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Q 2. Give three major reasons that suppliers of funds would not like to
directly purchase securities issued by ultimate users of funds ?
Q 11. Mention the different items that appear in a Bank’s Balance Sheet
in India.
Q 12. Q 11. Mention the different items that appear in a Bank’s Income
Statement (Profit & Loss Account) in India.
(1) Retail Deposits (2) Paid-up-capital (3) Loan Commitments (4) Consumer
loans (5) Interest on Investment securities (6) Interest on Savings Bank
Deposits (7) Current Deposits (8) Letter of Credit (9) Retained earnings
(10) Provision on NPA Loans
Q 14. Define Net Interest Income (NII) and Net Interest Margin (NIM).
Q 17. It’s often said that Banks must rely less on Net Interest Income/
Core Income and more on the Non-Interest Income/Other Income. Comment
on the statement defining the terms like Core Income and explaining (a) the
various sources of Non-interest Income and (b) the sources and strategies
to control the Non-interest expenses.
Q 19. How does one distinguish between an off-balance sheet asset and an
off-balance sheet liability ?
Q 23. Arrange the following items into an income statement. Label each
item, place it in the appropriate category and determine the bank’s bottom-
line net income.
Q 24. M/s XYZ Bank Ltd. has the following Balance Sheet & Income
Statement.
Income Statement
a. ROE
b. ROA
c. EM (Equity Multiplier)
d. ER (Efficiency Ratio)
e. AU
f. PM
Q 5. Expand SWIFT ?
Q 6. Expand RTGS ?
Q 9. Name the right of the Banker to retain possession of the goods &
securities owned by the debtor (borrower) until the debt due from the
latter is paid ?
Q 10. Name the bill finance facility under which Buyer’s Bank discounts
the bill for the account of the Buyer and remit the amount to the
Drawer/Seller of the Bill and Buyer’s Bank recovers the amount paid on
the bill along with interest and other charges, if any from the Buyer (his
Customer) on the due date of the bill. This is a working capital facility to
the buyer as an alternative to the Cash Credit facility against stocks.
Q 11. What is the name of a bill which is payable after a specified
period of time ?
Q 16. Current ratio is 1, find out the Net Working Capital (NWC) ?
Q 23. What is the NPA provision rate for Loss Loan Asset ?
Q 24. What is the maximum default period beyond which a loan account
will be classified as NPA in the books of the bank ?
Q 26. What is the minimum Capital adequacy ratio (CAR) for Banks in
India as per Basel II ?
Q 28. BCBS defines one risk as “the risk of direct or indirect loss
resulting from inadequate or failed internal processes, people and
systems or from external events”. This risk is called as --------- ?
Q 30. Name the ratio used for assessing the repayment capacity of a
borrower in case of a Term Loan ?
Q 31. If a Bank funds long-term assets with short-term liabilities, what will be the
impact on earnings of an increase in the rate of interest ?
this
Q 32. When the asset of a bank is long funded (borrowing long, lending short),
gives rise to a risk which is a particular form of interest rate risk. Name
this risk ------ ?
Q 33. If a Bank funds short-term assets with long-term liabilities, what will be the
impact on earnings of a decrease in the rate of interest ?
Q 40. Define the Rate Sensitivity Gap (RSG) also known as Re-pricing
Gap or Funding Gap ?
Q 41. What are the three pillars of Basel II new capital accord ?
Q 44. What are the two reasons for Which banks need liquidity ?
Q 46. Calculate the re-pricing gap and impact on net interest income
(NII) of a 1% increase in interest rates for the following position :
RSA = 100 crore, RSL = 50 crore
Q 47. Calculate the re-pricing gap and impact on net interest income
(NII) of a 1% increase in interest rates for the following position :
RSA = 50 crore, RSL = 150 crore
Q 1. Mention the different items that appear in a Bank’s Income Statement (Profit & Loss
Account) in India. Show step by step calculation to derive Operating Profit and Net Profit after
tax (Net Income).
Q 7. What are three pillars of Basel II new Capital accord ? What is the new risk introduced as per
Basel II ? Define Capital Adequacy Ratio, also known as Capital to risk-weighted asset ratio (CAR or
CRAR). What is the minimum Capital adequacy ratio requirement for Banks in India ?
Q 8. What is Credit Default Swap (CDS) ? Explain with the help of a diagram.
: : 2 : :
Q 9. M/s XYZ Bank Ltd. has the following Balance Sheet & Income Statement.
Balance Sheet (Figures are in Rs. Crores)
Liabilities & Equity Assets Assets
Demand Deposits 57,000 Cash & Bal. with RBI 19,000
Term Deposits 99,000 Bal. with Banks/Money
at call & short notice 52,000
Debentures 29,000 Investment securities 33,000
Total Liabilities 185,000
Paid up Equity Capital 22,000 Loans & advances 110,000
Share Premium 14,000 Fixed assets 15,000
Retained Earnings 12,000 Other assets 4,000
Total Liabilities & Equity 233,000 Total assets 233,000
Income Statement
a. NIM
b. ROE
c. ROA
d. EM (Equity Multiplier)
e. AU
f. PM
Q 4. Why banks need liquidity ? What two methods do Banks/Financial Institutions use to manage the
liquidity needs ?
Q 5. Calculate the re-pricing gap and impact on net interest income (NII) of a 1% increase in interest
rates for the following positions :
a. RSA = 100 crore, RSL = 50 crore
b. RSA = 50 crore, RSL = 150 crore
c. RSA = 75 crore, RSL = 70 crore
d. What conclusions can you draw about the re-pricing model from the above results ?
: : 2 : :
Q 10. (a) As per the duration gap model of interest rate risk management, the change in the Market
Value of the Equity (MVE) of an FI is given as under :
∆ E = - DGAP x A x ,
Derive the above formula and explain the effect of the above three factors on the market value of
the FI’s equity due to interest rate volatility.
(b) If the market values of assets and liabilities are Rs.2,400/- Crore and Rs.2,100/- Crore
respectively, compute the change in the market values of equity given the following information :
-------------------END-------------------------
Additional information :
(i) Standard asset carries a provision of 0.40%
(ii) The proportion of security available for the doubtful assets is 65%, 40% and 25%
for the three categories respectively.
Calculate the provisioning requirement of the bank based on the above information.
: : 2 : :
(1) Retail Deposits (2) Paid-up-capital (3) Loan Commitments (4) Consumer loans (5)
Interest on Investment securities (6) Interest on Savings Bank Deposits (7) Current
Deposits (8) Letter of Credit (9) Retained earnings (10) Provision on NPA Loans
Q 16. What is refinancing risk ? How is refinancing risk part of interest rate risk ? If an FI
funds long-term assets with short-term liabilities, what will be the impact on earnings of an
increase in the rate of interest ? A decrease in the rate of interest ?
Q 17. What is reinvestment risk ? How is reinvestment risk part of interest rate risk ? If
an FI funds short-term assets with long-term liabilities, what will be the impact on earnings
of a decrease in the rate of interest ? An increase in the rate of interest ?
Q 18. Arrange the following items into an income statement. Label each item, place it in the
appropriate category as per the Bank’s Income Statement (P & L A/c) format and determine
the bank’s bottom-line net income.
p. Interest paid on Term deposits Rs.100,000/-
q. Interest paid on Certificate of deposits Rs.101,000/-
r. Interest received on GOI Securities Rs.44,500/-
s. Fees received on selling of insurance and mutual funds Rs.23,000/-
t. Dividends paid to Shareholders of Rs.0.50 per share for 5,000 shares
u. Provision for loan losses/NPA provision Rs.18,000/-
v. Interest and discount on loans Rs.1,89,700/-
w. Interest paid on SB accounts Rs.33,500/-
x. Interest received on Corporate/PSU bonds Rs.60,000/-
y. Employees salary and benefits Rs.1,45,000/-
z. Purchase of a new Computer system Rs.50,000/- (Depreciation for the current year
Rs.10,000/-)
aa. Service charge/commission receipts from customer accounts Rs.41,000/-
bb. Occupancy expenses for the bank building Rs.22,000/-
cc. Taxes of 34% of taxable income are paid
dd. Safe Deposit Locker rent receipt Rs.15,000/-
Q 8. ABC bank has 11.75% as its average cost of funds. If the transaction
cost involved for credit accommodation is 0.5% and if the bank plans to
maintain a 3% margin on the same, compute the contractual rate for the
loan which is adjusted for loan defaults and losses. Following additional
information for the problem : Principal loan amount – Rs.1,500/- crore,
Probability of repayment – 0.9, Recovery rate for the principal and interest
component – 0.95.
Case Study 1
Read the case let carefully and answer the following questions. Each
Answer should be specific/to the point and not to exceed 4 to 5 lines.
Q 10. Define Net Interest Income (NII), Net Interest Margin (NIM) and
Burden or Overhead.
Q 13. What are the sources of other income for a bank ? Why it’s so
important for the bank in the present environment ?
Q 14. What are the sources of other income for a bank ? Why it’s so
important for the bank in the present environment ?
Q 15. Comment on the statement “The amount provided under the head of
provisions and contingencies fell by 34% Y-o-Y due to reversals of provisions
on corporate and government bonds, amounting to Rs.147 crore boosting its
profit growth. In fact, this is the most crucial aspect of the results, where
the profit growth is more on account of drop in provisions than the growth in
net interest income (NII).”
Q 16. “Going forward, the cost of deposits is expected to come down that
would ease the pressure on NIM”. Explain this statement.
AXIS Bank reported a 63.2% growth in net profit for the quarter ended
December 2008 on growing business and a sharp drop in provisions and
contingencies. Bank’s business as measured by the sum of deposits and
advances grew by 54.5% year-on-year (Y-o-Y). This was in line with the trend
seen in the first half of the financial year 2009. Net interest margin (NIM)
fell by close by close to 79 basis points (bps) to 3-12% for the December
quarter, as term deposits posted a growth of 75%, while CASA deposits
grew by just 29%. Term deposits attract higher interest than CASA
deposits. The bank also reduced interest rates after the RBI’s rate cuts.
Falling interest rates affect lending rates rather than the borrowing or
deposit rates. Therefore, it was expected that bank’s NIM could be
affected, though the change was substantial and it is extremely crucial for
Axis Bank to control its rising cost of deposits. Other income rose by 50%
Y-o-Y on strong momentum in fee income which grew by 56.7% and trading
gains.
The amount provided under the head of provisions and contingencies fell by
34% Y-o-Y due to reversals of provisions on corporate and government
bonds, amounting to Rs.147 crore boosting its profit growth. In fact, this is
the most crucial aspect of the results, where the profit growth is more on
account of drop in provisions than the growth in net interest income (NII),
which stood at a mere 24.4% against 70.8% during the six months ended
September 2008. The positive aspect of the third quarter result is that the
bank is still posting a very high growth on its loan book. The performance at
the operating level is satisfactory. The key concern is high cost of deposits.
The bank has to control its cost of funds, as it may affect its bottomline
growth in coming quarters. Going forward, the cost of deposits is expected
to come down that would ease the pressure on NIM. And if this happens, the
bank would continue to post high growth rates in profit as seen in the first
nine months of the financial year 2009.
Case Study 2
Read the case let carefully and answer the following questions. Each
Answer should be specific/to the point and not to exceed 4 to 5 lines.
Q 10. What do you mean by asset quality/credit quality ? How the asset
quality of a bank is measured ?
Q 13. Why the banks have voiced concerns over the impact on their asset
quality in the present situations ?
Q 14. Define loan sales. What is the difference between loans sold with recourse and without
recourse from the prospective of both sellers and buyers ?
Given the economic downturn, every top banker has voiced concerns over the
impact on their asset quality. They expect NPAs to rise from the current
levels. This is an opportunity for Arcil to grow its business. Arcil buys bad
loans from banks and expedite recovery of the amounts locked in NPAs.
Sectors like exports, textiles, gems and jewellery, logistics have faced
severe stress following the slowdown and these sectors are likely to
contribute most in the rise of NPAs. As job cuts have also become a regular
affair now, banks may also face rise in NPAs in their housing loans. Arcil has
recently started purchasing distressed assets, especially bad home loan
assets. However, its main focus continues to be buying the distressed
corporate loans from banks.
Case Study 3
Read the case let carefully and answer the following questions. Each
Answer should be specific/to the point and not to exceed 4 to 5 lines.
Q 13. “Banks run into losses on their bond portfolios, when bond yields rise
sharply. Thus, in the current circumstances, banks with a larger share of
portfolios in the AFS category (non-HTM bucket), and that too, bonds with a
longer duration, will be most affected.”
The first quarter of 2008-09 could see banks declare losses up to Rs.1,500
Crore on treasury operations. Nationalised banks are more likely to bear the
brunt of rising yields compared to their private sector peers since a few
large PSU banks have perked as much as 50-60% of their bond portfolios in
the available-for-sale (AFS) category. As against this, private sector majors
such as ICICI Bank, HDFC Bank and Axis Bank have perked only 15-20% of
their bond portfolios in the AFS bucket. As per RBI guidelines, banks have
to mark-to-market (MTM) a portion of their G-sec book (i.e., 26-30% of
assets owing to high SLR), which is in the non-held-to-maturity (HTM)
category. Thus, in the current circumstances, banks with a larger share of
portfolios in the AFS category (non-HTM bucket), and that too, bonds with a
longer duration, will be most affected. In addition, banks have also to mark-
to-market all their non-G-sec investments (like corporate bonds) every
quarter.