FAQ Banking Operations 1. Define Banking? Banking means taking deposits and deploying them in loans and investments.

2. What is spread? Spread means interest received - interest paid it is also called as net interest income. 3. What is burden? Burden is the operating income of the bank. 4. What is profits of bank? Spread - (burden- other income) = profit. 5. What is fund based income? When bank gives loans , advances and earns income by investing it is called as fund based income. 6. What is fee based income? Fee based income is earned by giving services like LC, BG, Bank assurance, derivative etc. 7. What is partial reserve banking? Bank keeps only part of the deposits as reserves for lending this is called as partial reserve banking. 8. Banks are purveyors of credit and creators of money do you agree? Purveying credit is the main function of bank, but bank create money since a cheque is a claim of one bank against other it is virtual money, thus bank create money. 9. What is a run on a bank? Money is nothing but confidence, if all depositors ask back their money no banking system can repay and it will lead to collapse of financial system, since they follow partial reserve banking. This is a systematic risk. 10. What is Reserve Bank? An individual bank refuses to bail out another bank, there by leading to run on entire banking system. To prevent this a Reserve Bank is created which do not compete with banks, with whom the banking reserves are kept and acts as lender of last resort , in India Reserve Bank is created by Reserve Bank of India Act 1934. RBI is called as lender of last resort and Bankers Banker.

12 What is the purpose of reserves? Reserves serve three purposes a. to act against bank failure b. To prevent bankers cheque bouncing c. To control inflation. 13. How Reserves can control inflation? As per Irving Fischer equation MV= PT , where M represents money supply, V velocity, P prices and T transactions, velocity of money can be reduced by blocking part of the virtual money created by banks through reserves. 14. What is the development model adopted by India post independence? Post independent India adopted the model of planned development, planning commission was created as extra constitutional authority for determining government expenditure. 15. What is statutory preemption? RBI act fixed Reserves as 52.5% of demand and time deposits as reserves and used them to finance Govt borrowing at a low rate of 4.6% through 91 day adhoc treasury bills. 16. What is repressive financial system? Most of the finance system was government owned and a large chunk of resources were used for financing government expenditure under force of law. This is called as repressive financial system. 17. What is Fiscal dominance? Fiscal policy which is the policy of government will dominate monetary policies and RBI is a mere adjunct of government of India. RBI governor had year on year tenure. 18. What is Automatic Monetization of deficit? If the Government of India does not find taxes and borrowings enough to finance its expenditure then it will issue 91 day 4.6% adhoc treasury bills and RBI must print notes. This is called as automatic monetization of deficit 19. What is call money? Call money is the borrowings of one Bank from another bank for periods not exceeding 24 hours. 20. What is notice money? Notice money is the borrowings of one bank from another bank for period exceeding 24 hours up to 14 days. 21. What is term money?

Any borrowings for 15 days and above are called as term money. 22. What is Bank rate? Bank rate is the rate at which RBI lends to bank. 23. What is Moral Hazard? Since RBI lends to banks which manage their affairs well and banks which do not manage their affairs well it sends a signal to strong bank to be financially imprudent, this is called as moral hazard. 24. What Is REPO? REPO is repurchase agreement under which banks borrow from RBI by selling notified security with agreement to buy back the same at different price, difference represents interest. 25. What is Reverse Repo? Reverse Repo is borrowing of RBI from bank by selling security with agreement to buy back at higher price difference representing interest. 26. Which is ceiling, floor and corridor rate in money market? Repo is ceiling, reverse repo is floor and call money rate is corridor rate in the market. 27. What is SLR/CRR rate? SLR- Statutory Liquidity ratio, CRR- Cash Reserve Ratio is compulsory impounding of banks resources by RBI to Finance government borrowings. Present CRR level is 4.5% and present SLR is 23%, this level itself is quite high, there is a healthy debate going on why not RBI replace these compulsory reserves with OMO. 28. What is priority sector lending? Priority Sector lending target was originally fixed at 19% of demand and time liabilities , at very low rates of interest. 29. What is administered interest rate? Since 72% of bank resources were forcefully lent at low rates, the balance has to be lent at very high rate to do cross subsidization, to achieve this RBI stamped out all forms of competition by going for administered interest rate regime in which RBI fixed all lending and deposit rates. 30. What is Joint Family system of banking? All public sector banks whether weak are strong were considered as part of joint family, in which govt of India is the father , RBI the mother and all banks whether weak or strong as children, thus removing the most important aspects of banking risk management.

31. How this form of banking operations was sustained? Corporate were lent at very high rate of interest, income was taken on accrual basis even if loan recovery is doubtful, provision for bad loan was made on agreement between Auditor and Management in non transparent manner and even this was not disclosed as per secrecy clause under banking regulation act. 32. What are three tiers of banking system in India? Commercial Bank, Regional Rural Bank and cooperative Bank.

33. What is OMO? OMO means open market operations, in which government borrows for its requirement through market paying market related rates of interest. 34. What are the instruments through which government borrows in market? Through Treasury bill for short term borrowing and dated government security for long term borrowing, borrowings are done through auction. 35. What is Broad Banding of priority sector? Items like education loan, housing loan, hitech agriculture were included in priority sector lending to reduce cross subsidies. 36. What is the name of the committee which was appointed in 1991 for financial sector reform? 1 st Narashimam committee 37. Which interest rate is administered today? Packing credit for exports is the only interest rate administered today. 38. When Private sector banks were allowed to enter banking sector? 1992 as per the recommendations of first Narashimam committee. 39. What is the tenure of Governor of Reserve Bank of India? 5 Years. 40. What is stagflation? Before 1970s based on Philip curve inflation was considered as necessary for growth, but in 1970 US suffered high inflation with low growth, which made Paul Samuelson the leading economist to coin the term stagflation. Inflation now was viewed as pure evil but as necessary evil.

41. What is currency chest? Currency chest is kept by Public sector Bank as agent for RBI, All amounts in currency chest belongs to RBI and expense of currency chest is borne by RBI. 42. What is ways and means advance? Government of India entered into an MOU with Governor RBI, whereby at any point of time RBIs credit to Government of India will not exceed 9000 crores and any excess can be adjusted through sale of securities. This phased out automatic monetization of deficit; this is called as ways and means advance. 43. What is LAF? LAF is known as liquidity adjustment facility; wherein fixed sum is provided and banks have to take their requirement as per auction and pay market related rates of interest instead of uniform rate as per bank rate thus removing moral hazard. 44. What is a basis point? Basis point is 1/100 th of a percentage. 45. How independence of Central Bank is maintained in US? In US chairman of Federal Reserve is appointed by President, while he reports to Congress, even though his tenure is 5 years officially he practically enjoys long tenure. Generally eminent people are appointed as Chairman Apart from this prior sanction of congress in required if budget deficit exceeds certain percentage as per Gramm Rudman and Hollings Act. 46. How independence of ECB is maintained? ECB is modeled on the basis of Burdens bank erstwhile central bank of Germany. Sole objective is inflation targeting. The Chairman of ECB itself sets inflation target and frames implementation policies. 47. How independence of Bank of England is maintained? In England Governor of Bank of England is an employee of British Government. Inflation Targeting is set by Chancellor of exchequer Implementation is done by Monetary Policy Committee (MPC) MPC consist of eminent economist, industrialist whose livelihood do not depend on British Government.

MPC proceedings are minuted and published. Public opinion keeps the independence of Bank of England.

48. What are the multiple jobs RBI is entrusted with? RBI is responsible for monetary policies, Foreign exchange management, Bankers to the government, regulator of bank. This leads to conflict of interest, as banker to government it wants to keep low rates to facilitate government borrowing, while as monetary authority it wants to maintain high rates to tame inflation. As exchange control authority it wants to maintain high short term interest to prevent attack on rupee. While as monetary authority it wants to reduce interest rates to spur growth. 49. Who suggested Inflation targeting as si8ngle objective of RBI? Raghuram Rajan committee suggested targeting of inflation as si8ngle objective of RBI. 50. What about RBIs independence? Even though India started at right note by appointing an eminent economist as RBI governor, in course of time IAS lobby took control of RBI to facilitate north blocks backseat driving. In a situation where inflation runs very high a bureaucrat rather than an economist heads RBI speaks volumes about RBI independence. 51. What is anytime banking? After the arrival of ATM money can be withdrawn at any time and not necessarily only during banking hours it is called as anytime banking. 52. What is anywhere banking? After core banking solution, money can be withdrawn from any branch, not only from the branch where the funds are deposited; it is called as core banking solution where all banks are inter connected to each other. 53. What is ECS? ECS means Electronic Credit System, where dividend, interest are credited to several accounts, instead of being sent by warrants, with consequent risk, it is part of Electronic Fund Transfer (EFT) 54. What is EDS?

Electronic Debit system by which several debits are made to various persons like payment of school fees, electricity bill and single account is credited. 55. What is MICR? MICR means Magnetic Ink Character Recorder, which facilitates mechanical sorting of cheque to facilitate clearing. 56. What is Cheque truncation facility? Cheque truncation facility is a virtual electronic clearing system, which functions without presenting physical cheque. 57. What is RTGS? Real Time Gross settlement, which is used for transfer of high value funds on gross basis. 58. What is volatile fund? Current account is a volatile fund. 59. What is vulnerable fund? Savings Bank account is vulnerable fund 60. What is stable fund? Fixed Deposits, Recurring Deposits, cash certificates are stable fund. 61. What is DIC? DIC is deposit Insurance Corporation which insures deposits up to 1 lakh, this constitutes moral hazard. 62. What is Current account? Current account is opened by business, it does not carry any interest and it can be withdrawn any time. 63. What is savings bank account? Savings bank is opened by non business individual. It carries interest and do not carry any interest. 64. What is fixed deposit account? An amount is held for fixed period exceeding 15 days. 65. What is recurring deposit? In recurring deposit periodic equal amounts are paid. 66. What is cash certificate?

Cash certificate involves deposit of unequal amount periodically for fixed amount.

67. What is M0 ? M0 is current notes and coins. 68. What is M1 ? Apart from current notes and coins chequable accounts are included including post office deposits. 69. What is M2? Apart from M1, it includes term deposits. 70. What is M3? It includes apart from M2 includes time deposits. 71. What is M4? M4 apart from M3 electronic and virtual money.

72. What is MIBOR? MIBOR means Mumbai Interbank offered rate, which should be a bench h mark rate like LIBOR, to develop this interbank borrowings are exempt from reserve requirements. 74 What is fiscal and monetary policy? Fiscal policy is budgetary policy, in the olden days money was backed by gold, after 1973 currencies became fiat. To get over great depression Keynes suggested countercyclical fiscal policy, surplus budget during boom and deficit during depression, but when money supply was based on the will of government, a strong authority should be established independent of government to control money supply. This is Central bank of the country and the policy of central bank is called as monetary policy.

75. What is Bank Assurance? Banks with capital in excess of Rs 500 crores and NPA less than national average can enter insurance business, while others can sell insurance policies.

76. What is the various classifications of investments of banks? Held to maturity which are held till maturity, available for sale, that means securities not held for sale but if opportunity arises they will be sold, held for trading. 77. What is valuation of securities? Held to maturity are valued at cost, available for sale and held for trading are marked to market. 78. What are various classifications of advances? Advances are classified as 1. Bills purchased, overdraft, cash credit and term loans 2. Loans fully secured, loans secured by government or bank guarantee, unsecured loan 3. Priority sector lending, public sector lending, others

79. What is fixed assets? Fixed assets do not earn any income and they are called as dead assets. 80. What are two methods of lending? Asset based lending, in which lending is done based on actual deposits , this is followed by public sector banks who are risk averse, while liability based lending where lending is based on ability to raise funds which are followed by private banks like ICICI Banks. 81. What are two methods of liquidity management? Working fund approach and technical approach. 82. What amount to be transferred to statutory reserves as per banking regulation act? 20% to be transferred to statutory reserves before declaration of dividends under banking regulation act. 83. What are the risks faced by bank? Interest rate risk, liquidity risk, credit risk, market risk, operational risk, reputation risk, foreign exchange risk. 84. What is NIM?

NIM is net interest margin which is NII/ Total Asset. 85. What are the various accounts maintained by bank? General ledger, p&l account is maintained separately, apart from this personal account like savings bank, current account and fixed deposits, advances , sub ledgers are maintained for main ledgers, all ledgers are entered directly from vouchers and totals are posted to general ledger on daily basis. Apart from this registers like Bills for collection both inward and out ward, demand draft, bank guarantees are maintained. 86. What is meant by Nostro, Vostro and Loro ac? Nostro account means accounts maintained by local bank with foreign bank or branch, vostro account means account maintained by foreign bank with local bank or branch, loro account means account maintained by third party bank with a foreign bank .All international trade payments are done by debiting or crediting nostro/ vostro account and not by physical transfer of funds, one banks nostro is other banks vostro, they are mirror images of each other. Periodically banks reconcile these accounts. 87. What is SWIFT? Society for worldwide interbank financial telecommunication, it is a nonprofit organization with more than 1500 members in 150 countries, non trade transfer of money are physically transferred through swift since it is fool proof for hacking. 88. What is offshore banking? Offshore banking, means substantial presence in overseas banking, Indian banks donot have any offshore banking due to their small size. 89. What is LC? LC means letter of credit, in which the buyers bank assures payment irrespective of the fact whether buyer reimburses it or not as long as proper documents are presented. 90. What is UCPDC 600? UCPDC means Uniform Customs and Practices for Documentary credit which governs the operation of LC. It has 39 clauses, 600 is the version. It is prepared by International chamber of commerce head quartered in Paris. 91. What is bill of lading? Bill of lading is the proof that the shipper has taken the goods on the board of the vessel, there are various types of bills of lading like clean bills of lading which do not contain any notation on its face and claused bill of lading which contains notations on the face, LC generally accepts clean bill of lading and not clause bill of lading. There is onboard bill of lading and on deck bill of bill of lading, LC asks for on board bill of lading and on deck bill of lading is not accepted due to risk involved. If LC permits short

form of bill of lading will be accepted, it do not contain all terms of the contract of carriage, non negotiable bills of lading are not document of title and they need not be produced for clearing the goods, they are usually used for shipping to sister concerns.

92. How goods should be described in bill of lading? Description of goods in bill of lading can be general and should not contradict description of goods in LC. Port of shipment and discharge should be the same as in letter of credit. Even if transshipment is prohibited goods shipped by containers and lash barges can be transshipped. Said to contain or shippers count wont be regarded as notation in bill of lading. Bill of lading can be signed by shipper or authorized agents in the form of physical, facsimile , engravings or rubber stamp. Bill of lading marked as original can be accepted as original.

93. What is charter party? Charter party is an agreement for hiring the whole ship, for a particular journey or particular time period. Charter parties are not accepted by LCs.

94. What is Airway bill? When goods are airlifted airway bills are issued. There are two types of airway bilks, house or home airway bill and master airway bill, airway bill is not a document of title. 95. What is house/ home airway bill? Considering innumerable items are airlifted airlines appoint air consolidation agents who accept consignments and issue house/ home airway bill. 96. What is master airway bill? Based on consolidated home airway bill the airlines take the goods ion aircraft and issues master airway bill. 97. What are combined transport documents? Combined transport documents are issued for containerized cargo which is transported through multimodal system.

98. What is Commercial invoice? Commercial invoice is prepared as per purchase order, description of goods should correspond to purchase order, shipper should be the beneficiary and buyer should be opener. 99. What is packing list? Packing list specifies how the goods shipped are packed. Documents should not contradict each other. 100. What is certificate of origin? Certificate of origin states that in which country goods are manufactured. They can be classified as preferential and non preferential. 101. What is preferential certificate of origin? In this a developed country gives concessions to goods manufactured in developing country without any reciprocal obligation for developing country to extend the same. It is called as generalized system of preference or GSP. 102. What is non preferential certificate of origin? It is done between two developing countries on reciprocal basis and it is known as Generalized system of trade preference (GSTP) 103. Whether document dated prior to the date of LC can be accepted? Unless there is any prohibition in the LC document dated prior to the date of LC can be accepted. 104. What is the quantity to be exported? As per UCPDC unless the exports are in terms of numbers are packages a +- 5% in quantity will be accepted if the value do not exceed the value of LC. 105. What is meant by words at, about & circa as per UCPDC? If words like at, about or circa is used as per UCPDC a variation of +- 10% in quantity is acceptable. 106. What is meant by terms beginning, middle and end of the month? Beginning means 1to 10th of the month, middle means 11th to 20 th and end means 21 st to end. 107. What is meant by first half and second half? First half means 1st to 15th while second half means sixteenth to end of the month. 108. What is a word like first class, high quality means in LC?

As per UCPDC the bank can ignore terms like first class and high quality and accept document from anybody. 109. What will happen to a condition which is not backed by a document? A condition which is not backed by a document can be ignored by the bank. 110. How many days given to the bank by UCPDC to check documents? Five days are given by UCPDC to bank to check the documents. 111. Whether a cover note of insurance can be accepted as a document under LC? No either an insurance policy or insurance certificate can be accepted and not a cover note of insurance. 112. If the last date of negotiation is a holiday what will happen to negotiation? As per UCPDC if last date of negotiation is a holiday then the documents can be presented on subsequent working day, this applies only for negotiation and not for shipment. 113. What is trust receipt? Trust receipt is one based on which bank will handover original document of title to party without payment, trust receipt should state that the party is willing to waive all discrepancies. 114. What is non preferential certificate of origin? Non preferential certificate origin which is used to verify whether the goods are manufactured in a proscribed country is rarely in use now. 115. What is FOB? FOB means free on board, that means all expenses have to be incurred by seller till the goods crosses the board of the vessel and expenses incurred after goods crossing board of vessel to be borne by the buyer. This is as per INCO terms 2000. 116. What is FAS? FAS is an American term which means free alongside ship, in which all expenses up to port of loading to be borne by seller and subsequent expenses to be borne by the buyer. 117. What is C&F? Here the price not only includes cost but also freight from origin port to destination port , in such cases LC should contain a term that the bill of lading should be endorsed freight prepaid. 118. What is CIF?

Here the price not only includes ocean freight but also insurance charges from origin to destination warehouse. Unless specified insurance should be done for CIF+10%. 119. What is exquay? This means that the selling price includes clearing charges from destination port, but donot include customs duty. 120. What is exquay duty paid? Here the price not only includes clearing charges but also customs duty. 121. What is DAF? DAF is delivered at frontier and it is used for land consignments, it includes all charges for delivery at frontier but customs duty is to be paid by the buyer. 122. What is DAF duty paid? Here price includes even customs duty. 123. What is INCO Terms 2000? INCO terms 2000 is international commercial terms framed by International Chamber of commerce headquartered in Paris, 2000 is version. 124. Who are various parties involved in LCs? Opener, opening bank, advising bank, confirming bank, negotiating bank/ nominated bank and beneficiary. 125. Who is opener? Opener is usually the buyer on whose request LC is opened. 126. What is opening bank? Opening bank is the bank of the buyer who opens the LC on the request of the opener 127. What is advising bank? Advising bank is the bank which advises about the authenticity of the LC at the request of the opening bank.

128. What is confirming bank?

Confirming bank is the bank which confirms the credit of buyers bank at the request of opening bank.. Under UCPDC foreign branch of a bank is treated as separate bank, thus unless specified confirmation by the foreign branch of a bank is valid.

129. What is negotiating bank/ nominated bank? Negotiating bank is any bank which negotiates the document of seller and advances money till the same is collected from the buyer, till that period interest is charged from the beneficiary. But if opening bank restricts negotiation to particular branch it becomes nominated bank. 130. What is negotiation under reserve? Usually negotiation of document is without recourse, that means if the opening bank refuses to pay then the loss is borne by buyers bank and not the buyer, but if there are discrepancies still the beneficiary may request negotiation under reserve, if the negotiating bank agrees for the same then it will negotiate under reserve that means it has recourse to beneficiary if the opening bank refuses to pay. 131. Who is beneficiary? Beneficiary is the person who receives the proceeds of LC. 132. Name various types of LCs? Irrevocable LC, Back to back LC, Transferable LC, Confirmed LC, Red Clause LC, Green Clause LC, Revolving LC, DA LC, DP LC, Stand by LC. 133. Irrevocable LC? Irrevocable LC cannot be revoked without the consent of beneficiary. 134. What is back to back LC? In back to back LC, an intermediary can ask a buyer to open a LC in his favour and open identical sub LCS within the value of mother LC. Once the supplier supplies goods against sub LC the intermediary can substitute his document for that of the seller and successfully conceal identity of buyer from seller to earn his spread. 135. What is transferable LC? A transferable LC can be transferred in full or part in favour of one or more supplier, but the supplier cannot further transfer it. 136. What is confirmed LC? In confirmed LC at the request of opening bank its credit is confirmed by confirming bank.

137. What is red clause LC? Red clause LC are in the nature of pure advance, since it indicates danger it is written in red letter in the LC. 138. What is green clause LC? In green clause LC the goods are not shipped but deposited in warehouse at the supplier country and against Ware finger certificate endorsed in favour of buyer money is collected, this helps to avoid cash flow in the form of customs duty. 139. What is Revolving LC? Revolving LC is opened for whole year and within the same it revolves for particular amount. 140. What is DA LC? DA LC gives credit to buyer it is called as document against acceptance and it is called as usance LC. In this documents of title are released to buyer against acceptance of bill of exchange. 141. What is DP LC? DP LC is called as document against payment LC in which documents is released against payment, it is called as sight LC. 142. What is Stand by LC? Standby LC is western equivalent of Indian Bank guarantees; unlike in the case of Indian Bank guarantees where the bank has to make payment on demand without demur against any documentary proof in US some documents by third parties regarding breach has to be produced, this is called as standby letter of credit. 143. What are different types of Bank Guarantee? Bid bond guarantee: This is given in lieu of EMD and security deposit Performance guarantee: This is given for continuing performance of equipment to release balance money. Statutory Guarantee: It is given for tax demands raised during course of appeal. Since BGs are on demand and without demur in India it is given only for top class clients as part of relationship banking. 144. What is document against collection? Document against collection are that the bank will release document only against payment or acceptance of bill of exchange, unlike in a LC the bank will not make payment if buyer refuses to make

payment. Document against payment are covered by Uniform rules for collection ( URC 522) issued by ICC head quartered in Parties. 145. What is LSC? Local document against collection are called as Local short credit or LSC. 146. What are documents of title? Bill of lading, combined transport document, lorry receipt and railway receipt. 147. What is advance payment? In advance payment buyer first pay the amount then seller releases documents. 148. What is open account? In open account first buyer receives the goods then makes payments. 149. What is BRC? BRC means Bank realization certificate, this is issued against payment for goods are service exported, now this is made electronic., 150. What is FIRC? Foreign inward remittance certificate, this is issued for advances received and are issued in stamp paper. 151. What is a cheque? Cheque is an order given by customer to a bank to make payment. 152. What is bouncing of cheque? If insufficient balance is there in the account of customers the bank will dishonor the cheque, it is called as bouncing of cheque. 153. What is a bearer cheque? A bearer cheque can be paid across the counter, once a bearer cheque always a bearer cheque. 154. What is crossed cheque? If two parallel lines are drawn in the top of cheque with or without the word & co it is known and it has to be collected from another bank. 155. What is account payee crossing?

If two parallel lines are drawn with the word account payee, the same has to be collected from another bank and credited to the account of customer only. 156. What is not negotiable crossing? In cheque which is a negotiable instrument, holder in due course who holds the cheque for valuable consideration, without notice of defect in title derives better title than the transferor, if endorsement is made non negotiable, it means the title of holder in due course is same as that of transferee. 157. What is payment in due course? If a bank pays a cheque in normal course of business it is called as payment in due course and it is protected for paying to wrong person as per section 131 of negotiable instrument act. But if a bank pays a crossed cheque across counter or pays a forged cheque, it is not payment in due course and it loses such protection. 158. What is a consequence of bounced cheque? Under section 138 of negotiable instrument act bouncing of cheque is a criminal offence. 159. What is a bankers cheque? Bankers cheque is a cheque issued by one bank on another bank, it is also known as demand draft or pay order, since bankers cheques are guaranteed by RBI even from strangers they are accepted since it wont bounce. 160. What is overdraft? If the client is permitted to issue more cheques than the balance in current account it is called as overdraft. Overdrafts are given for small business and professionals, collaterals for overdrafts are financial securities like shares, FDs etc. 161. What is cash credit? Cash credit is a facility peculiar for working capital in India, it is given to business. Since Indian government thought that Indian Industry is not capable of planning its own cash flow, the entire burden was shifted on banks, In cash credit once a facility is sanctioned the bank should always make it available, but the buyer can draw whatever amount he wants and can also payback whenever he wants, interest will be charged only on actual balance outstanding. 162. What are securities for cash credit? In cash credit securities are pledge or hypothecation of inventories. 163. What is pledge?

Pledge is applicable for moveable properties and in which physical possession of the property is handed over to lender. But this is extremely inconvenient for business. 164. What is hypothecation? In hypothecation property is in the possession of the borrower, but charge hovers like a cloud over the property, if borrower defaults then the lender will intervene and seize the property, it is a must to give notice of hypothecation. 165. What is narrow banking? Some banks specialize only in deposit taking, while some others specialize only in lending it is called as narrow banking. But in broad banking same bank does all the functions. 166. What is Mortgage? Transfer of interest in immovable property is mortgage, many of them needs compulsory registration. There are various types of mortgages like simple mortgage, English mortgage, mortgage by conditional sale, usufructory mortgage and equitable mortgage. 167. What is simple mortgage? In simple mortgage interest in property is transferred, but property is in possession of transferor and it can be enforced only with the intervention of the court. It requires compulsory registration. 168. What is English mortgage? In English mortgage property is transferred in the name of borrower in consideration for the loan, as and when principle and interest is paid the lender should transfer the property in favour of borrower. 169. What is mortgage by compulsory sales? In Mortgage by compulsory sales, like in English mortgage title is transferred in favour of lender, but if the borrower did not pay back the loan within stipulated period the transfer becomes absolute. 170. What is Usufructory mortgage? In usufructory mortgage the lender can occupy the property and enjoy the usufruct in lieu of interest, but as and when the loan is repaid the property should be transferred to borrower. 171. What is equitable mortgage? Equitable mortgage is by deposit of title deeds in certain cities and town and it dont require registration. 172. What are the various types of securities? Mortgages are given for term loans

First charge means in the event of default the lender will have the first right to appropriate the property. Second charge means in the event of default the lender will have second rights after the first charge holder is satisfied. Ceding of paripassu charge means that both lenders will have same rights over the property even though the other lender lent subsequently. Many a time second charge is ceded for working capital lending. 173. What is an LSR? LSR means legal scrutiny report which is taken by bank on the title of property from legal advisers. 174. What are covenants? Covenants are conditions attached to loans Positive covenants are those things the borrower should maintain like debt service coverage ratio, interest coverage ratio, while negative covenants are those which the borrower is prohibited to do without banks permission like Declaring dividend beyond a limit, further borrowing etc. Breach of covenant will lead to withdrawal of facility or rise in interest as per the discretion of the bank. 175. What is CD ratio? CD ratio means how much of deposit is given in the form of credit and how much was used for investment and other assets. 176. What is PLR? PLR is prime lending rate, which is the rate at which bank lends to its best customer, each bank is required to quote a base prime lending rate in the beginning ( BPLR) , bank cannot lend at a rate lower than this. 177. What are various committees appointed by Government of India and state their recommendations? Post independence, banks lent only based on security and not based on need, this led to funds getting diverted for industries having excess inventories and preventing funds flowing to needy industries, to prevent this Government of India appointed various committees. Daheja Committee, Tandon Committee, Chore Committee, Marathe Committee, Kannan Committee and Nayak committee. 178. What is Daheja Committee recommendation?

Daheja committee was the first committee to be appointed in 60s and it recommended part of the working capital to be financed by borrower out of its own long term resources. Since at that time there was no well developed capital markets in India, its recommendations were taken as indicative. 179. What are the recommendations of Tandon Committee? Tandon committee recommended concept of MPBF (Maximum Permissible Bank Finance) Under first method 75% of working capital gap will be financed by bank and balance by borrower leading to current ratio of 1.16. Under second method 25% of current assets will be financed by borrower out of long term funds, balance 75% current assets- current liabilities will be financed by bank leading to current ratio of 1.33 Under third method entire core current assets and 25% of CA-CCA will be financed by borrower and balance by bank leading to current ratio of 1.79. Tandon committee fixed inventory norms for 15 industries which availed 85% bank borrowings and any inventory in excess of this should be financed by borrower out of his own resources. 180. What is drawing power? Even though Tandon committee fixed 25% uniform margin for all current assets, many bank fixed higher margin for assets like work in process and debtors there by the actual eligible borrowing is far less than MPBF. This is called as drawing power. 181. What is Chore committee recommendation? Chore committee introduced Quarterly Information System (QIS). Form I before the beginning of quarter specifying forecast of working capital, Form II at the end of quarter comparing actual with forecast, explaining deviation. Form III every six months specifying P&L , Balance Sheet and fund flow statement.

182. What are Marathe Committee Recommendations? Marathe committee recommended abolition of prior credit authorization by RBI for loans beyond a level and instead bank will furnish certain information as part of credit monitoring arrangement (CMA) for post approval monitoring. 183. What is Kannan Committee recommendation? Kannan committee was constituted in 90s and it recommended complete freedom for banks in deciding ls Ever greening is a practice followed by bank; where in fresh loans are given to repay earlier loans to avoid NPA.

186. What is takeout finance? Take out finance is an arrangement by which one bank takes over liability from other bank at periodic interval, this is done for infrastructure project, which has long gestation period to avoid asset liability mismatch. 187. What are bills discounting? All committees have recommended bill discounting, by accepting a bill of exchange definite commitment is made for paying liabilities. But Indian industries used for open payment system in the form of cash credit and small industry payments, never wanted to commit themselves for fixed payment dates, so bill market never developed. In London which is the premier financial centre for the world acceptance house and discount house evolved, Indias attempt to replicate this through Discount and Finance House of India (DFHI) BY Government failed. Bankers acceptance of a bill is a contingent liability. 188. What is trade bill and accommodation bill? Trade bills are against genuine trade transactions so secured, while accommodation bills are having no securities, In India many accommodation bill masquerades as trade bill that is why bill financing never took off. 189. What is kite flying? In kite flying an artificial entity is created in a remote place, cheques are issued by these entities against fictitious transaction and they are discounted to enjoy financing due to clearing delay this is called as kite flying. 190. What is CDR? CDR means Corporate Debt Restructuring, in which corporate approach banks for troubled debt restructuring. 191. What is funded interest? Funded interest means banks convert outstanding interest on loan as fresh loan. 192. What is packing credit? Packing credits are given for exports against LC or firm export order. This is only credit where interest rate is controlled. The maximum interest rate to be charged for rupee packing credit is PLR-2.5% For foreign currency packing credit it is Applicable LIBOR+.75% Packing credit in foreign currency is given in $, euro, ,

It is given for pre shipment for purchase of raw material, converting them to finished goods, packing and keeping them ready for exports. Similarly post shipment credit is given for credit period for realizing export proceeds. Maximum period is 180 days extendable by further 90 days. Only condition is that it should be cleared out of export proceeds only. 193. What is a bridge loan? There is a period of 3 to 4 months between the announcement of public issue and realization of proceeds, bridge loan is given for this period to corporate to proceed with work, but they are realized out of proceeds of public issue. 194. What are two methods of pricing loan? Average cost method under which average cost of funds are taken irrespective of term of loan and markup is added. This is adopted during downturn where there is no much demand for bank funds. In pooled cost method the tenure of loan is matched with tenure of deposits and mark up added, this is done in boom where demand for fund exceeds availability. 195. What are two methods of charging floating rate method? Prime rate method, where markup is added to PLR Prime Time method where PLR+Markup / prime rate. 196. What are commitment charges? Commitment charges are levied on unused facilities. 197. What is float fund? Float fund is funds on which bank sit due to clearing delay, which is low cost fund for banks. 198. What is probability of default? Probability of default is what the probability is that the loan will not be repaid; this is estimated by sophisticated banks with help of models like Merton model. 199. What is Loss given default (LGD)? It is estimated based on quality of collateral and legal system in the country facilitating realization. 200. What is the relationship between expected rate and contracted rate? E(r) = P(r)+ (1-P) (R-1)r

Where r is contract rate, E(r) is expected rate, P is probability of default, R is recovery given default. 201. What is provision for standard asset? For Agriculture and SME it is .25%, real estate it is 1% and others .4% 202. What is substandard asset and what are the provisioning norms for the same? If principle or interest remain outstanding for more than 90 days, in case of agriculture ,for more than 180 days for short term crop and for more than two seasons for long term crops, it will be called as non standard assets. Once one account of borrower with a bank is declared non standard all others will be declared as non standard. Once an account is declared as non standard all income will be recognized on cash basis and not on accrual basis. Past unrealized income recognized on accrual basis will be reversed and will be recognized on cash basis. Provision for unsecured portion of substandard asset will be made at 25% and for secured portion at 15%. 203. What is provisioning norm for doubtful asset? If non standard asset remains non standard for more than 1 year it becomes doubtful asset. Once it becomes doubtful assets for unsecured portion provision is at 100% For secured portion For doubtful asset up to 1yr 25% 1 to 3 years 40%

For greater than 3 years 100%

204. What is loss asset and what is the provisioning norm? Any assets identified by management, internal auditors RBI or statutory auditors as loss assets will be provided 100%. 205. How internal rating based approach for provisioning? Exposure at default* Probability of default* loss given default is provision based on internal rating.

206. What are FCNR (A) accounts? FCNR (A) accounts are deposits taken by public sector bank at the instant of Government of India in any one of four foreign currencies $, ,, DM, interest exempt from tax, both principle and interest are freely repatriable, here foreign exchange risk is borne by Government of India through RBI. 207. What is FCNR (B) account? Same as FCNR (A) except that instead of DM deposits are taken in Euro. Here exchange risk is borne by the bank and not by government of India. 208. What is NRE account? In this the NRI keeps the accounts in Rs and bears exchange risk, interest is exempt from tax, interest and principle are freely repatriable. 209. What is NRNR account? This is like NRE account where only interest is repatriable but the principle is not, here also the interest is exempt from tax. 210. What is NRO account? NRO accounts are accounts in which neither the interest, nor principle is repatriable. But interest is exempt from tax. 211. What is EEFC account? EEFC account is exchange earners foreign currency account in which exporters are allowed to keep their account in foreign currency. 212. What are RFC accounts? Where a non resident Indian comes back to India for good, he is allowed to keep his accounts as such in abroad to discharge his obligation , up to seven years after returning to India, this is known as nonresident foreign currency account. 213. What is maturity matching? Assets and liabilities are classified into various maturity buckets. Assets and liabilities which fall within one year maturity bucket are classified as Rate Sensitive Asset (RSA), Rate sensitive Liability (RSL) Difference between RSA RSL is called as Rate Sensitive GAP.( RSG) If RSG is positive it means that management expects the rate to go up in that maturity period.

If RSG is negative in a maturity bucket, management expects the interest rate to reduce during that maturity bucket. RSA/RSG is called as GAP ratio. GAP only influences Net Interest Income (NII) during the year. Thus maturity matching only protects NII for the year and not shares holders wealth in the form of net worth. If the management wants to protect net worth it should do duration matching.

214. What is Yield curve? Yield curve is plotting YTM of government securities against term; there is upward sloping, downward sloping, and flat and kinked yield curve. 215. What is duration? Duration is sensitivity of interest rate Formula = PV*T/ PV Modified duration is = Duration/ 1+YTM/n Where N represents number of times interest is paid in a year.

216. What is Macaulays Duration? Macaulays duration assumes parallel shift in yield curve. 217. What is Fischer Weil Duration? Fischer Weil duration assumes non parallel shift in yield curve. 218. What is Key duration? Key duration recognizes only few key changes in interest rates and ignores others. 219. What is Effective duration? When the security has pre payment option without penalty effective duration is applied

Formula = P - - P+/ 2Pi 220. What is Modified duration indicates? Modified duration indicates sensitivity of price of fixed income security to change in YTM. It is an important measure of market risk for fixed income security.

221. What is convexity? Convexity is sensitivity of duration. Convexity factor CY = (1+r)2 (PV*T*(T+1))/ PV Convexity adjustment = CY *100*i2 It states that rise and fall of bond price due to change in interest rate is asymmetric, while the rise in price of bond will be more due to same extent of fall in YTM than fall in price of fixed interest bond due to same extent of rise is YTM. 222. What is effective convexity? Effective convexity P - + P + - 2P/ Pi2

223. How market risk is managed for bonds? If the direction of change in interest rate is certain high modified duration bonds are selected, but if the direction of change in interest rate is uncertain then low modified duration and high convexity bonds are selected. Strategies like laddering for high uncertainty interest rates, bar belling for relative uncertainty in interest rate and bulleting for certainty in interest rate movements are employed to manage market risk for fixed interest bonds. 224. What are regulations for managing equity related interest risk? In India not more than 5% of incremental deposits can be invested in shares. 225. What is Margin trading? Margin trading is bank financing part of the shares against security of shares, this is also covered under 5% limit.

226. What is Glass stegall act? After great depression in which many depositors of banks lost heavily due to banks stock operations banks were prohibited from doing stock operations under Glass stegall act. This lasted till the act was repealed by Gramm Billey Leach act in 1999. 227. What is operational risk? Operational Risk involves internal check like separation of duties, verification of assets, reconciliation, and review by management, internal audit, Basel 2 talks about capital adequacy to protect fraud against internal and external fraud and disasters. 228. What is basic indicator approach? In this 15% of gross income is provided for capital against operational risk. Gross income is average of past three years income. 229. What is Standardized approach? Under this the Banks activities are classified into eight categories and capita provided based on beta of each activity.

Classification Corporate Finance Trading and sales Payment and settlement Commercial Banking Asset Management Retail banking Retail Brokerage Agency Business

Capital as % of gross income 18 18 18 15 15 12 12 12

230. What is Advanced Measurement approach? In Advanced measurement approach risks are classified as given below Loss caused Frequency of occurrence High Low High Low Avoid Internal Audit, control Insurance, business continuity bear plan Risk is classified into all four categories and mitigation approach is adopted and loss caused due to residual risk borne is provided as capital based on past experience.

231. What is concentration Risk? Indian Bank faces high concentration risk due to their tendency to finance large companies in few sectors, since all these companies are highly correlated and affected by economic slowdown Indian banks faces high concentration risk compared to other Asian or BRICS Countries. 232. What are concentration limits imposed by RBI regulation? No bank can finance a company in excess of 15% of its capital and a group in excess of 40% of its capital. In the case of Infrastructure Company these limits stand enhanced to 20% & 50% respectively. No bank can finance a single industry in excess of 10% of available funds. But this stands enhanced to 20% for infrastructure. 233. What is VAR? VAR is value at risk which is a measure used to measure market risk; it is based on normal distribution. 234. What is Parametric VAR? In parametric VAR all measures are made as per mean and standard deviation. 235. What is Historic VAR? Historic VAR is based on past data. 236. What is simulated VAR? It is based on simulated data. 237. What is tail/ event risk? Normal distribution is incapable of measuring peculiar events , this is called as event risk or fat tail risk. 238. What is capital adequacy? Capital adequacy is for unexpected loss or tail risk. 239. What is Leverage Ratio? Leverage ratio is = Tier 1 capital/ risk weighed asset 240. What is RAROC? RAROC is Risk adjusted Return of capital which is like EVA.

RAROC = Income- expense- losses provided+ risk free return on economic capital/ Regulatory capital+ economic capital.