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.

Risk Management Caiib BFM

Risk management::

1. Risk is defined as uncertainties resulting in:
a) Adverse outcome, adverse in relation to planned objectives or expectations
b) Adverse variation of profitability or outright losses (financial risk)
c) Both (a) & (b) d) None of these
2. Financial Risk is defined as
a) Uncertainties in cash flow b) Variations in net cash flow
c) Uncertainties resulting in outright losses
d) Uncertainties resulting in adverse variation of profitability e) Both (c) & (d)
3. Uncertainties in cash inflows and / or outflows create uncertainties in:
a) net cash flow b) profits c) Both (a) & (b) d) none of these
4_ Which of the following is not correct?
a) Lower risk implies lower variability in net cash flow
b) Higher variability in net cash flow may result in higher profits or higher losses
c) Higher risk would imply higher upside and downside potential
d) Zero risk would imply no variation in net cash flow e) None of these
5. Return on zero risk investment would be ----as compared to other opportunities
available in the market ; a) high ,b) low c) medium d) higher or low depending upon type of investment Strategic risk is a type
of : a) exchange risk b) liquidity risk c) interest rate risk d) operational risk e) none of these
6. Investment in RBI bonds at 6.5% interest rate with a maturity of 5 years is investment.
a) zero risk b) lower risk c) medium risk d) high risk
7. The capital requirement of a business would be lower when there is :
a) lower variation in net cash flow b) lower risk
c) lower possibility of loss d) all of these e) none of these
8. The key driver in managing a business is seeking enhancement in
a) Return on investment b) Risk Management capability
c) risk adjusted return on capital d) all of these e) None of these
9. Risk adjusted return on investment is:
a) Netting risk in a business or investment against the return from this
b) Managing risk on investments
c) Managing-return on investment through risk management
d) Adjusting return on investment against the risk

11.An investment will be more preferred and higher will be the reward to investors when:
a) RAROC is higher b) RAROC is lower c) RAROC is one d) none of these
12.The banking book is generally not exposed to : a) liquidity risk b) interest rate risk c) credit risk
d) operational risk e) None of these
13.Which of the following is / are characteristics of the assets held in Trading Book?
a) They are normally not held until maturity
b) They are normally held until maturity and accrual system of accounting is applied
c) Mark to market system is followed d) Both (a) & (c) e) Both (b) & (c)
14.Trading book is mainly exposed to
a) Market Risk b) Market Liquidity Risk c) Credit Risk
d) Operational Risk e) All of these
15.The transactions relating to guarantees, letters of credit, committed or back up credit lines form part of a) Banking Book b) Trading
Book, c) Off Balance Sheet Exposures d) All of these
16.The liquidity risk of banks arises from :
a) Funding of long term assets by short term liabilities
b) Funding of short term assets by long term liabilities
c) Funding of long term liabilities by short term assets
d) None of these
17. Funding liquidity risk is defined as:
a) Excess of liabilities over assets
b) Excess of long term liabilities over long term assets
c) Excess of short term liabilities over short term assets
d) Inability to obtain funds to meet cash flow obligations
18. Liquidity risk in banks manifest in different dimensions. Which of the
a) Funding risk arises from the need to replace net outflows withdrawal / non renewal of deposits
b) Time risk arises from the need to compensate for non receipt funds e.g. NPA
c) Call risk arises due to crystallization of contingent liabilities
d) Both (a) & (b) e) None of these
19.Where an asset maturing in two years at a fixed by a liability
risk will be: a) Basis risk b) Yield curve riskc) Gap risk d) embedded option Risk
20.The risk of adverse variance of the mark to market value of change in market prices of interest rate instruments, equities, is called: a)
Price Risk b) Market Risk c) Translation Risk d) Both a & b
21.ln the financial market bond prices and yields are
a) inversely related b) directly related ,
c) inversely or directly related depending on type of bond d) none of these
22.When a bank is unable to conclude a large transaction in a particular instrument near the current market price, it is called as a)
Market risk b) Market Liquidity risk c) Default risk d) counter party risk
23.Potential of a bank borrower or counterparty to fail to meet its obligations according to agreed terms is called: a) credit risk b)
default risk c) market liquidity d) market risk e) either (a) or (b)
24.The risk related to non performance of the trading partners due to counter party's refusal
and or inability to perform is called ------risk : a) Liquidity, b) Operational , c) Counter Party , d) None
25. Country risk is an example of
a) Market risk b) Credit risk c) Operational risk d) Liquidity risk
The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events is called as
risk
a) legal b) compliance c) Fraud d) Operational
26. Which of the following is not a operational risk?
a) Compliance risk b) Transaction risk c) Legal Risk
d) Counter party risk e) System risk
27. Strategic Risk and Reputation Risk fall in the category of
a) Market risk b) credit risk c) Operational risk d) none of these
Risk arising from fraud, failed business processes and inability to maintain business continuity : a) Transaction risk b)
compliance risk c) credit risk d) none of these
28. Risk of legal or regulatory sanction, financial loss or reputation loss that a bank may suffer as a result of its failure
to comply with any or all of the applicable laws, regulations etc. is called as:
a) Transaction risk b) Compliance risk, c) legal risk d) Systems risk
Compiled by Sanjay Kumar Trivedy, ChiefManager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 52 | P a g e
31.Risk arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes is
called:
a) Reputation risk b) Strategic risk c) Operational risk d) Management risk
32. Reputation Risk which arises from negative public opinion may result in:
a) exposing an institution to litigation b) financial loss
c) decline in customer base d) all of these e) none of these
33.Risk associated with a portfolio is always less than the weighted average of risks of individual items in the portfolio due to
a) Diversification of risks
b) The fact that all accounts in a portfolio will not behave in unidirectional manner
c) The fact that risks in all the accounts in a portfolio will not materialize simultaneously,
d) Both (a) & (b) only e) All of these
34.Aggregated risk of the organizations as a whole is called:
a) Transaction risk b) Portfolio risk c) Total risk d) None of these

ANSWER ::
1 A 2 E 3 C 4 E 5 B 6 E 7 A 8 D 9 C
11 A 12 E 13 D 14 E 15 C 16 A 17 D 18 E 19 C 20 D
21 A 22 B 23 E 24 C 25 B 26 D 27 D 28 D 29 A 30 B
31 B 32 D 33 E 34 B

Given that Tier I capital is Rs. 500 crores and Tier II capital Rs. 800 crores and further given that RWA for credit risk
Rs. 5000 crores, capital charge for market risk and operational risk Rs. 200 crores and Rs. 100 respectively, answer the
following questions if the regulatory CAR is 8%.
Based on the data given above, answer the following questions.
What are the total risk weighted assets?
a. Rs. 7250 crores
b. Rs. 8750 crores
c. Rs. 9000 crores
d. Rs. 7800 crores
Ans – b
RWA of mkt risk
=200/.08=2500
RWA ops risk
=100/.08=1250
Total RWA = RWA credit risk+ RWA mkt risk+ RWA ops risk
= 5000+2500+1250
= 8750
.............................................
What are the risk weighted assets for market risk?
a. Rs. 1000 crores
b. Rs. 1500 crores
c. Rs. 2000 crores
d. Rs. 2500 crores
Ans –d
200/.08
=2500
.............................................
What are the risk weighted assets for operational risk?
a. Rs 1000 Cr
b. Rs 2000 Cr
c. Rs 1250 Cr
d. Rs 2500 Cr
Ans – c
100/.08
= 1250 Ans
.............................................
What is the Tier-I CRAR?
a. 10.29 %
b. 11.42 %
c. 5.71%
d. 14.85 %
Ans - c
TIER-I CRAR=Eligible tier-1 capital/(Total RWAs)
= 500/8750
= 5.71%
........................

0.1486
0.1111
0.1143
0.1282
Ans – c
Total CRAR = Eligible Total capital/(Total RWAs)
= 1000/8750
= 11.42 %
(Remember here tier-II capital does not exceed 100 % of tier-I capital. So, Tier-II of Rs. 500Crore is taken for
calculation (500+500=1000).
.............................................
Mr. Raj purchases a call option for 500 shares of A with strike price of Rs. 140 having maturity after 03 months at a
premium of Rs. 40. On maturity, shares of A were priced at Rs. 180. Taking interest cost @ 12% p.a. What is the
profit/lost for the individual on the transaction?
Explanation.
This is call option, so it is assumed that,
He will purchase 500 shares of A at a price of 140
Total value of shares is = 70000
Then he will sell the total shares in the market at a price of 180.
500 × 180 = 90000
So profit of 20000 in the transaction.
But he has to pay the premium for call options.
Which is 40 × 500 = 20000
And the fund interest cost will be, 12% p.a. So for 03 months 12/4=3%)
= 20000 × 3/100 = 600
Total premium + premium cost
= 20000 + 600
= 20600
In total,
= 20000 - 20600
= - 600

……………

Asset in doubtful-I category – Rs. 500000/-
Realization value of security – Rs. 400000/-
What will be the provision requirement?
a. Rs. 500000/-
b. Rs. 400000/-
c. Rs. 180000/-
d. Rs. 200000/-
Ans - d
Solution
Asset in doubtful-I category – Rs. 500000/-
Secured portion = Rs. 400000/-
So, unsecured portion = Rs. 500000 - 400000 = 100000/-
Provision for Secured portion in D-1 = 25 %
Provision for unSecured portion in D-1 = 100 %
So, the total provision requirement
= (400000 x 25%) + (100000 x 100%)
= 100000 + 100000
= 200000
.............................................
Given that Tier I capital is Rs. 500 crores and Tier II capital Rs. 800 crores and further given that RWA for credit risk
Rs. 5000 crores, capital charge for market risk and operational risk Rs. 200 crores and Rs. 100 respectively, answer the
following questions if the regulatory CAR is 8%.
Based on the data given above, answer the following questions.
What are the total risk weighted assets?
a. Rs. 7250 crores
b. Rs. 8750 crores
c. Rs. 9000 crores
d. Rs. 7800 crores
Ans – b
RWA of mkt risk
=200/.08=2500
RWA ops risk
=100/.08=1250
Total RWA = RWA credit risk+ RWA mkt risk+ RWA ops risk
= 5000+2500+1250
= 8750
.............................................
Spot Rate - 35.6000/6500
Forward 1M=3500/3000 2M=5500/3000 3M=8500/8000
Transit Period - 20 days.
Exchange Margin - 0.15%.
Find Bill Buying Rate
a. 33.1971
b. 34.1971
c. 35.1971
d. 36.1971
Ans - c
Solution :
Ans - Bill Buying Rate (Ready) : Bill Date + 20 days
Spot Rate = 35.6000 Less Forward Discount 1M (0.3500) Less Exchange Margin 0.15% (0.529)
i.e. 35.6000-.3500-.0529(0.15% of 35.2500) = 35.1971

Balance sheet of a bank provides the following information:
Total advances Rs 50000cr, Gross NPA 10% and Net NPA 3%, Based on this information, answer the following
quwstions?
1. What is the amount of gross NPA?
a. Rs 4000cr
b. Rs 4500cr
c. Rs 5000cr
d. Rs 5500cr
2. What is the amount of net NPA?
a. Rs 1000cr
b. RS 1200cr
c. Rs 1500cr
d. Rs 1800cr
3. What is the amount of provision for standard loans, if all the standard loan account represent general advance?
a. Rs 150cr
b. Rs 160cr
c. Rs 180cr
d. Rs 200cr
4. What is the provision on NPA accounts?
a. Rs 3000cr
b. RS 3500cr
c. Rs 4500cr
d. Rs 5000cr
5. What is the total amount of provisions on total advances, including the standard accounts?
a. Rs 3500cr
b. Rs 3680cr
c. Rs 4000cr
d. Rs 4200cr
6. What is the minimum amount of provision to be maintained to meet the PCR of 70%?
a. Rs 3500cr
b. Rs 3680cr
c. Rs 4000cr
d. Rs 4200cr
7. What is the amount of provision for standard loans, if all the standard loan account represent direct advances to
agricultural?
a. Rs 90cr
b. Rs 112.5cr
c. Rs 135cr
d. Rs 180cr
8. What is the amount of provision for standard loans, if all the standard loan account represent advances to SMEs
sectors?
a. Rs 90cr
b. Rs 112.5cr
c. Rs 135cr
d. Rs 180cr
9. What is the amount of provision for standard loans, if all the standard loan account represent advances to CRE

sectors?
a. Rs 112.5cr
b. Rs 180cr
c. Rs 337.5cr
d. Rs 450cr
10. What is the amount of provision for standard loans, if all the standard loan account represent advances to CRE-RH
sectors?
a. Rs 112.5cr
b. Rs 180cr
c. Rs 337.5cr
d. Rs 450cr
Solution :
1. c
Gross NPA
= 50000 x 10 %
= 5000 Cr
2. c
Net NPA
= 50000 x 3 %
= 1500 Cr
3. c
Stadard Accounts
= Total advances - Gross NPA
= 50000 - (50000 x 10%)
= 50000 - 5000
= 45000
Provision for standard loans (general advance)
= 0.4%
= 45000 x 0.4%
= 180 Cr
4. b
Provision of NPA
= (Gross NPA - Net NPA) x Total Advances
= (10% - 3%) x 50000
= 7% x 50000
= 3500 Cr
5. b
Provision on Total Advances
= Provision of NPA + Provision for standard loans
= 3500 + 180
= 3680 Cr
6. a
Minimum amount of provision to be maintained to meet the PCR of 70%
= Gross NPA x PCR
= 5000 x 70%
= 3500 Cr
7. b
Stadard Accounts
= Total advances - Gross NPA
= 50000 - (50000 x 10%)
= 50000 - 5000
= 45000
Provision for standard loans (direct advances to agricultural)
= 0.25%
= 45000 x 0.25%
= 112.5 Cr
8. b
Stadard Accounts
= Total advances - Gross NPA
= 50000 - (50000 x 10%)
= 50000 - 5000
= 45000
Provision for standard loans (SMEs Sector)
= 0.25%
= 45000 x 0.25%
= 112.5 Cr
9. d
Stadard Accounts
= Total advances - Gross NPA
= 50000 - (50000 x 10%)
= 50000 - 5000
= 45000

Provision for standard loans (Commercial Real Estate (CRE) Sector)
= 1%
= 45000 x 1%
= 450 Cr
10. c
Stadard Accounts
= Total advances - Gross NPA
= 50000 - (50000 x 10%)
= 50000 - 5000
= 45000
Provision for standard loans (Commercial Real Estate (CRE) Sector)
= 0.75%
= 45000 x 0.75%
= 337.5 Cr
SME - Small and Micro Enterprises
CRE - Commercial Real Estate (CRE) Sector
CRE - RH - Commercial Real Estate – Residential Housing Sector (CRE - RH)
………………………………………………………………………………………………

Balance sheet of a bank

Balance sheet of a bank provides the following information:
Fixed Assets - 1000cr
Investment in central Govt Securities - Rs 10000cr
In standard loan accounts
Housing Loans - RS 6000cr (Secured, below Rs 10 lac)
the Retail loan - Rs 4000cr
Other loans - Rs 8000cr
sub-standard secured loans - Rs 1000cr

sub-standard unsecured loans - Rs 500cr

ABC Bank has provided following details :
1- Tier 1 Capital = Rs.4500cr
2- Tier 2 Capital = Rs.4000cr.
3- Capital charge for market credit risk = Rs.2400cr
4- Capital charge for market risk = Rs.1600cr
5- Capital charge for operational risk = Rs.800cr
1) Based on the given information, please calculate the amount of total risk weighted assets, if the CAR is 8%;
Total risk weighted assets = RWA for credit risk + RWA for market risk + RWA for opperational risk
= 2400/0.08 + 1600/0.08 + 800/0.08 = 30000 + 20000 + 10000 = 60000 cr
2) Based on the given information, please calculate the amount of Tier 1 Capital adequacy ratio of the bank
Total risk weighted assets = RWA for credit risk + RWA for market risk + RWA for opperational risk
= 2400/0.08 + 1600/0.08 + 800/0.08 = 30000 + 20000 + 10000 = 60000 cr
Tier 1 Capital = 4500
Tier 1 Capital adequacy ratio = Eligible Tier 1/Total RWA = 4500/60000 = 7.5%
3) Based on the given information, please calculate the amount of Tier 2 Capital adequacy ratio of the bank
Total risk weighted assets = RWA for credit risk + RWA for market risk + RWA for opperational risk
= 2400/0.08 + 1600/0.08 + 800/0.08 = 30000 + 20000 + 10000 = 60000 cr
Tier 2 Capital = 4000
Tier 2 Capital adequacy ratio = Eligible Tier 2/Total RWA = 4000/60000 = 6.66%
4) Based on the given information, please calculate the total Capital to risk assets ratio;
Total risk weighted assets = RWA for credit risk + RWA for market risk + RWA for opperational risk
= 2400/0.08 + 1600/0.08 + 800/0.08 = 30000 + 20000 + 10000 = 60000 cr
Tier 1 Capital = 4500
Tier 2 Capital = 4000
Total = 8500
Total Capital to risk assets ratio = Eligible total capital fund / Total RWA = 8500/60000 = 14.17%

TREASURY MANAGEMENT ::

1. RBI pays interest on the cash balances in excess of which of the following to bank, of their
NDTL?
a) 2%
b) 3%
c) 5%
d) 6%
ans: b
2. while the exposure limits are generally left to the banks discretion. RBI has imposed
which ceiling of total business in a year with individual brokers.
a) 2%
b) 5%
c) 10%
d) 15%
ans : b
3. Ability of a business concern to borrow or build up assets on the basis of a given capital
is called.
a) debt service coverage ratio
b) good will
c) reputation
d) Leverage
ans: D
4. Protection of risk in a transaction usually through derevatives product is called.
a) insurance
b) swap
c) hedge
d) arbitrage
ans: c
5. For the organization point of view treasury is considered to be
a) Investment centre
b) Fund management department
c) service centre
d) commercial bank
e) Non of these

ans: c
6. A treasury transaction with a customer is known as…..
a) Marchant banking business
b) Trading business
c) investment business
d) commercial banking
e) Retail banking
Ans: a
7. Which act relating to foreign exchange has replace earlier one?
a) Foreign Exchange Management Act
b) Foreign Exchange Regulation Act
c) Both the above
d) none of these
ans :a
8. RBI has permitted banks to borrow and invest through their overseas correspondents
in foreign currency subject to which of the following ceilings.
a 25% of there Tier-I Capital
b 25% of there Tier-I Capital or USD 10 million
c 25% of there Tier-I Capital or USD 10 million whichever Is higher.
d 25% of there Tier-I Capital or USD 10 million whichever Is lower
ans-: c
9. The treasury is run by a few specialist staff engaged in high value transaction per trn size
generally not being below:
a Rs 10 million
b Rs 20 “
c Rs 50 “
d None of these
Ans : c
10 Treasury has open position which is also known as
a Trading position
b Open position
c Proprietary position
d) a & C both
e) a
ans : d

11. Security dealars deals with of the following market.
A primary mkt
B secondary mkt
C Open mkt
D OTC
E all of these
Ans: b
12. What is the minimum marketable investment in treasury…….
A Rs 5 crore
B Rs 10 “
C Rs 20 “
D Rs 50 “
E non of these
Ans ; A
13. which of the following is not a free currency in the foreign exchange market ?
A USD
B Rupee
C EUR
D All of these
Ans : b
14. which of following statement is not correct relating to TOD and TOM
A Rates are generally quoted at discount to the spot rate
B Rates are less favorable to the buyer of the currency
C Rates are generally quated at a premium to the spot rate
D Non of these
Ans : c
15 The interest rate differential is added to the spote rate of
A Low interest yielding currency
B high interest yielding currency
C Both
D non of these
Ans A
16. Buying of USD (with Rupees) in the market and selling same in forward market or vice
versa is called
A spot trn

B Forward tsn
C swap tsn
D convertible tsn
Ans: c
17 Call money refers to placement of fund……..
A same day
B overnight
C next day
D Two days
E Non of these
Ans: b
18. Notice money refers to placement of funds for period not exceeding……
A over night
B two days
C 7 days
D 10 days
E 14 days
Ans : e
19. Term money refers to placement of funds for period not exceeding…
A 01 yr
B 02 yr
C 03 yr
D 05 yr
 Ans ;A
20. Treasury Bills are issued by whom
A RBI
B State PSUs
C GOI
D IMF
E IRDA
Ans :C
21 treasury bill is issued for 91 days to 364 days by GOI 91 days t bill is auction on
weekly basis for amount Rs………….crore.
A 100

B 200
C 500
D 1000
Ans : c read qtn carefully total three qtns aare there..
22. 364 t bill is auction on fourthnightly basis for amt of RS ……….crore by GOI
A 500
B 1000
C 1500
D 2000
Ans : c
23. A commercial paper carried credit risk , issued for period of 14 days to 01 yr for
minimum amt of 05 lakh and face value of Rs 100 only by………………….and it
should be in D mat form. ( Read QTN care fully)
A RBI
B corporate
C commercial bank
D central govt
Ans : b
24. ECB( external commercial borrowings) indian companies can borrow ................without
approval of RBI
a. usd 500 mn up to minimum period of 5 yrs
b. usd 20 mn upto minimum period of 3 yrs
c. both a and b are correct
d. without RBI approval they cannot borrow at all
ans C
.page no 333 bfm
25individuals are now permitted to remit overseas freely without rbi approval upto
a. 100000 usd/year
b. 200000 usd/yr
c. 300000 usd/yr
d. not possible without rbi approval
 ans : b page 334 b pe
26. certificate of deposit is a negotiable debt instrument has maturity period of 07 to 1 yr
and minimum amt is Rs 01 lakh basically issued by……….
A RBI
B Banks
C Treasury
D Corporate
E None

Ans : b
27 the difference between buying and selling rate is called
a) spread
b) profit
c) a only
d) a& b
Ans:d
28 placement of funds for overnight is called
a) notice money
b) call money
c) term money
d) all the above
Ans : b
29. Treasury discount bills of exchange, of short term nature with a tenure of
A 1 to 3 month
B 3 to 6 m
C 6 to 9 m
D 9 to 12 m
Ans : b
30. govt security are issued by..
A central finance ministry
B ministry of commerce
C central govt
D RBI
Ans : d
31. The basis point value is associated with
A risk pricing
B risk measurement
C risk mitigation
D risk control
 Ans: b
32. Deventures are governed by
A Law of contract
B Company Law
C Negotiable instrument
D non of these
Ans: b
33. all exposure limit are reviewed ….
A once in a qtr
B once in half yr
C once in a yr
D no limit
Ans: c

34 interest cost of funds locked in a trading position is called
A swap
B pre-settlement
C carry
D speculation
E options
Ans:c
35. A situation where the depoiter of abank lose confidence in the bank and withdraw therir
balances immediately, is called
A liquidation of the bank
B falilue of bank
C run on the bank
D out of the money
Ans: c
36. The capacity of abank oa business organization to absorb losses on account of market
risk.
 A risk absorption capacity
B risk aversion capacity
C risk taking capacity
D risk appetite
Ans:d

Treasury Management::

1 The significance of Treasury operations in Asset Liability management is:
a) It operates in financial markets directly.
b) Treasury is a link between core banking functions and market operations
c) Treasury identifies and monitors the market risk d) All of these
2_ How the Treasury operations are useful in minimizing Asset Liability mismatch?
a) Through uses of derivatives
b) Use of new products
c) Through Bridging the liquidity and rate sensitivity gaps d) All of these
3 Which of the following statements is correct?
a) Trading in securities is exposed to market risk
b) At times the Risks are compensatory in nature and help to minimize the mismatches.
c) Options can be economic only in marketable size d) All of these
4. Treasury operations also help in effective monitoring and implementation of Asset
Liability management process in view of the:
a) Credit instruments can be replaced by Treasury instruments
b) Treasury products are more liquid.
c) Treasury operations monitor exchange rate and interest rate movements
d) All of these
5. Which of the following statements is not correct regarding Treasury operations in
Asset Liability management process?
a) Derivatives can be widely used in Treasury operations
b) Derivatives increases liquidity risk
c) The capital requirement for derivative operations is small.
d) Derivatives replicate market Movements.
6. Asset Liability mismatches can be reduced through use of derivatives in Treasury
operations because:
a) Derivatives can be used to hedge high value transactions
b) It can also minimize aggregate risk in Asset liability mismatches
c) (a) and (b) both d) None of these
7 Suppose a Bank is fundingmedium term loan of 3 years with deposits having
average maturity of 3 months as short term deposits or borrowings are cheaper than
3 years deposits. what would be the consequences and what a bank should do?
a) Bank would resort to short term resources to increase the spread.
b) The (a) above will have liquidity risk
c) This will also have interest Risk since every time the deposits would be priced.
d) The Bank should swap 3 month interest rate into a fixed rate for 3 years.
8. Suppose a Bank prices the 3 month deposit at 91 day T-Bill + 1% and swap rate of
the loan yield T-Bill+3%. What is the impact?
a) Fixed interest of the loan is swapped into floating rate
b) Bank has a spread of 2%
c) The Risk is protected during the period of loan. d) All of these
9. Suppose a Bank borrows US dollars at 3% and lends in domestic market at 8.5%.
The Bank pays forward premium of 1.5% to cover exchange Risk. What is the overall impact?
a) The Bank earns a spread of 2% without any exchange Risk.
b) A bank through Treasury operations can supplement domestic liquidity.
c) The above process is known as arbitrage. d) All of these
10. A Bank under the Treasury operations can buy call options to protect foreign
currency obligations as under:
a) This will help the Bank to protect rupee value of foreign currency receipts and payments
b) The Bank will gain if the spot rate of call option on the exercise date is more favourable than the strike
price of the option.
c) (a) and (b) both d) none of the above
11. Which of the followings is relevant when interest rate is linked to the rate of
Compiled by Sanjay Kumar Trivedy, ChiefManager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 67 | P a g e
inflation?
a) Index linked Bonds b) Treasury Bonds
c) Corporate Debt Instruments d) All of these
12. The significance of index linked bonds is:
a) It provides protection against inflation rate rise.
b) It is inbuilt in the process.
c) (a) and (b) both d) None of these
13. Suppose a Bank- issues 7 year Bond with a put option at the end of 31-6 year. What
does it signify?
a) It is as good as 3 year investment
b) The investment becomes more liquid
c) (a) and (b) both d) None of these
14. The limitations of Derivatives are:
a) If interest rate on deposits and loans are not based on benchmar-k
rates interest rate swaps may not be that useful.
b) The product prices may not move in line with market rates.
c) The Treasury operations may not provide perfect hedge. d) All of these
15'. Which of the followings is correct?
a) Treasury operations are concerned with market risk
b) Treasury operations has no link with the credit risk
c) Credit risk in Treasury operations are contained by exposure limits
d) All the above
16. Why the corporate prefer to issue debt paper than to Bank credit?
a) The cost of debt paper is much lower
b) The procedure is easy
c) (a) and (b) both d) None of these
17. A Bank may prefer to invest in corporate Bonds because:
a) Bbnd is more liquid Asset
b) Bond has an easy exit
c) Bond can be sold at discount d) All of these
18. Which of the following is not credit substitute?
a) Commercial paper b) Mortgage loan
c) Corporate bond d) Certificate of Deposit
19. The difference between a Bond and loan is:
a) The loan has normally fixed rate of interest. Bond price is dependent on Market interest rate movements.
Bonds are more liquid
Yield to maturity value can be known easily in a bond d) All of these
What is securitization?
A process which converts conventional credit into tradable Treasury Assets.
Credi t receivabl es of the Bank can be conver ted into Bonds i .e. .pass through
certificates
These certificates can be traded in the market
The advantages of securitization for a Bank is:
It provides liquidity to the issuing Bank
The Bank capital does not get blocked
Securitization proceeds can be used for fresh lending
22. Which of the following loans cannot be securitized?
a) Long term loans b) Short term loans
c) Medium term loans d) Retail loans
23. Which of the followings is true?
a) Surplus funds with the banks can be invested in pass through certificates
b) This will be indirect expansion of credit portfolio
c) (a) and (b) both d) None of these
24. The features of credit derivatives are:
a) It segregates credit Risk from loan
b) The Risk is transferred from the owner of the Asset to another person for a fee.
a) Allof these
d) All of these
Compiled by Sanjay Kumar Trivedy, ChiefManager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 68 | P a g e
c) The instrument is known as credit linked certificates d) All of these
25. The constituents of a credit Derivatives are:
a) Protection Buyer b) Protection Seller
c) Reference Asset d) All of these
26. The process of credit Derivative involves:
a) The protection seller guarantees payment of principal and interest or both of the Asset owned by the
protection Buyer in case of credit default.
b) The protection Buyer pays a premium to the protection Seller
c) (a) and (b) both d) None of these
27. The advantages of credit Derivatives are:
a) It helps the issuer to diversity the credit risk
b) The capital can be used more efficiently
c) Credit Derivative is a transferable instrument d) All of these
28. What is transfer pricing under Treasury operations?
a) It is the process of fixing the cost of resources and return on Assets of a Bank in rational manner.
b) The Treasury buys and sells deposits and loans of Bank. -
c) The price fixed by the treasury becomes the basis for assessing profitability of a Bank
d) All the above
29. The parameters for fixing price by a Treasury are:
a) Market interest rate
b) Cost of hedging market Risk
c) Cost of maintaining reserve assets of the Bank d) All of these
30. Which of the following statements is correct regarding transfer pricing under Treasury operations?
a) If Bank procures deposit at 7% but the Treasury buys at a lower cost, the difference being the cost would be borne by the
Bank.
b) If the Bank lends at higher rate and sells the loan to Treasury at lower rate, the Balance being risk premium
would be the income for the Bank.
c) (a) and (b) both d) None of these
31. An integrated Riskmanagement policy under Asset Liabilitymanagement should focus on: a) Riskmeasurement andmonitoring b) Risk
Neutralisation, c) Product pricing d) All of these
32. Liquidity policy survival prescribe: a) Minimum liquidity to be maintained b) Funding of Reserve Assets c) Exposure limit
to money market d) All of these
33. The derivative Policy should consist:
a) Capital Allocation b) Restrictions on Derivative Trading
c) Exposure limits d) All of these
34. The investment policy should contain:
a) Permissible investments b) SLR and non SLR investments
c) Private placement d) All of these
35. The investment policy need not contain:
a) Derivative Trading b) Trading in Securities and Repos
c) Valuation and Accounting policy d) Classification of Investments
36. The composite Risk policy under Treasury operations should include the following:
a) Norms for Merchant and Trading positions b) Securities Trading
c) Exposure limits d) All of these
37. Composite Risk policy should also contain the following:
a) Intra-day and overnight positions b) Stop loss limits
c) Valuation of Trading positions d) All of these
38. Transfer pricing policy shduld prescribe:
a) Spread to be retained by the Treasury
b) Segregation of Administrative and Hedging cost
c) Allocation of cost d) All of these
39. According to RBI, policy of Investment and Risk should be supplemented with:
a) Prevention of money laundering policy
b) Hedging policy for customer Risk_ c) (a) and (b) -d) None of these
40. Which of the following are essential requirements for formulation of policy
guidelines?

a) It should be approved by the Board
b) It should comply with the guidelines of RBI and SEBI
c) It should follow current market practices d) All of these
41. Which of the followings is correct?
a) All policies should be reviewed annually
b) A copy of the policy guidelines needs to be filed with RBI
c) (a) and (b) both d) None of above
42. A Run of the Bank signifies:
a) A situation where depositors lose confidence and start withdrawing their balances.
b) A Bank running in continuous loss
c) A Bank where non-performing Assets level is high. d) All of these
43. Liquefiable securities are:
a) Securities that can be readily sold in the secondary market.
b) Securities that have easy liquidity
c) Short term securities d) All of these
44. What is Sensitivity Ratio?
a) Extent of interest sensitive Assets
b).Ratio of interest rate sensitive Assets to interest rate sensitive Liabilities
c) -(a) and (b) both d) All of these
45. Risk appetite is:
a) The capacity and willingness to absorb losses on account of market Risk.
b) The extent of Risk involved in securities c) (a) & (b) d) All of these
46. Which of the followings is correct?
a) Special purpose vehicle is formed exclusively to handle securities paper on behalf of sponsoring Bank.
b) Hedging policy is a document which specifies extent of coverage of foreign currency obligations.
c) Self regulatory organizations formulate market related code of conduct
d) All of the above
47. Liquidity policy of a Bank should contain:
a) Contingent funding
b) Inter-Bank committed credit lines
c) (a) and (b) both d) All of these

ANS: 1 D 2 D 3 D 4 D 5 B 6 C 7 D 8 D 9 D 10 C
11 A 12 C 13 C 14 D 15 D 16 A 17 D 18 B 19 D 20 D
21 D 22 B 23 C 24 D 25 D 26 C 27 D 28 D 29 D 30 C
31 C 32 D 33 D 34 D 35 D 36 D 37 D 38 D 39 C 40 D
41 C 42 A 43 A 44 B 45 A 46 B 47 C

Treasury Management

1. Fund management has been the primary activity of treasury, but treasury is also responsible for Risk Management & plays an active part in ALM.
2. D-mat accounts are maintained by depository participants to hold securities in electronic form.
3. In present scenario treasury function is liquidity management and it is considered as a service center.
4. From an organizational point of view treasury was considered as a service center but due to economic reforms & deregulation of markets treasury has evolved as a profit center.
5. Treasury connects core activity of the bank with the financial markets.
6. Investment in securities & Foreign Exchange business are part of integrated treasury.
7. Integrated treasury refers to integration of money market, Securities market and Foreign Exchange operations.
8. Banks have been allowed large limits in proportion of their net worth for overseas borrowings and investment.
9. Banks can also source funds in global markets and Swap the funds into domestic currency or vice versa.
10. The treasury’s transactions with customers is known as merchant business.
11. The treasury encompasses funds management, Investment and Trading in a multy currency environment.
12. Globalization refers to integration between domestic and global markets.
13. RBI has been progressively relaxing the Exchange Controls.
14. The Exchange Control Department of RBI has been renamed as Foreign Exchange Department with effect from January 2004.
15. Though treasury trades with narrow spreads, the profits are generated due to high volume of business.
16. Foreign currency position at the end of the day is known as open position.
17. Open position is also called Proprietary position or Trading position.
18. Treasury sells Foreign Exchange services, various risk management products & structured loans to corporates.
19. Forward Rate Agreement (FRA) is entered to fix interest rates in future.
20. SWAP is offered to convert one currency into another currency.
21. Allocation of costs to various departments or branches of the bank on a rational basis is called transfer pricing.
22. The treasury functions with a degree of autonomy and headed by senior management person.
23. The treasury may be divided into three main divisions 1) Dealing room 2) Back office and 3) Middle office.
24. Securities market is divided into two parts, primary & secondary markets.
25. The security dealers deals only with secondary market.
26. The back office is responsible for verification & settlement of the deals concluded by the dealers.
27. Middle office monitors exposure limits and stop loss limits of treasury and reports to the management on key parameters of performance.
28. Minimum marketable investment is Rs. 5.00 Crores.

---------------------------------------------------------------------------------------------
1. The driving force of integrated treasury are:

A) Integrated cash flow management B) Interest arbitrage C) Investment opportunities D) Risk Management..
2. The functions of Integrated Treasury are:
A) Meeting Reserve requirements
B) Efficient Merchant services
C) Global cash management
D) Optimizing profit by exploiting market opportunities in Forex market, Money market and Securities market
E) Risk management
F) Assisting bank management in ALM.
3) The immediate impact of globalization is three fold
A) Interest rate
B) New institutional structure
C) Derivatives were allowed.
4) RBI is allowing banks to borrow and invest through their overseas correspondents, in foreign currency upto 25% of their Tier – I capital or USD 10Million which amounts higher.
5) Treasury products have become more attractive for two reasons
1) Treasury operations are almost free of credit risk and require very little capital allocation and
2) Operation coats are low as compared to branching banking.
6. Treasury generates profits from under noted businesses.
Conventional A) Foreign exchange business and B) Money market deals.
Investment activities e.g. SLR, non – SLR & investment in Subsidiaries.
Interest Arbitrage.
Trading is a speculative activity, where profits arise out of favorable price movements during the interval between buying and selling.

7. ARBITRAGE: is the benefit accruing to traders, who play in different markets simultaneously.
8. DERIVATIVES are financial contracts to buy or sell or to exchange a cash flow in any manner at a future date, the price of which is based on market price of an underlying assets which may be financial or a real asset with or with out an obligation to exercise the contract.
9. EMERGING MARKET COUNTRIES are countries with a fast developing economy, which are largely market driven.
10. D-MAT ACCOUNTS are maintained by depository participants to hold securities in electronic form, so that transfer of securities can be affected by debit or credit to the respective account holders without any physical document.

CAIIB-BFM (TOPIC: FOREIGN EXCHANGE MARKET)

FOREX as defined in FEMA means Foreign Currency & Includes:
1.All Deposits, Credits, Balance Payable in any Foreign Currency & Drafts, Travelers Cheques, Letters of Credit & Billes of Exchange Expressed/Drawn in Indian Currency & Payable in Foreign Currency.
2.Any Instruments Payable at the option of the Drawee/Holder, thereof/any other Party thereto, either in Indian Currency/Foreign Currency/Party in 1 & Party in tie other.
In short term FOREX means the process of converting 1 National Currency into another National Currency & transferring Money. In such conversions, the Foreign Currency is always treated as a Commodity & the Home Currency as the medium of purchasing Power.

FOREX MARKET & ITS PARTICIPANTS:
Banks & Customers who've to Buy/Sell FOREX. Inter-Bank dealings where Sale & Purchase Business is transacted between the Bank themselves within the Country. Dealings between Domestic & Foreign Banks.

TYPES OF FOREX TRANSACTIONS:
-Inter-Bank Transaction: Sale/Purchase of FX between Banks & Financial Institutions (Market Participants).
-Merchant Transaction: Sale/Purchase transaction with the Customers are called Merchant Transaction.

FACTORS AFFECTING EXCHANGE RATES: Exchange Rates in the Market are the outcome of the combined effect of a Multiple of Factors. They can be classified as Fundamental, Technical & Speculative Factors.
The Factors are:
- BOP: Surplus BOP in a Courtry strengthens its Currency.
- Economic Growth Rate: High Growth Rate fuels Imports & weakens the Local Currency.
- Fiscal Policy: An expansionary Policy, normally leads to a Higher Economic Growth which in turn fuels Imports.
- Monetary Policy: Central Banks determine monetary measures to Influence & Control Interest & Money Supply.
- Interest Rates: Domestic Interest Rates if High, attracts overseas capital (FDI, FII) leading to an excess supply of Foreign Currencies resulting into appreciation of Domestic Currency in short term. However if High Interest Rates continue for a long term, Economy will slow down, weakening the Currency.
- Political Issues: without Political Stability there can be no Economic Stability (detrimental to the Value of Currenc- Political Issues: without Political Stability there can be no Economic Stability (detrimental to the Value of Currency).
- Technical Reasons in Exchange Rate Determination: Govt. controls which determine the Inflow & Outflow of Capital are considered Technical Reasons.
- Speculation Major Factor in Exchange Rate Determination: Speculative trading is a Reality in FOREX Markets. Its estimated that the speculative trade to daily FOREX turnover is above 90%.

CORRESPONDENTS OF A/C'S: Banks dealing in International Trade & FOREX maintain A/c's in various Foreign Countries for the purposes of settlements. They also enter in into drawing arrangements such as Overnight/Regular Overdrafts Limits, agency arrangements for International Remittances collection of Cheques/Bills etc. The International Banks involved are termed as Foreign Correspondents & the concept of providing such services is called as Correspondent Banking. In a Correspondent Banking relation its not always necessary that an A/c relationship should exist. Some of the services can be rendered without an A/c. However for arrangements like Cheque Clearngog, OD Arrangements A/c's are CORRESPONDENTS OF A/C'S: Banks dealing in International Trade & FOREX maintain A/c's in various Foreign Countries for the purposes of settlements. They also enter in into drawing arrangements such as Overnight/Regular Overdrafts Limits, agency arrangements for International Remittances collection of Cheques/Bills etc. The International Banks involved are termed as Foreign Correspondents & the concept of providing such services is called as Correspondent Banking. In a Correspondent Banking relation its not always necessary that an A/c relationship should exist. Some of the services can be rendered without an A/c. However for arrangements like Cheque Clearngog, OD Arrangements A/c's are needed.
The A/c's when maintained by Banks in Correspondent Relationship are classified as follows:
1. NOSTRO ACCOUNTS: NOSTRO A/c's means OUR A/C WITH YOU. Its a Foreign Currency A/c maintained by a Bank in domestic country with a Bank in Foreign Country.
2. VOSTRO ACCOUNTS: VOSTRO A/c's means YOUR A/C WITH US. Its an A/c of a Foreign Bank being maintained in Our Country & with Our Bank. When VOSTRO A/c's are opened, KYC norms are compulsory in India. VOSTRO A/c's are to be operated in line with RBI Guidelines.
3. LORO ACCOUNTS: LORO A/c's means THEIR A/C WITH THEN. This's an A/c of a 3rd Bank being maintained by another/our Bank.
4. MIRROR ACCOUNTS: These are Dummy A/c's maintained by Banks to know actual position of their A/c's with the Foreign Correspondent Banks. We may call it a Pass-Book of Our A/c's maintained with the Correspondents...

Bfm qtns recollected on memories
SPOT : Settlement of funds takes place on the second working day
1. If spot GBP is 1.6000, and 1 month forward as 1.6050, then GBP is
Compounded
2. The interest factor is the basic factor in arriving at the forward
rate, in a perfect market.
3. The date of settlement of funds is known as value date. (credited
into Nostro account on 10 and message received by our bank on
11th what is value date. 11th
4. Problem based on Excess of assets over the liabilities (Long
position: The buying of a security such as a stock, commodity or
currency, with the expectation that the asset will rise in value.)
5. Who prescribes guidelines and rules of the game in forex market
operations, merchant rates, quotations etc. FEDAI
6. For retirement of import bill : 1) TT Buying 2) TT Selling 3) Bill
buying rate 4) non
7. Cross rate problem: GBP/USD & USD/INR combination.
8. Problem on Bill due date + usance period 30 days. Due date is 17
Feb in exam answer is none of the above.
9. The risk of failure of the counter party during the course of
settlement due to the time zone differences between the two
currencies to be exchanged Answer: Herstatt risk.
10. To trigger the limit or say maximum loss limit for adverse
movement of rates. Stop loss limit
11. Mumbai branch of abc bank maintaining an USD account with
New York branch of xyz bank. In the books of abc Mumbai branch
NOSTRO account
12. In Problem one straight question for VOSTRO account.
13. In same problem on question on mirror account. (reconciliation
of entries in the nostro account in abc bank Mumbai books.)
14. TARGET facilitates receipts and payments of funds across the
EURO Zone on RTGS system.
15. If a person abroad want to send money speedily he will use 1)
SWIFT 2) RTGS 3) NEFT 4) PAPER DD.
16. Which is wrong statement for OCB
1) Predominantly owned by NRI
2) Owner ship of NRIs should be minimum 60%
3) The facilities for investment into India, granted to OCBs were
almost similar to those granted to individual NRI. (3 is the
Answer: Because now not allowed from 16.09.2003)
18) A is an Indian origin person married a foreigner B. Got 2 sons M
& N. On M married a oman lady f, N is doctor settled in Pakistan by
marring G.
1ST question) B can open NRI account jointly with A
2nd question) M is an NRI
3rd question) G cannot open NRI account as she is a Pakistani.
19) UCPDC-600 all are irrevocable LC
20) Back to Back LC : on the strength of export LC.
21) The importer id required to submit Bill of entry, evidencing
import of good into India.
22) Ecgc classification - 7
23) The ultimate responsibility for designing and implementation of
ICAAP lies with 1) bank’s board of directors 2) RBI 3) FEDAI
24) Who is the nodal agency of EMF – EXIM Bank
25) By using interest rate swaps, forward rate agreements between
2 currencies, using cross currency or financial futures. Interest
Rate Risk is mitigated
26) running ac facility gives Embedded option risk
27) LC discount had default risk which leads to funding risk
28) long duration bonds are more Sensitive
29) prepayment of loans Embedded option risk
30) how may diamond dollar accounts an importer can maintain 5
31) CBLO is issued by CCIL
32) Not a constituent part of tier ii capital – innovative perpetual
debt instruments
33) If the daily volatility of the stock is .02 % what is it 10 day
volatility

BFM- Basel III Case study
Information relating to capital & reserves of bank is ,
Bank A is as under---------------------- : Rs. in cr
Equity Capital----------------------------:2000
Non-cumulative Pref Share----------:1500
PNCP share-----------------------------:1000
General provision& loss--------------:800
Revaluation Reserve------------------:1700
Forex Transaction----------------------:300
Redeemable Pref share--------------:1000
Balance of P&L Account-------------:150
Risk Weighted Assets----------------:42000
Calculate
01. What is amount of of CET1 Capital
CET1=Equity Capital+Revaluation Reserve+Forex Transaction
=2000+765(1700*45=765)+225(300*75=225)+150
=3140
-------------------------------------------------------------------------------------
02. What is amount of AT1 Capital
Solution
AT-1=PNCP share
=1000
-------------------------------------------------------------------------------------
03. What is Tier -1 Capital
Solution
Tier-I Capital=CET1+AT1
=3140+1000
=4140
Tier-I CAR =Tier-I Capital/RWA
=4140/42000*100
=0.09857
=9.86%
-------------------------------------------------------------------------------------
04. What is amount of Tier 2 capital
Solution
Tier-II =Non-Cumulative pref. share+General provision & loss+Redemable pref share
=1500+525(42000*1.25%)+1000
=3025
-------------------------------------------------------------------------------------
05. What is total Capital Fund
Solution
Total Capital Fund=Tier-1+Tier-II
=4140+3025
=7165
-------------------------------------------------------------------------------------
06. What is Capital Adequacy Ratio
Solution
CAR=Total Capital Fund/Risk weighted Assets
=7165/42000
=17.06%

Normal transit time:: CAIIB BFM

NTP means avg period normally involved from the DATE OF NEGETIOATION/PURCHASE/DICOUNT TILL THE RECEIPT OF BILL PROCESSDS in the NOSTRO account of bank concerned.

it is not to be confused with the time taken for the arrival of goods at overseas destination.

CAIIB-BFM (TOPIC: INTERNATIONAL COMMUNICATIONS PAYMENT SYSTEMS)

SWIFT (Society for World wide Inter-Bank Financial Telecommunications): SWIFT an acronym is a Joint, being exchanged physically. All Foreign Currency 3rd country Commercial Payments are settled electronically.
FEDWIRE (USA): System of Inter-Bank settlement operated by Federal Reserve Bank of USA. The facility is available to member Banks throughtout USA. The facility is available for paper instruments like Cheques, DD also apart from online transactions. Its therefore available in Online & Offline formats. However its restricted to USD instruments only. Its not a general Inter-Bank System but is restricted to Federal Reserve Bank & Banks having their A/c's with Federal Bank. It's meant for domestic settlements within USA.

CHAPS (UK): Clearing House Automated Payments System (CHAPS) is the British equivalent to CHIPS, handling receipts & payments in London. This system also works on the Net Settlement System. Non-Profit Co-Operative society owned by about 250 Banks. Most of these are European & North American Bank with Headquarter at Brussels. SWIFT is a World wide, computer based secure Net Work System & each Member has access to all the Other Members. It operates on a Secure Network. It is a Large Network of interconnected Banks & Financial Institutes facilitating secure International dealings. It eliminates the need to maintain multiple coding systems with various correspondents & totally removes the Risk of theft of Code Books, errors creeping as a result of not updating of Code Books etc. Messages are delivered in Uniform Perform or Formats. This reduces the chamber of misinterpretation or confusion. Besides being confidential, safe, self authenticated & SWIFT in real sense, the system reduces the cost of the transaction too.
CHIPS (USA): CHIPS stand for Clearing House Inter-Bank Payment System. Its an Electronic Payment System & is jointly owned by New Work house clearing association members. It processes more than a million instruments daily without.

TARGET (EURO): Trans-European Automated Real-time Gross Settlement Express Transfer system is a EURO. Payment System comprising 15 National RTGS Systems working in Europe.
RTGS+ & EBA (EURO): These are other EURO clearing system. RTGS+ is a German Hybrid Clearing System operating as a European Oriented Real-time Gross Settlement & Payment System with over 60 participants. The EBA-EURO-1 with a membership of over 70 Banks in all EU member countries works as a netting system with focus on Cross Border EURO Payments. for Retail Payments, EBA has another system called STEP-1 with over 200 members across EU Zone. STEP-2 is also in use in EU Zone, which facilities Straight Through Processing (STP) to member Banks, using Industry Standards...

Pre and post shipment

CAIIB BFM::: pre and post shipment

Pre-shipment Finance or
Packing Credit:::

Packing credit has the following features:
1. Calculation of FOB value of order/LC amount or Domestic cost of
production (whichever is lower).
2. IEC allotted by DGFT.
3. Exporter should not be on the “Caution List” of RBI.
4. He should not be under “Specific Approval list” of ECGC.
5. There must be valid Export order or LC.
6. Account should be KYC compliant.
Liquidation of Pre-shipment credit
 Out of proceeds of the bill.
 Out of negotiation of export documents.
 Out of balances held in EEFC account
 Out of proceeds of Post Shipment credit.
Concessional rate of interest is allowed on Packing Credit up to 270
days. Previously, the period was 180 days. Running facility can also be
allowed to good customers.

Post Shipment Finance:::

Post shipment finance is made available to exporters on the following
conditions:
 IEC accompanied by prescribed declaration on GR/PP/Softex/SDF
form must be submitted.
 Documents must be submitted by exporter within 21 days of
shipment.
 Payment must be made in approved manner within 6 months.
 Normal Transit Period is 25 days.
 The margin is NIL normally. But in any case, it should not exceed
10% if LC is there otherwise it can be up to 25%.
Types of Post Shipment Finance:
 Export Bills Purchased for sights bills and Discounting for Usance
bills.
 Export bills negotiation.
Discrepancies of Documents
Late Shipment, LC expired, Late presentation of shipping documents, Bill
of Lading not signed properly, Incomplete Bill of Lading, Clause Bill of
Lading , Short Bill of Lading or Inadequate Insurance.
Advance against Un-drawn Balance
Undrawn balance is the amount less received from Importers. Bank can
finance up to 10% undrawn amount up to maximum period of 90 days.
Advance against Duty Drawback
Duty drawback is the support by Government by way of refund of
Excise/Custom duty in case the domestic cost of the product is higher than
the Price charged from the importer. This is done to boost exports despite
international competition. Bank can make loan to exporter against Duty
Drawback up to maximum period of 90 days.

BFM Mod A

BFM
INTERNATIONAL BANKING:
UNIT – 1: EXCHANGE RATES AND FOREX BUSINESS

1. Foreign Exchange: Conversion of currencies from the currency of invoice to the home currency of the exporters is called as Foreign Exchange.

2. Foreign Exchange Management Act (FEMA),1999 defines Foreign Exchange as “All deposits, credits and balances payable in foreign currency and any drafts, traveler’s Cheques, LCs and Bills of Exchange, expressed or drawn in Indian Currency and payable in any foreign currency.” Any instrument payable at the option of the drawee or holder, thereof or any other party thereto, either in Indian Currency or in foreign currency, or partly in one and partly in the other.

3. A Foreign Exchange transaction is a contract to exchange funds in one currency for funds in another currency at an agreed rate and arranged basis.

4. Exchange Rate means the price or the ratio or the value at which one currency is exchanged for

5. Foreign Exchange markets participants are

- Central Banks - Commercial Banks - Investment Funds / Banks

- Forex Brokers - Corporations - Individuals

6. The Forex Markets are highly dynamic, that on an average the exchange rates of major currencies fluctuate every 4 Seconds, which effectively means it registers 21,600 changes in a day (15X60X24)

7. Forex markets usually operate from “Monday to Friday” globally, except for the Middle East or other Islamic Countries which function on Saturday and Sunday with restrictions, to cater to the local needs, but are closed on Friday.

8. The bulk of the Forex markets are OTC (Over the Counter).

9. Factors Determining Exchange Rates:
 - Balance of Payment - Economic Growth rate - Fiscal policy
- Monetary Policy - Interest Rates - Political Issues
- Government Control can lead to unrealistic value.
- Free flow of Capital from lower interest rate to higher            interest rates
- Speculative - higher the speculation higher the volatility in rates

10. Due to vastness of the market, operating in different time zones, most of the Forex deals in general are done on SPOT basis.

11. The delivery of FX deals can be settled in one or more of the following ways:
- Ready or Cash - TOM - Spot - Forward - Spot and Forward

12. Ready or Cash: Settlement of funds takes place on the same day (date of Deal)

13. TOM: Settlement of funds takes place on the next working day of the deal. If the settlement day Is holiday in any of the 2 countries, the settlement date will be next working day in both the countries.

14. Spot : Settlement of funds takes place on the second working day after/following the date of Contract/deal. If the settlement day is holiday in any of the 2 countries, the settlement date will be next working day in both the countries.

15. Forward: Delivery of funds takes place on any day after SPOT date.

16. Spot and Forward Rates: On the other hand, when the delivery of the currencies is to take place at a date beyond the Spot date, it is Forward Transaction and rate applied is called Forward Rate.

17. Forward Rates are derived from Spot Rates and are function of the spot rates and forward
premium or discount of the currency, being quoted.

18. Forward Rate = Spot Rte Premium or – Discount

19. If the value of the currency is more than being quoted for Spot, then it is said to be at a premium.

20. If the currency is cheaper at a later date than Spot, then it is called at a Discount.

21. The forward premium and discount are generally based on the interest rate differentials of the

22. In a perfect market, with no restriction on finance and trade, the interest factor is the basic factor in arriving at the forward rate.

23. The Forward price of a currency against another can be worked out with the following factors:
 - Spot price of the currencies involved
 - The Interest rate differentials for the currencies.
 - The term i.e. the future period for which the price is worked out.

24. The price of currency can be expressed in two ways i.e. Direct Quote, Indirect Quote.

25. Under Direct Quote, the local currency is variable
E.g.: 1 USD = `48.10

26. Direct Quote rates are also called Home Currency or Price Quotations.

27. Under indirect Quote, the local currency remains fixed, while the number of units of foreign currency varies.
E.g. `100 = 2.05 USD

28. Globally all currencies (Except a few) are quoted as Direct Quotes, in terms of USD = So many

29. Only in case of GBP (Great Britain Pound) £, €, AU$ and NZ$, the currencies are quoted as

30. Japanese Yen being quoted per 100 Units. (To type GBP symbol £ in key board : Pressing and holding the ALT with the left hand while a short code 1, 5, 6 is typed in on the keypad with the right hand. The ALT key is then released and the £ symbol appears). (To type Euro symbol in Key board : Pressing and holding the ALT with the left hand while a short code 0,1,2,8 is typed in on the keypad with the right hand. The ALT key is then released and the € symbol appears.)

31. Cross Currency Rates: When dealing in a market where rates for a particular currency pair are not directly available, the price for the said currency pair is then obtained indirectly with the help of

32. How to calculate Cross Rate?:

The math is simple algebra: [a/b] x [b/c] = a/c
Substitute currency pairs for the fractions shown above, and you get, for instance,
GBP/AUD x AUD/JPY = GBP/JPY.

This is the implied (or theoretical) value of the GBP/JPY, based on the value of the other two pairs.

The actual value of the GBP/JPY will vary around this implied value, as the following calculation shows. Here are Friday's actual closing BID prices for the 3 currency pairs in this example (taken from FXCM's Trading Station platform):
GBP/AUD = 1.73449,
AUD/JPY = 0.85535 and
GBP/JPY = 1.48417.
Now, let's do the math:
GBP/AUD x AUD/JPY = GBP/JPY

1.73449 x 0.85535 = 1.4836, which is not exactly the same as the actual market price. Here's why.

During market hours (Sunday afternoon to Friday afternoon, EST), all prices are LIVE, and small departures from the mathematical relationships can exist momentarily.

33. Fixed Vs Floating Rates:

- The fixed exchange rate is the official rate set by the monetary authorities for one  or more currencies. It is usually pegged to one or more currencies.

- Under floating exchange rate, the value of the currency is decided by supply and demand factors for

34. Since 1973, the world economies have adopted floating exchange rate system.

35. India switched to a floating exchange rate regime in 1993.

36. Bid & Offered Rates: The buying rates and selling rates are referred to as Bid & Offered rate.

37. Exchange Arithmetic – Theoretical Overview:
- Chain Rule:
 It is used in attaining a comparison or ratio between two quantities linked together through another or other quantities and consists of a series of equations.

- Per Cent or Per mile: 

A percentage (%) is a proportion per hundred. Per Mile means per

38. Value Date:
The date on which a payment of funds or an entry to an account becomes actually effective and/or subjected to interest, if any. In the case of TT, the value date is usually the same in

39. The payments made in same day, so that no gain or loss of interest accrues to either party is called as Valuer Compensate, or simply here and there.

40. Arbitrage in Exchange: Arbitrage consist in the simultaneous buying and selling of a commodity in two or more markets to take advantage of temporary discrepancies in prices.

41. A transaction conducted between two centers only is known as simple or direct arbitrage.

42. Where additional centers are involved, the operation is known as compound or Three (or more)

43. Forex Operations are divided into 3:
1) Forex Dealer
2) Back Office
3) Mid Office

Types of Letter of credit's

BFM

🔴Types of Letter of Credits :

✅Documents against Payment LC : Where payment is made against documents ( D/P LC )
✅Documents against Acceptance LC : Where payment is made on maturity date ( D/A LC )

🔴Irrevocable LC/ Revocable LC :

✅In Irrevocable LC : Issuing bank can amend/cancel LC with the consent of beneficiary (Seller)

✅In Revocable LC : Issuing bank can amend/cancel LC without the consent of beneficiary (Seller)

🔴With or Without Recourse LC :

✅With Recourse : Where the beneficiary holds himself liable to the holder of the bill, if dishonoured.

✅Without Recourse : Where the beneficiary does not hold himself liable, if the bill is dishonoured.

✅Restricted LC : Where a specified bank is designated to pay, accept or negotiate the documents

✅Confirmed LC : Where the advising/other bank at the request of issuing bank adds confirmation that payment will be made

✅Transferable LC : At the request of the opener, the LC can be transferred to one or more parties.

✅Back to Back LC : Where an exporter request for opening of LC in favour of local suppliers in cover of original LC received from his buyer Types of Letter of Credit

✅Red Clause LC : Where the LC permit the negotiating bank to grant of packing credit to the beneficiary at issuing bank ’ s responsibility

✅Green Clause LC : LC permits the advance for storage of goods in addition to pre-shipment advance

✅Stand by LC : It is similar to performance bond or guarantee. The beneficiary can submit the claim alongwith requisite documents to issuing bank

✅Revolving LC : The amount of drawing made under LC would be reinstated and made available to the beneficiary again
BFM

Parties to Letter of Credit :

Applicant : The buyer of goods

Issuing Bank : Buyer ’ s bank

Advising Bank : To whom LC is sent for onward transmission to the seller

Beneficiary : The party to whom, the LC is addressed i.e. seller

Negotiating Bank : The bank to whom the beneficiary will present the documents

Reimbursing Bank : Third bank, which repays/settles the funds at request of issuing bank

Confirming Bank : The bank, which undertake the responsibility of issuing bank on his failure Parties to Letter of Credit

LRS FAQs

LRS  FAQs  (especially for CAIIB BFM aspirants) :

Q 1. What is the Liberalised Remittance Scheme (LRS) of USD 2,50,000 ?

Ans. Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Further, resident individuals can avail of foreign exchange facility for the purposes mentioned in Para 1 of Schedule III of FEM (CAT) Amendment Rules 2015, dated May 26, 2015, within the limit of USD 2,50,000 only.

The Scheme was introduced on February 4, 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions.

In case of remitter being a minor, the LRS declaration form must be countersigned by the minor’s natural guardian. The Scheme is not available to corporates, partnership firms, HUF, Trusts etc.

Q 2. What are the prohibited items under the Scheme?

Ans. The remittance facility under the Scheme is not available for the following:

Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.
Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
Remittance for trading in foreign exchange abroad.
Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.
Q 3. What are the purposes under FEM (CAT) Amendment Rules, 2015, under which a resident individual can avail of foreign exchange facility?

Ans. Individuals can avail of foreign exchange facility for the following purposes within the LRS limit of USD 2,50,000 on financial year basis:

Private visits to any country (except Nepal and Bhutan)
Gift or donation
Going abroad for employment
Emigration
Maintenance of close relatives abroad
Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up
Expenses in connection with medical treatment abroad
Studies abroad
Any other current account transaction which is not covered under the definition of current account in FEMA 1999.
The AD bank may undertake the remittance transaction without RBI’s permission for all residual current account transactions which are not prohibited/ restricted transactions under Schedule I, II or III of FEM (CAT) Rules, 2000, as amended or are defined in FEMA 1999. It is for the AD to satisfy themselves about the genuineness of the transaction, as hitherto.

Q 4. Under LRS are resident individuals required to repatriate the accrued interest/dividend on deposits/investments abroad, over and above the principal amount?

Ans. No, the investor can retain and reinvest the income earned from portfolio investments made under the Scheme.

However, a resident individual who has made overseas direct investment in the equity shares and compulsorily convertible preference shares of a Joint Venture or Wholly Owned Subsidiary outside India, within the LRS limit, then he/she shall have to comply with the terms and conditions as prescribed under [Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations 2004 as amended from time to time] Notification No. 263/ RB-2013 dated August 5, 2013.

Q 5. Can remittances under the LRS facility be consolidated in respect of family members?

Ans. Remittances under the facility can be consolidated in respect of close family members subject to the individual family members complying with the terms and conditions of the Scheme. However, clubbing is not permitted by other family members for capital account transactions such as opening a bank account/investment/purchase of property, if they are not the co-owners/co-partners of the investment/property/overseas bank account. Further, a resident cannot gift to another resident, in foreign currency, for the credit of the latter’s foreign currency account held abroad under LRS.

Q 6. Is the AD required to check permissibility of remittances based on nature of transaction or allow the same based on remitters declaration?

Ans. AD will be guided by the nature of transaction as declared by the remitter in Form A2 and will thereafter certify that the remittance is in conformity with the instructions issued by the Reserve Bank in this regard from time to time. However, the ultimate responsibility is of the remitter to ensure compliance to the extant FEMA rules/regulations.

Q 7. Is it mandatory for resident individuals to have PAN number for sending outward remittances under the Scheme?

Ans. Yes., however, PAN card need not be insisted upon for remittance made towards permissible current account transactions up to USD 25,000 per financial year.

Q 8. Are there any restrictions on the frequency of the remittance?

Ans. There are no restrictions on the frequency of remittances under LRS. However, the total amount of foreign exchange purchased from or remitted through, all sources in India during a financial year should be within the cumulative limit of USD 2,50,000.

Once a remittance is made for an amount up to USD 2,50,000 during the financial year, a resident individual would not be eligible to make any further remittances under this scheme, even if the proceeds of the investments have been brought back into the country.

Q 9. Resident individuals (but not permanently resident in India) can remit up to net salary after deduction of taxes. However, if he has exhausted the limit of USD 2,50,000 as net salary remittance and desires to remit any other income under LRS is it permissible as the limit will be over and above USD 2,50,000?

Ans. Resident individuals (but not permanently resident in India) who have remitted their entire earnings and salary and wish to further remit ‘other income’ may approach RBI with documents through their AD bank for consideration.

Q 10. Para 5.4 of AP DIR Circular 106 dated June 01, 2015 states that the applicants should have maintained the bank account with the bank for a minimum period of one year prior to the remittance for capital account transactions. Whether this restriction applies to current account transactions?

Ans. No. The rationale is that remittance facility is up to the LRS limit of USD 250, 000 for current account transactions under Schedule III of FEM (CAT) Amendment Rules, 2015, such as for private and business visits which can also be provided by FFMCs. As FFMCs cannot maintain accounts of remitters the proviso (as mentioned in para 5.4 of the circular ibid) has been confined to capital account transactions. However, FFMCs, are required to ensure that the "Know Your Customer" guidelines and the Anti-Money Laundering Rules in force have been complied with while allowing the current account transactions.

Q 11. Are there any restrictions towards remittances to Mauritius and Pakistan for permissible current account transactions?

Ans. No, there are no restrictions towards remittances for current account transactions to Mauritius and Pakistan.

Remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time; and remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks are not permissible.

Q 12. What are the requirements to be complied with by the remitter?

Ans. The individual will have to designate a branch of an AD through which all the capital account remittances under the Scheme will be made. The applicants should have maintained the bank account with the bank for a minimum period of one year prior to the remittance.

For remittances pertaining to permissible current account transactions, if the applicant seeking to make the remittance is a new customer of the bank, Authorised Dealers should carry out due diligence on the opening, operation and maintenance of the account. Further, the AD should obtain bank statement for the previous year from the applicant to satisfy themselves regarding the source of funds. If such a bank statement is not available, copies of the latest Income Tax Assessment Order or Return filed by the applicant may be obtained. He has to furnish Form A-2 regarding the purpose of the remittance and declare that the funds belong to him and will not be used for purposes prohibited or regulated under the Scheme.

Q 13. Can remittances be made only in US Dollars?

Ans. The remittances can be made in any freely convertible foreign currency.

Q 14. Are intermediaries expected to seek specific approval for making overseas investments available to clients?

Ans. Banks including those not having operational presence in India are required to obtain prior approval from Reserve Bank for soliciting deposits for their foreign/overseas branches or for acting as agents for overseas mutual funds or any other foreign financial services company.

Q 15. Are there any restrictions on the kind/quality of debt or equity instruments an individual can invest in?

Ans. No ratings or guidelines have been prescribed under LRS of USD 2,50,000 on the quality of the investment an individual can make. However, the individual investor is expected to exercise due diligence while taking a decision regarding the investments which he or she proposes to make.

Q 16. Whether credit facilities (fund or non-fund based) in Indian Rupees or foreign currency can be extended by AD banks to resident individuals?

Ans. LRS does not envisage extension of fund and non-fund based facilities by the AD banks to their resident individual customers to facilitate remittances for capital account transactions under LRS.

However, AD banks may extend fund and non-fund based facilities to resident individuals to facilitate current account remittances under the Scheme.

Q 17. Can bankers open foreign currency accounts in India for residents under LRS?

Ans. No.

Q 18. Can an Offshore Banking Unit (OBU) in India be treated on par with a branch of the bank outside India for the purpose of opening of foreign currency accounts by residents under the Scheme?

Ans. No.

Q 19. What are the documents required for withdrawal/remittance of foreign exchange for purposes mentioned in para 1 of Schedule III to FEM (CAT) Amendment Rules, 2015?

Ans. RBI will not prescribe any documentation to be submitted to ADs except Form A2. All other documentation may be done as advised by the AD.

For small amounts aggregating up-to USD 25,000 per year, ADs need not obtain any document including Form A-2, except a simple letter from the applicant (containing the basic information, viz., names and the addresses of the applicant and the beneficiary, amount to be remitted and the purpose of remittance) as long as the foreign exchange is being purchased for a permissible current account transaction (not included in the Schedules I and II of FEM (CAT) Rules). AD banks shall prepare dummy A-2 for statistical inputs for Balance of Payment.

Q 20. Whether documents viz 15 CA, 15 CB have to be taken in all outward remittance cases including remittances for maintenance etc.?

Ans. In terms of A. P. (DIR Series) circular No. 151 dated June 30, 2014, Reserve Bank of India will not issue any instructions under the FEMA, regarding the procedure to be followed in respect of deduction of tax at source while allowing remittances to the non-residents. It shall be mandatory on the part of ADs to comply with the requirement of the tax laws, as applicable.

Q 21. Will the expenses incurred by an LLP to sponsor the education expense of its partners who are pursuing higher studies for the benefit of the LLP will be outside the LRS limit of such individuals (partners)?

Ans. LLP is a body corporate and has a legal entity separate from its partners. Therefore, if the LLP incurs/sponsors the education expense of its partners who are pursuing higher studies for the benefit of the LLP, then the same shall be outside the LRS limit of the individual partners and would instead be deemed as residual current account transaction undertaken by the LLP without any limits.

Q 22. Clarification on remittance by sole proprietor under LRS.

Ans. In a sole proprietorship business, there is no legal distinction between the individual / owner and as such the owner of the business can remit USD up to the permissible limit under LRS. If a sole proprietorship firm intends to remit the money under LRS by debiting its current account then the eligibility of the proprietor in his individual capacity has to be reckoned. Hence, if an individual in his own capacity remits USD 250,000 in a financial year under LRS, he cannot remit another USD 250,000 in the capacity of owner of the sole proprietorship business as there is no legal distinction.

Q 23. Whether prior approval is required to open, maintain and hold foreign currency account with a bank outside India for making remittances under the LRS?

Ans: No.

Q 24. What are the facilities under Schedule III of FEM (CAT) Amendment Rules, 2015 available for persons other than individual?

Ans. The following facilities are available to persons other than individuals:

Donations up-to one per cent of their foreign exchange earnings during the previous three financial years or USD 5,000,000, whichever is less, for- (a) creation of Chairs in reputed educational institutes, (b) contribution to funds (not being an investment fund) promoted by educational institutes; and (c) contribution to a technical institution or body or association in the field of activity of the donor Company.
Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India up to USD 25,000 or five percent of the inward remittance whichever is less.
Remittances up to USD 10,000,000 per project for any consultancy services in respect of infrastructure projects and USD 1,000,000 per project, for other consultancy services procured from outside India.
Remittances up to five per cent of investment brought into India or USD 100,000 whichever is less, by an entity in India by way of reimbursement of pre-incorporation expenses.
Remittances up to USD 250,000 per financial year for purposes stipulated under Para 1 of Schedule III to FEM (CAT) Amendment Rules, 2015. However, all residual current account transactions undertaken by such entities are otherwise permissible without any specified limit and are to be disposed off at the level of AD, as hitherto. It is for the AD to satisfy themselves about the genuineness of the transaction.
Anything in excess of above limits requires prior approval of the Reserve Bank of India.

Q 25. Can a resident individual make a rupee loan to a NRI/PIO who is a close relative of resident individual, by of crossed cheque/ electronic transfer?

Ans. A resident individual is permitted to make a rupee loan to a NRI/PIO who is a close relative of the resident individual (‘relative’ as defined in Section 2(77) of the Companies Act, 2013) by way of crossed cheque/ electronic transfer subject to the following conditions:

(i) The loan is free of interest and the minimum maturity of the loan is one year.

(ii) The loan amount should be within the overall LRS limit of USD 2,50,000, per financial year, available to the resident individual. It would be the responsibility of the lender to ensure that the amount of loan is within the LRS limit of USD 2,50,000 during the financial year.

(iii) The loan shall be utilised for meeting the borrower's personal requirements or for his own business purposes in India.

(iv) The loan shall not be utilised, either singly or in association with other person, for any of the activities in which investment by persons resident outside India is prohibited, namely;

the business of chit fund, or
Nidhi Company, or
agricultural or plantation activities or in real estate business, or construction of farmhouses, or
trading in Transferable Development Rights (TDRs).
Explanation: For the purpose of item (c) above, real estate business shall not include development of townships, construction of residential / commercial premises, roads or bridges.

(v) The loan amount should be credited to the NRO a/c of the NRI /PIO. Credit of such loan amount may be treated as an eligible credit to NRO a/c.

(vi) The loan amount shall not be remitted outside India.

(vii) Repayment of loan shall be made by way of inward remittances through normal banking channels or by debit to the Non-resident Ordinary (NRO)/ Non-resident External (NRE) / Foreign Currency Non-resident (FCNR) account of the borrower or out of the sale proceeds of the shares or securities or immovable property against which such loan was granted.

Q 26. Can a resident individual make a rupee gift to a NRI/PIO who is a close relative of resident individual, by of crossed cheque/ electronic transfer?

Ans. A resident individual can make a rupee gift to a NRI/PIO who is a close relative of the resident individual [relative’ as defined in Section 2(77) of the Companies Act, 2013] by way of crossed cheque /electronic transfer. The amount should be credited to the Non-Resident (Ordinary) Rupee Account (NRO) a/c of the NRI / PIO and credit of such gift amount may be treated as an eligible credit to NRO a/c. The gift amount would be within the overall limit of USD 250,000 per financial year as permitted under the LRS for a resident individual. It would be the responsibility of the resident donor to ensure that the gift amount being remitted is under the LRS and all the remittances made by the donor during the financial year including the gift amount have not exceeded the limit prescribed under the LRS.

BFM Basel problem

Srinivas Kante:
Caiib BFM::
Universal bank reported the following information relating to its business (rupees in 000 Cr):
Common Equity Tier 1 ratio 85.00
Capital conservation buffer 25.00
Total amount of PNCPS / PDI 35.00
Eligible PNCPS / PDI for AT1 21.25
Eligible Tier I capital 106.25
Tier 2 capital available 25.00
Tier 2 capital eligibility 28.33
Excess PNCPS / PDI eligible for Tier 2 capital 3.33
Total Eligible capital 134.58
Credit and operational risk weighted assets 1200
Market risk weighted assets 100
On the basis of given information, answer the following questions:
What is the min Common Equity Tier-1 (CET1) capital to support Credit and operational risk:
108
66--
24
18

What is the max Additional Tier-1 (AT1) capital to support Credit and operational risk:
108
66
24
18--
What is the max Tier 2 (T2) capital to support I Credit and operational risk:
108
66
24--
18
What is the amount of total capital to support Credit and operational risk:
108--
66
24
18
What is the min Common Equity Tier -1 (CET1) capital to support market risk:
26.58
19--
4.33
3.25
What is the max Additional Tier -1 (AT1) capital to support market risk:
15.53
19--
4.33
3.25
What is the max Tier 2 (T2) capital to support market risk:
26.58
19
4.33
3.25--
What is the amount of total capital to support market risk:
a: 26.58 --
b: 19
c: 4.33
d: 3.25