Lendi
ngandbor
rowi
ngf
or1day
.

Thi
sisal
socal
ledasTer
m Repo. 2-
Not
iceMoney
:

Thel
imi
tfi
xedbyRBI,
isundert
hiswindow,
is Lendi
ngandbor
rowi
ngf
or2day
sto14day
s.
0.
75%ofNDTLofthebanki
ngsystem. 3-
Ter
m Money
:
I
nterest
edbankscanavailfundsundert
hisr
outeby Lendi
ngandbor
rowi
ngf
or15day
sto1y
ear
.
quoti
ngaratewhichshouldbeequaltoorabov
e
theRepoRate.
3-
RBIhasalsophasedoutt
heExpor
tCr
edi
t
Ref
inancef
acil
it
y. I
nor dertofurt
herconsoli
datei
tscontroloverthe
i
nter-bankmarket,wit
heffectf
rom fi
rstquart
erof
2003, RBIhasimposedceili
ngovercallmoney
TheRever
seRepor
atewoul
dlayt
hefloor(
3.35%as l
endingandbor rowingbybanks:
onMarch12,
2021)
,whi
chisthemini
mum rateof

Join CAIIB WITH ASHOK on YouTube & App

Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE – C
MaxAv
glendi
ngi
naf
ort
night
: Chapter 22: FUNDING AND REGULATORY ASPECTS
(PART-IV)
I
tcanbeupt
o25%ofcapi
talf
undoft
hel
endi
ng
bank. What we will study?

Butonanypar
ti
culardayofthefort
nightl
endi
ng *What is NEFT & RTGS?
canbemaximum 50%oft hecapit
alfundofl
endi
ng *What is INFINET & NDS?
bank. What is STP?
Straight-through Processing ("STP") is a
Mechanism that automates the end-to-end
Processing of transactions of the financial
instruments.
MaxAv
gbor
rowi
ngi
naf
ort
night
:
It involves use of a single system to processor
I
tcanbemaximum 100%ofcapi
talf
undoft
he Control all elements of the work-flow of a financial
bor
rowi
ngbank. transaction, including what is commonly known as
Butonanypar
ti
culardayoft
hefor
tnightbor
rowi
ng the Front, Middle, and Back office, and General
canbemaximum 125%ofthecapi
talfundof
Ledger.
In other words, STP can be defined as electronically
borr
owi
ngbank.
capturing and processing transaction in one pass,
Lendi
ng:25% from the point of first ‘deal’ to final settlement.
Maxi
naday
:50%
Bor
rowi
ng:100%
Maxi
naday
:125%
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
PAYMENTANDSETTLEMENTSYSTEMS: Theimpor
tantdev
elopment
sint
hisr
egar
dar
eas
Paymentandsett
lementsyst
emspl
ayav
italr
olei
n under
:
thedev
elopmentoffi
nanci
almar
ket
s. RealTi
meGr
ossSet
tl
ementSy
stem (
RTGS)
:
Theimpor
tantref
ormsrel
evantt
otr
easur
y RTGShasbeenf
ull
yact
ivat
edbyRBIf
rom Oct
ober
oper
ati
onsincl
udethef
oll
owing: 2004.
Payment
sref
ertoi
nter
-bankpay
ment
sasal
so RTGSi sapaperl
essclear
ingsystem,wher
e
pay
mentsonbehal
fofcustomer
s. sett
lementsareongrossbasis,r
athert
handay-
end
Sett
lementref
erst
opay ment/r
eceipti
nexchange netsettl
ementofchequesinacleari
nghouse.
ofsecur
it
iesorfor
eignexchange. Alli
nter
-bankpaymentsandcustomerr
emit
tances
Conv entionall
y,i
nter -
bankpay mentshavebeen (cur
rent
lyminimum Rs.2lakhs)ar
eset
tl
ed
handledbynetset tlementthroughtheclearing i
nstantl
yundertheRTGS.
house.I nt hepast,evenwhent ransferofsecuri
ti
es Almostal
ltheurbancentresofpubl
icandpri
vate
wast akingpl aceinstantl
ythroughd- mat/el
ectr
onic sect
orbanksarealreadypart
ici
pati
ngintheRTGS.
systems, paymentsneededt obecl earedin1to3 SinceRTGSinvol
vesinstantpayment
s,banksneed
days, andev enlongeri fi
tisoutst
ationpay ment, tomaintai
nadequatefundswi t
hRBIthr
oughoutthe
gi
v i
ngr iset oexpensivedelaysandcount erpar
ty day.
ri
sks.
Tomeetanyshor t
fal
linfunds,RBIhasputinpl
ace
Operati
onalcost
swer
eal
sohi
ghi
npaperbased systemstoprovideint
ra-
dayl i
quidi
tyt
hrough
(cheque)cl
eari
ng. automaticr
epo,againstsecuri
tiesl
odgedby
respect
ivebanks.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
I
ndi
anFi
nanci
alNetWor
k(I
NFI
NET)
: RBIhadi
ntroducedt
heNDSi
nFebr
uar
y2002,
in
TheI nst
ituteforDevel
opmentandResearchi
n or
dertoachieve:
BankingTechnol ogy(I
DRBT)hasdevel
opedthe a)Automat
icel
ect
roni
crepor
ti
ngandset
tl
ement
IndianFinancialNetWork(
INFI
NET)asasecur e process
communi cati
onbackbonefort
hebankingand
b)Auct
ionsonel
ect
roni
cpl
atf
orm and
financi
al sect
ors.
c)At r
adingpl
atf
ormf ort
radingi
nGov er
nment
securi
ti
esonanegotiatedbasis(
tel
ephonebased
TheINFINEThashel pedinintroducti
onof tr
ading),
aswellasquote-dr
ivenmechanism.
Str
ucturedFi nancialMessagi ngSystem (SFMS) TheNDSmember shipisopentobanks,primary
whichfacil
itatesdomest i
ctransferoffundsand
dealers,mutualfunds,financi
ali
nsti
tut
ionsand
authent
icatedmessages, si
mi l
artotheSWI FTused i
nsur ancecompani es,whomai ntai
nSGLaccount
bybanksf orinternationalmessaging. (SubsidiaryGeneralLedgera/c)wit
hRBI ,andalso
thosewhohav econst i
tuentSGLaccountst hr
ough
banks/ deposi
toryinsti
tuti
ons.

Negot
iat
edDeal
ingSy
stem (
NDS)
:
NDSisanelect
roni
cplatf
ormforf
aci
li
tat
ingdeal
ing NDS-OM (
Negoti
atedDeal
ingSy
stem-
order
matchi
ngsyst
em):
i
ngovernmentsecur
it
iesandmoneymarket
i
nst
ruments. RBIlaunchedi
nAugust2005,
NDS-OM or
anonymousordermatchi
ngsyst
em,asan
i
mpr ovementoverNDS.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Inanonymousordermatching,
theident
it
yof FXCl
ear
:
counter
-par
tyi
snotdisclosedt
il
ltheoff
ered FxCl
eari
saFor exdealingsyst
em devel
opedby
pri
ce/vol
umeisaccepted. CCI
Lforf
oreignexchanget r
ansact
ions(
USD/INR
Thesy
stem i
spurelyorderdri
ven,wi
thal
lorder
s aswel
lascrosscurrencies)
.
bei
ngmatchedst
rictl
yonpr i
ce/ti
mepri
ori
ty.
CurrentlyCCI Lisprovidingstr
aightthrough
TheNDS-OM coexi
stswi
tht
elephonebased processing( STP)f orUSD/ I
NR,andCCI Lasan
tr
adi
ngmechani
sm onNDS. i
ntermedi aryset t
lesinter-
bankUSD/ Rupeeaswell
Thesystem al
lowsst
rai
ght
-t
hroughpr
ocessi
ng ascr osscurrencydeal sonnetbasi s,sothat
(STP)andtr
adesexecut
edwillf
lowst
rai
ghtt
oCCI
L i
ndividualbanksneednotexchangepay mentsfor
forset
tl
ement. eacht ransaction.

Over80%ofdeal
ingsi
nGovtsecur
it
iesnowtake
pl
aceonNDSt hr
oughscr
eenbasedtradi
ng. Deposi
tor
yInst
it
uti
ons:
CCILisaspeci
alizedinstit
uti
onpromotedbymajor Deposi
toryi
nsti
tut
ionsli
keNSDL( Nat
ional
banksforcl
ear
ingofsecur i
ti
es,
repotr
adesand Secur
it
iesDeposit
oryLtd.
)andCSDL( Centr
al
tr
adesinCBLO( centr
alizedborr
owingandlendi
ng Secur
it
iesDeposit
oryLtd.
)prov
idedel
iveryvs.
obli
gati
on). payment(DVP)forsecondar
ymarketdealsin
Physicaldel
iv
eryofchequesandwr it
ten equi
tyanddebtpaper.
confir
mat i
onsarenolongernecessaryf
or Thesecurit
iesandfundsarecl
ear
edbyt
hei
r
sett
lement. respect
iveclear
inghouses.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Sincethefundstransf
erandsecuri
ti
estransfer
takesplacebetweenthebuyerandsell
eront he Banks,whohav eimpl
ementedcor
ebanki
ng
elect
ronicplat
for
m simul
taneousl
y,thesett
lement solut
ions(CBS),f
aci
li
tat
eanyti
me-anywher
e
ri
skiseliminat
ed.
fundstransf
er.
Int
ernalt
ransfer(
withi
nbank)offundsf r
om one
NEFTandon-
li
nePay
ment
s: accounttoanotheraccountwit
hinthebankcanbe
eff
ectedinst
antly
,ir
respect
iveofthebranch
Alli
nter-
bankandintra-bankr
emittancescannow
beeffectedonthesamedaybyel ectr
onicfunds l
ocation.
tr
ansferusingtheNationalEl
ect
ronicFunds
tr
ansfersystem i
ntr
oducedbyRBI .
Inviewofthegr owi
ngcompl exit
iesinpayment
RBIhasdev elopedStructur
edFi nancialMessagi
ng systems,theRBIhasconstitutedBoard
System (
SFMS)–si milartoSWI FTadopt edby forRegul
ationandSupervi
sionofPay mentand
banksforinternat
ionalfundstransferetc.-wher
e Settl
ementSy stemsatthehighestlevel
,asasub-
i
nterbanktransfer
sar esortedoutandcl earedby commi tt
eeofi t
sCentr
alBoar d.
Nati
onalClear i
ngCellofRBI .
Bankswhichar efull
ycomput er
izedcanaccessany Indi
atodayhassophist
icat
edpaymentand
accountatanybr anchonl i
neanddebit
/credit sett
lementsystemscomparabl
eorevensuper
iort
o
funds,i
nstant
lyforinter
-banktr
ansfer
s,without
thesyst
emspr evai
li
ngindevel
opedmarket
s.
usingpaper.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 23: TREASURY RISK MANAGEMENT
(PART-I) Concer
nforTr
easur
yRi
sks:
What we will study? TheFi
rstconcer
n:
*What is treasury risk management? Bankmanagementi shi
ghl
ysensi
tiv
etotreasur
y
ri
sk,astheri
skari
sesoutofhi
ghlever
agethe
SUPERVISION AND CONTROL OF TREASURY:
tr
easurybusi
nessenjoy
s.
Treasury Risk Management:
Treasury risk management assumes importance Theri
skoflosi
ngcapit
al(bytr
easury)i
smuch
hi
gherthan,
say,i
nthecredi
tbusiness.
For two reasons:
(a) The nature of treasury activity is such that Bank'scapaci
tytoext
endl
oansi
slimit
edbythe
resourcesati
tscommand,t
hati
s,deposi
tsand
Profits are generated out of market opportunities
otherborrowi
ngs.
And market risk is present at every step.
Incaseofaloan,t
heri
ski
slimit
edtot
hepri
ncipal
(b) Treasury is also responsible for balance sheet
andinter
est
,whichmaybelost
,ful
l
yorpar
tl
y,over
management, i.e., market risk generated by other
aperiodoft
ime.
operational departments.
We will deal with the first aspect a little more Mostofthel
oansar
eal
sosecur
edbyt
angi
ble
asset
s.
elaborately.
Ther
iskis'
capped'
byt
heamounti
nvest
edi
nthe
l
oanasset.
Pot
ent
iall
ossi
nloanasset
sisknownascr
edi
tri
sk.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Treasur
yontheot
herhand,hasaver
ylowfundi
ng Ift
heTreasurercommi
tsanerr
orofjudgment
,
requi
rement
,whi
chwecallashighl
ever
age. consequentl
ossestot
hebankwouldbeenormous.
Forinst
ance,t
reasurycanbuyandsel lf
orei
gn Athir
df act
orcl osel
yconnectedtotheabov eisthat
exchangeofvalueRs.100crorewithoutanydi
rect thel
ossesi ntreasurybusi
nessmat er
ial
izeinvery
i
nvestmentoffunds,exceptf
orall
ocat i
onofri
sk short
-ter m,andt hetr
ansacti
ons,onceconfirmed,
capit
alaspercapit
aladequacyrequir
ementofRBI. arei
rrev ocable–hencenocor r
ecti
veactionis
Atthesamet i
me,anadversemov ementofthe possi
bl e.
exchangerat
ebyRs.1mayr esul
tinalossofover Parti
cular
lyinfor
eignexchange,mar
ketsr
eactso
Rs.1croretothebank-whichisastrai
ghtl
ossof fastt
hatpr of
it
sorlossesont r
adedeal
sareal
most
capit
al. i
nstantaneous.
Asecondreasonformanagementconcer
nist
he Tradersar
egenerall
ynotall
owedtoholdopen
l
argesizeoft
ransacti
onsdoneatt
hesole posit
ionsforl
ong,asther
iskofl
ossincreaseswi
th
di
scret
ionoftheTreasur
er. ti
me.
Aswehav elear
ntearl
ier
,whetheri
tisfor
eign Thesour ceofri
skintr
easuryact
ivi
tyi
sv ar
iati
onin
exchangeormoneymar ketori
nvestmentbusiness, themar ketpr
iceofcur
rencyorsecuri
ty,
whent her
e
thevalueofasi
ngl
etransacti
onmayr angefrom Rs. i
sagapbet weenthebuylegandselll
egoft he
5croretoRs.50cror
eorev enmoreinlargerbanks. transacti
on.
Thelimit
saredelegatedtotheTreasur
erin Theri
skishencetermedasmarketri
sk,
as
advance,andindi
vidualmar
ketdealsrar
elyneed opposedtocr
editri
skofl
oanassetsofthebank.
speci
ficapprovalf
rom themanagement.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE – C
Thevar
iabi
li
tyofthepr
ice,
upwar
dordownwar
d,i
s Chapter 23: TREASURY RISK MANAGEMENT
knownasvolat
il
it
y. (PART-II)
Incaseofcurr
ency
,iti
sknownasv ol
ati
li
tyof What we will study?
exchangerat
eandincaseofbonds,i
tisvol
ati
li
tyof
*What is treasury risk management?
i
nterestr
ates
Treasury risks are primarily managed by
Assetl
iabi
li
tymanagement(
ALM)oft hebanki
s
Conventional control and supervisory measures,
al
soclosel
yconnectedt
omar ketr
isk.
Mostly in the nature of preventive steps, which may
Be divided into three parts:
Treasuryrisksarepr i
maril
ymanagedby
1-Organisational Controls
conventionalcontrolandsuperv
isor
ymeasures,
most l
yint henatureofprevent
ivest
eps,
whichmay 2-Exposure Ceiling
bedividedi nt
othreeparts: 3-Limits on trading positions and stop-loss limits
1-OrganisationalControls:
1-
Organi
sat
ionalCont
rol
s The organizational controls refer to the checks and
2-
Exposur
eCei
li
ng Balances within the system.

3-
Limi
tsont
radi
ngposi
ti
onsandst
op-
lossl
imi
ts Treasury is basically divided into three parts:
The front office, back office and the mid office.
(Check chapter 16-V video for more details)

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
I
nter
nal
Cont
rol
s: 2-
Limi
tsonopenposi
ti
ons:
Themosti
mportantoft
heint
ernalcont
rol
sar
e Openposit
ionsrefert
othetr
adi
ngpositi
ons,
wher
e
posi
ti
onl
imi
tsandstoplossl
imits. t
hebuy/sellposi
ti
onsarenotmatched.
Thelimi
tsareimposedonthedealer
swhot
radei
n TheTr easur
ymaybuyUSD1mi l
li
on,
andholdont
o
for
eignexchangeandsecur
it
ies. thepositi
onwit
hanintent
iont
osellwhent
heUSD
Tradingi
sahi ghri
skarea,vul
nerabletosudden appreciat
esagai
nstt
heRupee.
marketfl
uctuati
onsandt heli
mi t
simposedby Notonl
yt her
ei sapot enti
allossiftheUSdollar
managementar epreventi
vemeasur estoavoi
dor doesnotappreciate,
butt hereisalsoa'car
ry'cost
,
containl
ossesinadversemar ketcondi
ti
ons. astheTreasurylosesinterestont heUSDfundsor
carr
yaver yminimalinterestduri
ngt hehol
ding
Thetradi
ngl
imi
tsinthecont
extoff
orei
gn
exchangear
eofthr
eekinds: peri
od.
Tr
easur
ymayal sot
akeforwardposi
ti
onsexpect
ing
(
i)l
imi
tsondealsi
ze
ari
seorfal
lint
heexchangerate.
(
ii
)li
mit
sonopenposi
ti
onsand
Themanagement,
theref
ore,
li
mit
sthesi
zeofopen
(
ii
i)st
op-
lossl
imi
ts. orunmat
chedposit
ions.
1-
Limi
tsondealsi
ze: Thelimit
sinfor
eignexchanget
radear
edef
inedas
Limit
sondealsizeprescr
ibet
hemaxi
mum v
alue dayl
ightandover
night.
forabuy
/sel
ltransacti
on. 2-
A)TheDay
li
ghtl
imi
ts:
Theli
mitisapr
otect
ionagai
nstpot
ent
iall
osseson Per
tai
ntotheint
ra-
dayposi
ti
ons,sayi
fthedeal
er
thedeal
. pur
chasescur
rencyi
nthemorningandsel
lsiti
n
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
t
heaf
ter
noon. St
op-
lossl
imi
ts:
2-
B)Ov
erni
ghtLi
mit
s: Stop-
lossli
mitsrepr
esentthefi
nal
stageof
Theov ernightlimit
saresmal l
erwhencomparedto contr
oll
ingtr
adingoperat
ions.
theday l
ightlimitsasthedealersmayconti
nueto Whenthemarketmov esadver
sel
y,t
heopen
holdtheposi tionfornextdayandduringt
henight posi
ti
onswi
llresul
tinloss.
theforexmar ketwouldbeact i
vebutnoonewould Adealerty
pical
lywouldl
iket
owaitti
llt
hemarket
betrackingt hepositi
on. t
urnsaround,sothathecancl
osetheposi
ti
onwith
Posi
ti
onl
imi
ts: aprof
it.
Posit
ionlimi
tsar
epr escr
ibedcurr
ency-
wiseasal
so Ther
eisanaddedriski
nthatthemar ketcorr
ecti
on
foraggregat
eposit
ionexpressedinRupees. maynottakepl
aceasantici
pated,andthelosses
Forthepurposeofaggregati
on,cur
rency
-wi
senet mayconti
nuetoaccumulatei
nt hemeant i
me.
posit
ioni
sf i
rstt
ransl
atedint
oUSDatt heday-
end Thest opl
osslimit
spreventthedeal
erfr
om wait
ing
rat
eandt henconvert
edintoRupees. i
ndefinit
elyandli
mi tt
helossestoalev
elwhichi
s
Evenwhenther
earematchi
ngposi
ti
ons,t
herei
s acceptabletothemanagement( whi
chthebankis
scopef
orlossi
fthedel
iv
eryi
satdi
ffer
entpoi
ntsof i
naposi t
iontoabsorb).
ti
me. Anyviol
ati
onofst
op-l
ossl
imi
tisv
iewedser
iousl
y
Inaswapdeal,
thedeal
ermaypurchaseUSDat bythemanagement.
spotandsel
li
tfor
ward,say
,af
terthr
eemonths. Thestop-
lossli
mitsar
eprescr
ibedperdeal,perday
,
Iti
samatcheddealast
hepur
chaseandsalepri
ces permonthasalsoanaggregat
el ossli
mitper
arepr
efi
xedandhencet
her
eisnoexchangeri
sk. year
.Backoff
iceneedtomonit
oral lt
heli
mits

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
met
icul
ousl
y. i
tsenti
resurpl
usestoasi
nglebankort
oahandf
ul
2-
Exposur
eCei
li
ngLi
mit
s: ofbanksandsuchaprocedur
ewouldover
comethe
ri
skofconcentr
ati
on.
Exposurel
imitsar
ekeptinpl
acetoprot
ectt
he
bankfrom cr
editr
isk/
count
er-
par
tyri
sk. Set
tl
ementr
isk:

Cr
edi
tri
sk: Thesettl
ementr i
skr
eferstothepossiblefai
lur
eof
thecounter
partytot
het r
ansacti
on( whichi
s
Credi
tri
skinTreasur
ymaybespl
iti
ntodef
aul
tri
sk general
lyabankoraf i
nanciali
nsti
tuti
on)to
andsett
lementri
sk. deli
ver/
sett
lethei
rpartofthetr
ansaction.
Def
aul
tri
sk: Whi l
ei deall
yalldealsshouldtakeplaceinDvP
Defaultri
skistypi
cal
lywhenthebanklendsi
nthe (Deli
v eryvs.Payment )mode,itisnotalways
moneymar ket(
mainl
ytootherbanks)
,the possiblet oachievethestandard,ei
therforwantof
bor
r owingbankmayf ai
ltor
epaytheamounton i
nstitutionalmechani sm,orduetophy si
calbarr
ier
s
duedat e. (suchasdi f
fer
entt i
mezones) .
Si
mil
arr
iski
sther
einr
epot
ransact
ionsal
so. Deliv
eryofgov er
nmentsecurit
iesi
salreadyt
aki
ng
placeagai nstpayment,asthebankshavebotht
he
Eventhoughint
er-
bankmar ketisconsider
edtobe
securiti
esaccount( SGL)andfundi
ngaccountwit
h
rel
ati
vel
yriskfr
ee,i
tisnotuncommont hataweak
RBI,sot hatdebitandcredi
tcantakeplace
bankmaysuddenlybecomebankr upt
,or,t
her
eisa
si
mul taneously.
runonthebanksqueezingitsl
iquidi
ty.
Simil
arsophi
sti
cati
onisalsopresenti
nexchange
Evenassumingthattherei
snocredi
tri
ski
nshort-
ofnon-SLRorcorpor
atesecuri
ti
eswi t
hdeposi
tor
y
ter
mlending,i
tisnotprudentt
hatTr
easur
ylends
part
ici
pantsi
nCCI Lmechanism.
 Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - C
Chapter 24: DERIVATIVES PRODUCTS (PART-I)
What we will study?
*What is derivative?
*What is the difference b/w OTC and Exchange
Traded Products?
DERIVATIVES AND THE TREASURY:
Derivatives are market products widely used by
bank treasuries.
Treasury uses derivatives chiefly
(a) to manage risk, including ALM risks
(b) to cater to the requirements of the clients
andmore particularly the corporate customers.
and
(c) to trade, i.e., to take a trading position
inderivative products.
Join CAIIB WITH ASHOK on YouTube & APP
OTC AND EXCHANGE TRADED PRODUCTS:
Banks may structure a derivative product to suit
therequirement of an individual client – based on
his risk appetite, size of transaction and maturity
requirements.
For instance, a bank may offer to a client a
forward contract or option for sale of USD on a
future date, for whatever period or amount
desired by the client.
The derivative products that can be directly
negotiated and obtained from banks and
investment institutions are known as Over-the-
Counter (OTC) products.
There are also standardized derivative
contracts, for a specified sum and for specified
period, whichare purchased or sold on an
exchange.
These are exchange traded derivatives, traded
on afutures exchange.
A forward contract traded on a futures
exchange iscalled a futures contract.
Join CAIIB WITH ASHOK on YouTube & APP
While cross currency derivatives existed for long,
Rupee derivatives are of fairly recent origin, and
useof certain derivative products is still regulated
by RBI.
Derivative Products:
A derivative, as its name suggests, does not
havean independent value.
The value of a derivative is derived from an
underlying asset/market/exposure.
The market may be financial market, or
commoditymarket, or an index of market prices.
Financial markets relate to products such as
foreign exchange, bonds and equities.
Commodity markets may cover any
commercial product, ranging from oil and gold
to cotton and wheat.
By definition, derivatives always refer to a future
price and the value of derivative depends on
spot market.
Join CAIIB WITH ASHOK on YouTube & APP
Exchange traded derivatives include currency
futures, interest rate futures, commodity futures,
stock and index futures, as well as options.
Some of the futures exchanges are organized
independently (e.g.
Chicago Mercantile Exchange,
Eurex,
Euronext, MCX of India),
or at times associated/or merged with stock
exchange (e.g.
Hong Kong Exchanges &
Clearing,SGX of Singapore,
NSE in India).
OTC products are different from exchange
tradedproducts in the following respects:
(SEE PIC)
 Join CAIIB WITH ASHOK on YouTube & APP
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - C
Chapter 24: DERIVATIVES PRODUCTS (PART-II)
What we will study?
* What is Forward Contract?
FORWARDS, OPTIONS, FUTURES AND SWAPS:
In India, derivatives are used for hedging underlying
currency, interest rate and commodity risks.
Trading in currency and interest rate
derivatives isrestricted to authorized banks,
except in futures market, where individuals,
corporates and other entities can freely
participate (subject to restrictions on non-
resident entities).
We shall confine this discussion to currency and
interest rate derivatives only.
Join CAIIB WITH ASHOK on YouTube & APP
Bank Treasuries and corporate customers of the
bank mostly use OTC products such as forward
contracts, options and swaps.
Only larger banks, which are market makers,
covertheir residual position in Futures traded in
the exchanges.
Where futures exchange is active, OTC derivative
products largely reflect exchange traded prices,
even though the volume of trade in OTC
products ismuch larger than that of the Exchange
Traded Products.
Join CAIIB WITH ASHOK on YouTube & APP
Derivatives are basically of three kinds:
Forward contracts; Options, and Swaps. Futures
arepart of forwards, where execution of contract
at afixed rate is obligatory through an exchange.
1. Forward Contract:
Forward contract is a contract to deliver foreign
currency on a future date at a fixed exchange
rate.
This is an OTC product where the counterparty
isalways a bank.
An exporter enters into a forward sale contract
ofhis export proceeds denominated in USD.
A 3-month forward sale contract at 69.00 implies
that on expiry date, the exporter can sell the
contracted amount to the bank at Rs. 69 per
dollar,irrespective of prevailing market rate.
The exporter is protected from the exchange
risk, even if, Rupee in the meantime appreciated
to say,Rs. 65.
 Join CAIIB WITH ASHOK on YouTube & APP
Similarly, a forward purchase contract protects
importers from depreciation of Rupee.
Forward purchase or sale contracts can be used
tohedge currency risks in cross-currency deals
also.
Forward contract being simplest of the
derivatives,it is available in most currencies.
Delivery of currency must be given or taken, as
percontract terms, on the expiry date of the
contract, otherwise the contract will be cancelled
and the difference between spot rate and
forward rate will be credited to or recovered
from the counterparty.
Forward option:
On request banks may allow delivery to take
placewithin a month before the expiry date.
This facility is known as forward option, where
bankwould quote forward premium (discount)
applicableto either start date or end date of the
option period, whichever is worse to the client or
favorable to the bank.
Join CAIIB WITH ASHOK on YouTube & APP
Forward premium or discount:
In case of freely convertible currencies, forward
premium or discount is exactly equal to the
difference between risk-free interest rates of
thetwo currencies.
However, in case of USD/INR, it is not always so,
asRupee is not yet fully convertible.
The forward exchange rate of USD/INR,
therefore isalso affected by supply and demand
for forward dollars.
Forward contract is ideal as a hedging
instrument to achieve zero risk, as the contracted
rate fixes thevalue of forward dollars,
irrespective of the market movement.
Opportunity Cost:
However, the holder of a forward contract
cannot get the benefit of market rate, if it is
better than thecontracted rate, on the date of
utilization - which is a disadvantage known as
opportunity cost.
Join CAIIB WITH ASHOK on YouTube & APP
Interest Rate and Premium and discount:
Forward rate, as we stated earlier, represents
interest rate differential of the two currencies.
The forward rate is either at premium or
discount tothe spot rate.
The currency carrying higher rate of interest is
always at a discount.
For instance, domestic interest rate of Rupee is
generally higher than interest rate of USD, hence
Rupee is at a discount to Dollar, or Dollar is at
premium vis-à-vis rupee.
By implication, forward rate of USD/INR is higher
than spot rate, or, dollar on a forward date is
worthmore rupees than today.
Same is the case with Euro/USD- interest rate of
EURO is higher than interest rate of USD, hence
forward EURO is at a discount to USD.
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - C
Chapter 24: DERIVATIVES PRODUCTS (PART-III)
What we will study?
*What is option?
*What is Call option & Put option?
Options:
Options refer to contracts where the buyer of an
option has a right but no obligation to exercise
thecontract.
Options are of two type :
1- Call option (buy)
2- Put option (Sell)
Call (4) = Buy (3)
Put (3) =Sell (4)
3=4 & 4=3
 Join CAIIB WITH ASHOK on YouTube & APP
Call option:
Call option gives a right to the holder to buy an
underlying product
(currency/bonds/commodities) at a prefixed rate
(strike price) on a specified futuredate.
Put option:
Put option gives a similar right to the holder to
sell the underlying at a prefixed rate (strike price)
on a specified future date or during a specified
period.
Strike Price:
The prefixed rate is known as the strike price,
whichis decided by the customer (Option Holder).
Expiry date:
The specified time is known as expiry date.
Writer of Option = Seller of option
Option holder = buyer of option
Join CAIIB WITH ASHOK on YouTube & APP
Put option is a right to sell the currency at strike
price, and call option is a right to purchase the
currency at strike price, the options being
exercisable on their expiry date.
Example:
USD/JPY=105 so 1 USD= 105 JPY
A Dollar put/JPY call option, for USD 1 million
with strike price at 105 and expiry after 3
months, gives the holder right to sell USD or
purchase JPY, at the rate of 105 JPY per dollar, on
expiry date.
If on expiry date market rate is 108, the option-
holder will not exercise put option, as he can get
more yen per dollar in the open market.
Market: USD/JPY=108 so 1 USD= 108 JPY
Option: USD/JPY=105 so 1 USD= 105 JPY (no put)
If the exchange rate on the expiry date is 100,
the option buyer will definitely exercise the put
option on the expiry date, as the strike price is
better thanmarket price.
Join CAIIB WITH ASHOK on YouTube & APP
Options on the basis of mode of settlement:
Options are divided into two types according to
their mode of settlement.
1-American Type Settlement
2-European Type Settlement
American Type Settlement:
An American type option can be exercised any
timebefore the expiry date.
After the sub-prime crisis which took place in the
year 2008/2009 in most of the markets,
Americanoption is prohibited.
European Type Settlement:
European type option can be exercised only on
theexpiry date.
In India we use only European type of options, a
currency option gives the holder option to buy
orsell a currency at strike price on expiry date.
Join CAIIB WITH ASHOK on YouTube & APP
Market: USD/JPY=100 so 1 USD= 100 JPY
Option: USD/JPY=105 so 1 USD= 105 JPY(yes put)
In the latter case, the option will be net settled,
i.e.,the counter-party pays the holder 5 yen per
dollar, being the difference between strike price
and spot rate.
ATM ITM & OTM:
ATM: at-the-money
ITM: in-the-money
OTM: out-of-money
The option is known to be at-the-money (ATM) if
the strike price is the same as the spot price of
thecurrency.
In the context of European option, the spot rate
is the rate prevailing on the maturity date; hence
it is (spot rate) actually the forward rate as on
the dateof buying the option.
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

The option is at-the-money, therefore, when the

strike price is the same as the forward rate on
thestart date.
More Examples:
The option is in-the-money (ITM), if the strike
price is less than the forward rate in case of a call Strike Spot rate or Call Put
option,or, if the strike price is more than forward price forward rate Option(buy) Option(sell)
rate in case of a put option. 90 100 ITM OTM
The option is out-of-money (OTM), if the strike 200 180 OTM ITM
priceis more than the forward rate in case of a 102 110 ITM OTM
call option, or, if the strike price is less than
100 990
forward rate in case of a put option. 0
To put simply, ITM is when the strike price is 800 950
betterthan the market price, and OTM is when 600 600
the strike price is worse than the market price.
Examples:

Strike Spot rate or Call Put

price forward rate Option(buy) Option(sell)
105 pen 100 pen OTM ITM
105 pen 105 pen ATM ATM
105 pen 108 pen ITM OTM

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

BFM MODULE - C The ATM and OTM options do not have any
Chapter 24: DERIVATIVES PRODUCTS (PART-IV) intrinsicvalue.

What we will study? Strike Spot rate or Call Intrinsic value

* What is Premium? price forward rate Option(buy)
105 pen 100 pen OTM (100-105)= -5 =0
* What are important features of options?
105 pen 105 pen ATM (105-105)=0
105 pen 108 pen ITM 108-103= 5
Premium:
Premium is the price of an option payable
upfront.Option premium has two components:
Strike Spot rate or Put Intrinsic
1-Intrinsic value price forward rate Option(sell) value

2-Time Value 105 pen 100 pen ITM 105-100 = 5

105 pen 105 pen ATM (105-105)= 0
1- Intrinsic value: 105 pen 108 pen OTM 105-108= -3 =0
The first component is intrinsic value of an ITM
option, being the difference between the strike 2- Time value:
price and current forward rate of the currency. The option price (strike price), less the intrinsic
Intrinsic value cannot be negative. value, is the time value of the option.
Time value of Option = Option price - intrinsic value
 Join CAIIB WITH ASHOK on YouTube & APP
Hence, the second component is the time value,
which is maximum for an ATM option.
Time value decreases with the option becoming
more and more ITM or OTM, as the expiry date
approaches.
Some of the important features of options are:
The buyer of an option has the right (but no
obligation) to exercise the option at strike price,
irrespective of market price prevailing on the
expirydate.
Hence his (buyer’s) profit potential is unlimited.
The seller of the option is obliged to buy/sell to
the holder of the option at the strike price,
irrespective of market price; the option-seller's
potential loss is therefore unlimited.
The option is based on an amount which is only
notional, as only difference in rates is exchanged
innet settlement.
Join CAIIB WITH ASHOK on YouTube & APP
The option always has two legs:
A put option on USD at USD/JPY
(right to sell USD against JPY at rate X) is also
a call option on JPY (right to buy JPY against USD
payment at X rate).
The option may thus be described as USD put or
Yen call at, say, 105.
A call option on a bond gives the right to buy the
bond at a prefixed price (strike price).
Options are primarily used as a hedge against price
fluctuations.
It is similar to insurance against adverse
movementof prices, where the risk is transferred
to others who are more tolerant of the risk.
For instance, an exporter would like Rupee to
depreciate so that his Rupee income would
increase; while the importer would benefit
from appreciation of Rupee so as to reduce his
Rupee cost.
Join CAIIB WITH ASHOK on YouTube & APP
The price of an option is much smaller than the
notional value; the traders and speculators
therefore do not require large investments to
tradein options (known as high leverage).
The buyer of an option pays premium to the
seller(upfront) for purchase of the option.
The premium depends on the volatility of the
underlying market, the expiry date (maturity),
interest rates and the strike price – the factors
thatdetermine the risk to the seller.
Option premium increases with the volatility of
themarkets, maturity and intrinsic value of the
option.
Option premium or the price of option is higher or
lower based on intrinsic value and time value of
theoption.
In the money (ITM) options are costlier than out-
of-the money (OTM) options.
Time value is linked to residual maturity – longer
the maturity, costlier is the option.
Join CAIIB WITH ASHOK on YouTube & APP
A bank as an intermediary sells a USD put option
tothe exporter, and a USD call option to the
importer, for fully or partially mitigating the risk.
A stock option is the right to buy or sell equity of
acompany at the strike price.
For instance, a put option on 1000 Maruti equity
shares at Rs. 500 with expiry on 30th June 2017,
means if the stock is trading below Rs. 500 on the
expiry date, the option-holder can still sell his
Maruti shares to the seller of the option, at Rs.
500per share.
If the price on the expiry date is above the
strike price of Rs. 500, the option-holder would
naturallyprefer to sell his shares in the open
market and does not exercise the option.
Plain Vanilla Option:
An option, without any conditionality, is called
plainvanilla option, which is a simple product and
ideal for hedging.
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

Exotic Option:
There are complex structured products making
useof different types of options, often combining
withother derivatives, and covering different
markets simultaneously, to suit requirements of
some customers.
Such products, often called exotics as they
bundletogether different risks, are highly risky
and are generally not suitable for hedging market
risk.

While exchange risk is protected in both cases,

there are material differences between options
andforwards:

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

BFM MODULE - C Currency futures are traded for major currencies

Chapter 24: DERIVATIVES PRODUCTS (PART-V)
What we will study?
*What is Futures Option?
Futures:
Futures are forward contracts traded in a
futuresexchange (Stock exchange).
Under a futures contract, the seller agrees to
deliverto the buyer a specified security/currency
or commodity on a specified date, at a fixed price.
(EURO, GBP, JPY, AUD and CAD) in terms of USD.
A contract of GBP 25000 is traded at The London
International Financial Futures and Options
Exchange (LIFFE) for delivery on 28 March, say at
1.6650, as against spot exchange rate of 1.60.
The contract implies that on 28th March the
sellerwould deliver to the holder of the contract,
GBP 25000 against payment of equivalent USD at
the rate of 1.6650.
On the settlement date, if the market rate of GBP
is 1.70, the seller will pay to the holder the
difference in contracted price and spot price on
that date.

Futures relating to exchange rates (currency
futures), Interest rates (bond futures) and equity
prices (stock/index futures) are known as
financialfutures, as distinct from commodity
futures (oil/metal/ agro-products etc.).
Futures contracts are of standard sizes with
prefixed settlement dates.
(1.70 - 1.6650 = USD .035 per Pound).
If the market price is less than the contracted
price,the buyer of the contract will bear the loss.
Unlike in options, the contract must be executed
byboth the parties on the due date at the
agreed future rate.
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

While the futures contract works like a forward
contract, there are three important differences:
(i) The buyer and seller of the contact do not
dealwith each other but they deal with the
Futures Exchange as counter party – the
Exchange guarantees performance of the
contract.
(ii) There is no counter party risk in future option.
(iii) Unlike forwards, futures contracts are
actively traded on the exchange, the contracts
are bought and sold several times during the
day.
In India, the futures market for USD/INR
commenced in August 2008.
Contract size of Futures:
The contract size is one unit which denotes USD
1000 and all settlements take place in Rupees.
Trading in cross-currency - Rupee contracts
(Euro/INR, GBP/INR and JPY/INR) also
commenced from last quarter of 2009 with the
contract size of one unit denoting 1000 Euro,
1000GBP and 1,00,000 JPY respectively.
Currency futures are traded actively in the
futuressegment of NSE and the BSE.
Interest rate futures are contracts written on
fixedincome securities (Treasury bills, bonds etc.)
of specified size.
Contracts written on treasury bills trade in short-
term interest rates, while contracts on treasury
bonds or corporate bonds deal in medium and
long-term interest rates.
Interest rate futures are the most popular
instruments to hedge interest rate risk.
Treasury bills, being risk free instruments, indicate
movements in market rate of interest.
The Treasury bills are traded at a discount, the
discount being equal to interest rate for the
period.
A futures contract of USD 1 million, for 1 year on a
Treasury bond trades at 96 if the expected interest
rate at the end of the period is 4% (i.e. 100 – 4 =
96).
The hedge is based on the inverse relationship
between the interest rates and bond prices, i.e. if

Join CAIIB WITH ASHOK on YouTube & APP

Join CAIIB WITH ASHOK on YouTube & App
the interest rate goes up, bond prices come BFM MODULE - C
down,and bond prices would move up if interest Chapter 24: DERIVATIVE PRODUCTS (PART-VI)
rates decline.
What we will study?
Rupee interest rate futures market:
*What is Interest Rate Swap?
Rupee interest rate futures market in India was
originally launched in 2003, but the attempt
failedfor various reasons.
With the initiative of RBI and SEBI, the interest
ratefutures market was relaunched in Aug 2009.
The contract size is Rs. 2 lacs and is based on 6
year, 10-year and 13 year Government securities
with residual maturity between 4 and 8 Years, 8
and11 years and 11 and 15 years respectively.
All futures contracts are of standardized size,
hence several contracts need to be purchased
tohedge an underlying exposure fully.
If an exporter needs to hedge receivables of
USD 560,700, he would need to buy 561 forward
sale contracts of USD 1000 each, aggregating to
USD 561,000.
 Join CAIIB WITH ASHOK on YouTube & App
Interest Rate Swaps:
A swap is an exchange of cash flow.
An interest rate swap is an exchange of interest flows
on an underlying asset or liability, the value of which is
the notional amount of the swap.
An interest rate swap is shifting of basis of interest rate
calculation, from fixed rate to floating rate, floating rate
to fixed rate or floating rate to floating rate (based on a
different benchmark rate).
SWAP from SWAP to
Fixed Rate Floating Rate
Floating Rate Fixed Rate
Floating Rate (LIBOR) Floating Rate (MIBOR)
The cash flows representing the interest payments
during the swap period are exchanged accordingly.
Join CAIIB WITH ASHOK on YouTube & App
Join CAIIB WITH ASHOK on YouTube & App
Conventionally, the fixed rate payer is known as the
buyer of swap and the fixed rate receiver is the seller of
the swap.
The floating rate of interest is always linked to a
benchmark rate.
A benchmark rate is a risk-free interest rate determined
by the market, and is widely accepted by market
players for its objectivity and transparency.
Interest Rate Swap (IRS) is an OTC instrument normally
issued by a bank.
Benchmark rates used in Indian markets other than
LIBOR, MIBOR are, 90 days T-bill and CP rate index.
Market practices on adopting different benchmark rates
are standardized by FIMMDA (Fixed Income, Money
Market and Derivatives Association) which is a self
regulatory agency for debt market.
Join CAIIB WITH ASHOK on YouTube & App
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Mumbai Interbank Forward Offer Rate (MIFOR):
MIFOR for 3 months/6 months is also a benchmark rate,
announced daily by Reuters, for term lending.
MIFOR is a combination of MIBOR and forward
premium of USD/INR, and is particularly suitable for
foreign currency borrowings swapped into Rupees.
However, RBI has permitted MIFOR to be used as a
benchmark rate only for inter-bank dealings.
Corporate are not permitted to use MIFOR as
benchmark rate.
A floating-to-floating rate swap (also known as basis
swap) involves change of benchmark rate.
If a company, having opted for a T-bill linked rate, later
prefers to have a base rate of MIBOR, it can enter into a
swap whereby it receives T-bill rate and pays MIBOR
linked equivalent rate.
There is a variety of interest rate swaps available in
market.

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
Quanto swaps refer to paying interest in home currency The type of IRS depends on the client's requirement - if
at rates applicable to a foreign currency (now he has to pay a fixed rate on a long-term borrowing and
prohibited in India). use the funds to meet his working capital requirement,
the working capital typically being a 3-month cycle, he
Coupon swaps refer to floating rate in one currency
may need to convert fixed rate borrowing into floating
exchanged to fixed rate in another currency.
rate borrowing.
There are also swaps with built-in options, known as
swaptions. There may be other clients who have an opposite
requirement, i.e. to convert floating rate into fixed rate.
In Indian Rupee market only plain vanilla type swaps
are permitted. The Treasury also uses IRS for the internal requirement
of the Bank, to bridge asset - liability mismatches.
Plain Vanilla Interest Rate Swap:
The Treasury hedges the residual risk, that is, net
Plain Vanilla Interest Rate Swap is an agreement position after entering into various swaps, through
between two parties (known as counterparties) where futures market.
one stream of future interest payments is exchanged
for another, based on a specified principal amount.
Interest rate swaps often exchange a fixed payment for
a floating payment that is linked to an interest rate
(most often the 3M LIBOR).
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - C
Chapter 24: DERIVATIVE PRODUCTS (PART-VII)
What we will study?
*What is Forward Rate Agreement (FRA)?
*What does it means FRA 3*9?
Join CAIIB WITH ASHOK on YouTube & App
Forward Rate Agreement (FRA):
A product closely linked with IRS is forward rate
agreement (FRA), where the interest payable for a
future period is committed under the agreement.
While IRS covers a series of periodical interest
payments, FRA is for a single payment in future.

Example 1: Suppose a company XYZ Ltd. wants to

borrow Rs. 50 Lac for 6 months but after 3 months not
today.
XYZ approaches to bank and bank says we can give you
loan at 10% PA today.
But bank cannot tell you how much rate of interest will
be after 3 months it may go to 12% or it may become
6% only.
Now XYZ Ltd. is worried about the rate going up after 3
months.
So XYZ Ltd. will contact another bank say FRA bank and
will ask them to book a FRA at 10% after 3 months and
for next 6 months.

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
This FRA is written as "FRA 3*9". Case 1: After 3 months if r=12% then FRA bank will pay
2% PA (12%-10%) to XYZ Ltd.
It means after 3 months and for next 6 months the rate
of interest will be 10% PA.
Case 2: After 3 months if r=6% then XYZ Ltd. will pay 4%
PA (10%-6%) to FRA bank.
This is how FRA works.
FRA Rate after Rate for next
FRA 3*9 3 months 6 months
Example 2: If a loan carries interest rate linked to LIBOR,
FRA 2*12 2 months 10 months and the interest for next half year is due to be fixed on
FRA 6*12 6 months 6 months 29th June, we run a risk that the LIBOR in June may be
much higher than today's LIBOR.
FRA 9*12 9 months 3 months
We would hence like to fix the interest rate for 29th
June now, based on today's rate.
For this purpose, we need to buy a 6/12 FRA or 6*12
So, FRA 6*9 at 12% means, party will give loan at the FRA (i.e. to fix interest rate 6 months hence, for the
rate 12% after 6 months the 12% rate will be charged next 6-month period).
for next 3 months [ total 9 months = 6+3].
It is normal practice that the floating rate (LIBOR) for an
interest rate payment period is decided in advance, on
Ex: Suppose a company XYZ Ltd. wants to borrow Rs. 50 the last day of the previous period/or (one day before
Lac for 6 months but after 3 months not today and FRA
is booked at 10% PA. then we book FRA 3*9.
 Join CAIIB WITH ASHOK on YouTube & App
the last day, as in the case of LIBOR), but interest is paid
at the end of the interest payment period.
In the above illustration, the interest settlement takes
place at the beginning of the period on 1st July as per
the market convention.
The interest is duly discounted for the period, and
hence the effective rate remains the same.
Join CAIIB WITH ASHOK on YouTube & App
Currency SWAP:
A Currency Swap is an exchange of cash flow in one
currency, with that of another currency.
The cash flow may relate to repayment of principal and
/or interest under a loan obligation where the lender or
the borrower intends to eliminate currency risk.
If only currency is hedged, it will be Principal Only Swap
(POS).
If only interest rate is hedged, it would be Coupon Only
Swap (COS).
It is left to the discretion of the client to hedge currency
and interest rate risks together, or separately.
The need for a swap arises when there is a currency
mismatch.
For instance, if a loan is denominated in a currency
different from the currency in which revenue is accruing,
there is a currency mismatch.
Let us assume that an investor in Germany intends to
invest in Indian market and hence is in need of Rupee
funds.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - C
Chapter 24: DERIVATIVE PRODUCTS (PART-VIII)
What we will study?
*What is Currency SWAP?
Join CAIIB WITH ASHOK on YouTube & App
At the same time there is a well rated Indian company
needing Euro funds for taking over a company in, say,
France.
The German investor is in a strong position to raise Euro
funds, at a relatively low rate, as compared to the
Indian company seeking to raise a Euro loan.
The position is reversed in case of a Rupee loan, where
the Indian company, with a good domestic rating, is in a
position to raise Rupee funds at a lower rate.
It is hence logical that the two parties raise the loans in
domestic currencies and swap the loans to serve their
respective objectives.
However, it would be a great coincidence if the two
parties with complementary requirements (in terms of
amount and period of loan) meet each other to derive
the advantage of lower rates of interest rates.
Banks, as financial intermediaries, are well placed to
offer currency swaps to interested clients, without
waiting for a matching demand.
 Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE – C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 25: Treasury and Asset Liability Management mat
uri
ti
es,r
angingfr
om anov
er draf
tforaf
ewday
s
(PART-I) t
omortgageloansof
,say15years.
What we will study? Thusthebankmodi fi
esandextendsmaturi
ti
es
whichtheret
aildeposi
tor
sthemselvescoul
dnot
*What is ALM? aff
ordto.
*What is Liquidity Risk? Simil
arl
y,whil
et hedepositorshaveassur edsafet
y
offundstogetherwithint
erest,thebankdoesnot
MEANING OF ASSET-LIABILITY MANAGEMENT
havethesamecomf or
twhilelendingori nvest
ing
(ALM):
fundsinvari
ousav enueswi t
hmar ketr iskand
Bank collects deposits from customers with
credi
tri
sk–t hust hebankalsoabsor bsriskwhich
Various maturities ranging from 7 days to 5years i
ndivi
dualdeposi t
orscouldnotont heirowndo.
(Though there is no bar on longer term deposits, Whilecreditr
iskofabanki sobv i
ousandis
Major banks discourage deposits for longer-terms managedconv ent
ionall
ythrougheff
ecti
vecredit
In order to avoid interest rate risk). supervi
sion,whatisnotsoobv i
ousist
hemar ket
ri
sk,whichismani festasli
quidi
tyri
skandinter
est
However, as per IBA guidelines, Banks can accept
rat
er i
skinbankingoper at
ions.
Deposits up to 120 months, i.e., 10years.
Ther i
skisspreadal lovert
hebalancesheetofa
The funds so collected along with capital funds and
bank.Toill
ustrat
e, assumet hatt
hebankhas
Call borrowings are lent to borrowers with varying acceptedadeposi tof3y earsat8%p.a.andhas
beenusingfundst opr ovi
dea90- daybi
ll
discount
ingfacil
it
yt oabor r
owercompany .
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Overthefi
rstyear,
inter
estrat
esstartdecl
iningand
bythesecondy ear
,letussaythebankisnol onger Theri
sksari
seoutofmi smat
chofassetsand
abl
etochar geover7%ont heworkingcapitall
oan. l
iabi
li
ti
esofthebankandasset-
li
abil
it
y
Clearl
y,t
hereisanegativeearningfort
hebankas managementismanagingsuchbalancesheetr
isks.
thedeposithasaf i
xedrateofinter
est,whi
let
hebil
l
Theri
sks,
ifnotcontr
oll
ed,
mayresul
tinnegat
ive
discount
ingfacil
it
yistoberepricedevery90day
s spr
eadsorinerosi
onofnetwor
th.
(eff
ecti
vely,
float
ingrat
eofinterest
).
ALM i
sther
efor
edef
inedaspr
otect
ionofnetwor
th
I
nanot hercontext,
assumet hattheav er
age oft
hebank.
deposit
soft hebankar eofone-y
earmat ur i
ty,
whil
e
theyhaveextendedqui t
eaf ewmor tgageloans
withaveragemat ur
ityexceedi
ngov er5y earsata LI
QUI
DITYRI
SKANDI
NTERESTRATERI
SK:
fi
xedrate.
1.Li
qui
dit
yRi
sk:
Fir
stl
y,t
hebankwillfaceali
quidi
typrobl
em when
Aswehav eseenear li
er,
li
qui
dityandinter
estrat
e
l
argedeposit
saretobepai doutonmat uri
tyofone
aretwosi desofthesamecoi n,astheli
quidi
tyri
sk
yearandsecondl
y,thebankwouldhav etoaccept
tr
ansl atesintoi
nterestrater
isk,whenthebankhas
fr
eshdeposit
sorbor rowfr
om int
er-
bankmar ketat
torecy clethedepositfundsorroll
overacredi
ton
curr
entrat
estomeetsuchobl i
gati
ons.
mar ketdet er
minedt erms.
Ifcur
r entinterestratesar ehigherthanthe
However,banksareext
rasensi
tiv
etol i
quidi
tyrisks,
contractedr atesonmor tgageadvances,t
he
astheycannotaff
ordtodefaul
tordelaymeet i
ng
mismat chi ninterestr atesleadstonegati
vespr
ead,
thei
robl
igati
onstodeposi
torsandotherlenders.
orreduct i
oni nneti nterestincome( NI
I)
.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Evensuspi
cionofpr
essureoverabank’
sli
quidi
ty Theavail
ablecashresour
cesar
ecomparedwith
maypromptar unonthebank,ori
ndeed,t
hreat
en i
mmedi at
eliabi
li
ti
esofthebankint
hegivent
ime
thever
ysurviv
aloft
hebank. rangeandthenetli
quidi
tyi
sworkedout
.
Hencespeci alattenti
onispaidtoli
qui
dit
y,i
n I
ndi ff
erentt
imebands,t
heloansfall
ingduefor
part
icularshort-
terml i
qui
dit
y(int
ra-
daytoone repaymentconsti
tut
ethemainsourceoffunds,
mont h)toensuref undsarepromptlymade whilethedeposi
tsandotherobl
igati
onsmaturi
ng
avai
lablewhent heyar eneeded. duri
ngt hesametimebandconstit
uteusesoffunds.
InALM,assetsyi
eldi
ncome,hencear
eshownas (I
nbothcases,int
erestfl
owsar
eal
soconsi
der
ed
cashinf
lows,whi
leli
abi
li
ti
esneedtober
epai
d, asandwhent heyarise.
)
henceareshownascashoutfl
ows. Thediff
erencebetweensourcesandusesoff unds
Asset
-l
iabi
li
tymismatchisther
efor
e,acashfl
ow i
nspecifi
ct i
mebandsi sknownasliquidi
tygap
mismatch,
wi t
hexcessinfl
oworoutfl
owoffunds. whichmaybeposi ti
veornegati
vei.
e.,when
advancesaremor ethandeposi
tsi
nat imebucket,
I
fpartofinf
loworoutf
lowi
sdenominatedin
f
oreigncurr
ency,
ther
eisal
socurr
encymi smatch i
tbecomesaposi t
ivegapandwhendeposi t
sare
whichneedstobemanagedbytheTreasury. morethanadv ancesinati
mebucket ,
itbecomes
negati
vegap.
Li
qui
dit
yimpl
iesaposi
ti
vecashf
low.
Hencethel
iquidi
tygaparisesoutofmi
smat
chof
I
tisnotonlycashsur pl
usesretainedbythebank, asset
sandliabil
it
iesoft
hebank.
butalsoothersourceswherecashcanber eadi
ly
drawn,suchascommi t
tedcreditli
nesfr
om other
banks,l
iquefi
ablesecuri
ti
esandnost robal
ances.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
RBIhasprescr
ibedti
mebands( Nextday,
2to7 RBIismorepart
icularaboutshor
t-
ter
mli
qui
dit
y,
days,
8to14day s,15to30days,etc.
)for rangi
ngfr
om int
ra-daytoonemont h.
measuri
ngandmoni tor
ingl
iqui
dit
ygaps. Currentgui
del i
nesst i
pulat
et hatthenetcumulati
ve
ALM processinvol
vesplot
ti
ngofassetsand negativ
emi smat chesdur i
ngt henextday(5%),
2-7
l
iabi
li
ti
esmat uri
tywiseint
imebucketsand days(10%),
8- 14day s(15%)and15- 28day s(
20%)
measuringthegapbetweenasset
sandl i
abi
li
ti
es bucketsshoul dnotexceed5%, 10%, 15%and20%
maturi
nginaspeci f
icti
meperi
od. ofthecumul ativ
ecashout f
lowsint herespect
ive
Li
quidi
tyr
iski
srefl
ect
edasmatur
it
ymismatch– ti
mebucket s.
whichi
sthegapincashi
nfl
owandout
flow. Banksar
er equir
edtopr ov
ideinthei
rLi
quidi
ty
Theri
skisnotbei
ngablet
ofi
ndenoughcash,or ManagementPol i
cy,conti
ngencymeasurestomeet
cashataccept
abl
erat
eofint
erest
,tof
undthegap. anyshor
tfalli
nli
quidi
ty.

Liquidi
tyri
skwi l
lal
soar i
seiftheli
quidi
tyinmar ket Thecont i
ngencymeasur esmayi ncludest and-by
credi
tli
nesf rom otherbanks,li
quidinv estments
driesupandt hebanki snotabletodisposeofi t
s
l
iquidsecurit
ieswithoutsuff
eringaloss,orifthe andmai ntenanceofadequat esecur i
ties( i
nexcess
l
iquef i
abl
esecuriti
essuddenlybecome‘ il
li
quid'. ofminimum r equirement)tofaci
lit
atebor r
owing
underLiquidi
tyAdj ust
mentFaci l
it
yofRBI /orunder
TheBankshoul
dhencet akei
ntoaccount ,t
he CBLO( coll
ateral
izedborrowingandl endi ng
market
abi
li
tyofsecur
iti
es,whi
leclassi
fyi
ngthem obli
gati
on)
asli
qui
dinst
rumentsinthenearestti
mebuckets.
RBIf
rom t
imet
ot i
meissuesdet
ail
edgui
del
inesf
or
managi
ngALM r
isks.

Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE – C Joi
nCAI
IBWI
THASHOKonYouTube
Chapter 25: Treasury and Asset Liability Management Inahypot
het
icalsi
tuat
ion,
letusassumet hatthe
(PART-II) Bankhasmobili
zeddeposi
tsofRs.100cr .
,with
What we will study? aver
agematuri
tyof6mont hs,at5%int
erest.
Letusal
soassumethatt hebanki
nvest
edt he
*What is interest rate risk? amounti
naf i
xedint
erestloanpay
ableaft
er5y ear
s
Interest Rate Risk: at7%pa.theNIIi
sacl ear2%orRs.2cr.peryear.
Interest rate risk arises when interest earnings are Thedepositsmatureaf
ter6monthsandneedtobe
Not adequate to set off interest payments due in a
repl
acedorrecycl
edatcurr
entmarketr
ate,
say
, at
Given period, even if the book value of the asset
6%asi nt
erestr
ateshaveri
senbythatt
ime.
Equals that of the liability, owing to a change in
Market rates of interest. Theinterestonl
oanconti
nuestobe7%,henceNI
I
Net interest income (NII) of the bank is the forsecondhalfoft
heyearisr
educedby1%.
Difference between interest earnings and interest Ifweassumet hatthedeposi
tsbecomeev en
Payments in a given accounting period. costl
ieraf
ternext6months,demandingrenewalat
Hence interest rate risk may be defined as the risk marketrateofsay,8%,t
heNIIactual
lybecomes
Of erosion of NII, on account of interest rate
negativ
eby1%.
Movements in the market.
However,i
fdeposi
trat
esf
allby2%,t
heNII
cor
respondi
nglyri
sesf
ort
hespecif
icper
iod.
Inareversesit
uati
on, adeposi
tfor5yearsmay
haveaf i
xedinter
est,whil
ethedepositf
undsare
depl
oyed, say
,indiscounti
ng3-monthusancebi
ll
s,
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
t
ost
artwi
th,
wit
haposi
ti
vespr
ead. However,
al oangett
ingrepaiddur
ingt
hisper
iodi
s
I
ft heint
erestrat
esfall
,subsequentdi scount
ingof dueforr
eprici
ng,asfreshlendi
ngcantakepl
ace
bil
lsmayear nlowerrat
eofi nter
est,inlinewit
h onl
yatmar ketrat
es.
mar ketr
ates,whil
ecostofdeposi tremai nsf
ixed, ForthepurposeofALM, allasset
sandliabi
li
tiesar
e
therebyadversel
yimpactingtheNI I
. placedi
nt i
mebuckets,basedont hei
rrepri
cing
Ther i
skoferosionofNI Ii
sonaccountofdeposi t dates(i
.e.whenthei
nterestratei
sduef ora
rat
esbei ngfl
oating( r
epr i
cedev ery6mont hs), change).
whil
et heloaninterestisfixed( repricedonl
yaf t
er5 Themismatchineachtimebucketismeasuredas
yearswhent hefundsar eav ai
lablef orfr
eshlending, agapbetweenratesensit
iveasset
sandrat
e
onrepaymentoft heloan), orvicev ersa. sensi
ti
vel
iabi
li
ti
es.
Theint
erestr
atemi
smat
chi
sther
efor
eal
soknown Themismatchmaybemeasur edeit
herinabsolut
e
asrepr
ici
ngri
sk. amounts,
orassensit
ivi
tyrat
io,orasa%ofr at
e
sensi
ti
veasset
storatesensi
tiveli
abil
it
ies.
Repri
cingr
iskexi
stswhere,i
nagiventimebucket,
say6mont hsto1year
,theassetsandli
abil
it
ies Themi
smatchpresentsari
sktotheNII
,hencei
sto
whicharedueforr
epri
cingarenotequal. bemoni
tor
edregular
ly,wi
thpr
e-setl
imi
ts.
Atier-
2bondmat ur
ingafter7y ear
swi t
hfixed I
tispossibl
etoreducethemismatchbyswappi
ng
i
nterestr
ateof7%,isnotduef orrepr
ici
ngdur i
ng f
loat
ingratetofi
xedrat
eorfixedrat
etofl
oat
ing
6m-1y rt
imebucket,henceisnotsensiti
veto r
ate,t
hatis,byusi
ngderiv
ati
veinstr
ument
s.
changesinmarketprice. RBIsti
pulat
escapi
taladequacyrequi
rementf
or
marketri
sk,whi
chincl
udesinter
estrate

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
mi
smat
ches. Underthecircumst ances,i
ncase,thedepositr
ate
Capit
alisalsotobeprov
idedf
oranyder
ivat
ives goesupsubsequentt oplacementofdepositbythe
(f
orwards,opti
onsandswaps)usedt
obri
dgesuch deposit
ors,t
hedeposi t
orwouldcomef or
prematureextensionoft hedeposi
tandgetthe
mismatches.
enhancedinterestrate.
RBIisrecommendi ngsimpli
fi
edappr oachunder
Banksal
sodonotchar
geanypenal
tyf
orsuch
Basel3,fordeter
miningthecapit
alrequir
ementfor
deri
vati
veinstr
ument sforBankswhichhandlea ext
ensi
on.
rangeofsophisti
catedderi
vati
veproductsli
ke I
ncase,
thedeposi
trat
efal
lsdown,
thedeposi
t
woul
dconti
nuewit
hthedeposi
tatt
hecontr
acted
Thegapmanagementi
sonl
yonewayofmoni
tor
ing
ALM. r
ateofi
nter
est
.

Thereareothermet hodsformeasuri
ngasset Hence,thedeposi
tor
sarecomfort
abl
einfi
xedrate
l
iabi
li
tymi smatches,usi
ngVaR,durati
onand i
nter
estr egi
meinourcount
ryandint
heprocess
ef
fecti
velypassonthei
nter
estrat
eri
sktothebank.
simulat
ionswhichwoul dmakeALM mor eeff
ect
ive.
Buti
ntheadvancesside,RBIhasint
roducedt
he
Exper
ienceofALM i
nIndi
anScenar
io:
MCLRsystem f
rom 1stApril
,2016,whichi
sa
Deposi
tor
sareal
way
scomf
ort
abl
ewi
thf
ixedr
ate fl
oat
ingr
ateofinter
est.
ofi
nter
est.
Hence,undertheint
erestratef
all
ingscenar
io,t
he
Bankli
keSBIandIDBIi
nt hepasti
ntroduced banks’
NI Iwouldbecomedownsi ncethedeposit
s
deposi
tschemesli
nkedtofloat
ingrateinter
est,
but areatf
ixedrateandadv ancesareatfl
oati
ngrate.
i
thadnotfoundthefl
avourofthedeposi t
ors.
Hence,
thesepr
oductswerewit
hdrawn.
 Join CAIIB WITH ASHOK on YouTube & App

Joi
nCAI
IBWI
THASHOKonYouTube BFM MODULE – C

Incase,int
erestr
ategoesup,thebanksmaynot Chapter 25: Treasury and Asset Liability Management

actuall
ygettheful
lbenefi
tofi
nter
estratehike,as (PART-III)
mostoft hedeposit
orswouldcomepr emature
extensi
onoft hedeposi
t. What we will study?
Bythi
s,theint
erestr
ategoi
ngupi
snul
li
fi
edandt
he
ri
skispassedont ot
hebanks.
*What is role of treasury in ALM?
*How ALM/treasury uses derivates to hedge the risk?

Join CAIIB WITH ASHOK on YouTube & App Join CAIIB WITH ASHOK on YouTube & App
ROLE OF TREASURY IN ALM: It may also be noted that bank earns profits out of
As stated earlier, the core function of Treasury is fund mismatches and it is not really advisable to remove the
management. mismatches completely from the balance sheet.

It automatically engulfs liquidity and interest rate risks,
as the treasury maintains the pool of bank's funds.
We may briefly explain the relationship between
Treasury and ALM as under:
The balance sheet of a bank carries enormous market
risk (in addition to credit risk), but the banking
operation itself is confined to accepting deposits, and
extending credit to needy borrowers so we need to deal
with these risks, we can't shy away from this risk.
It is treasury which operates in financial markets
directly, establishing a link between core banking
functions and market operations.
Hence the market risk is identified and monitored
through treasury.
The asset-liability mismatches cannot be ironed out as
the assets or liabilities cannot be physically moved
across the time bands.
Treasury uses derivatives and other means, including
new product structures to bridge the liquidity and rate
sensitivity gaps.
Treasury, while taking trading positions in forex and
securities markets, is also exposed to market risk on its
own creation.
Sometimes the risks are compensatory in nature and
help bridge the mismatches on banking side.
The treasury may therefore hedge only residual risk.
Residual risk is the risk that remains after efforts to
identify and eliminate some or all types of risk have
been made.
As this market get developed, many credit products are
being substituted by treasury products.
For instance, bank may subscribe to commercial paper,
instead of extending working capital to an entity.
 Join CAIIB WITH ASHOK on YouTube & App
Treasury products are marketable and hence liquidity
can be infused in times of need.
Treasury also monitors exchange rate and interest rate
movements in the markets, and hence it is much easier
to administer such risks through treasury operations.
It is for the above reasons that operations relating to
market risk management have become an integral part
of treasury.
In many banks, either ALM desk is part of dealing room,
or, ALCO support group is part of treasury team.
ALM: Asset Liability Management.
ALCO: Asset Liability Committee.
The Treasury head is always an important member of
ALCO, contributing not only to risk management but
also to product pricing and other policy issues.
Join CAIIB WITH ASHOK on YouTube & App
In the latter case (hedge aggregate risks), a dynamic
management of hedge is necessary as the composition
of assets and liabilities is always changing.
The following illustrations show how derivatives can be
used to manage ALM risks:
Assume that the bank is funding a medium-term loan of
3 years with deposits having average maturity of 3
months.
A short-term deposit or borrowing in inter-bank market
is much cheaper than a 3-year deposit, hence many
banks have resorted to funding their regular loans from
short-term resources in order to increase their spreads.
There is however, liquidity risk as the bank needs to
payback the short-term deposits much earlier to
repayment of the 3-year loan.
There is also interest rate risk as the deposits will be
repriced 12 times during the life of the loan.
Join CAIIB WITH ASHOK on YouTube & App
USE OF DERIVATIVES IN ALM:
Derivative instruments are useful in managing the
liquidity and interest rate risks, as also in structuring
new products which help overcome market risk to a
large extent.
Derivatives replicate market movements, and hence can
be used to counter the risks inherent in regular
transactions.
For instance, if we are buying a stock which is highly
sensitive to market movements, we can sell index
futures as an insurance/hedge against fall in stock
prices.
The advantage in derivatives is that the requirement of
capital is very small, and largely there is no deployment
of funds.
Derivatives can be used to hedge high value individual
transactions, or hedge aggregate risks as reflected in
the asset-liability mismatches.
Join CAIIB WITH ASHOK on YouTube & App
The interest rate on the deposit is akin to a floating rate,
as the bank has to pay the market rate of interest
whenever the deposit is recycled (repriced).
Market rates can be benchmarked to risk-free interest
rates, say, 91-day T-bill rate in the above case.
The bank may therefore swap the 3-month interest rate
into a fixed rate for 3 years, so that its interest cost is
also fixed and the spread over the loan is protected.
Note that the derivative transaction is independent of
the banking transaction.
Under the swap the bank is receiving floating rate
linked to T-bill, which meets the (basic) cost of the
deposit.
The bank is paying fixed rate under the swap which now
is effectively the cost of the deposit.
The 3-month deposit is now as good as a 3-year deposit.
Fixed interest income from the loan less the swap cost
of deposit, is gross margin (spread, or net interest
income) which is now protected from market risk.
 Join CAIIB WITH ASHOK on YouTube & App
As an alternative, the bank may swap fixed interest rate
on the loan into floating rate linked to T-bill rate.
Assume that ALCO prices the three-month deposit at
91-day T-bill at T+1% and the swap rate of the loan
yields T+3%.
There is a clear spread of 2% in bank's favour protected
throughout the life of the loan.
Treasury often arbitrages in foreign currencies.
The bank may borrow, say for 6 months, in USD and
lend equivalent Rupee funds in domestic market.
USD funds cost around 3% while the Rupee loan yields,
say, 6.5% for the same period.
The spread is a clear 3.5% for the bank. The Treasury
takes care of exchange risk by paying a forward
premium of 1.5%.
The bank then earns a spread of 2% (= 3.5-1.5) without
any exchange risk.
The forward premium is the cost of hedge against the
currency risk.
Join CAIIB WITH ASHOK on YouTube & App
Use of derivatives however is subject to certain
limitations.
It is assumed that the bank's products are priced
rationally.
If the interest rates on deposits and loans are not based
on benchmark rates, interest rate swaps may not be
really helpful.
Even when the interest rates are fairly aligned, the
product prices may not exactly move in line with
market rates, hence the treasury may not be able to
provide a perfect hedge.
ALM uses broad time bands, hence even after using
appropriate hedges, the market risk may not be
completely mitigated.
There are embedded options in certain bank products -
for instance, a fixed deposit or a term loan can be
prepaid, and such prepayment escapes ALM analysis
and cannot be fully hedged.
Join CAIIB WITH ASHOK on YouTube & App
Treasury can thus supplement domestic liquidity and
also ensure a positive spread for the bank.
Treasury may also hedge currency mismatches resulting
from foreign currency operations of the bank.
For instance, Treasury may buy call options to meet
repayment of FC loans, or buy put options to protect
value of foreign currency receivables in domestic terms.
Treasury enables the bank in structuring new products
which help reduce the mismatches in the balance sheet.
Floating rate deposits and floating rate loans, where the
interest rates are linked to a benchmark rate have
become fairly popular.
In securities market, we have govt. securities where
interest rate is linked to rate of inflation.
Corporate debt paper is also issued with call and put
options, to suit the risk appetite of individual investors.
The embedded options are also useful to improve the
liquidity of the investment.
For instance, a 7-year bond issue with a put option at
the end of 3rd year is as good as a 3-year investment.
Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C
Chapter 25: Treasury and Asset Liability Management
(PART-IV)
What we will study?
*We will know about credit risk and treasury?
 Join CAIIB WITH ASHOK on YouTube & App
CREDIT RISK AND CREDIT DERIVATIVES:
Treasury and Credit Risk:
As we have seen, treasury is mostly concerned with
market risk.
Credit risk in treasury business is only with respect to
counterparty dealings, contained by exposure limits.
In normal course, treasury operations are untouched by
the credit risk present in bank's lending business.
However, there are two ways in which treasury may get
involved with banking operations in the credit area.
Firstly, there are several treasury products, or more
correctly debt-market products, such as commercial
paper and bonds, which are credit substitutes.
Highly rated companies prefer issue of debt paper over
bank credit, as cost of credit (interest rate) is relatively
lower in the debt market - where in addition to banks,
there are other investors (insurance companies, mutual
funds etc.) who may invest in debt instruments.
Instead of lending to a company, the bank may also
prefer to invest in corporate bonds through the treasury.
Join CAIIB WITH ASHOK on YouTube & App
The process is called securitisation, whereby credit
receivables of the bank can be converted into units or
bonds (often called Pass-Through Certificates - PTCs)
that can be traded in the market.
For instance, the mortgage loans of a bank can be
securitised and issued in the form of PTCs through a
special purpose vehicle (SPV).
Securitisation infuses liquidity into the issuing bank, and
frees capital blocked in such assets for fresh lending.
Several banks have used the securitisation route to
encash their future receivables, not only in respect of
long-term loan assets, but also of medium-term retail
assets such as consumer loans.
Banks with surplus funds can also invest in such PTCs,
through their treasury, as a means to expand their
credit portfolio indirectly.
Join CAIIB WITH ASHOK on YouTube & App
While credit risk in a loan and bond is similar, unlike a
loan, bond is tradable and hence is a more liquid asset.
The bank has an easy exit because the bond can be sold
at a discount if the credit status of the issuer
deteriorates.
While a loan is normally with a fixed rate of interest or
interest linked to Base Rate/MCLRs of the bank, the
bond is priced in the market on the basis of credit
quality and interest rate movements - hence, the bond
can be marked-to-market as frequently as required, for
assessing potential gain or loss.
MCLR: Marginal Cost of Funds Based Landing Rate
The non-SLR investment portfolio of treasury, which
supplements bank's credit portfolio, is therefore more
flexible and ideal from ALM point of view.
Secondly, there are new products which convert
conventional credit into tradable treasury assets.
Join CAIIB WITH ASHOK on YouTube & App
Credit derivatives:
Credit derivatives have come into vogue only in the last
10 years.
Credit derivatives segregate credit risk from loan/
investment assets.
The instruments, known as credit default swap or credit
linked certificate which transfer the credit risk from
owner of the asset to another person who is in a
position to absorb the credit risk, for a fee.
There is a protection buyer, say a bank, a protection
seller who may be another bank or an investor, and a
reference asset - which may be a large corporate loan or
a bond or any other debt obligation.
The protection seller guarantees payment of principal
or interest or both, of the reference asset owned by the
protection buyer, in case of credit default (or, a credit
event defined in the contract).
In consideration of the protection, the protection buyer
pays a premium (akin to a guarantee fee) to the
protection seller.
 Join CAIIB WITH ASHOK on YouTube & App
Credit derivatives (CD) help the issuer diversify the
credit risk and use the capital more efficiently.
The CD is a transferable instrument, though the market
for CDs is not very liquid.
The CD products are still emerging and various
guidelines related to the transaction are incorporated in
the ISDA Master Agreement for Credit Derivatives.
ISDA: International Swaps and Derivatives Association.
The global financial crisis (2008-2009) brought out some
negative aspects of credit derivatives and securitization,
which in fact, aggravated the crisis.
Following two aspects have been of prime concern to
the regulators as well as market players:
1) Banks and investment institutions (in particular, in US,
UK and Europe) have rather been negligent in assessing
the credit quality of the assets, as they could securitise
the assets as soon as they are acquired, or transfer the
credit risk to a third party who would sell them as credit
default protection (by issuing credit default notes or
credit linked notes) for a small fee.
Join CAIIB WITH ASHOK on YouTube & App
fund managers created credit default swaps based on
synthetic assets (virtually, without underlying credit).
Once the mortgage crisis hit the underlying credit
market, the protection value offered by these
institutions almost disappeared, further spreading the
crisis to protection sellers like investment banks and
insurance companies.
This necessitated huge bail-outs from governments, as
the entire financial system was at risk if some of these
large institutions were to go into bankruptcy.
For the above reasons, Reserve Bank of India has been
very cautious in introducing credit derivatives in India.
However, with a view to providing market participants
a tool to transfer and manage credit risk associated
with corporate bonds, Reserve Bank of India has
introduced single name Credit Default Swaps (CDS) on
corporate bonds.
Banks can undertake transactions in such CDS, both as
market-makers as well as users. As users, banks can buy
CDS to hedge a Banking Book or Trading Book exposure.
Join CAIIB WITH ASHOK on YouTube & App
The protection however is not perfect, as there is a
counter party risk (the credit status of protection
provider), which replaces the underlying credit risk of
the loan.
During the crisis period, credit quality of the assets
(mainly home loan mortgages) as well as credit status of
the protection providers deteriorated very fast,
threatening the survival of some large commercial and
investment banks.
Finally, the governments/central banks had to come to
rescue by lending against weak assets (troubled assets)
to infuse liquidity and support shrinking capital of the
banks.
2) Credit Derivatives are highly leveraged (profitable) as
the protection fee or the credit default spread is a tiny
portion of notional value of the underlying credit.
As there is no initial investment, credit derivatives are
highly profitable so long as credit default does not take
place.
Trading in credit derivatives became very active,
particularly as some of the investment institutions and
Join CAIIB WITH ASHOK on YouTube & App
The eligible entities under market-makers and users
categories are as under:
Market Makers: Commercial Banks, standalone Primary
Dealers (PDs), Non-Banking Financial Companies (NBFCs)
having sound financials and good track record in
providing credit facilities and any other institution
specifically permitted by the Reserve Bank.
Insurance companies and Mutual Funds would be
permitted if permitted by their regulators.
Users: Commercial Banks, PDs, NBFCs, Mutual Funds,
Insurance Companies, Housing Finance Companies,
Provident Funds, Listed Corporates.
All India Financial Institutions namely, Export Import
Bank of India (EXIM), National Bank for Agriculture and
Rural Development (NABARD), National Housing Bank
(NHB) and Small Industries Development Bank of India
(SIDBI), Foreign Institutional Investors (FIIs) and any
other institution specifically permitted by the Reserve
Bank.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE - D
Chapter 26: COMPONENTS OF ASSETSAND
LIABILITIES IN BANK'S BALANCE (PART-I) However,
int
hederegul
atedenvir
onment,
What we will study? competi
ti
onhasnarr
owedt hespreadsofbanks.

What is asset liability management (ALM)? Thisnotonlyhasl edtotheintr

oduct
ionof
What is the significance of ALM? discr
iminatorypri
cingpoli
cies,
buthasalso
hi
ghlightedtheneedt omatchthemat ur
it
iesoft
he
What are the reasons of growing significance of
assetsandl i
abil
it
ies.
ALM?
Thedevel
opmentst
hathavetakenplacesi
nce
l
iber
ali
sat
ionhavel
edtoaremar kabl
etr
ansi
ti
oni
n
WHAT IS ASSET LIABILITY MANAGEMENT:
ther
iskpr
ofil
eofal
lbanks.
Because the business of banking in volves the
AssetLiabi
li
tyManagementisconcernedwi th
identifying, measuring, accepting and managing the
risk, the heart of bank financial management is risk str
ategicbal
ancesheetmanagementi nvolv
ing
management. ri
skscausedbychangesininter
estrates,exchange
rat
e,credi
tri
skandtheli
qui
dityposi
tionofabank.
One of the most important risk-management
Withprofitbecomi ngakey -
factor,ithasnow
Functions in banking is Asset Liability Management
(ALM). becomei mper ati
vef orabanktomov eawayfr
om
part
ialassetmanagement( Credi tandNon
Traditionally, administered interest rates were used PerformingAsset )andparti
al l
iabili
tymanagement,
To price the assets and liabilities of banks. towardsani ntegratedbal
ancesheetmanagement
wher eal
lthecomponent sofbal ancesheetandit
s
dif
ferentmat uri
tymi xwil
lbelookedatf r
om t
he

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
pr
ofi
tangl
eoft
hebank. SI
GNI
FICANCEOFASSETLI
ABI
LITY
AssetLi abi
li
tyManagement(ALM)i
stheactof MANAGEMENT:
planning,acqui
ri
ng,anddi
rect
ingt
hefl
owoff unds
throughanor gani
sati
on. Whydoweneedassetl
iabi
li
tymanagement
?
Theulti
mateobject i
veofthi
sprocessisto Insi
mpleterms,af
inanciali
nst
it
uti
onmayhav
e
generat
eadequat e/stabl
eearni
ngsandt ost
eadi
ly enoughassetst
opayof fit
sli
abi
li
ti
es.
buil
danorganisation'
sequit
yov ert
ime,whil
e
taki
ngreasonableandmeasur edbusinessri
sks, Butwhatif50%oftheli
abi
li
ti
esaremat
uringwit
hin
1yearbutonly10%oftheasset
sarematuri
ng
ALM isther
efor
e,t
hemanagementoftheNet wit
hinthesameperiod.
I
nterestMargi
n(NIM)toensur
ethati
tslev
eland
ri
skinessar
ecompatibl
ewithri
sk/
ret
urnobject
ives Thoughthefi
nanciali
nst
itut
ionhasenoughasset
s,
ofthebank. i
tmaybecomet empor ar
il
yinsol
ventduetoa
sever
eli
quidi
tycr
isis.
SoALM i
smor ethanjustmanagingthei
ndi
vi
dual
asset
sandl
iabil
it
iescategor
ieswell
. Thus,ALM i
srequi
redtomatchtheasset
sand
l
iabi
li
ti
esandmi ni
misethel
iqui
dit
yaswellas
NetInter
estI
ncome(
NII
)=I
nter
estI
ncome-I
nter
est
marketri
sk.
Expenses.
Asset-
li
abil
it
ymanagementcanbeperfor
medona
NetInter
estMar
gin(
NIM)=NI
I/Av
eraget
otal
per-
li
abil
it
ybasisbymatchi
ngaspeci
fi
cassett
o
Assets.
supporteachli
abi
li
ty.
Hereyouensur
ethatf
orever
yli
abil
it
y,t
her
eisan
equi
val
entt
enureandamountmatchi
ngasset
.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Againeveniftheassetsandliabi
li
ti
esmat ur
ityi
s yields/costsofassetsandl
iabi
l
iti
es,
whi
chfur
ther
matchedt oalargeextent
,theint
erestratescan affectthemar ketval
ueofthebankandi
tsNet
changedur i
ngtheperiodther
ebyaf fecti
ngthe InterestIncome(NII)
.
i
nteresti
ncomef r
om assetsandinterestexpenses
onli
abili
ti
es.
2‐
ProductI
nnov
ati
on:
Dependingupont hemovementofi nt
erestrat
est
he
netinter
estmarginmayincreaseordecrease Thesecondr easonforgr
owingi
mpor
tanceofALM
result
ingincor
respondi
ngincreaseordecreasei
n i
st herapi
dinnovati
onstaki
ngpl
acei
nthefi
nanci
al
profi
tduringacertai
nperi
od. productsofthebank.
Whi l
ethereweresomeinnovat
ionsthatcameas
passingfads,
othershav
erecei
v edt
remendous
Someofthereasonsforgr
owi
ngsi
gni
fi
canceof response.
AssetLi
abi
li
tyManagementar
e:
Whatevermaybefeat
uresoftheproduct
s,mostof
1‐
Vol
ati
li
ty: t
hem haveanimpactontheriskpr
ofil
eofthebank
Theef f
ectoff r
eeeconomi cenvi
ronment(
dueto t
herebyenhanci
ngtheneedforALM.
globali
zati
onandl iberal
isat
ion)arer
efl
ectedi
n Forexampl
e,Fl
exi
-deposi
tfaci
li
ty.
i
nt er
estratestructur
es,moneysuppl yandthe
overallcr
editpositi
onoft hemarket,
theexchange
ratesandpr i
cel ev
els.
Forabusiness,
whichinvol
vestr
adingi
nmoney , 3‐
Regul
ator
yEnv
ironment
:Att
hei
nter
nat
ionall
evel
,
rat
efl
uctuati
onsinvar
iabl
yaff
ectthemarketv
alue,
Bankf
orI
nter
nat
ionalSet
tl
ement
s(BI
S)pr
ovi
desa

Join CAIIB WITH ASHOK on YouTube & App

Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE - D
fr
amewor kforbankst
otackl
ethemarketri
sksthat Chapter 26: COMPONENTS OF ASSETSAND
mayar i
seduetoratef
luct
uat
ionsandexcessi
ve LIABILITIES IN BANK'S BALANCE (PART-II)
credi
tri
sk.
What we will study?
Centr
alBanksinvari
ouscountr
ies(
incl
uding
*What is Objective of ALM?
Reser
veBankofI ndi
a)hav
eissuedframewor ksand
gui
deli
nesforbankstodevel
opAssetLiabil
it
y *What is NII?
Managementpolici
es. *What is NIM?

4‐
ManagementRecogni
ti
on: PURPOSE AND OBJECTIVES OF ASSET LIABILITY
Al
ltheabov
e-menti
onedaspectsforcedbank MANAGEMENT:
managementst
ogiveaseri
oust houghttoef
fect
ive An effective Asset Liability Management technique
managementofasset
sandliabi
li
ti
es. Aims to manage the volume, mix, maturity, rate
sensitivity, quality and liquidity of assets and
Themanagement shavereal
isedthatitisj
ustnot liabilities as a whole so as to attain a
suffi
cienttohaveaverygoodf r
anchiseforcr
edit predetermined acceptable risk/reward ratio.
disbursement,nori
sitenoughtohavej ustaver
y
goodr etai
ldeposi
tbase. Thus, the purpose of Asset Liability Management is
To enhance the asset quality; quantify the risks
Inaddit
iont
ot hese,abankshouldbeinapositi
on
Associated with the assets and liabilities and
torel
ateandli
nkt heassetsidewit
htheli
abil
it
y
Further manage them.
sideandthi
scallsforeff
ici
entasset-
li
abi
li
ty
management .
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Suchapr
ocesswi
lli
nvol
vet
hef
oll
owi
ngst
eps:
*Revi
ewingtheint
erestr
at est
ructur
eand NetI
nter
estI
ncome(
NII
)
compari
ngt hesamet otheint
erest/
productpr
ici
ng NetI
nter
estMar
gin(
NIM)
ofbothassetsandli
abil
iti
es.
Economi
cEqui
tyRat
io
*
Examini
ngt hel
oanandinvestmentpor
tfoli
osin
t
heli
ghtofthefor
eignexchangeri
skandliquidi
ty
HereAbr
iefdescr
ipt
ionoft
hesepar
amet
ersi
s
r
iskt
hatmightari
se.
gi
venbel
ow:

*Examini
ngthecredi
tri
skandcont i
ngencyri
skthat
NetI
nter
estI
ncome(
NII
):
mayor i
ginat
eei
therduetorat
ef l
uctuat
ionsor
other
wiseandassessthequal
ityofassets. Thei
mpactofv
olati
li
tyontheshor
t-
ter
m pr
ofi
tis
measur
edbyNetInt
erestI
ncome.
*Rev i
ewingtheactualper
formanceagai
nstthe
projecti
onsmadeandanal ysingt
hereasonsforany
effectonthespreads. NetInter
estI
ncome=I
nter
estI
ncome-I
nter
est
Expenses.
TheAssetLi abil
it
yManagementt echniquesso
designedt omanagev ar
iousrisks,primari
lyaimto I
nor
dertost
abil
iseshort
-ter
m pr
ofi
ts,
bankshav
e
stabili
setheshort-
term profi
ts,long-
t er
m earni
ngs t
omini
misefl
uct
uationsintheNI
I.
andl ong-
term substance/qualit
yoft hebank.
Thepar
ametersthatar
esel
ectedfort
hepurposeof
st
abi
li
singAssetLi
abil
it
yManagementofbanksare: NetI
nter
estMar
gin(
NIM)
:

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
NetI
nter
estMar
gini
sdefi
nedasnetinter
est
i
ncomedivi
dedbyav
eragetot
alasset
s.
Economi
cEqui
tyRat
io:

NetI
nter
estMar
gin(
NIM)= Therati
ooftheshar
ehol
ders'
fundstot
hetotal
assetsmeasur
estheshi
ft
sintherat
ioofowned
NetI
nter
estI
ncome/
Aver
aget
otalAsset
s.
fundstot
alf
unds.
NetI
nterestMar
gincanbev
iewedast
he"
Spr
ead'
EER=Shar
ehol
der
sfund/
Tot
alAsset
s
onear
ningassets.
Thisf
actassessest
hesust
enancecapaci
tyoft
he
Thenetincomeofbankscomesmost l
yfrom t
he
bank.
spr
eadsmai ntai
nedbetweent
otali
nteresti
ncome
andtot
al i
nter
estexpense.
Obj
ect
ivesofALM:
Thehi
ghert
hespr
ead,
themor
ewi
llbet
heNI
M.
Atmacr o-l
evel,
AssetLiabil
it
yManagementl eadst
o
Thereexi
stsadi
rectcor
rel
ati
onbet
weenr
isksand
theformulati
onofcrit
icalbusinesspolici
es,
ret
urn.
effi
ciental
locati
onofcapitalanddesigningof
Asaresult
,great
erspr
eadsonl
yimpl
yenhanced productswithappropr
iateprici
ngstrategies.
ri
skexposure.
Andatmicr
o-l
eveltheobject
ivesofAssetLi
abi
li
ty
Butsinceanybusinessi
sconduct edwit
hthe Managementaretwofolds.
objecti
veofmakingprofi
tsandachievi
nghigher
Itai
msatprofi
tabil
it
ythr
oughpr
icematchi
ngwhil
e
profi
tabil
i
tyi
sthetarget
,itist
hemanagementof
ensuri
ngl
iqui
ditybymeansofmatur
it
ymat chi
ng.
ri
sksandnotr i
skelimi
nation,
thathol
dsthekeyto
success.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE - D
Chapter 26: COMPONENTS OF ASSETSAND
Pr
iceMat
chi
ng: LIABILITIES IN BANK'S BALANCE (PART-III)

I
tbasi cal
lyai
mst omaintai
nspreadsbyensuri
ng What we will study?
thatthedeploymentofli
abil
it
ieswil
lbeatarat
e *What is balance sheet?
higherthanthecosts.
Thisexerci
sewouldindi
cat ewhethert hei nst
ituti
on
i
sinaposi ti
ont
obenef i
tf r
om ri
singi nterestrates
byhav i
ngaposit
ivegap( asset
s>l iabili
ti
es)or
whetheriti
sinapositi
ont obenefitfrom declining
i
nterestrat
esbyanegat i
vegap( l
iabilit
ies>asset s).

Li
qui
dit
y:
Iti
sensur edbygr oupingtheassets/li
abi
li
ti
es
basedont heirmatur
ingprofi
les.Thegapist hen
assessedt oidenti
fyfutur
ef i
nancing
requi
rement s.Howeverthereareof t
enmat urit
y
mismat chwhi chmayt oacer t
ainextentaffectthe
expectedr esult
s.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

BALANCESHEET:
LI
ABI
LITI
ES(
Sour
ceoff
und)ASSETS(
Useoff
und)
Itisast at
ementofasset
s(whatisowned,
and
l
iabil
it
ies(whati
sowedt oot
hers)ofanent
it
yata Longt
erml
iabi
l
iti
es Cur
rentAsset
s
parti
cularmoment. Cur
rentl
iabi
li
ti
es Fi
xedAsset
s
Asset
s:Whatf
ir
m owns Networ
th I
ntangi
bleAsset
s
Li
abi
li
ty:
Whatf
ir
m owes NonCur
rentAsset
s
Iti
sli
keasnapshotofasset sandliabi
li
ti
esandjust
Tot
al== ==Tot
al
asonepi ct
uremaybedi ffer
entfr
om anothert
aken
anyti
meear li
er,t
hebalancesheetmayalsobe
dif
ferentatdif
ferentmomentsofthesameday .
Footnot
e Cont
ingentLi
abi
li
ty
Theref
ore,ever
ybal
ancesheetmustindi
cat
ethe
BankGuar
ant
ee Let
terofcr
edi
t
dateattheendofwhichi
tisprepar
ed.
Asset
s:
Nor
mal l
y,thebalancesheeti
sprepar
edatt
heend
oft
heaccount i
ngperiodforwhi
chtheP&Laccount 1-Cur
rentAsset
s
i
sprepared. 2-
NonCur
rentAsset
s
P&Laccounti
spr
epar
edf
oraper
iod. 3-
FixedAsset
s
Bal
anceSheeti
spr
epar
edf
orapar
ti
cul
ardat
ei.
e 4-I
ntangi
bleAsset
s
asonadate.
1-
Cur
rentAsset
s:Thoseasset
swhi
char
eli
kel
yto
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

(
d)Mi
ningr
ight
s,
beeitherconsumedorconv er
tedi
ntocashwit
hin1 (e)Copyr
ight
s,andpat
ent
sandot
heri
ntel
l
ect
ual
yearfrom t
hedat eofbal
ancesheetar
ecall
ed proper
tyri
ghts,
CurrentAssets. 3-
FixedAsset
s:(
netbl
ock)
Exampl
e: (t
angi
bleasset
s:whi
chcanbet
ouched)
1-
BankBal
ance 5-
Debt
ors Thoseasset
swhi
chwi
llbeusedf
orl
ongoft
ime.
2-
Inv
ent
ory
/st
ock 6-
Accr
uedI
ncome OrThoseasset
swhi
char
enotmeantt
obesol
d.
3-
Cash 7-
PrepaidExpenses(I
nsur
ance, (
a)Land, (
b)Bui
ldi
ngs,
AdvanceTax,AdvanceRent)
(
c)Pl
antandEqui
pment
,(d)Fur
nit
ureandFi
xtur
es,
4-
Bil
lRecei
vabl
e
(
e)Vehi
cles,
2-
Int
angi
bleAsset
sorFi
cti
ti
ousAsset
s:
Theassetswhichdonothavephy
sicalexi
stence 4-
NonCur
rentAsset
s:
arecal
ledInt
angibl
eAsset
s.
Thoseasset
swhi
chcannotbecl
assi
fi
edas
Ex-
Ei
therf
ixedasset
s
(
a)Goodwi
ll
,
Orcur
rentasset
s
(
b)Br
ands/
trademar
ks,
OrI
ntangi
bleasset
s
(
c)Comput
ersof
twar
e,
Ar
ecal
ledNoncur
rentAsset
s.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Li
abi
li
ty: dat
eofbal
ancesheeti
scal
ledCur
rentl
iabi
li
ty.
1-
Longt
erml
iabi
li
ty
Exampl
e:
2-
Cur
rentl
iabi
li
ty
1-
Unsecur
edLoan
3-
Networ
th
2-
Debent
ures(
whi
char
emat
uri
ngaf
ter12mont
hs)
1-
Cur
rentLi
abi
li
ty: 3-
Ter
mloan
Amountpayabl
etooutsiderWITHI
N1y earfrom t
he (
inst
all
mentwhi
char
epay
abl
eaf
ter1y
ear
)
dat
eofbalancesheeti
scalledCur
rentl
iabi
li
ty.
3-
Networ
thorOwner
'sEqui
ty:
Exampl
e:
Amountcontr
ibut
edbyOwner+Profi
tret
ainedi
n
1-
Inst
all
ment
soft
erml
oanpay
abl
ewi
thi
noney
ear
. thebusi
nessi
scalledt
henetwor
th.
2-
Bil
lspay
abl
e Exampl
e:
3-
Sundr
yCr
edi
tor
s 1-
Capi
talorshar
ecapi
tal
4-
Prov
isi
onf
ort
ax 2-
Reser
vesandsur
plus
5-
Out
standi
ngexpenses 3-
Shar
epr
emi
um
6-
BankBor
rowi
ngi
nfor
m ofCCandOD
2-
Longt
erml
iabi
li
ty:
Amountpay
abl
etoout
siderAFTER1y
earf
rom t
he
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE – D
Chapter 27: CAPITAL ADEQUACY TheBaselCommi t
teepr
ovidedtheframewor
kfor
THE BASEL-II OVERVIEW (PART-I) capi
taladequacyi
n1988,whichisknownasthe
What will we study? Basel
-Iaccord.

*What is BASEL-II? The1988BaselAccor

dledt
osigni
fi
canti
ncr
eases
*What is CAPITAL ADEQUACY? i
nthecapi
talhel
dbybanksovert
henext10year
s.
Itdeser
vesagr
eatdealofcr
edi
tfori
mpr
ovi
ngt
he
INTRODUCTION:
stabi
li
tyoft
hegl
obalbanki
ngsyst
em.
Whey we call it BASEL?
Howev
er,
ithadcer
tai
nsi
gni
fi
cantweaknesses.
Central Bank Governors of the Group of 10
Countries formed a committee of banking TheBasel
-Inormsforr
iskwei
ght
swer
emor
eofa
Supervisory authorities in 1975. st
rai
ghtj
acketnat
ure.
This Committee usually meets at the Bank of Forexampl
e,al
lexposur
est
osov
erei
gnswer
e
International Settlement (BIS) in Basel, Switzerland. gi
ven0%r i
skweight
.
Hence it has come to be known as the Basel
Al
lbankexposur
eshadar
iskwei
ghtof20%.
Committee.
Cor
por
ateadv
anceshadar
iskwei
ghtof100%.
Suchr i
gidappr
oachwithoutanyconsi der
ati
onf or
thestrengt
hsorweaknessesofi ndiv
idualenti
ties
wast hemainshort
comi ngoftheBasel -
Iaccord,
e.g.
,alll
oansbyabankt oacor porat
ionhavear i
sk
weightof100%andr equir
ethesameamountof
capit
al.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Example:Aloantoacor
porati
onwit
haAAAcr
edi
t TheRev i
sedFramewor kconsistsoft
hree-mut
ual
ly
rat
ingistr
eatedint
hesamewayasonetoa rei
nforci
ngpil
lars,
v i
z.,
mi ni
mum capi
tal
corpor
ati
onwi t
haBcreditr
ati
ng. requi
rements,supervi
soryrevi
ewofcapital
adequacy,andmar ketdisci
pli
ne.
Smal
lti
cketl
oans(
ret
aill
endi
ng)al
socar
ri
edar
isk
wei
ghtof100%.
Toovercomet heshortcomingsofBaselI ,t
heBasel BASEL-
II–REVI
SEDFRAMEWORK:
Commi tt
eeofBanki ngSupervisi
on( BCBS)rel
eased
TheRevisedFrameworkconsi
stsoft
hree-
mut
ual
ly
the“I
nternati
onalConvergenceofCapi t
al rei
nfor
cingPil
lar
s,v
iz.
,
MeasurementandCapi talStandards:ARevised
Framewor k”onJune26, 2004. 1-
Mini
mum capi
talr
equi
rement
s,

Acompr ehensi
vev er
sionoftheRev
ised 2-
Super
visor
yrev
iewofcapi
taladequacy
Framewor kwasissuedinJune2006,whichi
sa 3-Mar
ketdi
sci
pli
ne.
compil
ationoftheJune2004BaselIIFr
amework.
UnderPi l
lar1,t
heFramewor koffer
st hr
eedi
sti
nct
TheRev i
sedFrameworkseekstoarr
iveat optionsforcomput i
ngcapit
alrequi
r ementfor
si
gnifi
cantl
ymoreri
sk-
sensiti
veapproachest
o creditri
skandt hr
eeotheropti
onsf orcomputing
capi
talrequi
rement
s. capitalr
equirementforoper
ati
onalr isk.
Itprovi
desarangeofoptionsf ordeter
miningthe Theseopti
onsforcreditandoper ati
onalri
sksare
capital
requi
rementsforcreditri
skandoper at
ional basedonincr
easingrisk-sensi
ti
vi
t yandall
owbanks
risktoall
owbanksandsuper v i
sorstoselect tosel
ectanapproacht hatismostappr opri
ateto
approachesthataremostappr opri
ateforthei
r thest
ageofdevelopmentofbank' soperat
ions.
operati
onsandf i
nanci
almar kets.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Theopt
ionsav
ail
abl
eforcomput
ingcapi
talf
or SCOPEOFAPPLI
CATI
ON:
cr
edi
tri
skare:
1-
Standar
disedAppr
oach(
opt
edbyI
ndi
anbank) Therevisedcapit
aladequacynor msar eappli
cabl
e
2-Foundat
ionI
nter
nalRat
ingBasedAppr
oach uni
formlytoallCommer cialBanks(except
3-Adv
ancedI
nter
nalRat
ingBasedAppr
oach. Cooperativ
eBanks,LocalAr eaBanksandRegi onal
RuralBanks),
bothatthesol olevel
(globalposi
ti
on)
aswellasattheconsolidatedlevel
.
Theopt
ionsav
ail
abl
eforcomput
ingMar
ketr
iskar
e AConsoli
dat
edbankisdef
inedasagroupof
1-
Standar
dizeddur
ati
onappr
oach ent
it
ieswher
eali
censedbankisthecont
rol
li
ng
ent
it
y.
(
opt
edbyI
ndi
anbank)
Aconsoli
datedbankwil
lincl
udeal
lgroupenti
ti
es
2-
Standar
disedmat
uri
tyappr
oach
underi
tscontr
ol,
excepttheexempt
edentit
ies.
3-
Int
ernalmodel
sappr
oach(
suchasVAR)
Aconsol i
datedbankmayexcl udegr
oupcompani es,
whichar eengagedi
ni nsur
ancebusinessand
Theopti
onsavai
labl
eforcomput
ingcapi
talf
or businessesnotpert
ainingtofi
nanci
alservi
ces.
oper
ati
onalr
iskare Aconsolidatedbankshoul
dmai nt
ainami ni
mum
1-
Basi
cIndi
cat
orAppr
oach(
opt
edbyI
ndi
anbank) Capi
taltoRisk-wei
ghtedAsset
sRat i
o(CRAR)as
appl
icabl
et oabankonanongoi ngbasis.
2-
Standar
disedAppr
oachand
3-
Adv
ancedMeasur
ementAppr
oach.

Join CAIIB WITH ASHOK on YouTube & App

Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE – D
KeepinginviewtheReserveBank'sgoalt ohave Chapter 27: CAPITAL ADEQUACY
consist
encyandhar monywithinternat
ional THE BASEL-II OVERVIEW (PART-II)
standar
ds,itwasdecidedthatallcommer cial What will we study?
banksinIndia(excl
udi
ngCo- operat
iveBanks,Local
*What is PILLAR-I (Minimum Capital Requirement)?
AreaBanksandRegi onalRuralBanks)shalladopt
St
andar
disedAppr
oach(
SA)f
orcr
edi
tri
sk THREE PILLAR OF BASEL-II
Basi
cIndi
cat
orAppr
oach(
BIA)f
oroper
ati
onalr
isk Pillar-I: Minimum Capital Requirement
Standar
disedDur
ati
onAppr
oach(
SDA)f
ormar
ket Pillar-II: Supervisory Review
ri
sks. Pillar-III: Market Discipline

PILLAR-I– MINIMUM CAPITAL REQUIREMENTS

The capital ratio continues to be calculated using
The definition of regulatory capital and risk-
Weighted assets.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Thedef i
nit
ionofel
igi
bleregul
ator
ycapitall
argel
y Supplementarycapit
alcompr i
sessubor dinated
continuest obeasdefinedint
heearli
eraccordof debtofmor ethanfiv
ey ears’matur
it
y,loanl oss
1988andamendedt oincl
udeTier
-II
Icapit
alas reserves,
reval
uati
onr eser
ves(whichisnowpar tof
prescribedinJanuary96andSeptember97. Tier-
Icapit
alinI
ndia),i
nvestmentfl
uctuat i
on
Thust
het
erm capi
talwoul
dincl
ude reserves,
andlimit
edlifepref
erenceshar es.

Ti
er-
Iorcor
ecapi
tal
, Ti
er-
IIcapi
tali
srest
ri
ctedt
o100%ofTi
er-
Icapi
tal
asbefore.
Ti
er-
IIorsuppl
ement
alcapi
tal
,and
Tier-
II
I(Present
lynotall
owedbyRBI)capi
tal
Ti
er-
II
Icapi
tal
. consistsofshort-
ter
m subordi
nat
eddebtforthe
TierII
Icapi
tal,whi
chtookcareofmarketri
skoft
he solepurposeofmeet ingapropor
ti
onofthecapit
al
bankshassi ncebeenphasedoutwiththe requir
ementf ormarketri
sk.
i
nt r
oducti
onofBaselIIIgui
del
ines. Ti
er-
II
Icapi
talwillbeli
mitedt
o250%ofabank’s
Thet
otalcapi
talr
ati
oshoul
dbemi
mimum 8%. Ti
er-
Icapi
talthatisrequi
redt
osuppor
tmarketr
isk.

(
9%i
nIndi
a).
Tier-
II
Icapitalwasprovi
dedundert heBaselII
Corecapit
alconsi
stsofpai
dupcapital,
free
guideli
nes,butRBIhasnotpermittedthiscapi
talfor
reser
vesandunall
ocatedsur
pluses,
lessspeci
fi
ed
Banksi nIndia.Wi
ththeint
roduct
ionofBaselI I
I,
deducti
ons.
thiscapit
alwasphasedoutbyBCBSal so.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Anycapit
alrequi
rementar
isi
ngi
nrespectofcr
edit
andcounter-
part
yri
skneedstobemetbyTier-
Iand
ThusTot
alRi
skwei
ght
edasset
s=
Tier
-I
Icapi
tal.
Riskweight
edassetsforcr editr
isk+12.5*
Capi
tal
Thescopeofri
skweightedassetsi
sexpandedto requi
rementformarketrisk+12.5*Capi
tal
i
ncludecer
tai
naddit
ionalaspect
sofmarketri
sk
requi
rementforoper
ationalrisk.
andalsooper
ati
onalri
sk.
ThusTot
alRi
skwei
ght
edasset
s(I
NINDI
A)=
Theareaofoper
ati
onalr
iski
sbroughtundert
he
ambitofr
isk-
wei
ghtedasset
sforthefi
rstt
ime. Riskweight
edassetsforcr editr
isk+11.
11*Capi
tal
requi
rementformarketrisk+11.11*Capi
tal
Capi
taladequacyrat
io=Regul
ator
yCapi
tal
/Tot
al requi
rementforoper
ationalrisk.
ri
skweightasset
s
Totalri
skweight
edasset sincludethecapi t
al
requi
rementformarketriskandoper at
ionalri
sk Pi
ll
ar2:Super
visor
yRev
iew:
multi
pli
edby12.5,i
.e.recipr
ocaloft hemi ni
mum 1.Ev
aluat
eri
skassessment
capit
alrequi
rementof8%( I
nI ndi
a,t
her iskweight
2.Ensuresoundnessandi
ntegr
it
yofbank’
sinter
nal
hasbeencappedat11. 11si ncethemi nimum
processestoassesst
headequacyofcapi
tal
capit
alrequi
rementis9%)
3.Ensur
emaintenanceofmini
mum capitalwi
th
al
ongwi
thr
iskwei
ght
edasset
sforcr
edi
tri
sk.
promptcor
rect
iveacti
on(PCA)forshor
tfal
l
4.Pr
escr
ibedi
ff
erent
ialcapi
tal
,wher
enecessar
yi.
e.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE – D
Chapter 28: ASSET CLASSIFICATION AND
PROVISIONING NORMS (PART-I)
wher
ethei
nter
nalpr
ocessesar
esl
ack.
What will we study?
Pi
ll
ar3:Mar
ketDi
sci
pli
ne:
*What is Asset Classification?
1-Enhancedi
scl
osur
es
*What is NPA?
2-Cor
edi
scl
osur
esandsuppl
ement
arydi
scl
osur
es
3-Di
scl
osur
esshoul
dbemadeonhal
fyear
lybasi
s.
ASSET CLASSIFICATION (History):
In August 1991, a high-level committee, headed by
Thust heBasel
-I
Iaccorddoesnotmer el
yprescr
ibe M. Narasimhan was appointed to examine various
minimum capit
alrequi
rement,butenv
isages Aspects of financial system.
processesofsupervi
soryr
eviewandmar ket One of the important recommendations of the
di
scipline. Narasimham Committee was that balance sheets
Therevi
sedfr
amewor
kismor
eri
sksensi
ti
vet
han Of the banks should be transparent and comply with
the1988ccor
d. International accounting standards.
The Committee recommended that banks should
Therear
eincent
ivesf
ort
hosebanks,whi
chhav
e
Adopt uniform accounting practices in regard to
bett
erri
skmanagementcapabi
li
ti
es.
Income recognition and bad debts provisioning.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Inparti
cul
ar,
incomer
ecogni
ti
onofnon-
perf
orming Def
ini
ti
ons:Non-
per
for
mingAsset
s:
assetsshoul
dnotbeonaccr
ualbasi
sbutonrecor
d
Anasset,i
ncl
udi
ngal easedasset
,becomesnon-
ofrecover
y. perf
ormingwhenitceasestogenerat
eincomefor
TheCommitteeal
sosuggest
edthatpr
ovisi
oning thebank.
shoul
ddependuponapropercl
assi
fi
cati
onof
Anon-
per
formingasset(
NPA)i
sal
oanoran
asset
s,whi
chintur
nshouldbebasedonobjecti
ve
adv
ancewhere:
cri
ter
ia.
1-
IfTer
m Loan:
I
nl i
newi ththeinternat
ionalpracti
cesandasper
therecommendat ionsmadebyt heCommi tteeon I
nt er
estand/ori
nstal
lmentofpri
nci
palr
emain
theFinancialSystem (Chair
manM.Nar asi
mham) , overdueforaperi
odofmor ethan90daysi
n
theReser veBankofI ndiahasintroduced,ina respectofatermloan.
phasedmanner ,prudenti
alnormsf orincome 2-
IfCC/
ODAccount
:
recognit
ion,assetclassif
icat
ionandpr ov i
sioning
A)Theaccountr
emai
ns'
outofor
der'
inr
espectof
fortheadv ancespor t
foli
oofthebanks.
anOver
draft
/CashCr
edi
t(OD/
CC).
Or
B)IfCCandODli
mitisnotrenewed/rev
iewed
wit
hin180day
sfrom duedateofrenewal,
theni
tis
cal
ledNPA.
Or
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

C)Ifstockst
atementwhi
chi
ssubmi
tt
edi
nbankby 3-
IfBi
llPur
chasedorBi
llHandl
ed:
customeris Thebil
lremainsov
erdueforaperi
odofmoret
han
3mont
hsol
d:i
rr
egul
araccount 90daysinthecaseofbi
ll
spurchasedand
6mothsol
dornofr
eshst
ockst
atementi
srecei
ved di
scounted.
i
nlast6mont
hs:NPA '
Over
due'
:
Anyamountduet othebankunderanycr
edi
t
'
OutofOr
der
’St
atus: faci
li
tyi
s‘ov
erdue’i
fiti
snotpaidontheduedat
e
Anaccountshouldbetr
eatedas“outoforder
'ift
he fi
xedbythebank.
out
standingbal
anceismorethansancti
onedli
mit
orDrawingpowerformorethan90days.
4-
IfAgr
icul
tur
eLoan:
or
t
hei
nstal
lmentofpr
inci
palori
nter
estt
her
eon
Eithert
herei
snocredi
torcr
edi
tsar
enotenought
o r
emai
nsov er
duefor
recoverthei
nter
est
.
*
Twocr
opseasonsf
orshor
tdur
ati
oncr
ops.
Thentheseaccount
sshoul
dbet
reat
edas“
outof
*
Onecr
opseasonf
orl
ongdur
ati
oncr
ops.
order
'.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Banksshouldcl
assi
fyanaccountasNPAonlyi ft
he AssetCl
assi
fi
cat
ion:
i
nterestchar
geddur
inganyquart
erisnotser
viced
1-
Standar
dAsset
ful
lywithi
n90daysfr
om theendofthequart
er.
2-Subst
andar
dAsset
Theclassi
fi
cat
ionofanassetasNPAshoul
dbe
basedontherecor
dofrecover
y. 3-
Doubt
fulAsset

Bankshoul dnotcl assi

fyanadv anceaccountas 4-
LossAsset
NPAmer elyduet otheexistenceofsome Not
e:2,
3,
4ar
ecal
ledNPA.
defi
ciencieswhi charetempor aryi
nnaturesuchas
1-
Standar
dAsset
:
*non-
av ai
labil
it
yofadequat edr awi
ngpowerbased
onthel at
estav ail
ablestockstatement, Ifpaymenti
sregul
ator
ycomi
ngt
heni
tisa
standar
dasset.
*
bal
anceoutst
andi
ngexceedi
ngt
hel
imi
t
t
emporar
il
y, Speci
alMensi
onAccount
:(
SMA)

*nonsubmi
ssi
onofst
ockst
atement
sonduedat
e *
Irr
egul
arst
andar
daccount
sar
ecal
ledSMA
and Now,
*
non-
renewal
oft
hel
imi
tsont
heduedat
e,et
c. SMA0:I
fir
regul
arf
or1-
30day
s
SMA1:
Ifi
rr
egul
arf
or31-
60day
s
SMA2:I
fir
regul
arf
or61-
90day
s
*Af
ter90day
saccountbecomeNPA.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

(
a)Subst
andar
dAsset
s: (
c)LossAsset
s:
OnbecomingNPAt heaccounti
scl
assi
fi
edas Thataccounti
nwhi
chmoneycan'
tber
ecov
ered.
Subst
andardaccount
.(
upto12months) Alossassetisonewherelosshasbeenident
if
ied
Witheff
ectfrom 31March2005,asubstandar
d bythebankorinter
nalorext
ernalaudi
tor
sorthe
assetwouldbeone,whichhasremainedNPAf ora RBIinspect
ionbutt
heamounthasnotbeenwr itt
en
peri
odlessthanorequalto12months. offwholl
y.
(
b)Doubt
fulAsset
s:
I
fNPAorSubst
andar
dformor
ethan12mont
hs. I
ncomeRecogni
ti
on:
Thepol
icyofi
ncomerecognit
ionhastobe
Witheffectfr
om March31,2005,anassetwouldbe obj
ect
iveandbasedontherecordofr
ecover
y.
cl
assif
iedasdoubtfuli
fithasremainedi
nthe
I
nternat
ionall
y ,i
ncomefrom non-perf
ormingassets
subst
andar dcat
egoryforaperi
odof12mont hs.
(NPA)isnotr ecogni
sedonaccr ualbasi
s,butis
Doubt
fulAsset
sar
efur
thercl
assi
fi
edas: bookedasi ncomeonl ywhenitisactual
lyrecei
ved.
Ther
efor
e,t
hebanksshoul
dnotchar
geandt
aket
o
Doubt
ful1(
D1)
:Ifdoubt
fulupt
o1y
ear i
ncomeaccounti
nter
estonanyNPA.

Doubt
ful2(
D2):I
fdoubt
fulf
ormor
ethan1y
ear Howev er,inter
estonadvancesagai
nstterm
andupto3year
s deposi
t s,NSCs, KVPsandli
fepoli
ciesmaybe
takentoi ncomeaccountont heduedate,
provided
Doubt
ful3(
D3)
:Ifdoubt
fulf
ormor
ethan3y
ear
s.
adequat emar gi
nisavai
labl
eintheaccounts.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Incaseofgovernmentguar ant
eedadvances Exampl
e:
becomingNPA, thei
nterestonsuchadvances
31-
03-
2020:I
nst
all
mentwasdue.
shouldnotbetakentoincomeaccountunlessthe
i
nteresthasbeenreal
ised. 01-
04-
2020:SMA0

Summar
y: 30-
04-
2020:SMA0

*
SMA0:I
fir
regul
arf
or1-
30day
s 01-
05-
2020:SMA1

SMA1:
Ifi
rr
egul
arf
or31-
60day
s 30-
05-
2020:SMA1

SMA2:I
fir
regul
arf
or61-
90day
s 31-
05-
2020:SMA2

Thesear
est
andar
daccountbuti
rr
egul
ar 29-
06-
2020:SMA2

*Subst
andar
d:f
rom dat
eofNPA(
91t
hday
)andupt
o 30-
06-
2020:NPAorSubst
andar
d
1year 30-
06-
2021:
NPAorSubst
andar
d
Thi
sisNPAaccount
. 01-
07-
2021:
Doubt
fulAsset(
D1)
*
Doubl
efulAsset
:IfNPAorSubst
andar
dformor
e 01-
07-
2022:
Doubt
fulAsset(
D1)
t
han1year.
02-
07-
2022:
Doubt
fulAsset(
D2)
D1:Doubt
fulf
or1y
ear
s
02-
07-
2024:
Doubt
fulAsset(
D2)
D2:Doubt
fulf
ormor
ethan1y
earupt
o3y
ear
s
03-
07-
2024:Doubt
fulAsset(
D3)
D3:Doubt
fulf
ormor
ethan3y
ear
s
Thenl
ossasset
.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE – D
Chapter 28: ASSET CLASSIFICATION AND
PROVISIONING NORMS (PART-II) Thismakesaf
urt
herdenti
nthepr
ofi
tabi
li
tyoft
he
bank.
What will we study?
TheReserveBankofI ndiaint
r oducedt hesy
stem of
*What is Provisioning Norm?
assetcl
assifi
cati
onandpr ovisioninginli
newith
i
nternat
ionalpract
icesforthef i
rstti
mei n1993.
PROVISIONING NORMS:
A non-performing asset (NPA) causes two-fold Thenormshaveunder
gonesev
eralchangesdur
ing
Impact on the profitability of a bank. thel
ast27year
s.

On one hand, the bank ceases to earn interest on Inconformi

tywit
htheprudenti
alnor
ms, pr
ovi
sions
This asset and thus is deprived of its legitimate shouldbemadeont henon-per
formi
ngassetson
Income from the asset. thebasisofcl
assi
fi
cati
onofassetsint
oprescr
ibed
categori
es.
On the other hand, the bank is required to make
Provisions for this asset, depending on the Takingintoaccountt hetimel agbetweenan
classification/ category of the asset and value of accountbecomi ngdoubtfulofrecovery,
its
security, if any. recognit
ionassuch, t
her eal
isati
onofthesecurit
y
andt heerosionov erti
mei nthev al
ueofsecurit
y
chargedt othebank, t
hebanksshoul dmake
provisi
onagai nstsubstandardassets,doubtf
ul
assetsandl ossasset sasment ionedbelow:

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

St
andar
dAsset
s: (a)
(i
)Farm Cr
editt
oagr
icul
tur
alacti
vi
ti
esandSmall
andMi cr
oEnter
pri
ses(
SMEs)sectorsat0.
25per
(i
)Banksarerequi
redtomakegeneralpr
ovi
sionf
or
cent.
standar
dassetsatthefol
lowi
ngr
ates:
(a)(
ii
)TheMedium Enterpri
seswi
llat
tract0.
40%
LOAN(
Standar
dAsset
) Pr
ovi
sioni
ng
standar
dassetpr
ov i
sioning.
Nor
malRat
e 0.
4%
(b)
(i
)Advancest
oCommerci
alRealEst
ate(
CRE)
MSE 0.
25% Sectorat1.
00percent
.
Medi
um Ent
erpr
ise 0.
40% (b)
(i
i)AdvancestoCommercial
RealEst
ate-
Advt
oAgr
icul
tur
e 0.
25% Resident
ialHousi
ngSect
or(CRE-RH)at0.75per
cent.
Commer ci
alr
ealest
ate 1%
(shop,
offi
ce,
par
ketc.) (c)Housi
ngl
oansextendedatt
easerrat
esat2per
centi
nv i
ewoft
hehigherri
skassoci
atedwi
ththem.
Commer
cialr
ealest
ate(
Housi
ng) 0.
75%
Thepr ovi
sioningrateshallbereducedto0.40per
I
ndi
vi
dualHousi
ngl
oan 0.
25% centafter1y earfrom thedateonwhichtherates
Housi
ngl
oanatt
easerr
ate 2% areresetathi gherrat
esiftheaccountsremain
'
standard'.
Housi
ngl
oanatt
easerr
ate 0.
40%
(d)Al
lotherl
oansandadvancesnoti
ncl
udedi
n(a)
aft
er1yearf
rom thedat
eonwhi ch
and(b)aboveat0.
40percent.
t
herat
esareresetathi
gherr
ates
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

(
ii
)Theprovi
sionsonstandar
dasset
sar
enott
obe Ageneralprovi
sionof15%ont ot
aloutst
anding
r
eckonedforarr
ivi
ngatnetNPAs. shoul
dbemadewi thoutmakinganyall
owancefor
(i
ii
)Theprovisi
onst owardsStandar
dAsset sneed ECGCguar ant
eecov erandsecur
it
iesavai
labl
e.
notbenettedfrom grossadvancesbutaretobe The‘unsecuredexposures'
whicharei
dentif
iedas
shownseparatelyas'Conti
ngentProvisi
onsagainst substandar
dwoul dattr
actaddi
ti
onalpr
ovisi
onof
StandardAssets'under‘
OtherLiabi
li
ti
esand 10%,i.e.
,atotalof25%ontheoutst
andingbalance.
Provi
sionsOthers'i
nSchedule5oft hebalance
Unsecur
edl
oan:
sheet.
Aloanisconsider
edasunsecuredfrom begi
nning
TeaserRat
e: i
freal
isabl
ev al
ueofsecur
it
iesattheti
meof
Wheninst
resestr
atesarelowint
hebegi
nni
ngand sanct
ionofloanwas10%orl essthan10%oft he
af
tersometimeiti
ncreases. l
oanamountsanct i
oned.

Subst
andar
dAsset
s: Doubt
ful
Asset
s:
AssetTy
pe Pr
ovi
sioni
ng Per
iodf
orwhi chAssetwas Secur
ed Unsecured
doubtful Porti
on Porti
on
Nor
malSubst
andar
dor 15%
Upt
o1y
ear
(D1) 25% 100%
Secur
edSubst
andar
d 15%
1y
ear
+&upt
o3y
ear
s(D2) 40% 100%
Usecur
edSubst
andar
d 25%
3y
ear
s+(
D3) 100% 100%

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Summar
y:
(i
)100%oft heextenttowhichtheadv anceisnot St
andar
dAsset
s:
coveredbythereali
sablevalueofthesecurit
yto
LOAN(
Standar
dAsset
) Pr
ovi
sioni
ng
whichthebankhasav al
idrecourseandt he
real
isabl
evalueisesti
mat edonar eal
isti
cbasis. Nor
mal
Rat
e 0.
4%

(i
i)I
nregardtothesecuredporti
on,provi
sionmay Advt
oSME 0.
25%
bemadeont hef ol
lowingbasi
s,attherat
esr angi
ng Advt
oMedi
um Ent
erpr
ise 0.
40%
fr
om 25%t o100%oft hesecuredporti
ondepending
Advt
oAgr
icul
tur
e 0.
25%
upontheperi
odf orwhichtheassethasremai ned
doubtf
ul. Commer ci
alr
ealest
ate 1%
(shop,
offi
ce,
par
ketc.)
LossAsset
s:
Commerci
alr
ealest
ate 0.
75%
AssetTy
pe Pr
ovi
sioni
ngr
equi
rement
(Housi
ng)
LossAsset 100%
I
ndi
vi
dualHousi
ngl
oan 0.
25%
Housi
ngl
oanatt
easerr
ate 2%
*
Lossasset
sshoul
dbewr
it
tenof
f.
Housi
ngl
oanatt
easerr
ate 0.
40%
*Ifl
ossasset
sar epermit
tedtoremaininthebooks
aft
er1y
earfrom t
hedateon
foranyr
eason, 100%oftheoutstandi
ngshouldbe
whi
cht
heratesarer
esetat
provi
dedforprovisi
oni
ng.
hi
gherrat
es
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube

Subst
andar
dAsset
s: LossAsset
s:
AssetTy
pe Pr
ovi
sioni
ng
Nor
malSubst
andar
dor 15% AssetTy
pe Pr
ovi
sioni
ngr
equi
rement
Secur
edSubst
andar
d 15% LossAsset 100%
Usecur
edSubst
andar
d 25%

Doubt
fulAsset
s:

Per
iodforwhi
ch Provi
sioni
ng Provi
sioning
Assetwas Requir
ement Requir
ement
doubt
ful
Secured Unsecured
Porti
on Porti
on
Upt
o1y
ear 25% 100%
1y
ear
+&upto3 40% 100%
year
s
3y
ear
s+ 100% 100%

Join CAIIB WITH ASHOK On YouTube & APP

BFM MODULE – D
CHPATER 28:- ASSET CLASSIFICATION AND
PROVISIONING NORMS
(CASE STUDY ) PART :- III

What we will study ?

*Case Study based on Provisioning Norms ?
 Join CAIIB WITH ASHOK On YouTube & APP
BFM MODULE – D
CHPATER 28:- ASSET CLASSIFICATION AND
PROVISIONING NORMS
(CASE STUDY-2 ) PART :- IV

What we will study ?

*Case Study based on Provisioning Norms ?
 Join CAIIB WITH ASHOK On YouTube & APP
BFM MODULE – D
CHPATER 28:- ASSET CLASSIFICATION AND
PROVISIONING NORMS
(CASE STUDY-3 ) PART :- V

What we will study ?

*Case Study based on GROOSS NPA,NET,NPA and
PROVISIONING ?
 Join CAIIB WITH ASHOK on YouTube & App

BFM MODULE - D
Chapter 29: LIQUIDITY MANAGEMENT (PART-I)
What we will study?

*What is Liquidity?
*What is Liquidity Management?

Funding liquidity risk vs market liquidity risk:

Funding liquidity risk is different from market

Liquidity risk.
Funding liquidity risk is the risk that a bank will be
Unable to pay its debts when they fall due.
In simple terms, it is the risk that the bank cannot
Meet the demand of customers wishing to
Withdraw their deposits.
Market liquidity risk, on the other hand, is the risk of
Not being able to sell assets in a timely fashion
Without having to offer a heavy discount.
Research has shown that funding liquidity issues
Can often lead to market liquidity risk and vice vers

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
I
NTRODUCTI
ON: Oflate,t
hemar kett
urmoilt
hatbeganinmid-
2007
Theobj
ecti
vesofassetl
iabi
li
tymanagement
(ALM) hashighli
ghtedthecruci
ali
mportanceofmarket
aret
wo-f
old: l
iquidi
tytothebankingsect
or.

Ensur
ingpr
ofi
tabi
li
ty and Thecont r
actionofl iquidi
tyincert
ainproductsand
i
nterbankmar kets,aswel lasanincreased
Ensur
ingl
iqui
dit
y. probabil
it
yofof f
-balancesheetcommi tments
Li
quidi
ty,whichi
sr epr
esentedbythequal
it
yand comingont obanks' balancesheets,l
edt osever
e
marketabi
li
tyofassetsandliabi
li
ti
es,
exposest
he fundi
ngl i
quiditystrainsforsomebanksandcent ral
or
ganisati
ont ol
iquidi
tyr
isk. bankinterventionneededi nsomecases.
Unli
keot herrisksli
keinterestr at
er i
sk,mar ketri
sk, Theseev entsemphasisedthelinksbetween
operati
onal andtechnologyr isksandf orei
gn fundi
ngandmar ketl
iqui
dityri
sk,the
exchanger i
skst hatcant hreatenthev er
ysol vency i
nterrel
ati
onshipoffundingli
quidit
yriskandcredi
t
ofthebank, li
quidit
yriskisanor malaspectof ri
sk,andt hefactt
hatli
quidit
yisakeydet er
minant
everydaymanagementofaf inanciali
nstit
ution. ofthesoundnessoft hebankingsector.
Onl
yinext
remecases,l
iqui
dit
yri
skpr
obl
ems
t
ransl
atei
ntosol
vencyr
iskprobl
ems. Toaddr esstheli
quidi
tyri
skoft
hebanksonly,Basel
Thenumerousbankfai
lur
esandacoupleof II
Iguideli
neshav ecomeouttwoli
qui
dit
yrati
os,
l
iqui
dit
ycr
isesatmajorbanksduri
ng1980sand Liqui
dityCoverageRati
o(LCR)andNetStabl
e
90shavemadebankersintheUSmor eandmore FundingRatio(NSFR).
awareoft
heneedforbankliqui
dit
y.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
DEFI
NITI
ON: Ifl
iqui
dityneedsarenotmett hr
oughliqui
dassets
Banksneedl
iqui
dit
ytomeetdeposi
twi
thdr
awal
s holdi
ngs, abankmaybef or
cedtorest
ructur
eor
andtofundl
oandemands. acquir
eaddi t
ionall
iabi
li
ti
esunderadversemarket
condit
ions.
Thevari
abi
li
tyofloandemandandthevari
abil
it
yof
deposi
tsdet
ermineabank'
sliqui
dit
yneeds.
Li
quidityr
epresentstheabi
li
tyt
oaccommodatethe DI
MENSIONSANDROLEOFLI
QUI
DITYRI
SK
decreasesinli
abil
it
yandtofundthei
ncr
easesin MANAGEMENT:
assets. ABank'sli
quidi
tymanagementistheprocessof
Abankhasadequat eli
qui
dit
ywhenitcanobtai
n generat
ingfundstomeetit
scontr
actualor
suff
ici
entfundsei
therbyi
ncreasi
ngl
iabi
li
ti
esorby rel
ati
onshipobli
gati
onsatr
easonablepri
cesatal
l
convert
ingasset
s,prompt
lyandatareasonabl
e ti
mes.
cost. Newloandemand, existi
ngloancommitment
s,and
Liabi
li
tyisessent
ialinal
lbankstocompensat efor depositwi
thdr
awalsar ethebasi
ccont
ract
ualor
rel
ati
onshi
pobligat
ionsthatabankmustmeet.
theexpectedandt heunexpectedbalancesheet
fl
uctuati
onsandtopr ovi
def undsforgrowth.
Thepr i
ceofli
qui
dit
yisafunct i
onofmar ket Effect
ivel
iqui
dit
ymanagementbyabankser
ves
conditi
onsandmarketpercepti
onsoft her i
sks, thefoll
owi
ngimport
antpurposes:
bothinter
estr
ateri
skandcr editr
isks,refl
ectedi
n (a)I
tdemonstr
atesthemarketpl
acet
hatt
hebank
thebank'sbal
ancesheetandof fbalancesheet i
ssafeandtheref
orecapabl
eofrepay
ingi
ts
acti
vi
ties.
borr
owings.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
(b)I
tenabl
esbankt
omeetit
spriorl
oan 1.Hi
stor
icalf
undi
ngr
equi
rement
s
commitments,
whet
herf
ormalorinf
ormal
. 2.Cur
rentl
iqui
dit
yposi
ti
on
(c)I
tenabl
est
hebankt
oav
oidunpr
ofi
tabl
esal
eof
3.Ant
ici
pat
edf
utur
efundi
ngneeds
assets.
4.Sour
cesoff
unds
Thisf
unct
ionper
mit
st hebankt
oavoidsaleof
asset
satfi
resal
epr
ices,t
ogenerat
efunds. 5.Opt
ionsf
orr
educi
ngf
undi
ngneeds

(d)I
tlower
sthesizeofthedef
aul
tri
skpr
emi
um t
he 6.Pr
esentandant
ici
pat
edassetqual
it
y
bankmustpayforfunds. 7.Pr
esentandf
utur
eear
ningscapaci
ty
Thisfunct
ionfocusesonthereasonabl
eprice 8.Pr
esentandpl
annedcapi
talposi
ti
on
aspectsofthedefi
nit
ionofl
iqui
ditymanagement
.

Asallbanksareaff
ectedbychangesinthe
Bank’
swit
hst r
ongbal
ancesheet
swillbeper
cei
ved economiccli
mate,themonit
ori
ngofeconomi cand
bythemarketpl
aceasbei
ngli
quidandsafe. moneymar kettr
endsisthekeytoli
qui
ditypl
anni
ng.
Suchbankswi l
lbeabl
etobuyf
undsatlowri
sk Asoundf i
nancialmanagementcanmini
mizethe
premium ascomparedtot
hemarket
'sper
cei
ved negati
veeffect
softhesetrendswhi
l
eaccentuat
ing
credi
tworthi
ness. theposit
iveones.

Adequacyofabank'
sli
qui
dit
yposi
tiondepends Thefact
orst
hatmayaf
fectabank'
sli
qui
dit
y
uponananaly
sisoft
hefol
lowingf
actor
s: i
nclude:
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE - D
1.Adecl
inei
near
nings Chapter 29: LIQUIDITY MANAGEMENT (PART-II)
2.Ani
ncr
easei
nnon-
per
for
mingasset
s(NPA) What we will study?
3.Deposi
tconcent
rat
ions
*What are the different types of liquidity risk?
4.Downgr
adi
ngbyr
ati
ngagenci
es
Types of Liquidity Risks:
5.Expandedbusi
nessoppor
tuni
ti
es
Liquidity exposure can stem from both internally
6.Acqui
sit
ions (Institution specific) and externally generated
factors.
7.Newt
axi
nit
iat
ives
External liquidity risks can be geographic, systemic
Toprovi
defundstosati
sfyi
tsf
undingneeds,a Or instrument-specific.
bankmustperfor
m oneoracombinati
onofthe Internal liquidity risk relates largely to perceptions
fol
lowi
ng: Of an institution in its various markets: local,
1.Di
sposeofl
iqui
dasset
s
regional, national or international.

2.I
ncr
easeshor
t-
ter
m bor
rowi
ngs Other categories of liquidity risk are:
3.Decr
easehol
dingsofl
essl
iqui
dasset
s
1-FundingRisk
4.I
ncr
easel
i
abi
li
ti
esofat
erm nat
ure 2-TimeRisk
3-CallRisk
5.I
ncr
easecapi
talf
unds
Assuch, l
iqui
dit
ymanagementanditsassociat
ed
ri
sksassumepar amounti
mportanceunderthe
over
alll
iabil
it
ymanagementstr
ategi
es.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Fundi
ngRi
sk: Cal
lRi
sk:
Needt orepl
acenetout f
lowsduetounanti
cipated Cryst
all
isationofconti
ngentl
iabi
li
ti
esandi
nabil
i
ty
withdrawal(
pre-
mat ureclosur
eofdeposi
ts)/non- toundertakeprofi
tabl
ebusinessoppor
tuni
ti
es
renewalofdeposit
s( wholesal
eandret
ail
),ar
ises whendesi rabl
e,ari
sesdueto:
duet o:
1-Conv
ersi
onofnon-
fundbasedl
imi
tint
ofund-
1-
Fraudcausi
ngsubst
ant
iall
oss based
2-
Syst
emi
cri
sk 2-
Swapsandopt
ions
3-
Lossofconf
idence
4-
Liabi
li
ti
esi
nfor
eigncur
renci
es Manyt
imesmorethanonefact
ormani
festand
maket
heli
qui
dit
ysituat
ionwor
se.
Forexample,abigfr
audcanti
ghtentheposi
ti
onof
Ti
meRi
sk:
abankalongwi t
hlossofconf
idenceoft
hepubli
c,
Needt
ocompensatefornon-
recei
ptofexpect
ed resul
ti
ngar unonthebank.
i
nfl
owsoff
unds,ar
isesdueto:
Inadditi
ontorun,
theremaybeint
er-
bankdeal
ings
1-
Sev
eredet
eri
orat
ioni
ntheassetqual
it
y andinturn,
otherbanksmayalsobeaff
ect
edinthe
2-St
andardassetstur
ningint
onon-perf
orming process.
assetsand/
orbor r
owers'def
aul
ti
ngt orepayasper I
fabankf ai
lstohonourit
scommi t
ment stothe
thetermsofrepayment marketpart
ici
pants,i
tcancauset
heot her
3-
Tempor
arypr
obl
emsi
nrecov
ery par
tici
pantnothonouri
ngitscommitmentsbased
ontheexpectedinfl
owoffundsfr
om thefail
ed
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
i
nst
it
uti
on. ofconfi
dencei
nfi
nanci
alinst
it
utions,
thetime
Sometimesf
orei
gncurr
enciescr eatecomplexi
tyt
o avail
abl
etoabanktoaddresstheproblem wi
llbe
l
iqui
dit
ymanagementbecauset herealstr
engthof determi
nedbyi
tsli
qui
dit
y.
thebankmaynotbeknownt othef orei
gncredi
tor
s. Indeed, t
heimportanceofliqui
dit
ytranscendsthe
i
ndi v
idualinsti
tut
ion,si
nceal i
quidi
tyshort
fal
lata
Theymaynotbeinaposi
ti
ontodist
ingui
sh
betweent
herumourandt
hereal
it
yofcr i
sis. singleinsti
tut
ioncanhav esystem-wide
repercussions.
I
ncertai
ncir
cumstances,
abankmaynotbeableto
mobil
isedomest
icfundstomeetf
orei
gncur
rency Forthi
sreason,t
heanalysisofli
quidi
tyrequi
res
l
iabi
li
ti
es. bankmanagement stomeasur enotonlythe
l
iquidi
typosi
ti
onsofbanksonanongoi ngbasisbut
alsotoexaminehowfundingrequir
ement sare
MEASURI
NGANDMANAGI
NGLI
QUI
DITYRI
SK: l
ikelyt
oev ol
veundercr
isisscenari
os.

Measur
ingandmanagingli
qui
dit
yareamongt
he Inpar t
icular
,goodmanagementi nformat i
on
mostvi
talact
ivi
ti
esofcommerci
albanks. systems, centrall
iqui
ditycont
rol
, analysi
sofnet
fundingr equi
rement sunderal
ternat i
vescenarios,
Byassuringabank'
sabi l
itytomeetit
sli
abil
it
iesas
diversi
ficati
onoff undingsour
ces, andcont i
ngency
theybecomedue, l
iqui
ditymanagementcanr educe
planningar ecruci
alelementsofst rongli
quidit
y
theprobabil
it
yofanadv ersesi
tuat
iondevel
oping.
managementatabankofanysi zeorscopeof
Evenincaseswherecri
sisdevelopsbecauseofa operations.
probl
em el
sewhereatabank, suchasasev er
e
deter
ior
ati
oninassetquali
tyortheuncoveri
ngof
fr
aud,orwhereacri
sisrefl
ectsagenerali
sedloss

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Thefol
lowingst
epsarenecessar
yformanagi
ng Understandi
ngthecont extofl
iquidi
tymanagement
l
iqui
dit
yriski
nbanks: i
nv ol
vesexaminingabank' smanager i
alappr
oach
1.Dev
elopi
ngast
ruct
uref
ormanagi
ngl
iqui
dit
yri
sk tofundi
ngandl i
quidityoperat
ionsandi t
sli
quidi
ty
planni
ngunderalternati
vescenarios.
2.Set
ti
ngt
oler
ancel
evelandl
imi
tforl
iqui
dit
yri
sk
3.Measur
ingandmanagi
ngl
iqui
dit
yri
sk
Theli
quidit
ystrat
egyshouldsetoutthegeneral
appr
oacht hebankwillhavetoadopttoimprovethe
Dev
elopi
ngaSt
ruct
uref
orManagi
ngLi
qui
dit
yRi
sk: l
iqui
dit
yincludi
ngv ar
iousquanti
tat
iveand
qual
it
ati
v etar
gets.
Soundliquidi
tyr
iskmanagementi nvolvessett
inga
str
ategyforthebankensuringeff
ectiveboardand Thest rategyshouldalsoaddressthebank'sgoalof
seniormanagementov ersi
ghtaswel lasoperati
ng protectingfi
nancialst
rategyandtheabili
tyto
underasoundpr ocessformeasuring,monitori
ng withstandst r
essfulev
ent si
nthemar ketplace.
andcont r
olli
ngl
iqui
dit
yrisk. Itshoul
denunci atespecif
icpolici
esonparti
cular
Vir
tual
lyever
yfi
nancialt
ransacti
onorcommi
tment aspectsofliquiditymanagementl ikecomposit
ion
hasimpli
cati
onsforabank'sli
quidi
ty. ofassetsandl iabili
ti
es,maintenanceofcumulati
ve
gapsov ercertainper i
odsandt heapproachto
Mor
eover
,thetr
ansf
ormati
onofill
iqui
dasset
sint
o
managingl i
quidi t
yindiff
erentcurrenci
esandfrom
mor
eli
quidonesisakeyact
ivi
tyofbanks.
onecount r
yt oanot her.
Thus,
abank'
sliquidi
typol
ici
esandliqui
dit
y
Thest
rat
egyofmanagingli
quidi
tyri
skshoul
dbe
managementapproachshouldfor
mt hekey
communicat
edt
hroughouttheorgani
sat
ion.
el
ementsofabank'sgeneralbusi
nessstr
ategy
.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE - D
Allbusinessunit
swithinthebankt hatconduct Chapter 29: LIQUIDITY MANAGEMENT (PART-III)
acti
vit
ieshavinganimpactonl iquidi
tyshouldbe
What we will study?
ful
lyawar eoftheli
quidit
ystrat
egyandshoul d
operateundertheappr ovedpoli
ciesand *How tolerance level of liquidity risk is set by bank?
procedures.
TheBoar dshoul
dmoni t
ortheperf
ormanceand The following steps are necessary for managing
Liquidity risk in banks:
l
iquidityri
skprof
ileofthebankandper i
odically
1.Developing a structure for managing liquidity risk
revi
ewi nf
ormati
ont hatist
imelyandsuff
icientl
y
2.Setting tolerance level and limit for liquidity risk
detailedtoall
owt hem tounderst
andandassess 3.Measuring and managing liquidity risk
theliquidi
tyri
skfacingthebank'skeyport
foliosand
thebankasawhol e. Developing a Structure for Managing Liquidity Risk:
(Some part already covered in PART-II)
ABankshouldhav eali
quidi
tymanagement
st
ructur
einplacetoexecuteef
fect
ivel
ythel
iqui
dit
y Treatment of Foreign Currencies:
st
rategy
,pol
iciesandprocedur
es. For banks with an international presence, the
Treatment of assets and liabilities in multiple
Theresponsibi
li
tyofmanagi
ngtheov
eral
lli
qui
dit
y
Currencies adds a layer of complexity to liquidity
oft
hebankshoul dbeplacedwit
haspeci
fi
c Management for two reasons.
i
denti
fiedgroupwithi
nthebank.
Thismi
ghtbei nthef or
m ofanAssetLi
abi
li
ty
Committeecompr i
singofseni
ormanagement,the
tr
easur
yf unct
ionorar i
skmanagementdepart
ment .

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Fi
rst
,banksareoftenl
esswel
l-
knowntol
iabi
li
ty f
ort
hewhol
ebanki
nev
erycur
rency
).
hol
dersi
nforeigncurr
encymar
kets. 2-Al
ternati
vely,
itmaydecent r
ali
zebyassigni
ng
Intheev entofmar ketconcer
ns,especi
all
yifthey operat
ingdivisi
onsr esponsi
bil
it
yforthei
rown
rel
atet oabank'sdomest icoper
atingenvi
ronment, l
iquidi
ty,butsubjecttoli
mitsi
mposedbyt hehead
theseliabil
it
yholdersmaynotbeabl etodisti
ngui
sh offi
ceorf r
equent,routi
nereport
ingtothehead
rumour sfrom f
actaswel lorasquickl
yasdomest ic offi
ce.
currencycustomer s. Forexampl
e,anon-Eur
opeanbankmi ghtassi
gnit
s
Second,intheeventofadistur
bance,abankmay Londonoff
icet
heresponsibi
li
tyf
ortheli
quidi
ty
notalwaysbeabletomobi l
izedomesticl
iqui
dit
yto managementfori
tsEuropeanoperat
ionsinal
l
meetf or
eigncur
rencyfundingrequi
rements. curr
enci
es.
Hence,
whenabankconductsit
sbusi
nessi
n 3-Asat hirdapproach, abankmayassi gnt he
mult
ipl
ecur
renci
es,i
tsmanagementmustmake responsibil
ityf
orliquidit
yinthehomecur rencyand
t
wokeydecisi
ons. forov er
allcoordi
nationt othehomeoff i
ce, and
Thefi
rstdeci
sionconcer
nst
hemanagement responsibil
ityf
orthebank' sgloball
i
quidityineach
st
ruct
ure. maj orforei
gncur r
encyt othemanagementoft he
foreignofficei
nthecount r
yissui
ngthatcur rency.
ABankwi t
hfundingrequi
rement
sinfor
eign
curr
enci
eswillgener
all
yuseoneofthefoll
owi
ng Forexampl e,t
hetreasur
eri
ntheTokyooff
iceofa
non-Japanesebankcouldberesponsi
blef
orthe
thr
eeapproaches.
bank'sgloball
iqui
dit
yneedsinyen.
1-
Itmaycompl
etel
ycentr
ali
zel
iqui
dit
y
management(
theheadoff
icemanagi
ngl
iqui
dit
y Al
loft
heseappr
oaches,however,
prov
idehead
of
fi
cemanagementwiththeopport
uni
tytomonit
or
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
andcont
rolwor
ldwi
del
iqui
dit
y. Suchast r
ategywil
lcal
lfordrawingeit
heronhome
Theseconddecisionconcernsthel
iquidi
tystrategy curr
encysourcesandconv er
tingthem t
ofor
eign
i
neachcurrency
.I ntheordi
narycourseofbusi ness, curr
encythroughtheexchangemar ket
sordrawi
ng
onback-upsourcesinpart
icul
arforei
gncurr
enci
es.
abankmustdeci dehowf or
eigncurr
encyf unding
needswil
lbemet . 2.Sett
ingTol
eranceLev
elandLi
mitf
orLi
qui
dit
y
Towhatextent,f
orexample,wil
labankf und Risk:
for
eigncurr
encyneedsindomest i
ccur r
encyand Bank'smanagementshoul dsetl
imit
stoensur
e
conver
ttheproceedstofor
eigncurrencythr
ough l
iqui
dityandtheseli
mitsshouldberevi
ewedby
thefor
eignexchangemarketorcurrencyswaps? supervi
sors.Al
ter
nati
vely
,supervi
sorsmaysetthe
Howwi llabankmanagetheassoci
atedri
ski
f l
imits.
exchangemar ket
sceasetobeavai
labl
e? Li
mit
scoul
dbesetont
hef
oll
owi
ng:
Abank' sassessmentwi lldependonthesizeofi
ts 1.Thecumul ativ
ecashf lowmi smatches(i.
e.,t
he
fundingneeds, i
tsaccesst oforei
gncurr
ency cumul ati
venetfundingrequirementasa
fundingmar ket
,andi t
scapaci t
ytorel
yonof f
- percentageoftotall
iabi
lit
ies)overpart
icul
ar
balance-sheeti
nstrument s(e.
g.,st
andbyli
nesof peri
ods–nextday ,nextweek, nextf
ortni
ght,next
credit
,swapf acil
it
ies,et
c.). mont h,nextyear.
Abankmustal sodevel
opaback-upli
quidi
ty Thesemi smatchesshouldbecalcul
atedbytakinga
str
ategyforci
rcumst
ancesinwhichit
snormal conserv
at i
vevi
ewofmar ketabi
li
tyofliqui
dassets,
approachtofundi
ngfor
eigncur
rencyoperat
ionsi
s wit
hadi scounttocoverpri
cevolati
l
ityandanydrop
di
srupted. i
npr i
ceintheev entofafor
cedsale,andshould
i
ncludeli
kelyoutfl
owsasar esul
tofdr aw-
downof

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
commi
tment
s,et
c. 8.Fl
exibl
eli
mitsont
hemi ni
mum/ maxi
mum
2.Li
quidasset
sasaper
cent
ageofshor
t-
ter
m aver
agemat ur
it
yofdi
ff
erentcat
egori
esof
l
iabi
li
ti
es. l
iabi
li
ti
es.

Theassetsincludedinthi
scategoryshouldbe
thosewhicharehi ghl
yli
qui
d,i.
e.,
onlythoseassets Anexampl
eofset
ti
ngt
oler
ancel
evelf
orabank:
whicharejudgedt obehavingareadymar ketev
en 1.Tomanaget hemi smatchlevelssoastoavert
i
nper i
odsofstr ess.
wideliqui
dit
ygaps-Ther esidualmat ur
it
ypr
of i
leof
3.Al
i
mitonl
oant
odeposi
trat
io. assetsandliabil
it
ieswil
lbesucht hatmismatch
4.Al
i
mitonl
oant
ocapi
talr
ati
o. l
evelforti
mebucketof1- 14day sand15–28day s
remainsaround80%cashout fl
owsi neachti
me
5.Agener all
imitontherel
ati
onshi
pbetween bucket.
ant
ici
patedf undingneedsandavai
labl
esour
cesf
or
2.Tomanagel i
quidi
tyandremainsolventby
meeti
ngt hoseneeds.
maint
aini
ngshort-t
erm cumulat
ivegapupt oone
6.Fl
exiblelimit
sont hepercentagereli
anceona year(
short-
ter
ml i
abil
it
ies–short-
ter
m assets)at
part
icularli
abi
li
tycategory
, (
e.g.,cer
ti
fi
catesof 15%oftotaloutfl
owoff unds.
depositsorhighcostdepositsshouldnotaccount
formor ethanacertainpercentageoftotal Banksshoul danal
ysetheli
kel
yimpactofdi
ff
erent
l
iabi
lit
ies). stressscenari
osontheirl
i
quidi
typosi
ti
onandset
theirl
imit
saccordi
ngly
.
7.Li
mitsont
hedependenceonindi
vidual
cust
omersormarketsegmentsf
orfundsin
l
iqui
dit
yposi
ti
oncalcul
ati
ons.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE - D
Deregul
ati
onofthebankingsystem i
nthe70s,however
,
Chapter 30: INTEREST RATE RISK MANAGEMENT
gotmanybankersunpreparedtomanageinter
estrat
e
(PART-I)
ri
sktowhichthei
rinst
it
utionsweresuddenl
yexposed.
What we will study?
Manybankfai
lur
esintheworl
ddur
ingthe70s,
80sand
*What is Interest rate risk? 90sweret
ri
ggeredoutofpoor
lymanagedi
nter
estr
ate
*What are the sources of interest rate risk? ri
sk.
Manyfinanci
ali
nsti
tut
ionsfundedt
heirl
ong-
ter
mfi
xed
INTRODUCTION:
asset
swi t
hshort
-t
ermv ol
atil
eli
abi
li
ti
es.

Till 1970, the regulatory restrictions on banks greatly Soaslongasdeposi

tsandlendingr
atesremai
ned
Reduced many of the risks in the financial system. regul
ated,
suchf
undi
ngmi smatcheswerenotatal
la
The deposits were taken in at mandatory rates and probl
em.
Loaned out at legally established rates. Thederegul
ati
onofthefi
nanci
alsy
stem i
nIndiahasput
Interest rates therefore remained unaffected by i
nplacealotofoper
ati
onalfr
eedom t
othefinanci
al
market pressures. i
nsti
tut
ions.
The phrase “3-6-3' i.e., bankers bring in short-term Thepr
ici
ngofv
ari
ousasset
sandl
i
abi
li
ti
eshasbeenl
eft
Deposit sat 3%, lend long at 6% and be home for the tot
hei
rcommerci
alj
udgment.
day
Theearni
ngofassetsandthecostofl
iabi
li
ti
esare
By 3 p.m. became a common reference about the
bankers. ther
efor
eclosel
yrel
atedt
ot hei
nter
estrat
ev ol
ati
li
ty.
In the 50s and 60s, banks considered only the credit Thus,i
nter
estr
ateri
sk,
ater
mt ot
all
yunknownt
ot he
and banki
ngindust
ryi
nIndi
ahassuddenl
ybecomesrelev
ant
.
Liquidity risks as major constraints on profitability.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
ESSENTI
ALSOFI
NTERESTRATERI
SK: Sol
uti
on:
Int
erestrat
eri
skistheexposur
eofabank'sf
inanci
al PV=FV/
(1+r
)^n
condit
iontoadver
semov ementsi
nint
erestr
ates.
FV=100Rs.
Butexcessi
vei
nter
estr
ateri
skcanposeasigni
fi
cant
n=1
thr
eattoabank'
searni
ngsandcapi
talbase.
A)
NowR=10% orr
=0.
1
Changesinint
erestratesaffectabank'
searni
ngsby
changi
ngitsnetint
erestincome( NI
I)andthel
evelof (
1+r
)=1.
1
otheri
nter
estsensit
iveincomeandoper at
ingexpenses. PV=FV/
1.1=100/
1.1=90Rs.
Changesi ninter
estrat
esalsoaffecttheunder l
yi
ngvalue B)R=20%orr
=0.
2
ofthebank' sasset
s,li
abi
li
ti
es,andof f-
balance-
sheet
(
1+r
)=1.
2
(OBS)instrumentsbecausethepr esentvalueoffut
ure
cashfl
ows( andinsomecases, t
hecashf l
ows PV=100/
1.2=83Rs
themselves)changewheni nt
erestr at
eschange.
C)R=5%orr
=0.
05
Themar ketval
ueofanassetorliabi
li
tyi
sconcept
ual
ly
(
1+r
)=1.
05
equalt
ot hepresentval
ueofcurr
entandfut
urecash
fl
owsfrom thatassetandl
iabi
li
ty. PV=FV/
1.05=95Rs

Therefor
e,theri
singint
erestr
atesincr
easethediscount Conver
sel
yfal
li
ngi
nter
estrat
esi
ncr
easet
hemar
ket
rat
eont hosecashf l
owsanddecr easethemarketval
ue val
ueofasset
sorl
iabi
li
ti
es.
ofthatassetorl
iabil
it
y. Moreover,
mi smatchingmat
urit
iesbyholdinglongert
erm
Example:Iwil
lRs100inaf
teroneyearsowhati
sit
's asset
sthanliabil
it
iesmeansthatwheninterestrat
esri
se,
presentv
alueofthi
scashfl
ow(fut
ure)
? themarketvalueofassetsf
all
sbyagr eateramountthan
l
iabi
li
ti
es.
I
fR=10%or20%or5%(
compoundi
ngy
ear
ly)
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Thi
sexposesthebankt
otheriskofeconomi
clossand Theser
isksar
ebr
ief
lydi
scussedbel
ow:
pot
ent
ial
lytheri
skofi
nsol
vency.
Int
erestr
ateriskr ef
erstovolat
il
it
yinNetI
nter
estI
ncome
SOURCESOFI
NTERESTRATERI
SK:
(NII
)orvolat
il
ityinNetInter
estMar gi
n(NI
M),duet
o
changesininterestrat
es. 1.GaporMi
smat
chRi
sk:

NI
I=I
NTERESTEARNED-
INTRESTPAI
D Agapormi smatchr i
skar i
sesfr
om holdi
ngasset
sand
l
iabil
it
ieswithdif
ferentpr i
nci
palamounts,mat
uri
tydates
NI
M=NI
I/Ear
ningAsset
s
orreprici
ngdates,therebycreat
ingexposur
etochanges
Inotherwor
ds,i
nterestrat
eri
skar i
sesfrom hol
ding i
nt helevelofi
nterestrate.
assetsandl
iabi
li
ti
eswi t
hdiff
erentpri
ncipalamounts,
I
notherwor
ds,whenassetsandli
abi
li
ti
esfal
ldueto
maturit
ydat
esorr epr
ici
ngdates,i
.e.,
“rol
lov
errates'
.
r
epr
ici
ngindif
fer
entper
iods,t
heycancreat
eami smat
ch.
Suchami smatchorgapmayleadtogai
norl
oss
Accordi
ngly,
anef f
ecti
veri
skmanagementprocesst
hat dependinguponhowinter
estr
atesi
nthemar
kettendt
o
maintai
nsinter
estrat
eriskwi
thi
nprudentl
evelsi
s mov e.
essenti
alt
ot hesafet
yandsoundnessofbanks.
Exampl
e1:
Mostofthebankshav eal
readyident
ifi
edint
erestrat
e
AbankholdsRs.100cror
eliabi
li
ti
esat9%ofoney
ear
ri
skasadragont hei
rprof
itabi
li
tyandhavestarted
maturi
tytofundasset
sofRs.100cror
eat10%wit
htwo
assessi
ngthemagnitudeofint
erestrater
iskembedded
yearmaturi
ty.
i
nt hei
rbal
ancesheets.
ASSET(
2y) % LI
ABI
LITY(
1y) % Di
ff
I
nterestrater
iskisbroadl
yclassi
fi
edint
omi smatchor
gaprisk,basi
srisk,
netinter
estposi
ti
onrisk,embedded 100Cr 10% 100Cr 9% +1%
opti
onr i
sk,yi
eldcurveri
sk,pri
ceri
skandr ei
nvest
ment 100Cr 10% 100Cr 11% -
1%
ri
sk.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Overt
hefir
sty
ear,bankisget
ti
ngapr
ofi
tspr
eadof1% I
nt hi
scase,thebankwi
llhav
enoasset–li
abi
li
ty
amounti
ngtoRs.1crore. mismat chorgap,
andhencether
ewouldbenoi
nter
est
r
aterisk.
Howev
er,
itspr
ofi
tsf
orsecondy
earar
enotcer
tai
n.
I
ft heinterestrateri
sesby100basispoi
ntsduringthe91
Ifi
nter
estrat
eremainsunchanged,
thepr
ofi
tswi
ll
-dayst erm ofthedeposit
,thedeposi
twi
llberenewedat
conti
nuetobethesame.
9%andT- Billwil
lal
somat ureandthepr
oceedscanbe
However,si
ncet hel
iabil
it
ies(
FD)aref
oroneyearand reinvestedatt henewy i
eldof11%.
needtober ol
ledoverforsecondyear
,banki
sexposedt
o
Thus,
the200basi
spoi
ntsNI
Iwi
llbepr
eser
ved.
i
nter
estrateri
sk.
Ifthepr oceedsofthe91day sdepositarereinvest
edina
Ift
heint
erestrat
eonl
iabi
li
ties(FD)i
ncr
easeto11%in
floati
ngr ateloan(r
epr
icedatmont hlyint
ervals)wit
han
secondyear,
bankwouldbei ncur
ri
ngalossof1%,i
.e.
,Rs.
i
ni t
ialrateof10%, t
hei
nterestrat
eear nedont heloanwi
ll
1crorei
nthesecondyear.
changet wiceduri
ng91day s,whi
lethedeposi trat
e
Converselybankisagai nexposedtointerestrateri
skifi
t remai nsunchanged.
holdsshorterterm assetsr
elati
vetoliabi
li
ties,i
.e.
,
Sincetheassetisrepr
icedmuchmorerapi
dlythanthe
l
iabil
it
iesmat uri
ngint woyearsagainstasset smaturi
ng
l
iabil
it
yduri
ngt hi
speriod,t
hebanki
sassetsensit
ive.
i
noney ear.
Theassetsensit
ivebankcanproducealargeNIIi
fthe
Itt
henfacestheuncert
aint
yofint
erestr
ateatwhichi
t
i
nter
estrateri
sesinthemarketbecauseinter
estrat
eon
canrei
nvestfundsaft
erthefi
rsty
earforfur
theroney
ear
fl
oati
ngratel
oanmov eshi
gherduri
ngthe91day speri
od,
matchi
ngt heli
abi
li
ti
esmaturi
ty.
whil
eint
erestbeingpaidonthedeposi
tremainsat8%.
Exampl
e2:
Conver
selyassetsensit
ivegappositi
onwouldcause
Consi
derthatabankhasinv
estedtheproceedsofa91 compressi
onintheNI Ii
ftheint
erestrat
esdecl
ine.
days8%depositin91day
sT-Bi
llear
ning10%and
maturi
ngont hesamedayasthedeposit
.
 Join CAIIB WITH ASHOK on YouTube & App
Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE - D
Ift
hebankusesa91day s8%ter
m deposi
ttofunda5
Chapter 30: INTEREST RATE RISK MANAGEMENT
yearfi
xedrat
emor t
gagel
oanat10%,t
heloanwill
(PART-II)
conti
nuetoearn10%,whi
let
hedeposi
tgetsrepr
icedat
every91daysint
erv
al. What we will study?
Thebankisnowli
abil
itysensi
ti
vebecausetheint
erest *What are the different types of interest rate risk?
pai
donitsdeposi
tisresetmorerapi
dlythant
herate
bei
ngchargedontheloan. Gap or Mismatch Risk. (Lecture1)
Ariseorf
alli
nint
erestrat
einali
abil
it
ysensi
ti
vesi
tuat
ion Price Risk:
hastheopposi
teeffectontheNI
Ithanonanasset Price risk occurs when assets are sold before them
sensi
ti
vebank. Maturity dates.
In the financial market, bond prices and bond yields
Anyincr
easeinint
erestr
atewi
llcauseaner
osi
oni
nthe Are inversely related.
l
iabi
li
tysensi
ti
vebank'sNII
.
For example, the price of 10-year 14% Government
Of India stock will receive only lower price than
Originally paid for, when coupon or stocks of similar
maturityhasgoneupto15%inthemarket.

The price risk is closely associated with the trading

Book which is created for making profit out of short
-term movements in interest rates.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
EmbeddedOpt
ionRi
sk:
NetI
nter
estPosi
ti
onRi
sk: Largechangesi nmar ketint
erestrat
escr eat
e
anot hersourceofr i
sktobankspr ofitby
prepay mentofl oansandbonds( wit
hputorcal l
Thebank'
sneti
nter
estposit
ional
soexposest
he options)and/ orpremat ur
ewi t
hdrawal ofdeposi
ts
bankt
oanaddit
ionali
nter
estrat
erisk. befor ethei
rstatedmat uri
tydates.
Ifabankhasmor eassetsonwhi chitearnsinterest I
ncaseswher etherei
snopenalt
yforprepayment
thanit
sli
abil
iti
esonwhichi tpaysint
erest,i
nterest ofloans,t
heborr ower
shav
eanat uralt
endencyto
rater
iskari
seswheni nt
erestrateearnedonasset s payoffthei
rloanswhenadeclineinint
erestr
ate
changeswhilethecostoffundingoftheliabi
li
ties occurs.
remainsthesame.
I
nsuchcases,
thebankwi
l
lrecei
veonl
yal
owerNI
I.
Thus,thebankwi
thaposit
iveneti
nter
estposit
ion
Exampl
e:
wil
lexperi
encear
educti
oninNIIasint
erestr
ate
decl
inesandanexpansi
oninNIIasint
erestr
ate Takethecaseofabankwhi
chhasdisburseda90
ri
ses. daysl
oanattherat
eof10%whichisfunded
thr
ougha90-dayCDatther
ateof8%.
Alar
gepositi
venetint
erestposi
ti
onaccount
sfor
mostoftheprof
itgenerat
edbymanyf i
nanci
al I
ncasether at
eofinter
estdeclinet o9%after30
i
nsti
tut
ions. day
sandt heborrowerprepayshi sloan
i
mmediatelyandthebankr eceivesonly200basis
poi
ntsNI
If or30daysratherthant heanti
cipat
ed90
day
s.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
I
nt heremaining60daysofthe90dayst
erm,
the Theundernot
edt
abl
eshowshowt
hebasi
sri
sk
NIIwillbeonly100basi
spoint
s,ast
heBankwoul
d occur
s.
ber ei
nvesti
ngthefundsat9%. GapSt
atementofXYZBank(
Amt
.inCr
oreofRs.
)
Theembeddedopti
onri
skisbecomingar eal
it
yin
Repri
cing Repr
ici
ngLi
abi
li
ty
I
ndiaandi
sexperi
encedi
nv ol
ati
lesi
tuat
ions.
Assets
Thefast
erandhighert
hemagni t
udeofchangesi
n
Cal
lMoney 50 Sav
ingDeposi
t 50
thei
nter
estrat
e,thegr
eaterwil
lbetheembedded
opti
onsri
sktothebank'
sNI I
. CashCr
edi
t 40 Fi
xedDeposi
t 50

Basi
sRi
sk: 90 100

I
naper f
ectl
ymat chedgappositi
on,ther
eisno Gap= 90-
100=-10
ti
mingdif
ferencebetweentherepri
cingdates;
i.
e., 10% 9 10% 10 1
themagnit
udeofchangei nthedepositr
ateswould
9% 8.
1 9% 9 .
9
beexact
lymat chedbythemagnitudeofchangein
thel
oanrate. .
1

However,
int
erestrat
eoftwodi
ff
erentinst
ruments Thebankasofnowhasanegat
ivegapofRs.10
wil
lsel
dom changebythesamedegreeduringt
he cr
ore.
sameperi
odoft i
me. Incasetheinterestrat
efall
sby1%, t
henaspert he
Ther
iskthatt
heint
erestr
ateofdi
ff
erentasset
s tradi
ti
onalgapmanagement( assumingratesonall
andl
iabi
li
ti
esmaychangeindif
fer
entmagnitudes assetsandliabi
lit
ieschangeby1%-par all
elshi
ft
),
i
scal
ledbasisri
sk. thebank'sNIIshouldimprove.

Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
I
nst eadoffall
ingi
nthesamemagni tude, assume Thedegreeofbasi sr
iski
sfai
rl
yhighi
nrespectof
thattherateoncallmoneylendi
ngf allsby1%, the bankst
hatcr eat
ecompositeasset
soutof
rateoncashcr edi
tfal
lsby0.7%,ther ateonsav i
ngs composi
t el
iabil
it
ies.
depositfall
sby0.5%andther at
eonf ixeddeposit
s
fal
lsby0. 4%.
Theundernotedcal
cul
ati
onsindi
cat
ethatt
he
bank'
sNIIwoulddeter
ior
ater
athert
hanimprov
ing Yi
eldCur
veRi
sk:
i
ntermsoft heassumpti
onofgapmanagement. Anyi
eldcur
veisali
neonagraphplot
ti
ngthey
iel
d
ofal
lmatur
it
iesofapar
ti
cul
ari
nstr
ument.

Cal
lmoney 50*
1% Rs.0.
50 Yiel
dcurvechangesi
tssl
opeandshapefr
om ti
me
toti
medependinguponrepr
ici
ngandvar
iousother
Cashcr
edi
t 40*
0.7% Rs.0.
28 fact
ors.
Tot
al(
A)= Rs.0.
78 Astheeconomymov est
hroughthebusi
nesscy
cle,
Sav
ingdeposi
t 50*
0.5% Rs.0.
25 theyi
eldcur
vechangesr
atherf
requent
ly.

Fi
xedDeposi
t 50*
0.4% Rs.0.
20 Attheinter
vent
ionofReserveBankofIndia,t
he
yi
eldcurvecanbet wi
stedt
ot hedesi
reddirect
ion
Tot
al(
B)= Rs.0.
45
byalt
eringtheyi
eldsongovernmentstocksor
NI
I=A-
B 0.
78-
0.45 Rs.0.
33 di
ffer
entmat ur
it
iesbyRBI.
 Joi
nCAI
IBWI
THASHOKonYouTube Joi
nCAI
IBWI
THASHOKonYouTube
Exampl
e:
Toil
lust
ratehowachangeintheshapeofy
iel
d
cur
veaffectsthebank'
sNI
I, Rei
nvest
mentRi
sk:
l
etusassumet hatXYZBank,used3yearsfloati
ng Uncert
aint
ywithregar
dtointerestrat
eatwhicht
he
rat
efixeddeposi
tsforf
unding3yearfl
oati
ngr at
e fut
urecashfl
owscanber einvestediscal
led
l
oans( t
hedeposit
sandloansarerepr
icedat rei
nvest
mentrisk.
quart
erlyi
nter
val
s).

I
fthebankpay s100basispointabovethe12.
50%
(91daysTreasur
yBil
lsrate)
,i.
e.13.5%tofi
xed Exampl
e:
deposi
tsandcharges300basi spoi
nt,abovet
he Suppose,
XYZBankhasazer ocoupondepositof
364daysTreasuryBi
ll
srateof13%, i.
e.,
16%onit
s Rs.10,
000anditpr
omisestodoubletheamount
l
oans, wit
hin7year
sandusest hefundsf
orinvest
ingi
na
aNI
Iof250basi
spoi
ntsi
spr
oduced. 7-
yearbondatanannualcouponof12%.

I
ft heyieldcurveturnsinvert
eddur i
ngthenext Incase,
theinter
estrat
ef al
lst
o10%af teroneyear
,
repri
cingdat ewiththe91day sTBsr atei
ncreasi
ng thebankcouldrei
nvestthecouponcashf l
owsonly
to14%and364day sTBsr at
eremai ni
ngat13%and at10%againsttheanti
cipat
ionofrei
nvesti
ngthe
thespr eadrelat
ionshipordeposi
t sandloansto couponataf i
xedrat
eof12%.
TBsr emai nsconstant,t
heNI Iwi
llbereducedto Duetothi
srei
nvest
mentrisk,
thebankwil
lfi
ndit
100basi spoints,i
.e.,
(16%-14%+1%=1%) . di
ff
icul
ttopaythei
nter
estondepositonmatur
it
y.

Join CAIIB WITH ASHOK on YouTube & APP

Joi
nCAI
IBWI
THASHOKonYouTube
BFM MODULE - D
Thebondpr i
cingformulaassumesthatallcoupon
Chapter 31: RAROC AND PROFIT PLANNING
paymentsarer ei
nvest
edatthebond’sYieldto
Matur
it
y( YTM) . (PART-I)

Ift
heint
erestr
ateincreasesovert
heli
feofabond, What we will study ?
couponswil
lberei
nv estedathi
ghery
iel
dsther
eby *What is Profit Planning?
i
ncreasi
ngtherei
nvestmentincome.
Theincr
easei
nr ei
nvest
mentincomewi
lli
ncr
ease PROFIT PLANNING:
ther
eali
sedyi
eldofthebond.
Profit planning in a bank essentially involves
Whent heinter
estrat
egoesup, thebondspri
ce Maximisation of earnings and minimisation of
decr
easesbutt hebond'sreal
isedcompoundy i
eld expenditure.
wil
lincreaseduetohighercouponrei
nvest
ment Bank's Income:
i
ncome.
Banks' income arises from three sources, viz.
Ontheot herhand,
whentheint
erestrat
edecl i
nes,
thebondpr i
ceincr
easesr
esult
inginacapitalgai
n, 1-Interest income,
butthereali
sedcompoundyiel
ddecreases 2-Feebased income and
becauseoflowercouponrei
nvestmentincome.
3-Treasury income.
Theshort
-t
erm bondshavemorerei
nvestmentri
sk
si
nceproceedsofthebondsmustbereinvest
ed
moreandmor eti
mes.
Al
ter
nat
ivel
y,l
ong-
ter
m bondshav
emor
epr
icer
isk.
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

1- Interest Income (First Source of Income): Let us take one example of various combinations.

Interest income is derived from lending as well as Suppose a bank has Rs. 1,000 to invest or lend. We
investments in securities, bonds etc. look at four different scenarios as follows:

In most of the countries, there are norms that a

certain percentage of deposits is mandatorily required
to be kept in government securities.
In our country, statutory liquidity ratio (SLR) takescare of
this aspect.
Though, the investments in government securities are
practically risk-free, the yield on such investments is
lower when compared to the depositrates.
Similarly, the interest income on highly rated
corporate debt is much lower as compared to the
income on lower rated corporate debt.
Banks are required to have a proper blending of
investment in government securities and credit
portfolios to maximise the profits for a given levelof
risk appetite.

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

Thus, you would observe that risk would increase for 2- Fee based Income (Second Source of Income):
lending to lower rated customers resulting in an
The second major source of income is derived from
increased need for capital and also improved yield on
fee-based activities.
the assets.
The traditional activities such as
Effect of NPA on Interest based income:
demand drafts,
Banks have to take into account the effect of NPAon
the interest income and thereby on the profitability. remittances,

NPAs do not generate income and therefore bringdown safe custody,

the yield on advances. guarantees,
Also, under Basel-II/III regime, the risk weightage ofsuch letters of credits,
assets is higher, thereby forcing a bank to maintain
bills, etc.,
higher capital.
continue to be prevalent.
Thus, NPAs have a two-fold effect,
However, with technological changes, some of the
1- reduction in income and services such as demand drafts, remittances, bills
2- need for additional capital. handling may reduce drastically.
Some new services like
Hence, return on capital or profitability gets further
deteriorated. depository services,
internet banking,
 Join CAIIB WITH ASHOK on YouTube & APP
e-commerce
have appeared on the scene.
These services have given a boost to the fee
income.
Banks have also ventured into cross selling of other
financial products such as insurance policies, mutual
funds, etc., and with their established network and
position of trusted entity for their customers, banks can
make logical and natural entry in the selling of such
third party products.
Banks thus tend to become financial super markets
and such measures help increase the fee-based income.
Banks are required to keep in mind the operationalrisks
associated with these new services.
Join CAIIB WITH ASHOK on YouTube & APP
Bank's Expenditure:
On the expenses side, there are two major
expenses, viz.,
1- interest expenses and
2- operating expenses.
2- Interest expenses:(First factor of expenditure)
There are three major parts of the deposit portfolio.
Current Deposits which are interest free, and Savings
Deposits and Term (short & long) Deposits
– for which interest rates are deregulated in India.
The Savings Deposits interest rates were deregulated
with effect from 25th October, 2011 and interest is
paid on these deposits on daily product basis, but the
comfort for the banks is thatthese rates continue to
be low.
Thus, a bank has to find ways and means to improve
the share of low cost deposits such as Current and
Savings Bank. This helps them to lowerinterest costs.
Join CAIIB WITH ASHOK on YouTube & APP
3- Treasury Income (Third Source of Income):
The last and most important component of incomeis
treasury income, which is derived by trading in
securities, foreign exchange, equities, bullion,
commodities (not permitted in our country) and
derivatives.
This is largely a speculative activity, which banks
undertake with stringent internal controls and checks
in place.
Trading activities may provide large incomes to banks.
These activities may result in large amountsof losses
as well.
If a bank is not adequately capitalised, such lossescan
cause serious problems for it.
In the 90s, Barings Bank, a very old British Bank,
collapsed due to very large losses due to speculative
trading of Nikkei Futures on Tokyo Exchange.
Join CAIIB WITH ASHOK on YouTube & APP
Interest rates of term deposits are largely decidedby
market forces.
A bank keeps such interest rates at a level, at whichit
can garner requisite deposits in competition with other
banks.
These interest rates are also influenced by other
instruments such as debentures, postal deposits,
Government securities, provident fund, etc.
2-operating expenses:(second factor of expenditure)
The second factor of expenditure is operating costs,
which consists of staff costs and other costs.
Banks try to improve productivity and also link up some
of the staff costs to productivity by providingincentive
based packages.
Thus, every effort is made to maintain and reducethe
percentage of staff costs to the income level.
Other cost comprises depreciation, rent, utilities,legal
expenses, travelling expenses, postage,
telecommunication charges, stationery, etc.
 Join CAIIB WITH ASHOK on YouTube & APP
Banks like any other commercial organisationswould
ensure that wasteful expenditures are avoided.
Cost benefit aspects are looked into and alternatives
are explored. Thus, every effort to rationalise this
segment of expenditure is made.
In nutshell, profitability is a function of six variables:
1. Interest income
2. Fee-based income
3. Trading income
4. Interest expenses
5. Staff expenses
6. Other operating expenses
Maximisation of the first three variables and minimisation
of the last three variables are therequisites to maximise
profitability.
Join CAIIB WITH ASHOK on YouTube & APP
over a defined time period.
This begins with a clear differentiation between
expected and unexpected losses.
Expected losses are covered by specific reservesand
provisions.
and
unexpected losses require capital allocation, which is
determined on the principles of confidence levels,time
horizon, diversification and correlation.
In this approach, risk is measured in terms ofvariability
of income.
Under this framework, the frequency distribution of
return, wherever possible, is estimated and the Standard
Deviation (SD) of this distribution is also estimated.
Capital is thereafter allocated to activities as afunction
of this risk or volatility measure.
Join CAIIB WITH ASHOK on YouTube & APP
BFM MODULE - D
Chapter 31: RAROC AND PROFIT PLANNING
(PART-II)
What we will study ?
*What is RAROC?
RISK AGGREGATION AND CAPITAL ALLOCATION:
Banks, across the world, use different ways toestimate
the aggregate risk exposures.
Mostly 2 ways , one is RAROC and another one isbased
on cash flow and variability in earning.
RAROC:
The most commonly used approach is the RiskAdjusted
Return on Capital (RAROC).
Each type of risk is measured to determine both the
expected and unexpected losses using VaR or worst-
case type analytical model.
The key to RAROC is the matching of revenues, costs
and risks on transaction or portfolio basis
Join CAIIB WITH ASHOK on YouTube & APP
The second approach is similar to the RAROC, but
depends less on capital allocation and more on cash
flows or variability in earnings.
This is referred to as EaR (Earnings at Risk), when
employed to analyse interest rate risk.
Under this analytical framework also, frequency
distribution of returns for any one type of risk canbe
estimated from historical data.
Extreme outcome can be estimated from the tail ofthe
distribution. Either a worst-case scenario couldbe used
or Standard Deviation could also be considered.
Accordingly, each bank can restrict the maximum
potential loss to certain percentage of past/ current
income or market value.
Thereafter, rather than moving from volatility of value
through capital, this approach goes directly tocurrent
earnings implications from a risky position.
 Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

business.
This approach, however, is based on cash flows
RAROC is also related to concepts such as shareholder
and ignores the value changes in assets and liabilities
value analysis and economic valueadded.
due to changes in market interest rates.
In the past, performance was measured by
ECONOMIC CAPITAL AND RAROC:
return on assets (ROA), which adjusts profits forthe
The expected loss is a measure of the reserves
associated book value of assets, or
necessary to guard against future losses.
return on equity (ROE), which adjusts profits for the
The pricing of products should provide a buffer
associated book value of equity.
against expected losses.
None of these measures - ROA and ROE - is satisfactory
The unexpected loss is a measure of the amount of
for evaluating the performance ofbusiness lines as they
economic capital required to support the banks
ignore risks.
financial risk. This capital is also called risk capital.
Risk Capital:
Some activities may require large amounts of risk
capital, which in turn requires higher returns. RAROC is a part of the family of the risk-adjusted
performance measures (RAPM).
This is the essence of risk adjusted return on
capital (RAROC) measures. Consider, for instance, two traders such that each
returned a profit of $10 million over the last year.
The central objective is to establish benchmarks to
evaluate the economic return of business activities.
This includes transactions, products, customertrades,
and business lines, as well as the entire

Join CAIIB WITH ASHOK on YouTube & APP Join CAIIB WITH ASHOK on YouTube & APP

The first is a foreign currency trader,and For Forex dealer:

second a bond trader. RC = VAR = $100,000,000 X .12 x 2.33 = $28 million

The question is, how do we compare their For Bond dealer:

performance? RC= VAR= $100,000,000 X .04 x 2.33 = $9 million
This is important in providing appropriate compensation
The risk adjusted performance is then measured asthe
as well as deciding which line ofactivity to expand.
profit divided by the risk capital,
Assume the FX and bond traders have notionalamount
RAPM = Profit/RC RAPM(FX)=
and volatility as described below.
10 million/28 million=0.36
The bond trader deals in larger amounts, $200 million,
but in a market with lower volatility, at 4%per RAPM(BOND)=10 million/9 million=1.11
annum.against FX dealer deals in amount of
$ 100 million and 12% of volatility per annum. Thus the bond trader is actually performing betteras
the FX trader, as the activity requires less risk capital.
The risk capital can be computed as a VAR (Value at
Risk) measure, say at the 99% confidence level over
a year.
Assuming normal distributions, this translates into a
risk capital of
 Join CAIIB WITH ASHOK on YouTube & APP
RAROC Methodology:
Risk Management:
Includes the measurement of portfolio exposure, the
volatility and correlations of the risks factors.
Capital Allocation:
This requires the choice of a confidence level and
horizon for the VAR measure, which translates intoan
economic capital.
Performance Measurement:
This requires the adjustment of performance forthe
risk capital.
Performance measurement can be based on RAPM
method.
For instance, Economic Value Added (EVA) focuses on
the creation of value during a particular period in excess
of the required return on capital.
Join CAIIB WITH ASHOK on YouTube & APP
credit have become things of the past.
The Reserve Bank of India is now more concerned
about prudential norms and disclosure requirements
of the banks.
During the last few decades, several new privatesector
banks have come into existence. They havediverse
ownership patterns.
Similarly, foreign banks have also been givenclearances
for expansion.
Recently, the associate banks of State Bank of Indiaand
Bharatiya Mahila Bank have merged with State Bank of
India.
More mergers may also take place in the near
future.
RBI has also permitted opening of Small FinanceBanks
and Payment Banks which are called as'Differentiated
Banks'.
So in our country the Banking Industry consist of:Public
Sector Banks.
Join CAIIB WITH ASHOK on YouTube & APP
EVA measures the residual economic profit as
EVA = Profit – (Capital * k)
Where profits are adjusted for the cost of economic
capital, with k defined as the discount rate.
Assuming the whole worth is captured by the EVA, the
higher the EVA, the better the product or project.
Banking Industry in India:
The past few decades have been historically
momentous for the banking industry in India.
Starting with the Narasimhan committee report of
1991, the Indian banking has seen a total change inthe
scenario during the last 3 decades.
The process of deregulation which was set in motion
has brought in a sea change in the Indianbanking.
Regulated interest rates and directed investment/
Join CAIIB WITH ASHOK on YouTube & APP
New Generation Private Sector Banks.
Old Generation Private Sector Banks.Co-
operatiive Banks.
Regional Rural Banks.
Small Finance Banks.
Payment Banks.
Hence, there is a keen competition among thebanks
in the banking sector.
All banks have either upgraded their technology orare
in the process of upgrading it.
New products are being introduced and aggressive
marketing is the order of the day.
Profitability has now become one of the most
important parameters in the banks' functioning.
Indian banks have shown that they are alive to the
changing environment and are geared up to face the
new challenges.