MODERN THEORY: HICKS — HANSEN SYNTHESIS: IS-LM CURVE MODEL

MODERN THEORY: HICKS — HANSEN SYNTHESIS: IS-LM CURVE MODEL
1. Modern theory was propounded by Hicks and Hensen.
2. According to the theory, the interest depends upon saving, investment, liquidity preference and income.
3. The rate of interest according to the theory is determined by monetary equilibrium and income
equilibrium.
4. This theory is a synthesis between the Classical and Keynes' theories of interest.
5. It has propounded an adequate and determinate theory of interest through the intersection of what are
called IS and LM curves.
6. According to Hicks and Hansen, the classical and loanable funds theories amount to the same thing. The
difference between these two theories, i.e. classical and loanable funds, lies only in the meaning of savings.
7. IS curve is derived from various saving curves at various income levels together with the given
investment demand curve. This IS curve tells us what will be the various rates of interest at different levels of
income, given the investment demand curve and a family of saving curves at different levels of income.
8. LM curve is obtained from Keynes' formulation. The LM curve is obtained from a family of liquidity
preference curves corresponding to various income levels together with the given stock of money supply.
This is because as the level of income increases, people would like to hold more money under the
transactions motive. That is, the higher the level of income, the higher would be the liquidity preference
curve. With the given supply of money, the different levels of liquidity preference curves corresponding to
various levels of income would determine different rates of interest. This yields LM curve, which depicts the
various combinations of interest and income level, at which money market is in equilibrium.
9. Hicks and Hansen show that with the intersection of IS and LM curves, both the interest and income
are simultaneously determined. Thus the classical and Keynes' theories taken together help us in obtaining
as adequate and determinate theory of interest.
DERIVATION OF THE IS CURVE:
1 As the income rises, the savings curve shifts to the right and the rate of interest, which equalizes savings
and investment, falls.
2. Since, as income increases, rate of interest falls, the IS curve slopes downward.
3. IS curve relates the rates of interest with the levels of income at which intended savings and investment
are equal. In other words, the IS curve depicts the various combinations of levels of interest and income at
which, intended savings equal investment; goods-market is in equilibrium.
4. Since with the increase in income the savings curve shifts to the right, its intersection with the
investment demand curve will lower the rate of interest.
5. The level of income and rate of interest are inversely related. That is, the IS curve slopes downward.
6. Further, the steepness of the IS curve depends upon the elasticity or sensitiveness of investment
demand to the changes in rate of interest. A given change in interest will produce a large change in
investment and thereby cause a large change in the level of income.
7. Thus when investment demand is greatly elastic or highly sensitive to the rate of interest, the IS curve
will be flat (i.e. less steep). On the other hand, when investment demand is not very sensitive to the changes
in rate of interest, the IS curve will be relatively steep.
8. The *position of IS curve and changes in its level are determined by the level of autonomous
expenditure
such as government expenditure, transfer payments, autonomous investment. If the government
expenditure or any other type of autonomous expenditure increases, it will increase the equilibrium level of
income at the given rate of interest. This will cause the IS curve to shift to the right. A reduction in
government expenditure or transfer payments will shift the IS curve to the left.
DERIVATION OF THE LM CURVE FROM KEYNES' LIQUIDITY PREFERENCE THEORY
1. The LM curve can be derived from the Keynesian liquidity preference theory of interest.
2. Liquidity preference or demand for money to hold depends upon transaction motive and speculative
motive.
3. It is the money held for transactions motive which is a function of income. The greater the level of

income, the greater the amount of money held for transactions motive and, therefore, the higher the level of
liquidity preference curve.
4. A family of liquidity preference curves can be drawn at various levels of income. The intersection of
these various liquidity preference curves, corresponding to different income levels with the supply curve of
money fixed by the monetary authority, would give the LM curve that relates the rate of interest with the level
of income as determined by money-market equilibrium corresponding to different levels of liquidity
preference curve.
5. The LM curve tells us what the various rates of interest will be (given the quantity of money and the
family of liquidity preference curves) at different levels of income. But the liquidity preference curves alone
cannot tell us what exactly the rate of interest will be.
6. As income increases, liquidity preference curve shifts outward and therefore the rate of interest, which
equates supply of money with demand for money, rises.
THE SLOPE AND POSITION OF THE LM CURVE
1. The LM curve slopes upward to the right. This is because with higher levels of income, demand for
money (that is, the liquidity preference curve) is higher and consequently the money-market equilibrium, that
is, the equality of the given money supply with liquidity preference curve occurs at a higher rate of interest.
This implies that rate of interest varies directly with income
2. Factors that determine the slope of the LM curve include (i) Responsiveness of demand for money (i.e.
Liquidity Preference) to the changes in income and (ii) Elasticity or responsiveness of demand for money
(i.e., liquidity preference for speculative motive) to the changes in rate of interest.
3. As the income increases, demand for money would increase for being for transactions motive. This
extra demand for money would disturb the money-market equilibrium, and in order to restore the equilibrium
the rate of interest will rise to the level where the given money supply curve intersects the new liquidity
preference curve corresponding to the higher income level.
4. In the new equilibrium position, with the given stock of money supply, money held under the
transactions motive will increase whereas the money held for speculative motive will decline. The greater the
extent to which demand for money for transaction motive increases with the increase in income, the greater
the decline in the supply of money available for speculative motive.
5. Given the liquidity preference schedule for speculative motive, the higher the rise in the rate of interest,
the steeper the LM curve consequently.
6. According to Keynes' liquidity preference theory, r = f (M2,L2) where M2 is the stock of money available
for speculative motive and L2 is the money demand or liquidity preference function for speculative motive.
7. The second factor which determines the slope of the LM curve is the elasticity or responsiveness of
demand for money (i.e., liquidity preference for speculative motive) to the changes in rate of interest. The
lower the elasticity of liquidity preference with respect to the changes in interest rate, the steeper will be LM
curve.
8. On the other hand, if the elasticity of liquidity preference (money-demand function) to the changes in
the rate of interest is high, the LM curve will be relatively flat or less steep.
What brings about shifts in the LM curve?:
1. An LM curve is drawn with a given stock of money supply. Therefore, when the money supply
increases, given the liquidity preference function, it will lower the rate of interest at the given level of income.
This will cause the LM curve to shift down and to the right. On the other hand, if money supply is reduced,
given the liquidity preference (money; demand) function, it will raise the rate of interest at the given level of
income and therefore cause the LM curve to shift above and to the left.
2. The other factor that causes a shift in the LM curve is the change in liquidity preference (money
demand function) for a given level of income. If the liquidity preference function for a given level of income
shifts upward, this, given the stock of money, will lead to the rise in the rate of interest. This will bring about
a shift in the LM curve above and to the left. On the contrary, if the liquidity preference function for a given
level of income declines, it will lower the rate of interest and will shift the LM curve down and to the right.
Intersection of the IS and LM curves: Simultaneous determination of interest rate and income
1. The IS curve and the LM curve relate the two variables: (a) income, and (b) the rate of interest.
2. Income and the rate of Interest determined together at the equilibrium rate of interest are, at the point
of intersection of IS and LM curve.
3. At this point, income and the rate interest stand in relation to each other such that (1) investment and
saving are in equilibrium, and (2) the demand for money is in equilibrium with the supply of money (Le., the
desired amount of money is equal to the actual supply of money).
4. Thus, a determinate theory of interest is based on: (1) the investment-demand function, (2) the saving
function (or, conversely, the consumption function), (3) the liquidity preference function, and (4) the quantity
of moneyor, conversely, the consumption function),
5. According to Hicks and Hansen, both monetary and real factors, namely, productivity, thrift, and the
monetary factors, that is, the demand for money (liquidity preference) and supply of money play a part in
determining of the rate of interest. Any change in these factors will cause shift in IS or LM curve and will
therefore change the equilibrium level of the rate of interest and income.

INFLATION & RELATED TERMS

INFLATION & RELATED TERMS

1. Inflation: A situation of a steady and sustained rise in general prices is usually known as inflation.

Inflation is a state in which the value of money is falling i.e. prices are rising.

2. Cost-push Inflation: It arises due to an increase in production cost. Such type of inflation is caused by

three factors: (i) an increase in wages, (ii) an increase in the profit margin and (iii) imposition of heavy

taxation.

3. Demand- push Inflation: It arises as a result of strong consumer demand. When many individuals are

trying to purchase the same good, the price will inevitably increase. When this happens across the

entire economy for all goods, it is known as demand-pull inflation

4. Deflation: Deflation is the reverse case of inflation. Deflation is that state of falling prices which occurs

at that time when the output of goods and services increases more rapidly than the volume of money in

the economy. In the deflation the general price level falls and the value of money rises.

5. Disinflation: A fall in the rate of inflation. This means a slower increase in prices but not a fall in prices

6. Recession: A period of slow or negative economic growth, usually accompanied by rising

unemployment.

7. Stagnation: A prolonged recession, but not as severe as a depression.

8. Disinflation: A fall in the rate of inflation. This means a slower increase in prices but not a fall in prices.

9. Depression: A prolonged recession in economic activity. The textbook definition of a recession is two

consecutive quarters of declining outpur. A depression is an even deeper and more prolonged slump.

CAIIB ABM TODAY EXAM 55 QUESTIONS RECOLLECTED by Srinivas Kante

CAIIB ABM TODAY EXAM 55 QUESTIONS RECOLLECTED 

1.Hicks -Hansen synthesis
2.Basic difference between IS and LM curve
3.Increase in money supply Lowe interest rate and raising inflation
4.NDP @factor cost
5.Demand –pull inflation means
6.Erosion as per the role
7.Climate Survey
8.Case study one related to Budget
9.Central limit theorem
10.sampling methods .
11. job erosion
12 curreneaccountdefficit
13 Gross deficit etc.
case
14..standard deviations mean related
15  .Case 3 Xyz jewellery shop
Related
But the level oh complexity is very high..n ..
16  fiscal policy ,monetary policy
17.demand supply curve etc...
18.Correlation and regression numerical
19.NNP @ factor cost
20working capital
21. bank guarantee
22.Performance Appraisal
23. Halo effect Tendency..
24.NNP at market price
25.In correct characteristics in Business cycle
26 Notional income also known as..
27.Least squre method used in..
28.Fctoring of services the factor
29.Lender to sensitising test and scenerion analysis..Type of loans
30. Debt to equity of enter prises raatio is.05 its...
31.Bank Gaurantee to commoidity brokarage (margin %)..
32.find P(x bar >/85)  ?
33Std error of the mean is????
34 Estimate of the population proportion is..
35 Commericial paper issued multiples of..
36.Commericial paper issued maximum period
37.Find P(88|
39.HRM
40.monetary policy
41.Annuity due prblems
42. Future Value problem
43.Estimation
44.Bond price
45.Revenue dediciat problem
46.Job evealution Job specfication case study
47. Turn over methodeapplied on leass than 5 cr
48. Factor of Supply schedule
49.Lional econmic statement.
50. GDP calculation
51. GNP at amrket price calculation
52. Sampling Methodes
53.Hallo effect
54 Cov(X,Y)=150 mean X=20 mean Y=10 standard deviation x=25 then equation of regression line is
55. 3 questions from HRM 5 marks each



Thank you all,

Srinivas Kante  https://iibfadda.blogspot.com/2018/06/caiib-abm-recollected-june-2018-today.html

Current Affairs on 26.11.2018

Today's Headlines from www:

*Economic Times*

📝 Prices of TV, home appliances may go up 7-8 per cent from next month

📝 Khadi sales jump 4-fold in FY18; KVIC to run 'Khadi Express' train to boost sales

📝 Welspun India aims 50% revenue from innovation-based products by 2022

📝 RBI may hold the rates baton till March: report

📝 Jio tops chart in terms of AGR in September quarter: TRAI data

📝 216 railway projects report cost overrun of Rs 2.46 lakh crore

📝 JNPT SEZ eyes Rs 900-1,000 crore from land auction

📝 Andhra Bank puts up Rs 1,553-cr NPAs for sale, prefers cash bids

*Business Standard*

📝 Social commerce platform Meesho targets 20 million resellers by 2020

📝 IndiGo and SpiceJet make web check-in paid service, flyers tweet protest

📝 I-T department sells Cairn Energy's shares in Vedanta to recover tax

📝 Lots Wholesale Solutions plans to invest Rs 10 bn in India over next 5 yrs

📝 UAE to offer long-term visa schemes to rich and educated foreigners

📝 MFs add 7.7 mn accounts in Apr-Oct, take total to all-time high of 80 mn

📝 Working overtime to meet BS-VI norm ahead of April 2020 deadline: Maruti

*Financial Express*

📝 Qbera: Startup aims to provide quick, hassle-free personal loans

📝 Wind energy: Capacity addition likely to rebound after a lean FY18

📝 CAIT raises various demands in letter to PM Narendra Modi

📝 Freecharge co-founder to roll out Cred by December-end, raises $25 million from Sequoia, others

📝 JSW Steel revamps operations, product mix to align with climate change goals

📝 Six firms bid for advising FinMin on two M&A deals

*Mint*

📝 EU leaders seal Brexit deal, urge Britons to back PM May

📝 Bitcoin falls further below $4,000; crypto continues plunge

📝 Oil PSUs to allot 65,000 petrol pumps ahead of general elections

📝 Finance ministry expects 3-4 banks to be out of PCA this fiscal: Report

📝 FPIs infuse Rs 6,310 crore in November so far

📝 Bankrupt firms in India to get a new and quick rescue option

📝 Standard Chartered Bank moves NCLT against CoC selecting Arcelor for Essar Steel

📝 CDC Group plans Ayana stake sale to raise $100 million.

General banking for promotion exams 2

1 Hypothecation is defined in
Ans. Indian Contract Act
2 This is not considered as Document of Title to Goods?
Ans. Lorry Receipt
3.Wrongful dishonor of cheque is covered under
Ans. Sec-31 of NI Act
4 The Banks have to transfer a minimum --- % of their profits to Reserve Fund as per
RBI
directives?
Ans. 25 %
5 An undertaking given by a company not to create charge on its assets is known as
Ans. Negative Lien
6 Bank cannot exercise general lien on
Ans. Articles in Safe Deposit and Contents in Safety Locker
7 Which Act prohibits issuance of Bearer Demand Drafts?
Ans. RBI Act
8 TDS recovered from contractors to be deposited with Tax Authorities within----from
the date of deduction
Ans. One week
9 Guarantors right to step into the shoes of creditor after discharging the dues of
principal
debtor is called the ’Right of
Ans. Subordination
10 Wrongful dishonor of cheque is covered under
Ans. Sec-31 of NI Act
11 What is the limitation period of Equitable Mortgage, from the date of Mortgage?
Ans. 12 Years
12 ITO has sealed the locker. Rent will be recovered from
Ans. Locker hirer
13 What is the Pillar-III under Basel-II?
Ans. Market Discipline
14 What are the risks provided in Basel-II?
Ans. Credit Risk, Operational Risk and Market Risk
15 ‘Gilt Edged Securities’ Mean
Ans. Govt Securities
16 Garnishi Order is served on
Ans. Bank of the judgment debtor having deposit a/c

17 Banker is liable for wrongful dishonor of cheques to
Ans. Drawer only
18 Which of the following is not a negotiable instrument?
Ans. TDR
19 Letter in Hindi to be replied in
Ans. Hindi only
20 Mortgage is defined in
Ans. Transfer of Property Act
21 For creation of Equitable Mortgage, the property should be in
Ans. Any place
22 Collection charges to be shared between two collecting banks in the ratio of
Ans. 50:50
23 Bank’s name is written on the face of the cheque without two traverse lines. It is
called
Ans. Special Crossing
24 A person is said to be intestate, if he dies
Ans. Without Will
25 For joint accounts, who are not related to each other, they have to independently
prove their
Ans. Address Identity
26 Inchoate Instrument is a/an---Instrument
Ans. Incomplete
27 Indian Bank Branches Located in Special Economic Zone ( SEZ) which deals with
Foreign currencies is called as
Ans. Off-shore Banking
28 AEBA.. Aadhar enabled bank acc
29 A probate is
Ans. Copy of the Will certified by Court under its seal
30 An ‘Executor’ is
Ans. A person appointed by court to settle the assets of a deceased person

General banking for promotion exams

1. The Negotiable Instruments Act extends to
Ans. Whole of India
2. A Promissory Note payable to bearer
Ans. Cannot be drawn
3. Bill of Exchange is defined in Section _______ of NI Act
Ans. 5
4. What is the time allowed to the drawee for accepting the bill?
Ans. 48 hrs exclusive of public holidays
5. A cheque is defined in Section___________ of NI Act
Ans. 6
6. The Truncation of a cheque is
Ans. Electronic image of a cheque
7. Crossing Applies to
Ans. Cheques
8. When a Cheque is wrongfully dishonoured by the bank, it is liable to
Ans. Drawer
9. According to the present RBI guidelines, minimum Tier-I capital adequacy ratio
required to be maintained by Commercial Banks in India is _________.
Ans. 3%
10. The drawer of a cheque can be made liable under Sec 138 of N.I Act provided
Ans. The cheque is issued in discharge of a debt or liability
11. When a cheque is dishonoured for insufficient funds, it is treated as
Ans. Criminal offence
12. To become a holder of a Negotiable Instrument, consideration is
Ans. Not Essential
13. In the case of a Holder in due course, the consideration is
Ans. Essential
14. When a order cheque is made into bearer, it requires the drawer’s full signature
as it amounts to
Ans. Material alteration
15. Noting and Protesting relates to
Ans. Promissory Notes or Bill of Exchange
16. _________________Mortgage has to be registered electronically in CENTRAL
Electronic
Registry set up by Govt of India
Ans. Equitable Mortgage

17. Minor is defined in
Ans. Indian Majority Act
18. When a Guardian is appointed by the Court, the minor attains majority on
completion of
Ans. 18 years
19. A Minor was admitted as a full fledged partner in a firm as per partnership
deeAns. Whether the partnership deed is valid?
Ans. The Deed is invalid
20. Who is the Guardian of a Hindu Minor Married girl?
Ans. Her Husband if he is a major or Her father if her husband is a minor or Her
mother if her husband is a minor and father is not alive
21. Insolvency is a
Ans. Ans. Civil Death
22. A Power of Attorney can be attested by
Ans. Notary Public or Magistrate of a Court
23. Whether a Mandate Letter is stamped and witnesseAns.
Ans. The Mandate Letter do not attract stamp duty and not witnessed
24. Executor is a person whose name is mentioned in
Ans. The Will
25. Adminstrator is a person who is
Ans. Appointed by a Court when a person dies without a will or Appointed by a
Court when the Executor refuses to execute the Will
26. When a sole executor dies, the legal heirs have to
Ans. Obtain fresh probate from the Court
27. Who is the Karta of the JHF
Ans. Eldest co-parcener of the family
28. JHF are governed by
Ans. Hindu succession Act
29. A club can be registered with
Ans. Registrar of Societies
30. The important document obtained while opening the account in the name of Club
is
Ans. Bye-Laws
31. A Public Charitable Trust is governed by
Ans. Public Trust Act
32. In a Trust, the number of trustees are restricted to
Ans. No Limit

33. A Public Charitable Trust are registered with the
Ans. Charity commissioner
34. A cheque drawn by a sole trustee is presented for payment after his death.
Whether the
cheque can be paid?
Ans. Should not be paid
35. The minimum paid-up capital of Public Ltd Company should be
Ans. Rs. Nil no limit
36. The minimum number of directors in a Private Limited Company should be
Ans. 2
37.Government Company is one where the minimum share capital of _____% is held
by the
Central / State Government
Ans. 51
38.What is the name of the person appointed by the Court when there is a
compulsory winding up of the company?
Ans. Liquidator
39 .When an order is issued by a court advising the bank to stop operations on the
account, it is called as
Ans. Order Nisi

Certified Treasury professionals Recollected questions on November 24th 2018

Some of the recollected questions of certified treasury professional exam held on 24/11/2018 3 pm
TT buy/ TT sell bill /buy Bill sell/ TC buy TC /sell Forex card rates of dollar and pound given.
Various forex transaction based questions (5 marks)

 ∆Y= change in the yield of a bond in decimal
V+ = the estimated value of the bond if yield is increased by ∆Y
V- = the estimated value of the bond if yield is decreased by ∆Y
Vo = Initial price of the bond
All these values given
Questions asked: percentage change in price per basis point Change for an increase in yield of delta y etc.

Average percentage price change per basis point change in yield
(5 marks)

 cash inflow and outflow of the repo borrower in a repo transaction
Accured interest for first leg second leg etc (5 marks)

Present value of all coupons 10 years bond coupons payed semi annually.

Apart from black scholes model another famous option pricing model name.
 How options Greek measures the sensitivity of an options price

A decrease in interest rates raises bond prices by more than a corresponding increase in rates lowers price

Money market refers to the market for short term maturities upto 1 year.

Yield and price of 364 and 91 days treasury bill.


Given CTP Exam today (24/11/18) 10.00 Slot. Next heading toward FRM & Certified Bank trainer. In today CTP exam, Case Study Questions (5Q ) were from Repo Transaction, T Bills, TT Buying & Bills Buying rates, option price calculations, Bond yield & price calculations, option greeks & duration. Then individual questions (1 - 2Q) from CP, SI,CI, option pricing models, forex valuation, dealers code of conduct, etc.

Risk management important article

Risk Management ::( Very important content read everyone)



The growing sophistication in banking operations, online electronic banking,

improvements in information technology etc, have led to increased diversity and

complexity of risks being encountered by banks. These risks can be broadly grouped

into Credit Risk, Market Risk and Operational Risk. These risks are

interdependent and events that affect one area of risk can have ramifications for a

range of other risk categories.

Basel-I Accord: It was introduced in the year 2002-03, which covered capital

requirements for Credit Risk. The Accord prescribed CRAR of 8%, however, RBI

stipulated 9% CRAR. Subsequently, Banks were advised to maintain capital charge

for Market Risk also.

Basel-II New Capital Accord: Under this, banks have to maintain capital for Credit

Risk, Market Risk and Operational Risk w.e.f 31.03.2007. The New Capital Accord

rests on three pillars viz., Minimum Capital Requirements, Supervisory Review

Process & Market Discipline. The implementation of the capital charge for various risk

categories are Credit Risk, Market Risk and Operational Risk. Analysis of the bank’s

CRAR under should be reported to the Board at quarterly intervals.

Internal Ratings Based (IRB) Approach: Under this approach, banks must

categorise the exposures into broad classes of assets as Corporate, Sovereign, Bank,

Retail and Equity. The risk components include the measures of the Probability of

Default (PD), Loss Given Default (LGD), Exposure at Default (EAD) and Effective

Maturity (M). There are two variants i.e Foundation IRB (FIRB) and Advanced IRB.

Under FIRB, banks have to provide their own estimates of PD and to rely on

supervisory estimates for other risk components (like LGD, EAD) while under

Advanced IRB; banks have to provide their own estimates of all the risk components.

It is based on the measures of Expected Losses (EL) and Unexpected Losses (UL).

Expected Losses are to be taken care of by way of pricing and provisioning while the

risk weight function produces the capital requirements for Unexpected Losses.

Market Risk: It is a risk pertaining to the interest rate related instruments and

equities in the Trading Book i.e AFS (Available For Sale) and HFT (Held for Trading)

positions and Foreign Exchange Risk throughout the bank (both banking & trading

books). There are two approaches for measuring market risk viz., Standardized

Duration Approach & Internal Models Approach.

Operational Risk: Banks have to maintain capital charge for operational risk under

the new framework and the approaches suggested for calculation of the same are –

Basic Indicator Approach and The Standardized Approach. Under the first approach,

banks must hold capital equal to 15% of the previous three years average positive

gross annual income as a point of entry for capital calculation. The second approach

suggests dividing the bank’s business into eight lines and separate weights are

assigned to each segment. The total capital charge is calculated as the three year

average of the simple summation of the regulatory capital charges across each of the

business lines in each year.

Advanced Measurement Approach (AMA): Under this, the regulatory capital

requirement will equal the risk measure generated by the bank’s internal operational

risk measurement system using certain quantitative and qualitative criteria. Tracking

of internal loss event data is essential for adopting this approach. When a bank first

moves to AMA, a three-year historical loss data window is acceptable.

Pillar 2 – Internal Capital Adequacy Assessment Process (ICAAP): Under this,

the regulator is cast with the responsibility of ensuring that banks maintain sufficient

capital to meet all the risks and operate above the minimum regulatory capital

ratios. RBI also has to ensure that the banks maintain adequate capital to withstandthe risks such as Interest Rate Risk in Banking Book, Business Cycles Risk, and

Credit Concentration Risk etc. For Interest Rate Risk in Banking Book, the regulator

may ensure that the banks are holding sufficient capital to withstand a standardized

Interest Rate shock of 2%. Banks whose capital funds would decline by 20% when

the shock is applied are treated as ‘Outlier Banks’. The assessment is reviewed at

quarterly intervals.

Pillar 3 – Disclosure Requirements: It is aimed to encourage market discipline by

developing a set of disclosure requirements which will allow market participants to

assess the key pieces of information on the capital, risk exposures, risk assessment

processes and hence the capital adequacy of the institution. Banks may make their

annual disclosures both in their Annual Reports as well as their respective websites.

Banks with capital funds of `500 crore or more, and their significant bank

subsidiaries, must disclose their Tier-I Capital, Total Capital, total required capital

and Tier-I ratio and total capital adequacy ratio, on a quarterly basis on their

respective websites. The disclosures are broadly classified into Quantitative and

Qualitative disclosures and classified into the following areas:

Area Coverage

Capital Capital structure & Capital adequacy

Risk Exposures &

Assessments

Qualitative disclosures for Credit, Market, Operational,

Banking Book interest rate risk, equity risk etc.

Credit Risk General disclosures for all banks.

Disclosures for Standardised & IRB approaches.

Credit Risk Mitigation Disclosures for Standardised and IRB approaches.

Securitisation Disclosures for Standardised and IRB approaches.

Market Risk Disclosures for the Standardised & Internal Models

Approaches.

Operational Risk The approach followed for capital assessment.

Equities Disclosures for banking book positions

Interest Rate Risk in

the Banking Book

(IRRBB)

Nature of IRRBB with key assumptions. The increase /

decrease in earnings / economic value for upward /

downward rate shocks.

The Basel-II norms are much better than Basel-I since it covers operational risk.

However, risks such as Reputation Risk, Systemic Risk and Strategic Risk (the risk of

losses or reduced earnings due to failures in implementing strategy) are not covered

and exposing the banks to financial shocks. As per Basel all corporate loans attracts

8 percent capital allocation where as it is in the range of 1 to 30 percent in case of

individuals depending on the estimated risk. Further, group loans attract very low

internal capital charge and the bank has a strong incentive to undertake regulatory

capital arbitrage to structure the risk position to lower regulatory risk category.

Regulatory capital arbitrage acts as a safety valve for attenuating the adverse effects

of those regulatory capital requirements that activity’s underlying economic risk.

Absence of such arbitrage, a regulatory capital requirement that is inappropriately

high for the economic risk of a particular activity could cause a bank to exit that

relatively low-risk business by preventing the bank from earning an acceptable rate

of return on its capital.

Nominally high regulatory capital ratios can be used to mask the true level of

insolvency probability. For example – Bank maintains 12% capital as per the norms

risk analysis calls for 15% capital. In a regulatory sense the bank is well capitalized

but it is to be treated as undercapitalized from risk perspective.

Basel-III is a comprehensive set of reform measures developed to strengthen the

regulation, supervision and risk management of the banking sector. The new

standards will considerably strengthen the reserve requirements, both by increasing

the reserve ratios and by tightening the definition of what constitutes capital. The



new norms will be made effective in a phased manner from 1st July 2013 and

implemented fully by 31st March 2019 and banks should maintain minimum 5.5% in

common equity (as against 3.6% now) by 31st March 2015 and create a Capital

Conservation Buffer (CCB) of 2.5% by 31st March 2019. Further, banks should

maintain a minimum overall capital adequacy of 11.5% by 31st March 2019 and

supplement risk based capital ratios by maintaining a leverage ratio of 4.5%. These

measures will ensure well capitalization of banks to manage all kinds of risks besides

to bring in more clarity by clearly defining different kinds of capital.

Counter Cyclical Capital Buffer (CCCB): The objective of CCCB is twofold viz., it

requires banks to build up a buffer of capital in good times which may be used to

maintain flow of credit to the real sector in difficult times and also to achieve the

broader macro-prudential goal of restricting the banking sector from indiscriminate

lending in the periods of excess credit growth that have often been associated with

the building up of system-wide risk. It may be maintained in the form of Common

Equity Tier-1 capital or other fully loss absorbing capital only and the amount of the

CCCB may vary from 0 to 2.5% of total risk weighted assets of the banks. RBI

intends banks to have a sustainable funding structure. This would reduce the

possibility of banks’ liquidity position eroding due to disruptions in their regular

sources of funding thus increasing the risk of failure leading to broader systemic

stress. The Basel committee on banking supervision framed two ratios viz., Liquidity

Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as part of global

regulatory standards on liquidity to be implemented from 1st January 2018.

i) Liquidity Coverage Ratio (LCR): In order to promote short-term resilience of

the liquidity risk profile of banks, RBI has introduced LCR in a phased manner,

starting with a minimum requirement of 60% from 1st January 2015, and reaching a

maximum of 100% by 1st January 2019. The LCR will ensure that banks have an

adequate stock of unencumbered high-quality liquid assets that can be converted

easily and immediately in private markets into cash to meet their liquidity needs for

a 30-calendar day liquidity stress scenario.

 ii) Net Stable Funding Ratio (NSFR): The ratio seeks to ensure that banks

maintain stable source of funding with respect to the profile of their assets (loans

and investments) and off-balance sheet activities such as extending asset

management and brokerage services to the clients. The NSFR should be 100% on an

ongoing basis. It limits over reliance on short-term wholesale funding, encourages

better assessment of funding risks across all assets and off-balance sheet items and

promotes funding stability.

Tier – I capital consists of Paid up Equity Capital + Free Reserves + Balance in

Share Premium Account + Capital Reserves (surplus) arising out of sale proceeds of

assets but not created by revaluation of assets MINUS Accumulated loss + Book

value of Intangible Assets + Equity Investment in Subsidiaries+ Innovative Perpetual

Debt instruments.

Tier – II consists of Cumulative perpetual preferential shares & other Hybrid debt

capital instruments + Revaluation reserves + General Provisions + Loss Reserves

(up to maximum 1.25% of weighted risk assets) + Undisclosed Reserves +

Subordinated Debt + Upper Tier-II instruments. Subordinated Debts are unsecured

and subordinated to the claims of all the creditors. To be eligible for Tier-II capital

the instruments should be fully paid, free from restrictive clauses and should not be

redeemable at the instance of holder or without the consent of the Bank supervisory

authorities. Subordinated debt usually carries a fixed maturity and they will have to

be limited to 50% of Tier-I capital.

However, due to the stress on account of rollover of demonetization and GST, the

implementation of Basel-III norms may slightly be delayed and the regulator likely to

inform the timeframe shortly.



Economic Capital (EC) is a measure of risk expressed in terms of capital. A bank

may, for instance, wonder what level of capital is needed in order to remain solvent

at a certain level of confidence and time horizon. In other words, EC may be

considered as the amount of risk capital from the banks’ perspective; therefore,

it differs from Regulatory Capital (RC) requirement measures. It primarily aims to

support business decisions, while RC aims to set minimum capital requirements

against all risks in a bank under a range of regulatory rules and guidance. So far, EC

is rather a bank-specific or internal measure of available capital and there is no

common domestic or global definition of EC. The estimates of EC can be covered by

elements of Tier-1, 2 & 3, or definitions used by rating agencies and/or other types

of capital, such as planned earning, unrealized profit or implicit government

guarantee. EC is highly relevant because it can provide key answers to specific

business decisions or for evaluating the different business units of a bank.

Dynamic Provisioning: At present, banks generally make two types of provisions

viz., general provisions on standard assets and specific provisions on non-performing

assets (NPAs). The present provisioning framework does not have countercyclical or

cycle smoothening elements. Though the RBI has been following a policy of

countercyclical variation of standard asset provisioning rates, the methodology has

been largely based on current available data and judgment, rather than on an

analysis of credit cycles and loss history. Since the level of NPAs varies through the

economic cycle, the resultant level of specific provisions also behaves cyclically.

Consequently, lower provisioning during upturns, and higher provisioning during

downturns have pro-cyclical effect on the real economy. However, few banks have

started making floating provisions without any predetermined rules; many banks are

away from the concept which has become difficult for inter-bank comparison. In the

above backdrop, RBI introduced dynamic provisioning framework for Indian banks to

address pro-cyclicality of capital and provisioning to meet the international

standards. Recently, RBI has allowed banks to recognize some of their assets like

real estate, foreign currency and deferred tax, reducing the extra capital needs of

state-owned banks by 15 per cent. The move is aimed to align the regulatory capital

of banks with the Basel-III standards.

Leverage Ratio: It is the tier-1 capital divided by the sum of on-balance sheet

exposures, derivative exposures, securities financing transaction exposures and off-

balance sheet items. This ratio is calibrated to act as a credible supplementary

measure to the risk based capital requirements with the objective to constrain the

build-up of leverage in the banking sector to avert destabilizing deleveraging

processes for the sound financial economy and to reinforce the risk based

requirements with a simple, non-risk based “backstop” measure. The desirable

exposure should be within 25 times of tier-1 capital.

Banks in India need substantial capital funds in the ensuing years mainly to fund the

credit growth which is likely to grow at around 15% to 20% p.a. and banks are

required to set aside a portion of capital for the said purpose. Banks also need

additional capital to write off bad loans as well as to meet the operational risks on

account of weaker implementation of systems and procedures. More importantly, the

implementation of Basel-III norms warrants pumping of substantial capital funds.

Raising these funds, though, will require several steps, apart from legislative

changes as Public Sector Banks can not dilute its equity below 51%. Attracting

private capital warrants minimum governance and structural reforms. It is also

proposed to create an independent Bank Holding Company to invite private capital

without diluting the equity to address the issue.

MSME ABBREVIATIONS

ABBREVIATIONS::



ACWW: Associated Country Women of the World

AIC: Agro Industries Corporation

ANC: Ancillary Undertakings

APTDC: A. P. Technology Development Centre (CII)

ASBA :Alliance of Small Business Associations in the USA

ASI: Annual Survey of Industries

ASSOCHAM Association of Chambers of Commerce and Industry

AWEK Association of Women Entrepreneurs of Karnataka

BDS Business Development Services

CAR Common Annual Return

CDCC Central Documentation and Clearance Centre

CDR Corporate Debt Restructuring

CGTMSE: Credit Guarantee Fund Trust for Micro and Small Enterprises

CGTSI Credit Guarantee Trust for Small Industries

CII Confederation of Indian Industry

CITD Centre for International Trade in Agriculture and Agro-based Industries, New

Delhi

COSIA Chamber of Small Industry Associations

CRM Customer Relationship Management

CWEI Consortium of Women Entrepreneurs in India

CWEI Consortium of Women Entrepreneurs of India

DIC District Industries Centre

DICGC Deposit Insurance & Credit Guarantee Corporation

DRT Debt Recovery Tribunal

DWCRA Development of Women and Children in Rural Areas

EDIT Entrepreneurship Development Institute of India

EOU Export Oriented Units

EU European Union

EXIM BankExport Import Bank of India

FAPCCI Federation of Andhra Pradesh Chambers of Commerce and Industry

FAPSIA Federation of Andhra Pradesh Small Industries Association

FASII Federation of Associations of Small Industries of India

FDI Foreign Direct Investment

FICCI Federation of Indian Chambers of Commerce and Industry

FISME Federation of Indian Micro & Small and Medium Enterprises

FISME Federation of Indian Small & Medium Enterprises

FIWE Federation of Indian Women Entrepreneurs

FOSMI Federation of Small & Medium Industries

GATT General Agreement on Trade and Tariff

Gol Government of India

HUDCO Housing & Urban Development Corporation

HUF Hindu Undivided Family

ICSI Indian Council of Small Industry

ICWE India Council of Women Entrepreneurs, New Delhi

IDLSS Integrated Development of Leather Sector Scheme

IIA Indian Industries Association

IIC Industrial Infrastructure Corporation

IIE Indian Institute of Entrepreneurship, Guwahati

IRAC Income Recognition and Asset Classification

ISEC Interest Subsidy Eligibility Certification

JHF Joint Hindu Family

KVIC Khadi & Village Industries Commission

LLP Limited Liability Partnership

MFA Multi-Fibre Arrangement

MSE-CDP Micro & Small Enterprises Cluster Development Programme

MSMED Micro Small and Medium Enterprises Development

NABARD National Bank for Agriculture and Rural Development

NAYE National Alliance of Young Entrepreneurs

NGO Non-Governmental Organization

NIC National Industrial Classification

NIESBUD National Institute for Entrepreneurship and Small Business Development,Noida

NIMSME National Institute for Micro, Small and Medium Enterprises

NISBET National Institute of Small Business Extension Training

NMCP National Manufacturing Competitiveness Programme

NPA Non-Performing Asset

NPV Net Present Value

NRY Nehru Rojgar Yojna

NSIC National Small Industries Corporation

OECD Organisation for Economic Co-operation and Development

OGL Open General License

OTS One Time Settlement

PACS Primary Agricultural Cooperative Credit Society

PCB Pollution Control Board

PMEGP Prime Minister's Employment Generation Programme

PPP Public Private Participation

PRF Portfolio Risk Fund

PRODIP Product Development, Design Intervention and Packaging

QRs Quantitative Restrictions

RBI Reserve Bank of India

RGUMY Rajiv Gandhi Udyami Mitra Yojana

SEZ Special Economic Zone

SFC State Financial Corporation

SFURTI Scheme of Fund for Regeneration of Traditional Industries

SHG Self Help Group

SIDBI Small Industries Development Bank of India

SIDC State Industrial Development Corporation



SIDO Small Industries Development Organisation

SIIC State Industries Investment Corporation

SMERA Small & Medium Enterprises Rating Agency of India Ltd.

SMEs Small and Medium Enterprises

SNDP State Net Domestic Product

SPV Special Purpose Vehicle

SSIDC State Small Industries Development Corporation

SSSBE Small Scale Service and Business (industry-related) Enterprises

TANSTIA Tamil Nadu Small and Tiny Industries Association

TCO Technical Consultancy Organisation

TREAD Trade Related Entrepreneurship Assistance and Development

TRIPs Trade-Related Intellectual Property Rights

TRYSEM Training for Rural Youth for Self Employment

TUFS Technical Upgradation Fund Scheme

WE Town and Village Enterprises

UNIDO United Nations Industrial Development Organization

VAT Value Added Tax

WASME World Association for Small and Medium Enterprises

WASME World Association of Small and Medium Enterprises

WAWE World Association of Women Entrepreneurs

WE Women Enterprises

WTO World Trade Organisation

Current Affairs on 25.11.2018

Today's Headlines from www:

*Economic Times*

📝 Insolvency law help address Rs 3 lakh cr stressed assets in 2 yrs: Official

📝 American Monster Trucks Association to bring the experience to India

📝 After Samsung, LG hints at foldable smartphone

📝 eNACH suspension may pinch digital lenders

📝 Rajiv Bajaj is ready to shake up the auto sector with his 'anti-car'

📝 Made-in-India drugs to be based on weed soon

*Business Standard*

📝 Net worth of top realty barons continues to rise despite sectoral slowdown

📝 Stock broker count halves in three years on high costs, falling margins

📝 In 3 years, Alcobrew Distilleries eyes Rs 10-billion sales revenue, IPO

📝 1361 infrastructure projects face 20% cost escalation on delays

📝 Growing US economy adds to surge in India's gold jewellery exports from SEZ

📝 Central Bank plans to buy Rs 30 billion of retail loans in next 4 months

📝 J&K Bank made a public sector unit, brought under purview of RTI, CVC

*Financial Express*

📝 IIFL Holdings arm to raise Rs 5,000 cr

📝 Political uncertainty to exert pressure on rupee, say Analysts

📝 Climate change will shrink US economy, claims report

📝 SAIL chairman stresses on meeting 2-third ferro alloy requirement in-house

📝 Reliance Jio achieves highest Q2 revenue market share in Odisha

📝 Facebook to train 5 million people with digital skills by 2021

📝 Microsoft surpasses Apple to become most valuable US company

📝 South Africa to invest $1 billion in South Sudan oil sector

📝 Gold prices fall below Rs 32,000 on weak global cues, demand from jewellers

*Mint*

📝 IL&FS crisis: 10 group firms to be up for sale

📝 Omidyar leads $11 million funding in live tutoring platform Vedantu

📝 NCLT admits petition against KSK Power Group unit Sai Wardha

📝 Jet Airways withdraws lounge access for economy-class fliers

📝 Govt does not need RBI funds for next six months, says Jaitley

📝 Samsung Electronics apologises for factory cancer cases

📝 Gibraltar deal clears way for Sunday Brexit summit.

Kyc aml bits

KYC AML

1. Cash receipt or cash payment of more than Rs 10 lakh are reported to FIU on CTR statement

which should be sent to FIU within _____ from the close of the month: 15 days.

2. Suspicious Transaction report is sent to FIU within: 7 days from confirmation of

suspicion.

3. In case of transactions carried out by a non-account based customer, that is a walk-in customer,

where the amount of transaction is equal to or exceeds rupees whether conducted as a single

transaction or several transactions that appear to be connected, the customer's identity and

address should be verified: fifty thousand

4. As per KYC norms, banks are required to periodical update data. In respect of High risk

customers, full KYC exercise will be required to be done at least every: two years

5. As per KYC norms, for how much period banks are required to preserve records in respect of

photograph and proof of address or identity?: 5 years from date of close of account

6. As per KYC norms, in the event of change in this address due to relocation or any other

reason, customers may intimate the new address for correspondence to the bank within: two

weeks of such a change

7. As per KYC norms, risk classification of customers should be reviewed in every: 6 Months

8. Banks are required to FIU, cash transactions which are integrally connected to each other and

total amount of receipt or total amount of payment in a month is more than: Rs 10 lac

9. Cash Transaction Report (CTR) in respect of cash receipt or cash payment of more than Rs 10

lac is to be sent to Director – FIU. What is the periodicity of the report – Fortnightly, Monthly,

Quarterly, half yearly: Monthly, within 15 days of the close of the month.

10. FIR to be filed if number of Counterfeit notes in a single deposit is: 5 or above

11. If a customer does not comply with KYC requirements despite repeated reminders

by banks, banks should impose ‘partial freezing’ by allowing all credits and

disallowing all debits with the freedom to close the accounts after ____ months

notice followed by a reminder for further period of ____months. If the accounts are

still KYC non-compliant after _____months of imposing initial ‘partial freezing’

banks may disallow all debits and credits from/to the accounts, rendering them

inoperative: 3, 3, 6 months.

12. In a cash deposit made by a customer, one piece of counterfeit note is detected. What should

the bank do - (i) It should be impounded and acknowledgement to be issued(ii) Should be

destroyed (iii) Should be returned back: It should be impounded and acknowledgement

to be issued to depositor signed by cashier.

13. In case of counterfeit notes received in a deposit by a person with bank, FIR is not lodged

and only a monthly consolidated report is sent if counterfeit notes in one remittance is up

to: 4

14. In case of Non-KYC compliant customer, after how much time notice, account should be

freezed?: 3 months notice

15. In respect of Low Risk customers, KYC norms relating to obtaining photograph and proof of

address and ID should be applied once in: 10 Years

16. In respect of Medium Risk customers, KYC norms relating to obtaining photograph and proof of

address and ID should be applied once in: 8 Years

17. Process of making illegally-gained proceeds (i.e. "dirty money") appear legal (i.e. "clean") is

called: Money Laundering

18. RBI has allowed banks to accept at least _____ of the documents prescribed by RBI as activity

proof by a proprietary concern, for opening a bank account in respect of a sole proprietary

firm: One

19. What is the Risk category of Trust account High/Low/medium risk?: High Risk

20. When in case of deposit of cash over counter, two counterfeit notes are detected by bank,

what should the bank do – (a) To be returned to customer, (b) impounded immediately, (c)

call the police, (d) destroy it: impound immediately and issue acknowledgement to

tender signed by the cashier

21. While opening bank account, as per KYC norms, what another document is taken by bank in

addition to proof of ID?: proof of address ( Both can be same also)

22. Relaxation in KYC norms is permitted if the depositor undertakes that the balance outstanding

in his account will not be more than and credits in a financial year will not exceed

. Rs 50,000; Rs 100,000

23. Why KYC guidelines have been issued by RBI under section 35 A of the Banking Regulation

Act: To prevent Money Laundering -

24. The terms used for hiding money to avoid tax is : Money laundering

25. Money laundering: conversion of illegal money into legal through banking channels.

26. For the purpose of KYC rules any addition & modification on which recommendation: Financial

Action Task Force

27. Risk type for customer having political exposed person: High Risk

28. As per KYC Guidelines, Records of transactions to be maintained for at least ten years from the

dateof transaction, instead of _________from the date of cessation of transactions, and

records pertaining to identification of the customer and his address to be preserved for at least

ten years after the business relationship is ended: ten years

29. A customer who does not complete all KYC norms, what type of account is opened for him? No

Frill account in which cannot be more than Rs.50000 and credits in the Financial Year cannot

be more than Rs.100000.

30. There were three cash withdrawals of Rs 5.80 lac ,Rs 4.90 lac & 0.25 lacs from an account in a

month. Which of these transactions is/are will be reported to Financial Intelligence Unit as part

of CTR? Cash withdrawals of Rs 5.8 lac and Rs 4.9 lac.

31. Under Prevention of Money Laundering Act, banks are required to preserve records relating to

opening the account for how much period?: 5 years from date of closure of account.

32. Which of the following is not the key element of KYC policy a) Customer Acceptance Policy; b)

Customer Identification Procedures; c) Monitoring of Transactions; d) Risk Management e)

Customer Awareness Policy: Ans is E i.e. Customer Awareness Policy.

33. On whose recommendations, KYC norms came into force? (a) Goiporia Committee (b) Ghosh

Committee (c) FATF: Ans is FATF

34. Under KYC Norms, Documents relating to opening the account like proof of address and

identity and photograph should be taken again at what interval? (a) once in 10 years for low

risk customer (b) once in 8 years for medium risk customers (c) once in 1 year for high risk

customers (d) Both (a) and (b): Ans is (d)

35. Record of cash receipt and payment under KYC to be maintained if cash receipt or payment in

a single day from one account is more than Rs 10 lakh.

36. For Low Risk customers, periodical up-dation of KYC data: Once in 10 years.

Current Affairs on 24.11.2018

Today's Headlines from www:

*Economic Times*

📝 OECD expects India’s economy to grow close to 7.5% in 2019, 2020

📝 Blackstone to acquire $300 mn stake in Sona BLW, to merge it with Comstar

📝 Crypto losses near $700 billion in worst week since bubble burst

📝 Indian business leaders seek AI collaboration with Singapore

📝 Reliance Industrial Investments and Holdings Ltd. sets up unit in Estonia

📝 77 percent Indian households use Ayurvedic products: PwC report

📝 All isn't lost for banks under PCA as their retail loan pie jumps 400 bps to 19%

*Business Standard*

📝 Bajaj's quadricycle Qute to take on small carmakers; set for Feb launch

📝 Thailand's Minor International plans majority stake in Leela hotels

📝 Vodafone Idea to pare 16,000 distributors and 2,000 retail stores

📝 Iron ore import to rise 60% to 15 million tons in FY19: Report

📝 Even $1 rise in crude can inflate import bill by Rs 61.6 bn: India Ratings

📝 Govt transfers over Rs 16 bn to 4.8 mn eligible mothers under PMMVY scheme

📝 Nyara Energy to get $1.5-billion fuel-backed loan from Trafigura, BP

*Financial Express*

📝 ABB signs potential $1.9 billion deal for Power Grids products in China

📝 Broadband subscriber base at 463.6 million in August-end: Department of Telecom

📝 Forex reserves up by $568.9 million to $393.58 billion

📝 RBI likely to maintain status quo on policy rates, says Report

📝 EIB, SBI expand cooperation in wind energy financing

📝 Sharp rise in trade-restrictive measures from G20 economies, claims WTO

📝 Few takers for model agricultural land leasing law, says NITI Aayog

*Mint*

📝 ESR-Allianz Real Estate JV to invest $1 billion in India

📝 Oil India to buy back 4.45% shares for Rs 1,085 crore

📝 Government likely to stick to capital infusion programme for PSU banks

📝 Yamuna Expressway Industrial Authority allots land to Vivo for Rs 3,500cr unit

📝 To tide over churn, realty firms eye partnership deals

📝 Auto sales fizzled in festive season, say dealers

📝 Gensol engineering eyes Rs 20 crore from IPO next year.

FATF recommendations

THE FATF RECOMMENDATIONS::  Total 40

A – AML/CFT POLICIES AND COORDINATION

1 - Assessing risks & applying a risk-based approach *

2  - National cooperation and coordination

B – MONEY LAUNDERING AND CONFISCATION

3  Money laundering offence *

4 Confiscation and provisional measures *

C – TERRORIST FINANCING AND FINANCING OF PROLIFERATION

5 Terrorist financing offence *

6 Targeted financial sanctions related to terrorism & terrorist financing *

7 Targeted financial sanctions related to proliferation *

8  Non-profit organisations *

D – PREVENTIVE MEASURES

9 Financial institution secrecy laws

Customer due diligence and record keeping

10  Customer due diligence *

11  Record keeping

Additional measures for specific customers and activities

12  Politically exposed persons *

13  Correspondent banking *

14 Money or value transfer services *

15 New technologies

16  Wire transfers *

Reliance, Controls and Financial Groups

17  Reliance on third parties *

18  Internal controls and foreign branches and subsidiaries *

19  Higher-risk countries *

Reporting of suspicious transactions

20  Reporting of suspicious transactions *

21 Tipping-off and confidentiality

Designated non-financial Businesses and Professions (DNFBPs)

22  DNFBPs: Customer due diligence *

23 DNFBPs: Other measures *

THE FATF RECOMMENDATIONS

INTERNATIONAL STANDARDS ON COMBATING MONEY LAUNDERING AND THE FINANCING OF TERRORISM & PROLIFERATION

 2012 OECD/FATF 5

E – TRANSPARENCY AND BENEFICIAL OWNERSHIP

OF LEGAL PERSONS AND ARRANGEMENTS

24  Transparency and beneficial ownership of legal persons *

25 Transparency and beneficial ownership of legal arrangements *

F – POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES

AND OTHER INSTITUTIONAL MEASURES

Regulation and Supervision

26 Regulation and supervision of financial institutions *

27  Powers of supervisors

28  Regulation and supervision of DNFBPs

Operational and Law Enforcement

29 Financial intelligence units *

30 Responsibilities of law enforcement and investigative authorities *

31 Powers of law enforcement and investigative authorities

32  Cash couriers *

General Requirements

33  Statistics

34  Guidance and feedback

Sanctions

35  Sanctions

G – INTERNATIONAL COOPERATION

36 International instruments

37  Mutual legal assistance

38 Mutual legal assistance: freezing and confiscation *

39  Extradition

40 Other forms of international cooperation

Forex individual and operations exam differences

IIBF certifications maximum members getting this doubt??

What is the difference between forex exchange for individuals and forex operations ??

1.Both Certifications are different

2.Foreign remittance facilities for individuals is a part of forex operations.

3. First one deals only with retail operations but in forex operations you will be learning about trade as well as trade finance

4. If you want to learn trade you can try forex operations.

Difference LC and BG

Difference between Letter of Credit and Bank Guarantee
Difference between Letter of Credit and Bank Guarantee
📣📣📣📣📣📣📣
Introduction🏙
⬅⬅⬅⬅⬅⬅⬅⬅
This two terminology looks similar but both are very different. When one wants to expand the business means beyond the national boundary or within, one needs assurance from the buyer side that after delivery of goods or services the payment will receive and this can be done by the bank only.

In short, both these terms are used while doing business or transactions with domestic or international companies.
So, both these services are facilitated by the bank but in a different way as per the need of seller party.
Letter of Credit🏙
⬅⬅⬅⬅⬅⬅⬅⬅⬅
It is used while there is a high level of risk involves in business.It is used while doing import and export transactions with international companies.L/C is a written commitment issued by the bank or some other financial institutions for payment assurance to the seller party from buyer’s request.In L/C, the seller gets a guarantee of payment from the buyer’s banks on the due date payment will receive only if the seller meets all the conditions of deal like timely delivery etc.Banks offer a service like L/C on the basis of proof provided by the buyer’s party.If the buyer fails to make payment to the seller, the bank pays on behalf of a buyer and then the bank will recover it from a buyer anyhow.Banks will charge fees for this type of facilities.So in short, letter of credit is beneficial when product or service is delivered and payment is not done.It eliminates the financial risk involved in the business.

Types of Letter of Credit🎎
⬅⬅⬅⬅⬅⬅⬅⬅⬅⬅⬅
🗼Irrevocable Letter of Credit:
It is not modified or cancelled without the concern of all the parties.
🗼Revocable Letter of Credit:
In it, the issuing bank can revoke or cancel the letter of credit any time without prior notice to the seller.
🗼Confirmed Irrevocable Letter of Credit:
In it, the confirming bank gives more assurance to seller same as issuing bank.
🗼Unconfirmed Irrevocable Letter of Credit:
In it, an advisory bank from the seller's side performs as an agent for the issuing bank without any responsibility to the seller.
🗼Revolving Letter of Credit
This type of letter is used if in case regular transactions take place and remain valid for a long term without issuing the another letter of credit.

Bank Guarantee🏙
⬅⬅⬅⬅⬅⬅⬅⬅⬅⬅
🏦 guarantee is a service by which bank gives a guarantee to the seller on behalf of his client for assurance of payment.
🏢So, Bank guarantee has the same function as a letter of credit but with some differences.
🏦 guarantee generally used in domestic transactions.
🏦 guarantee is beneficial when contractual obligations are not fulfilled by the other seller party.
🏦 guarantee is used in infrastructure and real estate projects to reduce risk level.
⤵Letter of Credit V/s 🎎Bank Gurantee
Basis🎟
⤵Letter of CreditBank Guarantee-DefinitionA letter of credit is an obligation by the bank to the seller if the criteria met, the bank will make payment.

🎎In bank guarantee, if the opposing party doesn’t fulfil contractual obligations the Bank will make payment.
Boundary🎟
⤵It is used internationally.
🎎It is used domestically.
Protection🎟
⤵It protects both parties but favours exporter.
🎎It also protects both but favours buyer.
Industry🎟
⤵It is used by merchants.
🎎It is used by real estate and infrastructure developer.
L/Cs are frequently used in international transactions compared with bank guarantees. When comparing the two instruments, the market for bank guarantees is much larger than that for L/Cs.

DIFFERENT KINDS OF RISKS RELATED TO FOREX TRANSACTIONS

DIFFERENT KINDS OF RISKS RELATED TO FOREX TRANSACTIONS

Foreign exchange operations face large no. of different type of risk due to a variety of reasons such as location of forex

markets without any single location, markets existing in different time zones, frequent fluctuations in the foreign currency

rates, effect of policies of the government and central banks of the related country etc.

Foreign exchange exposure: The exposure can be classified into 3 categories:

1. Transaction exposure : This arises on account of normal business operation. A transaction in foreign exchange can

exposure a firm to currency risk, when compared to the value in home currency.

2. Translation exposure : It arises on valuation of assts and liabilities created through foreign exchange and receivables or

payable in home currency, at the end of accounting period. These are notional and not actual.

3. Operating exposure : These are the factor external to a firm such as change in competition, reduction in import duty,

reduction in prices by other country exporters etc.

Exchange rate risk : Even the major currencies may experience substantial exchange rate movements over relatively short

periods of time. These can alter the balance sheet of a bank if the bank has assets or liabilities domiciled in those currencies.

An adverse movement of the rate can alter the value of the foreign exchange holdings, if not covered properly. The dealers

have to cover the position immediately.

Positions in a foreign currency : When the assets and the outstanding contracts to purchase that currency are more than the

liabilities plus and the outstanding contracts to sell that currency.

 Long or overbought position : When the purchases (and outstanding contracts to purchase) are more than the sale (the

outstanding contracts to sell).

 Short position or oversold position : When the purchases (and outstanding contracts to

purchase) are less than the sale (the outstanding contracts to sell).

Overbought or oversold position : It is called open position

Covering of position risk : The position is covered by fixing suitable limits (such as daylight position limit, overnight position limit,

single deal limit, gap-for-ward mismatch limits).

Prudent limit prescribed by RBI for open position : RBI has given discretion to bank Boards to fix their own open position limits

according to their own requirement, expertise and other related considerations.

Pre-settlement risk : It is the risk of failure of the counter party, due to bankruptcy or closure or other risk, before maturity of the

contract. This may force the bank to cover the contract at the ongoing market rates resulting into loss due to difference prevailing

between the contracted rate and rate at which the contract covered.

Settlement risk: Payment/delivery of one currency and received of other currency by both the parties. Settlement risk is the

risk of failure of the counter party during the course of settlement due to time zone differences between the two currencies

which are to be exchanged. For example, if a bank in the earlier time zone (say in Australia) performs its obligation and

delivers the currency and a bank in a later time zone (say USA) fails to deliver or delivers with delay, the loss may be caused to

the bank in the earlier time zone.

Foreign exchange settlement risk is also called temporal risk or Herstatt risk (named after failure of Bankhaus Herstatt in Germany)

The settlement risk can be taken care of by operating the system on a single time basis and also on real time gross settlement

(RTGS) basis.

Liquidity risk: The liquidity risk is where a market does not have the capacity to handle, at least without significant adverse

impact on the price, the volume of whatever the borrower buys or sells at the time he want to deal. Inability to meet debt

when they fall due could be another form of such risk.

For example, if there is deal of UK Pound purchase against the rupee and the party selling the UK Pound is short of pound in its

NOSTRO account, it may default in payment or it may meet its commitment by borrowing at a very high cost.

Country risk: It is the risk that arises when a counter party abroad, is unable to fulfill its obligation due to reasons other than the

normal risk related to lending or investment.

For example, a counter party is willing and capable to meet its obligation but due to restrictions imposed by the govt. of the

country or change in the polices of the govt., say on remittances etc. is unable to meet its repayment / remittance capacity.

Country risk can be very high in case of those countries that are having foreign exchange reserve problem.

Banks control country risk by putting restrictions on overall exposure, country exposure.

Country risk is in addition to normal credit risk. While the normal credit risk is due to failure on meeting obligation on the part of

counterparty on its own, the country risk arises due to actions initiated by the Govt. of that country due to which counterparty is not

able to perform its part.

Sovereign risk : It is larger than country risk. It arises when the counterparty is a foreign govt. or its agency and enjoys sovereign

immunity under law of that country. Due to this reason, legal action cannot be taken against that counterparty. This risk can be

reduced through disclaimers and by imposing 3,d country jurisdictions.

Interest rate risk: The potential cost of adverse movement of interest rates that the bank faces on its deposits and other

liabilities or currency swaps, forward contracts etc. is called interest rate risk. This risk arises on account of adverse

movement of interest rates or due to interest rate differentials. The bank may face adverse cost on its deposit or adverse

earning impact on its lending and investments due to such change in interest rates.

Interest rate can be managed by determining the interest rate scenario, undertaking appropriate sensitivity exercise to estimate the

potential profit or losses based on interest rate projections.

Gap risk : Banks on certain occasions are not able to match their forward purchase and sales, borrowing and lending which

creates a mismatch position, which is called gap risk. The gaps are required to be filled by paying or receiving the forward

differential. These differentials are the function of interest rates.

The gap risk can be managed by using derivative products such as interest rate swaps, currency

swaps, forward rate agreements.

Fledging risk: This occurs when one fails to achieve a satisfactory hedge for one's exposure, either because it could not be

arranged or as the result of an error. One may also be exposed to basic risk where the available hedging instrument closely

matches but does not exactly mirror or track the risk being hedged.

Operational risk : It is a potential catch that includes human errors or defalcations, loss of documents and records, ineffective

systems or controls and security breaches, how often do one consider the disaster scenario.

Legal, jurisdiction, litigation and documentation risks including netting agreements and cross border insolvency. Which country's

laws regulate individual contracts and the arbitration of disputes ? Could a plaintiff take action against a borrower in an

overseas court where they have better prospects of success or of higher awards ? There is a growing and widespread belief

that, whatever goes wrong, someone else must pay. The compensation culture whatever its justification or cause, is becoming

a big problem for many businesses.

Current Affairs on 23.11.2018

Today's Headlines from www3

*Economic Times*

📝 Volvo to assemble hybrid electric vehicles in India from next year

📝 SBI likely to raise Rs 3,000-5,000 crore via perpetual bonds

📝 HCL Tech & Bajaj Fin to replace Wipro & Adani Ports in Sensex

📝 IndiGo plane tilts mid-air; aviation regulator DGCA starts probe

📝 Indirect tax mop-up in FY'19 may fall short by Rs 90,000 crore: Report

📝 BMW to hike prices in India by up to 4 pc from January

📝 Bharti AXA Life logs 52% growth in new policies

*Business Standard*

📝 PSBs get more power to ask govt for look-out circulars against defaulters

📝 Favourable domestic realisations, deals to keep Tata Steel's prospects firm

📝 HDFC Bank's wholesale loan book grows 23% to Rs 3.5 trillion in FY19 so far

📝 Textile ministry may simplify ATUFS norms soon to make it industry friendly

📝 Indirect tax mop-up may fall short by Rs 900 bn

📝 Rupee nears 3-month high of 70.69 as brent crude falls to $63.25 a barrel

📝 Fortis Healthcare takes a shot at moving the brand away from controversy

*Financial Express*

📝 Employable population: India's employability rises to 47%; engineers most employable

📝 FPIs buy bonds worth $723 million in Nov so far

📝 India’s gas usage to rise 2.5 times by 2030: Modi

📝 General insurers post 12% gross premium growth till October

📝 NHAI files papers with Sebi to raise Rs 10,000 crore via bonds

📝 CAD may narrow to 2.6% of GDP in FY19 on falling crude: Report

📝 Panel for upfront payments by REC, PFC to IPPs

*Mint*

📝 WTO says G20 curbs affect $481 billion of trade

📝 Bank credit grows by 14.88%, deposits by 9.13%

📝 Airtel completes tender offer to buyback $1.5 billion debt

📝 NBFC Mudra loans grew faster than banks in FY18

📝 Online shoppers during festive season sale surged 71%: report

📝 Quikr FY18 revenue jumps 52% at Rs 199 crore, losses shrink

📝 I-bankers hit the road for IL&FS’s highway, renewable assets sale

📝 Sebi comes out with new rules for re-classification of promoter as public investor.

Non-Applicability of SARFAESI ACT

Non-Applicability of Sarfeasi ACT in certain cases:

1. lien on any goods, money or security given by or under the Indian Contract Act, 1872 or the Sale of Goods Act, 1930 or any other law for the time being in force;

2. pledge of movable within the meaning of Section 172 of the Indian Contract Act, 1872;

3.creation of any security in any aircraft as defined in clause(1) of Section 2 of the Aircraft Act, 1934;

4.creation of security interest in any vessel as defined in clause (55) of Section 3 of the Merchant Shipping Act, 1958;

5.any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;
any rights of unpaid seller under Section 47 of the Sale of Goods Act, 1930;

6.any properties not liable to attachment or sale under Section 60 of the Code of Civil Procedure, 1908;

7.any security interest for securing repayment of any financial asset not exceeding one lakh rupees;

8.any case in which the amount due is less than 15% of the principal amount and interest thereon.

9. Agriculture Loans

Current Affairs on 22.11.2018

Today's Headlines from www:

*Economic Times*

📝 Kotak, L&T, NBCC, 2 others submit EoI to take over bankrupt Jaypee Infratech

📝 Indian OTT market has a potential to reach $5bn by 2023: BCG

📝 Aye Finance raises Rs 70 crore in debt from BlueOrchard

📝 Indiabulls Housing raises Rs 23,615 crore past two months

📝 NHAI to raise Rs 10K crore via bonds, may offer 8.5-9%

📝 GDP growth may ease to 7.2% in July-September on sluggish economy

📝 Air India revives plans to raise Rs 500 cr; to mop up Rs 6,100 cr from aircraft sale and lease back

📝 Ultratech Cement makes Binani its subsidiary

*Business Standard*

📝 European Union flags concerns on certain provisions of Data Protection Bill

📝 Almost a million payroll additions in September highest in 13 months

📝 Maersk, DP World face probe for antitrust behaviour at Mumbai port: Sources

📝 Zircon Tech gets Sebi's nod for IPO; total clearance reaches 70 in 2018

📝 Price cap on drugs, medical devices helped patients save Rs 150 bn: Govt

📝 If ONGC, OIL fields tapped fully, total natural gas output to rise by a 3rd

📝 Indian airlines seek waiver from airports, oil firms for financial revival

📝 Facebook, Instagram hit by global outage due to unspecified problems

*Financial Express*

📝 Xiaomi to set up 5,000 offline stores in rural India

📝 Gold worth $37 billion traded in London each day, new data show

📝 Expert panel on RBI’s capital framework to be set up soon, say sources

📝 PSBs’ Q2 provisions 1.5 times their operating profit

📝 Reliance Mutual Fund announces 3rd FFO for CPSE ETF

📝 Paper mills see red as Trai dubs phone bills as anti-green

📝 Eram Scientific, Bill Gates foundation in talks for toilet technology

📝 Japan’s KDDI to avail Jio’s VoLTE international roaming services in India

*Mint*

📝 Shapoorji Pallonji Group plans $1 billion share sale of solar unit

📝 Bharti Airtel signs for over $2 billion loan amid threat of ratings cut

📝 India, Russia sign $500 million deal for two warships

📝 ICICI Bank to raise ₹25,000 crore to fill void left by NBFCs

📝 Credit set for worst year since 2008 as crashes roil market

📝 HDFC returns to masala bond market after tax change

📝 Delisting: Sebi allows promoters to make counter offers

📝 Banks get ₹3.7 trillion lending boost with RBI-FinMin ceasefire.

Risk management and credit rating

Risk Management and credit rating::

The risk that the banking business faces, can be:
· Credit risk
· Market risk (resulting from adverse movement of prices of govt. securities, interest rates, forex etc.)
· Operational risk (resulting from staff errors, failure of internal processes, external events etc.)
Credit Risk : It refers to the possibility of loss that the bank or financial institution may suffer as a consequence of inability of
the counterparty (i.e. the borrower, who is operating in an environment having many uncertainties resulting in threat to the
viability and sustainability of the activity) to meet its repayment or other commitment/s as per agreed conditions and commit
default.
Reserve Bank of India states that the credit risk or default risk involves inability or unwillingness of a customer or counterparty to
meet commitment in relation to lending, trading, hedging, settlement and other financial transactions.
In terms of the guidelines issued by RBI, the credit risk is generally made up of (I) transaction risk or default risk and (2) portfolio
risk. The portfolio risk in turn comprises intrinsic and concentration risk.
· The transaction risk is the risk arising from an individual transaction or a counterparty or b orrower's default in meeting the
commitment.
· The intrinsic risk is the risk which is inherent in respect of an activity due to the operating environment. This is also termed as
industry or activity risk.
· The concentration risk refers to the risk which arises as a result of undertaking exposure in only few industries or activities or
lines of business or borrowers and borrowing groups without ensuring the diversification of the portfolio.
Why does credit risk arise ?
The credit risk arises due to operation of a number of external and internal factors.
The external factors are the state of the economy of the concerned country or state or even global economy, wide swings in the
prices of various commodities, foreign exchange rates, interest rates, trade restrictions, economic sanctions, Govt. policies, natural
calamities etc.
The internal factors are the factors which may be internal to the borrower or internal to the financing institution.
· The factors internal to the borrowing entity may be planning factors, execution factors, finance factors, marketing factors,
management factors etc.
· The factors internal to the financing banks or institutions relate to the deficiencies in loan policies/administration,
absence of prudential credit concentration limits, inadequately defined lending limits for loan officers/credit committee,
deficiencies in appraisal of borrowers' financial position, excessive dependence on collaterals and inadequate risk pricing,
absence of loan review mechanism and post sanction surveillance etc.
Steps for credit risk mitigation:
The objective of mitigation is the restrict the risk within an acceptable limit and it involves steps to be taken at (a) macro level in
the bank and (b) micro level in the bank.
At Macro Level:
i. Frequent review of norms and fixing internal limits for aggregate commitments to specific sectors of industry and business.
2. periodical review of loan policies.
3. classification of portfolio based on certain parameters of quality
At Micro Level:
i. framing of policy regarding credit appraisal standards, sanction and delivery process, monitoring and review of individual
borrowers, obtaining collaterals.
2. obtaining credit rating and their updation.
Credit rating
The credit risk differs for each project and each promoter. The appraisal of proposal done with a view to measure the risk involved
and its quantification by using a credit rating method, with following objectives:
i. to take a decision whether to accept or reject a proposal without or without modification
2. to determine the rate of interest (risk pricing)
3. to help in. macro evaluation of the total credit portfolio by classifying the individual loan account in a specific category,
depending up on the rating.
Rating Models:
The rating can be done by using internal rating model available with the bank. Most of the banks have their rating models.
The rating can also be got done by using service of external rating agencies such as CRISIL, SMERA, CARE, ICRA etc.

Credit rating methodology:

Banks the credit rating model, based on which they are able to place their borrower in a particular rating category. The broader
categories of risk area that the rating models take into account are:
1. Management related aspects
2. Security related aspects
3. Financial aspects on the basis of financial statements
4. Business risk
These ratings are required to be reviewed periodically, in view of dynamic nature of the business of the borrower.
Derivative instruments for Credit Risk Management
The derivative instruments are used to hedge the inherent credit risk without transferring the loan account. Simple techniques for
transferring credit risk are available with the banks for very long time which include guarantors, collateral securities, credit
insurance from agencies like DICGC, CGTMSE. In recent some new instruments have also been introduced that include (a) Credit
default swaps and (b) credit linked notes.
Credit default swaps (CDS) : It is a contract between the financing bank (risk seller) and protection seller, whereby the protection
seller provides protection against credit events (i.e. default). For this purpose, the risk seller makes payment of premium to the
protection seller. The credit events include bankruptcy, failure to pay, restructuring etc.
Credit linked notes (CLN): In this arrangement, the protection seller (normally a special purpose vehicle — SPV) issues notes linked
to underlying credit. These notes can be purchased by general public as investors and the SPV purchases high rated securities with
that amount. On maturity, these securities are sold and money is returned to investors, if there is no credit default. In case of
credit default, the funds are used to make payment to risk seller.
The risk seller makes regular payment of premium.
New Capital Accord (Basel 2) : Implications on Credit Risk
The Basel Committee on Banking Supervision has proposed 3 approaches, viz.,
1. Standardised and
2. Foundation Internal Rating Based Approach
3. Advanced Internal Rating Based Approach
In India, presently the Standardized approach has been implemented.
Under the standardised approach, preferential risk weights in the range of o%, 20%, 50%, 100% and 150% are assigned by RBI for
certain risk weighted assets and some discretion has been given to bank where they can allot risk weight on the basis of external
credit assessments.
Internal Rating Based Approach
There are two approaches — foundation and advanced - as an alternative to standardised approach for assigning preferential risk
weights. Under the foundation approach, banks, which comply with certain minimum requirements viz. comprehensive credit
rating system. The adoption of these approaches requires substantial upgradation of the existing credit risk management systems.
The time schedule fixed by RBI for migrating to Internal Rating Based approach is as under: The earliest date of making application by
banks to RBI — April 01, 2012 Likely date of approval by RBI — March 31, 2014.
The banks have been advised by RBI to undertake an internal assessment of their preparedness for migration to advanced approaches,
in the light of the criteria envisaged in the Basel II document, as per the aforesaid time schedule, and take a decision, with the approval
of their Boards, whether they would like to migrate to any of the advanced approaches. The banks deciding to migrate to the advanced
approaches should approach us for necessary approvals, in due course, as per the stipulated time schedule. If the result of a bank's
internal assessment indicates that it is not in a position to apply for implementation of advanced approach by the above mentioned
dates, it may choose a later date suitable to it based upon its preparation.
It may be noted that banks, at their discretion, would have the option 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 would not
be necessary to adopt the advanced approaches for all the risk categories simultaneously. However, banks should invariably obtain
prior approval of the RBI for adopting any of the advanced approaches