TREASURY RISK MANAGMENT

TREASURY RISK MANAGMENT

1) Leverage means ability of a business concern:
a) To with stand pressures in the times of crisis
b) To meet its liabilities in time
c) To borrow or build up assets on the basis of given capital d) none of these
2) In case of banks, lev-erage is expressed by:
a) Return on Assets b) Net NPA ratio c) Capital adequacy ratio
d) Capital to outside liabilities e) None of these
3) Treasury deals are normally done over phone or over a dealing screen_ The deal
terms are-con-firmed in writing by
a) Front office b) back office c) middle office d) any of these
4) Delivery versus payment means one account is debited and another is credited:
a) on the same day b) by next day c) at the same time d) none of these
5) lh Treasury Operations, the term 'carry' means
a) Interest cost of funds locked in a trading position
b) Carrying forward the contract to next trading period
c) Carrying forward the settlement to next day d) none of these
6) "Marked to Market" means valuation of trading positions applying
a) Purchase price b) current market value
c) current market value or purchase price whichever is lower d) None of these
7) Mismatch refers to:
a) Difference in interest rates paid and received
b) Difference in sale and purchase price
c) Difference in duration of assets and liabilities d) all of these a) None of these
8) Which of the following is a reason for importance of Treasury risk management
a) Adverse market movements may result in instant losses
b) Treasury transactions are of high value needing relatively low capital
c) Large size of transactions done at the sole discretion of the Treasurer
d) Both (a) & (b) only e) All of these
9) High leverage means:
a) Very low capital requirement
b) Very high capital requirement
c) Very high profits compared to capital
d) Very high productivity e) None of these
10) Which of the following is/are not a conventional tool of management control on a
treasury function
a) Back office which checks all transactions of dealers
b) Exposure limits for counterparties avoiding concentration risk
c) Intra day and overnight ceiling on open positions and stop loss limits
d) Value at risk and duration techniques e) None of these
11) Which of the following is not a function of Back office of a treasury
a) Generating deals i.e. purchase and sale of foreign exchange, securities etc.
b) Settling the trade after verifying internal controls
c) Obtaining independent confirmation of deal from the counterparty
d) Verifying that rates / prices mentioned in the deal slip are conforming to the market
rates at the time of the deal e) None of these
12) Which of the following is responsible for ensuring compliance with various risk limits
imposed by the Management and RBI as well as accuracy and objectivity of the transaction?
a) front office b) back office c) middle office
d) both (a) & (b) only e) All of these
13) Middle office in a treasury is responsible for:
a) Validating deal wise information from accounting point of view
b) Overall risk management and MIS
c) Both (a) & (b) d) None of these
14) Default risk in Treasury means:
a) Failure of the borrowing bank in the call money market to repay the amount on due date to the lending bank
b) Possible failure of the counterparty to the transaction to deliver I settle their part of transaction

c) Both (a) & (b) d) None of these
15) The exposure limits for counterparties are fixed on the basis of counterparty's
a) net worth b) market reputation c) track record
d) size of treasury operations e) all of these
16) The Exposure limits for counterparties are:
a) Vary in relation to period of exposure
b) Remain same irrespective of period
c) Fixed only as per net worth irrespective of period d) none of these
17) In which of the following areas trading limits are not fixed by management?
a) limits on deal size b) limits on open position c) stop loss limits
d) all of these e) None of these
18) Open Position refers to:
a) Trading positions where the buy / sell positions are not matched
b) Trading positions where the securities are bought in the open market
c) Open market operations d) none of these
19) Limit on open positions are fixed because
a) There may be loss if there is adverse movement in rates
b) There is 'carry' cost
c) Both (a) & (b) d) None of these
20) Which of the following is incorrect regarding open position in forex?
a) Position limits are prescribed currency wise as also for aggregate position in Rupees
b) There are separate limits for 'day light' and 'over night' c) None of these


TREASURY RISK MANAGEMENT
1 C 2 C 3 B 4 C 5 A 6 B 7 C 8 E 9 A 10 D
11 A 12 D 13 B 14 C 15 E 16 A 17 E 18 A 19 C 20 C

DERIVATIVE PRODUCTS

1) Under the Treasury operations the derivatives are used:
a) To manage Risk as including ALM Risk.
b) To meet the requirements of corporate customers.
c) For taking trading position in derivative products d) All the above
2) The kinds of Derivatives are:
a) Cross currency derivatives b) Rupee derivatives
c) (a) and (b) both d) All these
3) The features of a Derivative are:
a) It does not have independent value.
b) The value of a Derivative is derived from an underlying market_
c) Derivatives are used in both the financial and commodity markets d) All the above
4) Financial market consists of:
a) Foreign Exchange b) Debt Instruments c) Equities d) All the above
5) Which of the followings are not derivatives?
a) Forward Contract b) Corporate Bonds c) Swaps d) Options
6) Forward contracts are used by:
a) Exporters b) Importers c) Banks d) All of these
7) Derivative is an instrument where:
a) Value is derived from spot prices in an underlying market.
b) Price depends upon future market conditions
e) (a) and (b) both d) None of these
8) A derivative product can be structured based on the following criteria:
a) Risk Appetite b) Size of Transactions
c) Maturity Requirements d) All of these
9) What is an over the counter product?

TREASURY & ASSET LIABILITY.MANAGEMENT MCQs

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

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.

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


Answers

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

TT Rates and Bill Rates

TT Rates and Bill Rates
Following 4 types of buying and selling rates are important:
1. TT Buying rate
2. Bill Buying rate
3. TT Selling rate
4. Bill Selling rate
In Interbank market, exchange rate is quoted up to 4 decimals in multiples of 0.0025. e.g.
1USD=53.5625/5650
For customers the exchange rate is quoted in two decimal places i.e. Rupees and paisa. e.g. 1
USD =Rs. 55.54.
Amount being paid or received will be rounded off to nearest Rupee.
TT Buying Rate
It is required to calculate when our Nostro account is already credited or
being credited without delay e.g. Receipt of DD, MT, TT or collection of
Foreign bills. This rate is used for cancellation of Forward Sales Contract.
Calculation
Spot Rate – Exchange Margin
Bill Buying Rate Bill Buying rate is applied when bank gives INR to the customer before
receipt of Foreign Exchange in the Nostro account i.e. Nostro account is
credited after the purchase transaction. In such cases.
Examples are:
 Export Bills Purchased/Discounted/Negotiated.
 Cheques/DDs purchased by the bank.
Calculation
Spot Rate + Forward Premium (or deduct forward discount) – Exchange
margin.

Foreign Exchange

Foreign Exchange
It includes all Currency, deposits, Credits and Balances payable in Foreign
currency. It also includes Drafts/TCs, LCs and Bills of Exchange payable in
Foreign currency. In nut shell, all claims payable abroad is Foreign
Exchange.
On the other hand, Foreign Currency is narrow term which includes hard
currency say Pounds, Dollars etc.
Forex Market It comprises of individuals and entities including banks across the globe
without geographical boundaries. Forex market is dynamic and it operates
round the clock. Exchange rate of major currencies change after about
every 4 seconds. It opens from Monday to Friday except in Middle east
countries where it is closed on Friday and opens on Saturday and Sunday.
Exchange Rate
mechanism
When settlement of funds and exchange
of currency takes place_________
TOD rate or Cash Rate Same day (it is also called ready rate)
TOM Rate Next working day
Spot Rate 2nd working day (48 hours)
Forward Rate After few days/months
 If Next day or 2nd day is holiday in either of the two countries, the
settlement will take place on next day. For example Spot deal is
stuck on 23rd Dec. 25th is Christmas Day and 26th is Sunday. Under
such circumstances, value date will be 27th i.e. Monday.
 There are two types of rates- Fixed and Floating. Floating rates are
determined by market forces of Demand and Supply. India
switched to Floating exchange rates regime in 1993.
Buy and Sell
Maxim
Buy Low Sell High (Direct Quotations)
Buy rate is also called Bid Rate and Sell Rate is called Offer Rate.
Buy High Sell Low (Indirect Quotations)
 When Local Currency is fixed, bank will like to have more foreign
currency while buying and give less foreign currency while selling.
Forward Rates
(Premium is
always added and
Discount is
always deducted
from Spot Rate to
arrive at Forward
Rate)
It is required when currency is exchanged after few months/days.
Buy Transactions :
Spot Rate (+ ) premium OR ( - ) Discount
( Lower premium is added OR Higher discount is deducted )
Sale Transactions:
Spot Rate (+ )Higher premium OR (-) Lower discount
(So that currency may become cheaper while buying and dearer while
selling
In India, Forward Contracts are available for Maximum period
of 12 Months.

Interest Rate Risk Management

There is complete deregulation of Interest rates on Fixed Deposits, Recurring Deposits, and SB
Deposits above Rs. 1.00 lac. Banks are also free to determine Interest rates on NRE Deposit
accounts. This has led to interest rate Volatility resulting into greater Interest Rate Risk.
Adverse movement of Interest rates has direct impact on NII as well as NIM. Market Interest
rate also has impact on Present Value of Bonds and Securities. 1% rise in market rate of return
will cause lesser valuation of securities. Also 1% fall in interest rate will cause higher valuation
of securities resulting into increase in Mark to Market Price.
Types of Interest Rate Risk
Following are various types of Interest Rate Risk:
1. Mismatch or Gap Risk
This is risk of gap between maturities of Assets and Liabilities. Sometimes, Long term
loans are funded by short term deposits. After maturity of deposits, these liabilities are
get repriced and Gap of Interest rates between Assets and Liabilities may become
narrowed thereby leading to reduction of profits.
2. Basis Risk
Change of Interest rates on Assets and Liabilities may change in different magnitudes
thus creating variation in Net Interest Income. It tries to explain what will be the %age
effect on Earnings due to increase or decrease in interest rates by 1bps.
3. Net Interest Position Risk
If the bank has more assets than the liabilities, 1% decrease in interest rate will result
into less earnings and more expenditure on account of interest. This will directly affect
NII and NIM.
4. Embedded Option Risk
Adverse movement of Interest Rate may result into pre-payment of CC/DL and TL. It
may also result into pre-mature withdrawal of TDs/RDs. This will also result into reduced
NII. This is called Embedded Risk.
5. Yield Curve Risk
Yield is Internal Rate of Return on Securities. Higher Interest Rate scenario will reduce
Yield and thereby reduction in the value of assets. Adverse movement of yield will
certainly affect NII (Net Interest Income).
6. Price Risk
In financial market, when assets are sold before maturity in order to meet liquidity
requirements, loss may occur due to lower selling price.
7. Re-investment Risk
It is uncertainty with regard to interest rate at which future cash flows could be reinvested.
Effects of Interest Rate Risk
Effect on Earnings.
Effect on Economic value of share
Embedded Losses

Liquidity Management

Banks are required to honour withdrawals from Deposits. Also the banks are supposed to
disburse loans in time. Liquidity is needed to meet both these requirements. In other words,
liquidity is the ability to accommodate decrease in liability as well as funding of increase in
assets.
Functions of Liquidity Management:
1. It defines market place of bank.
2. It enables banks to meet prior loan commitments.
3. It enables the banks to avoid unprofitable sale of assets.
4. It lowers size of default risk premium.
Liquidity Mismanage may lead to the following:
 It declines earnings.
 It increases NPAs.
 It results in downgrading of rating.
Factors affecting Liquidity
Liquidity is affected by the following:
1. Less profits leads to less liquidity
2. Rise in NPAs means less liquidity
3. Deposit concentration in Term Deposits may lead to less liquidity
4. More taxes means less liquidity.
Types of Liquidity Risks
1. Funding Risk: Decrease in deposits due of bad reputation or loss of confidence.
2. Time Risk:Instalments of loan are not forthcoming in time.
3. Call Risk: Non-fund based credit facilities converted into Fund based. Crystallization of
Contingent liabilities like LC/LG turning into Fund Based Loans.
4. Embedded Risk: Adverse movement of Interest Rate may result into pre-payment of
CC/DL and TL. It may also result into pre-mature withdrawal of TDs/RDs. This will also
result into reduced NII. This is called Embedded Risk.
How to manage Liquidity Risk?
1. Developing an organizational structure.
2. Setting of Tolerance level limits.
 Limit of cash flow mismatches for tomorrow, next week, next month or next year.
 Limit of Loan to Deposit Ratio
 Limit of Loan to Capital ratio.
Mismatch level in 1-14 days bucket and 15-88 days bucket should remain about 80% of cash
flow in the particular period. To manage liquidity and remain solvent by maintaining short term
gap up to 1 year should be around 15% .
Measurement of Liquidity Risks: Liquidity Risk can be measured in any of the two ways:
1. Stock Approach
2. Flow Approach

Provisioning related numericals

 Provisioning related numericals
Ex. 1
Account with Outstanding of Rs. 10.00 lac became Out of order on 22.1.11 and it became NPA
on 22.4.2011. The Value of Security at later stage is Rs. 7.00 lac. Calculate Provision as on
31.3.12.
Solution
It is a Sub-Standard Asset as on 31.3.2012.
Provision is 1000000*15/100 = 150000/-
Ex. 2
A loan account with outstanding of Rs. 10.00 lac and Value of Security Rs. 6.00 lac was Substandard
as on 30.3.2008. What will be provision as on 31.3.2012?
Solution
The account will be Doubtful (DI) on 30.3.2009, D2 on 30.9.2010, D3 on 30.3.2012. Provision
will as under:
Secured portion = 6.00*100/100 = 6.00 lac
Un-secured portion = 4.00*100/100 = 4.00 lac
Total Provision = 6+4 = 10.00 lac.
Ex. 3
A loan became Doubtful on 12.2.2009. The outstanding is 6.00 lac. What will be provision on
31.3.2012.
Solution
The Account will be categorized as Doubtful (D3) as on 12.2.2012. Provision is 100% of 6.00 lac
= 6.00 lac

lac
97
Ex. 4
D2 category account has outstanding--10.00 lac, DI/SI ----2.00 lac, Value of security ---6.00 lac
Solution
Un- Secured portion = 10-2-6 = 2.00 lac Provision = 2.00 * 100/100 = 2.00 lac
Secured portion = 6.00 * 40/100 = 2.40 lac
Total provision = 2.00 + 2.40 = 4.40 lac
Ex. 5
D2 Category loan is having outstanding 4.00 lac, Value of Security 1.50 lac and ECGC cover
50%. Calculate provision as on 31.3.2012.
Solution
Unsecured portion = 50% of (O/s – VS) = 50% (4.00 – 1.50) = 1.25 lac
Secured portion = 1.50 lac
Provision on Unsecured portion = 1.25*100/100 = 1.25 lac
Provision on Secured portion = 1.50*40/100 = 0.60 lac
Total provision = 1.25 +0.60 = 1.85 lac.
Ex. 6
A D2 category loan is having outstanding Rs. 6.00 lac. The Collateral Security is Rs. 3.00 lac
and Primary Security is Rs. 2.00 lac. There is also Guarantee of Rs. 10.00 lac. Calculate
provision.
Solution
Unsecured portion = O/s – Primary Security – Collateral = 6.00 – 2.00 -3.00 = 1.00 lac
Secured portion = 2.00 + 3.00 = 5.00 lac.
Provision on Unsecured portion = 1.00 *100/100 = 1.00 lac
Provision on Secured portion = 5.00*40/100 = 2.00 lac
Total provision = 1.00 + 2.00 = 3.00 lac.
Ex. 7
Advance portfolio of a bank is as under:
Total advances = 40000 crore, Gross NPAs = 9%, Net NPAs = 2%
Find out 1) Total Provision 2) Provisioning Coverage Ratio
Solution
NPAs = Total Advances *9/100 = 40000*9/100 = 3600 crore
Standard Assets = 40000-3600 = 36400 crore
Provision on Standard Assets = 36400*0.40% = 145.60 crore
Provision on NPAs = 9% - 2% = 7% = 40000*7/100 = 2800 crore
1) Total provision = 145.60 + 2800 = 2945.60 crore
Gross NPAs = 40000*9/100 = 3600 crore
Net NPAs = 40000*2/100 = 800 crore
2) Provision Coverage Ratio = Provision on NPAs / Gross NPAs = 2800/3600 = 77%.
Ex. 7 Account becomes doubtful on 12th Feb 2008. The Balance is Rs. 6 lac. Value of security is
3 lac. What will be the provision on 31.3.2011?
Solution
 It is D3 Type of account.
 Therefore, provision will be 100% i.e. 6 lac = 6.00 lac Ans.

Ex. 8 NPA o/s : Rs. 10 lac including suspended interest/Derecognized interest Rs. 2 lac.
Security value is Rs. 6 lac. It became NPA on 25th Feb 2008. What would be the provision on
31.3.2011.
 It is D2 category account
 4.40 LAC (10-2-6= 2x100%= 2 lac + 40% on 6 lac ie 2.40 lac = 4.40 lac) D2
Ex. 9 A/c became NPA on 2nd January 2008. Balance o/s is 10 lac including Derecognized
interest Rs. 2 lac and ECGC cover of 50%. Value of security is 4 lac. What will be provision on
31.3.2009.
 It is D1 category account.
 10 lac – 2 lac, DI – 4 lac Sec. = 4 lac
 ECGC Cover: 4 lac x 50% = 2 lac
Provision on Unsecured portion
 Unsecured: 4 lac – 2 lac = 2 lac x100% = 2.00 lac
Provision on Secured portion
 Secured: 4 lac x 25% = 1.00 lac
 Total Provision: 2 + 1 = 3.00 lac

Today Forex for individual recollected questions

Forex for individual
LRS
CN BUYING NUMERICAL
TT BUY / SELLING DEF
INDO NEPAL REMITTANCE
CDF FORM
MTSS NO IN YR
NRE NOMINATION
NRO PERMIT DEBIT
RFC D ACCOUNT
EMIGRATION AMT LIMIT
LIBIYA 5000 USD
BILL BUYING NUMERIC
FEMA SCHED 3
KYC 4 SIMPLIFIED MEASURE

NOTE CARRYING PERMISSION TO BHUTAN
IMMOVABLE PROERTY CANNOT BE BUY BY WHOM
AGENT PAYMENT TO REAL ESTATE COMMISSION MAXIM
HOW NEPALI CAN INVEST IN INDIAN SHARE
FCRA PURPOSE

FCNR TO NRE NUMERIC
INT PAYMENT IN PREMATURE FCNR WITHDRAWAL
NOMINATION IN NRE
DIPLOMAT RESIDENT IN INDIA SINCE 3 YR WHICH ACCOUNT TO OPEN
EEFC FOR STARTUP
P and I club permission
CULUTURAL GROUP PERMISSION FROM WHICH MIISTRY
FORM A 2 PURPOSE
LOAN CONDITION TO NRI FROM CLOSE RELATIVE
WHO ARE CLOSE RELATIVE
FOREX WHEN TO BUY BEFORE TRAVELLING
SURRENDER TIME OF FOREX
HONARAIUM RCVED CAN BE DEPOSIT IN WHICH AC

Foreign exhange facilities for individuals

1. 7 exchange rate calculation numericals of 2 marks each.. mostly tt selling and buying rate for DD issue, nostro settelment, nre to fcnr b conversion
2. Approx 12 questions on nre, nro and EEFC account.. through knowledge is required.
3. Ad1 and ad2 category dealers
4.resident joint savings account with nri will be treated as ? And mode of operation will be ?

5. Transfer limit of funds in foreign currency for accompanying relative facing medical emergency per fy
6. Capital account and current account transactions
7. How much money can given to a consultant as commission for sale of property in india by an nri and outside india by a resident
8. Can nro/nre funds be used to purchase property in India ?
9.if nri/PIO s close relative dies in India then how much funds can he transfer from proceeds if sale of assets in India

10. When NRI becomes Indian resident what happens to his nro account ?

11. If an employee gets shares under ESOP outside India then after selling shares should he immediately transfer funds to india or not.

12. Is interest given for sat n sunday if renewal of fcnr deposit lies on sat/sun - 3 questions with variations if savings interest will be given or no interest will be given or full interest on maturity amount from date of maturity/renewal to be given.

Treasury and ALM

Treasury and ALM:
ALM refers to risk management to avoid mismanagement between Assets and Liabilities. The
risk of Liquidity and Interest rates, if not controlled may result into negative spread and can
cause loss to bank. Therefore ALM manages two risks : 1. Liquidity Risk & 2. Interest Rate Risk.
Liquidity Risk and Interest Rate Risk
We borrow from Money market and invest in 5 year G-securities. If Bond prices come down, we
are not willing to sell the bond, but loan has to be repaid. This may lead to shortage of funds
which is called Liquidity Risk.
Liquidity Risk is translated into Interest Rate Risk when funds have to be arranged at higher
rate. Mismatch between Assets and Liabilities also lead to Interest Rate Risk.
Role of ALM to mitigate Liquidity Risk
Liquidity Gap arises when there is difference between souses and uses of funds. RBI has
prescribed Time bands to measure Liquidity Gaps. These are
1-14 days.
14-29 days
1M – 3M
ALM measures the gap between Uses and Sources between above said Time bands.
RBI has also prescribed limits of maximum negative mismatch as under:
Next Day -------5%
2-7 Days------10%
8-14 Days—-15%
15-28 Days--20%
ALM takes steps to meet shortfall as a contingent measure at a reasonable rate.
Interest rate Gap leads to erosion of NII (Net Interest Income) due to difference between
earnings and payments.
ALM has the following role to play:
 Treasury establishes a link between Core banking and market operations to manage
risks.
 Treasury earns profits by managing funds out of mismatches.
 Treasury hedges residual risk in Forex market.
 Treasury monitors exchange rates and interest rate movements in the market.
Use of Derivatives in ALM
Derivatives are used to hedge high value individual transactions.
For Example: Medium Term Loan of 3 Years is funded by Deposit of 3M because 3M deposit is
cheaper and NII is increased.
 Bank may swap 3M interest rate into fixed rate into Fixed rate for 3 years.Bank may also
swap Fixed interest rate on loan into floating rate linked to T-bill rate. If 3M deposit rate
is T+1% and 3Year interest rate on loan is T+3%, there will be NII@2%.

 Bank may arbitrage Forex. It can buy USD funds at cheaper rate (say 3%) and invest in
rupee loan at 6.5%. The spread can be 3.5%
Risks of Derivatives: Derivatives are not free from risks. Tworisks involved in Derivatives are:
1. Residual risk i.e. basis risk.
2. Embedded Option Risk :There are embedded options in certain bank products. E.g. FD
is paid premature or TL is pre-paid. It affects the ALM policy if pre-mature payments are
large.
Treasury and Credit Risk
There are chances of failure on the part of counter party to meet its obligations especially when
Treasury deals in:
1. Debt Market products such as CPs, Bonds, Debentures etc.
2. Securitization of Credit Receivables – when credit receivables are converted into Units
or Bonds which are called PTCs ( Pass-through certificate).
3. SPV –Special Purpose Vehicle enables the banks to securitize the Mortgage loans
Credit Derivatives
1. Credit Default Swaps
2. Total Returns Swap
3. Credit Linked Notes
Transfer Pricing
It is important function of ALM. It relates to:
 Fixing cost of recourses and return on Assets.
 ALM notionally buys and sells deposits and loans of the bank.
 Price is paid for buying deposits and price is received for selling loans. This is called
Transfer Pricing.
 The prices vary according to the tenure or maturity of deposits and loans.
 Deposits are bought by Treasury at a rate arrived at by adjusting hedging cost from rate
of deposit. If bank accepts deposits%7% and cost of hedging is 1%, the deposits will be
bought by Treasury @6%.
 Loans are sold to Treasury at transfer cost. For example, 10% loan may be notionally
sold to Treasury @7%. The balance is denoted as Risk premium.
 Treasury Division, after implementing the Transfer Pricing takes care of Liquidity Risk
and Interest rate risk.

Derivative Products Treasury management

Derivative Products Treasury management
Derivative Products
Derivatives don’t have independent value. Their value is derived from the underlying market.
The market may be financial market dealing in forex, bonds and equities as well as commodity
market dealing with underlying commodities like Gold, Silver etc.
Derivatives refer to Future Price based on Spot Market. Two types of Products are as under:
1. OTC Products
These are Over The Counter products which include Forward Contracts and Options.
These are offered by FIs. These derivatives offer contracts with date, amount of terms
fixed as per requirement of the client. Price is quoted by banks/FIs after adding margin.
Settlement is made by physical delivery. Counterparty Risk is always present.
2. Exchange Traded products
These include Futures traded on organized exchanges. Size of the contract is
standardized. Price is transparent. The exchanges collect margin based on Mark to
Market price. Physical delivery is not must. There is no counter party risk.
Types of Derivatives
1. Forward Contracts
2. Futures
3. Options
4. Interest Rate Swaps
5. Currency Swaps
Forward Contracts
It is a deal to buy or sell Shares, Commodity or Foreign Exchange at a contracted rate with
desired maturity. Forward rate is the interest rate differentiation of two currencies. If Interest
rate is high in a country, its currency will be cheaper.
Futures
It is Exchange traded product. The seller agrees to deliver a specified security, currency or
commodity on specified date at a fixed price. Currency Futures are traded in EURO, GBP, JPY,
CHF, AUD& CAD.
Forward Contract Futures
It is OTC (Over the Counter) Product It is Exchange traded product
It can be for any odd amount It is always for Standard amount
It can be for any Odd period It is always for Standard period
Delivery is essential Delivery is not must
Margin is not essential It is based on Margin requirement and
Marked to market

Types of Risks Risk mangement

Types of Risks
1. Liquidity Risk
It is inability to obtain funds at reasonable rates for meeting Cash flow obligations.
Liquidity Risk is of following types:
Funding Risk: It is risk of unanticipated withdrawals and non-renewal of FDs which
are raw material for Fund based facilities.
Time Risk: It is risk of non-receipt of expected inflows from loans in time due to
high rate NPAs which will create liquidity crisis.
Call Risk: It is risk of crystallization of contingent liabilities.
2. Interest Rate Risk
Risk of loss due to adverse movement of interest rates. Interest rate risk is of
following types:
Gap or Mismatch Risk: The risk of Gap between maturities of Assets and
Liabilities. Sometimes, Long term loans are funded by short term deposits. After
maturity of deposits, these liabilities are get repriced and Gap of Interest rates
between Assets and Liabilities may become narrowed thereby reduction of profits.
Basis Risks: Change of Interest rates on Assets and Liabilities may change in
different magnitudes thus creating variation in Net Interest Income.
Yield Curve Risk: Yield is Internal Rate of Return on Securities. Higher Interest
Rate scenario will reduce Yield and thereby reduction in the value of assets.
Adverse movement of yield will certainly affect NII (Net Interest Income).
Embedded Option Risk : Adverse movement of Interest Rate may result into prepayment
of CC/DL and TL. It may also result into pre-mature withdrawal of
TDs/RDs. This will also result into reduced NII. This is called Embedded Risk.
Re-investment Risk: It is uncertainty with regard to interest rate at which future
cash flows could be re-invested.

EXIM BANK

Exim Bank – its
functions
Exim Bank (Export/Import Bank) was established in 1981 with the objective
of financing Import Export Trade especially on Long term basis. The
functions of Exim bank are as under:
 Offering Finance for Exports at competitive rates.
 Developing alternate financial solution
 Data and Information about new export opportunities.
 Respond to export problems and pursue Policy solutions.
The finance activities of Exim bank consist of :
1. Arranging Suppliers‟ credit and Buyers‟ credit
2. Consultancy and Technical services for exporters
3. Pre-shipment credit – over 6 months
4. Setting up of EOU in EPZ (Export Processing Zones)
5. Finance for DTA (Domestic Tariff Area) units exporting minimum
25% of annual sales.
6. Finance for Import of Computer System and Development of
Software. Plant and Machinery and Technical up-gradations etc.
7. Services for Overseas Investments.
8. Line of Credit to exporters on the basis of which they receive export
orders.
EXIM Bank performs following functions for Commercial Banks:
 Export Bills Rediscounting – Usance period should not exceed 180
days.
 SSI Export Bills Rediscounting.
 Refinance of Export credit
 Refinance of TL to EOU, Software Capital goods up to 100%
 Participates with banks in Issuance of Guarantees.
Besides above, the EXIM bank arranges Relending facilities for Overseas
Banks, sanctions direct credit to foreign importers and arranges line of
credit for foreign importers.
DPG (Deferred
Payment
Guarantees
It is normally beyond 6M and meant for SHE (Status Holder Exporters)
only.
Banks can approve proposals up to 25 crore.
Above 25 crore up to 100 crore are referred to EXIM bank.
Above 100 crore proposals will be considered by Inter institutional Working
Group consisting of members from RBI, FEDAI, ECGC and EXIM.
Other services
of EXIM bank
Besides above, the EXIM bank provides assistance for :
1. Project Exports – export of Engineering goods on Deferred Payment
terms
2. Turnkey Projects- supply of equipment along with related services
like design, detailed engineering etc.
3. Construction Projects
4. Funded facilities.
EXIM Bank is nodal agency designated by GOI to manage Export
Marketing Fund (EMF) which consists of loan made available to India by
World bank to promote International Trade.

FOREIGN TRADE RISKS AND ECGC

Risks in
International
Trade
Foreign trade risk may be defined as Uncertainty or Unplanned events with
financial consequences resulting into loss. Types of Risks are as under:
1. Buyers‟ Risk: Non-Acceptance or non-payment
2. Sellers‟ Risk: Non- shipping or Shipping of poor quality goods or
delay.
3. Shipping Risk: Mishandling, Goods siphoned off, Strike by potters or
wrong delivery.
4. Other Risks:
- Credit Risk
- Legal Risk
- Country Risk
- Operational Risk
- Exchange Risk
5. Country Risk
Provision of risk is made if Exposure to one country is 1% or more of total
assets. ECGC has the list of Country Risk Ratings which can be referred to
by the Banks and the banks can make their own country risk policy.
Risk
Classification
of Countries
Export Credit and Guarantee Corporation provides guarantee cover for risks
which can be availed by the banks after making payment of Premium.
ECGC adopts 7 fold classification covering 204 countries. The list is updated
and published on quarterly basis. The latest classification is as under:
1. Insignificant Risks A1
2. Low Risk A2
3. Moderately Low Risk B1
4. Moderate Risk B2
5. Moderately High Risk C1
6. High Risk C2
7. Very High Risk D
Besides above, 20 countries have been placed in “Restricted Cover
Group-1” where revolving limits are approved by ECGC and these are valid
for 1 year.
The other 13 countries are placed in “Restricted Cover Group-2” where
specific approval is given on case to case basis by ECGC.


ECGC _ Export
Credit and
Guarantee
Corporation
ECGC was established in 1964. Export Credit and Guarantee Corporation
provides guarantee cover for risks which can be availed by the banks after
making payment of Premium. Its activities are governed by IRDA.
The functions of ECGC are 3 fold:
1. It rates the different countries.
2. It issues Insurance Policies.
3. It guarantees proceeds of Exports.
Types of Policies:
1. Standard Policies
It provides cover for exporters for short term exports. These cover
Commercial and Political Risks. The different types of Policies are:
- Shipment (Comprehensive Risk) Policy – to cover
commercial and political risks from date of shipment. Default
of 4 months.
- Shipment (Political Risks) Policy.
- Contracts (Comprehensive Risk) Policy for both commercial
and Political risks.
- Contracts (Political Risks) Policy
2. Small Exporters’ policy
A small exporter is defined whose anticipated total export turnover
for the period of 12 M is not more than 50 lac. The policy is issued
to cover shipments 24 M ahead.
The policy provides cover against Commercial risks and Political
risks covering insolvency of the buyer , failure of the borrower to
make payment due within 2 months from due date, borrower‟s failure
to accept the goods due to no fault of exporter.
3. Specific Shipment Policy
Commercial risks – Failure to pay within 4M. It covers short term
credit not exceeding 180 days.
4. Exports Specific Buyer Policy
Commercial risks – Failure to pay within 4M and Political Risks
The other Policies are Exports (specific buyers‟ Policy), Buyers‟ Exposure
Policy, Export Turnover Policy (exporters who pay minimum 10 lac premium
to ECGC are eligible) and Consignment export Policy.
Financial
Guarantees
ECGC issues following types of Guarantees for the benefit of Exporters:
Packing Credit Insurance
ECIB (WT-PC) – Exporters Credit Insurance for Banks (whole Turnover
Packing Credit)
This policy is issued to banks to guarantee export risks:
- For all exporters
- Minimum 25 accounts should be there.
- Minimum assured premium is Rs. 5.00 lac.
- Period of cover is 12M.
- The claim is payable if there is default of 4 Months.
- Premium for fresh covers is 8 paisa per month and for others is 6-9.5
paisa percent per month. It is calculated on average outstanding.
- Percentage of cover ranges from 50-75%
- If due date of export proceeds is extended beyond 360 days,
approval of ECGC is required.
- Claim is to be filed within 6M of report of default to ECGC.

IMPORTS

Imports – Prerequisites
AD1 banks are to ensure that Imports are in accordance with:
 Exim Policy
 RBI Guidelines
 FEMA Rules
 Goods are as per OGL (Open General list).
 Importer is having IEC (Import Export Code) issued by DGFT.
Imports
Formalities &
Time limit for
import payment
The following are essential elements of Imports:
1. An importer before remitting proceeds exceeding USD 5000 must
submit application on Form A-1 to the Authorized Dealer.
2. AD banks can issue LC on the basis of License and Exchange
Control Copy.
Remittance against exports should be completed within 6 months from
date of shipment.
 Any delay beyond 6 months will be treated as Deferred
Payment arrangement and the same will be treated as
Trade Credit up to the period less than 3 years.

Pre-shipment & Post-shipment Finance

Pre-shipment & Post-shipment Finance
Q. 1
Received order of USD 50000(CIF) to Australia on 1.1.11 when USD/INR Bill Buying Rate is
43.50. How much pre-shipment finance will be released considering profit margin of 10% and
Insurance and freight cost@ 12%. Contribution from borrower is 25%.
Solution
FOB Value = CIF – Insurance and Freight – Profit (Calculation at Bill Buying Rate on 1.1.11)
= 50000X43.5 = 2175000 – 261000(12%) – 191400(10% of 1914000) = 1722600
Pre-shipment Finance = FOB value - 25% (Margin) = 1722600-430650=1291950.Ans.
Q. 2
What will be amount of Post-shipment Finance under Foreign Bill Purchased for USD 45000
when Bill Buying rate on 31.3.11 (date of submission of Export documents) is 43.85
Solution
45000X43.85 = 1973250 Ans.
Q. 3
Period for which concessional Rate of Interest is charged on DP bills from date of purchase.
Solution
25 days.Ans.
Q. 4 If the above said bill remains overdue for 2 months, what will be date of crystallization?
Due Date of Bill will be 31.3.11 + 25 days = 25.4.2011
The bill will be crystallized on 24.5.2011 i.e. on 30th day from due date. Ans.
Q. 5
On 8th Sep, an exporter tenders a demand bill for USD 100000 drawn on New York. The
USD/INR quote is as under:
Spot---------USD 1 =34.3000/3500
Spot Sep-------------------6000/7000
Spot Oct--------------------8000/9000
Spot Nov------------------10000/11000
Transit Period is 20 days and Exchange margin 0.15%
Calculate Rupee payable to the customer. Customer wants to retain 15% in Dollars
Interest @13% has to be charged on INR liability of the customer.
Solution
Since, the currency is at premium, the transit period will be rounded off to the lower month
(i.e. NIL). And the rate to the customer will be based on Spot Rate. If interest rate is 13%, how
much interest will be recovered from the Exporter
Spot Buying rate = 34.3000
Less Exchange Margin = 0.0515
34.2485 or 34.25 per dollar.
Amount in Indian Rupee = 85000(85% of 100000) x 34.25 = 2911250/-
Interest will be charged on 2911250/- @ 13% for 20 days = 20738/-.

Q. 6
On 26th Aug, an exporter tenders for purchase a bill payable 60 days from sight and drawn on
New York for USD 25650. The dollar rupee rate is as under:
Spot----------------------1USD = 34.6525/6850
Spot Sep--------------------------------1500/1400
Spot Oct---------------------------------2800/2700
Spot Nov--------------------------------4200/4100
Spot Dec--------------------------------5600/5500
Exchange Margin is 0.15%, Transit Period is 20 days. Rate of Interest is 13%. An amount of Rs.
500/- on account of Out of Pocket expenses has to be charged.
What will be the exchange rate payable to the customer and Rupee amount payable?
Solution
Notional due Date = 20+60 days from 26th Aug i.e. 14th Nov. Since, the currency is at discount,
the period will be rounded off to the same month). Obviously, the discount of Nov will be more
and it will make the Buy Rate Lower.
Dollar/Rupee market spot Buying Rate = 34.6525
Less Discount for August to November = 0.4200
34.2325
Less Exchange Margin @.15% .0513
= 34.1812
Rupee Amount payable to exporter = 25650 X 34.18 = 876717-00
Less Interest for 80 days @ 13% = 24980-00
Less out of pocket expenses = 500-00

EXPORTS

RBI and DGFT
RBI controls Foreign Exchange and DGFT (Directorate General of Foreign
Trade) controls Foreign Trade. Exim Policy as framed in accordance with
FEMA is implemented by DGFT. DGFT functions under direct control of
Ministry of Commerce and Industry. It regulates Imports and Exports
through EXIM Policy.
On the other hand, RBI keeps Forex Reserves, Finances Export trade and
Regulates exchange control. Receipts and Payments of Forex are also
handled by RBI.
IEC - Importer
Exporter Code
One has to apply for IEC to become eligible for Imports and Exports. DGFT
allots IEC to Exporters and Importers in accordance with RBI guidelines
and FEMA regulations. EXIM Policy is also considered before allotting IEC.
Export
Declaration
Form
All exports (physically or otherwise) shall be declared in the following Form.
1. GR form--- meant for exports made otherwise than by post.
2. PP Form---meant for exports by post parcel.
3. Softex form---meant for export of software.
4. SDF (Statutory Declaration Form)----replaced GR form in order to
submit declaration electronically.
SDF is submitted in duplicate with Custom Commissioned who puts its
stamp and hands over the same to exporter marked “Exchange Control
Copy” for submission thereof to AD.
Exemptions
 Up to USD 25000 (value) – Goods or services as declared by the
exporter.
 Trade Samples, Personal effects and Central Govt. goods.
 Gift items having value up to Rs. 5.00 lac.
 Goods with value not exceeding USD 1000 value to Myanmar.
 Goods imported free of cost for re-export.
 Goods sent for testing.
ADs may consider waiver for export of goods free of cost for export
promotion up to 2% of average annual exports of previous 3 years subject
to ceiling of Rs. 5.00 lac. The limit is Rs. 10.00 lac for Status Holder
Exporters.
Prescribed Time
limits
The time norms for export trade are as under:
 Submission of documents with “Exchange Control Copy” to AD
within 21 days from date of shipment.
 Time period for realization of Export proceeds is has been reduced
to 9M for all types of exports including exports to SEZ (Special
economic zones), SHE(Status Holder Exporters) and 100%EOUs.
Previously, the time period was 12Months for SEZs and SHEs.
 For, Exports to Warehouse established outside India, as soon as it
is realized and in any case within fifteen months from the date of
shipment of goods
 After expiry of time limit, extension is sought by Exporter on ETX
Form. The AD can extend the period by 6M.
However, reporting will be made to RBI on XOS Form on half yearly basis

in respect of all overdue bills which remained outstanding for more than
prescribed period or the bills which are overdue
Direct Dispatch
of Shipping
Documents
AD banks may handle direct dispatch of shipping documents provided
export proceeds are up to USD 1 Million and the exporter is regular
customer of at least 6 months.
Advance
Payments
Exporters may receive advance payments from their overseas importers
provided:
 Shipment is made within 1 year from receipt of advance.
 Rate of interest payable should not exceed LIBOR+100 bps.
 Documents are routed through AD from which advance was routed.
Prescribed
Method of
payment and
Reduction in
export proceeds
Exporter will receive payment though any of the following mode:
 Bank Drafts, TC, Currency, FCNR/NRE deposits, International
Credit Card. But the proceeds can be in Indian Rupees from Nepal
and Bhutan.
 Export proceeds from ACU countries can be settled in ACU/EURO
or ACU/Dollar. A separate Dollar/Euro account is maintained which
is denominated as ACU Dollar or ACU EURO.
ACU – Asian Clearing Union was formed in Tehran, Iran in 1974 and it
comprises of following 9 countries as members.
India, Bangladesh, Bhutan, Myanmar, Iran, Pak, Srilanka, Nepal and
Maldives.
Exporters may be allowed to reduce the export proceeds with the following:
 Reduction in Invoice value on account of discount for pre-payment
of Usance bills (maximum 25%)
 Agency commission on exports.
 Claims against exports.
 Write off the unrecoverable export dues up to maximum limit of 10%
of export value.
The proceeds of exports can be got deposited by exporter in any of the
following account:
1. Overseas Foreign Currency account.
2. Diamond Dollar account.
3. EEFC (Exchange Earners Foreign Currency account)
DDA _ diamond

LETTER OF CREDIT

Documentary
Letters of Credit
(LC)
LC is a document:
 Issued by Buyer‟s bank at his request.
 Carrying undertaking to pay to the seller
 Upon presentation of documents evidencing shipping of goods.
 In compliance with terms and conditions.
ILC is Inland Letter of Credit and FLC is Foreign Letter of Credit. The
parties to LC are as under:
Applicant Buyer or Importer
Beneficiary Seller or Exporter
Issuing Bank It is opening Bank which ultimately pays on
behalf of importer in the Importer‟s country.
Advising Bank or
Notifying Bank
Bank in Exporter Country through which LC is
advised. It acts as agent
Negotiating Bank
or Nominated Bank
Bank in Exporter Country which makes payment
to exporter or accepts Bill of Exchange.
Confirming Bank In Exporter‟s country. It may be advising bank
also if it adds confirmation. This bank will be
responsible for default, if any.
Reimbursing Bank The bank which reimburses the negotiating
bank. (Usually, it is the bank having Nostro
account of Opening Bank.

UCP– 600
Uniform Custom
and Practice of
Documentary
Credit

CORRESPONDENT BANKING Caiib

Correspondent Banking
It is a relationship between two banks which have mutual accounts with
each other:
Nostro accounts “ Our account with you “
E.g. SBI Mumbai maintaining USD account with City Bank, New York
Vostro accounts “Your account with us”
E.g.. City Bank New York maintains Rupee account with SBI Ludhiana.
Loro account“His account with them”
E.g. City bank referring to Rupee account of Bank of America with SBI
Mumbai.
Mirror account---- It is replica ofNostro account to reconcile.
What is Swift?
Society for Worldwide Interbank Financial Telecommunications. There are
8300 members of the society. Financial messages are sent through Swift.
The messages are automatically authenticated through BKE (Bilateral Key
Exchange). It is operational 24 hours and 365 days. Swift has now
introduced new system of authentication system wherein banks are
required to have authentication key exchanged between them through a set
format by use of RMA (Relationship Management Application). This is
called BIC or Bank Identifier Code).
CHIPS – New York
Clearing House Inter Bank Payment System.
CHIPS is major payment system in USA with 48 members. The participants
use the system throughout the day for sending and receiving electronic
payment instructions. These are netted at end of the day and net position is
debited or credited to Nostro account of Federal Reserve.
It is used for Foreign Exchange Inter bank settlements and Euro Dollar
Settlements.
FEDWIRE -USA
It is US payment system being operated by Federal Reserve Bank. It
handles majority of domestic payments. All US banks maintain account with
Federal Reserve Bank and are allotted ABA numbers to identify senders
and receivers of payments.
CHAPS – London
Clearing House Automated Payment System
It is UK based Settlement System. It handles receipts and Payments in UK.
It has 16 member banks and 400 Indirect members.
TARGET
The full form of TARGET is Trans-European Automated Real-Time Gross
Settlement Express Transfer System. It is Euro Payment System which
comprises of 15 national RTGS systems working in EUROPE. It process
high value payments from 30000 participating institutions across Europe.
RTGS-plus
RTGS plus has over 60 participants. It is a German Hybrid clearing system
and operating as a European oriented RTGS and Payment system.
RTGS & NEFT in India
Real Time Gross Settlement is a payment system for Interbank transfer

with minimum Rs. 2.00 lac. This system is managed by IDRBT, Hyderabad,
which connects all banks to Central server maintained by RBI. The network
is INFINET (Indian Financial Network)
Timings are:
8:00AM to 8:00PM (Saturday: 8:00 to 3:30 PM)
NEFT (National Electronic Fund Transfer) is mainly used for low amount
transactions. However, there is no minimum and maximum limit. The
timings are: 8:00AM to 7:00PM (Saturday 8:00 to 1:00 PM). There are 12
batches daily except Saturday with 6 batches. The time period is B+2.
Who is Resident
Indian? Who is
Non- Resident
A person who resides in India for more than 182 days during preceding
financial year is Resident Indian. A person who is not resident is Non-
Resident.
Who is NRI? A person who is citizen of India but resides outside India owing to:
 Employment, Business, vocation-------indicating indefinite period of
stay outside.
 Work abroad on assignment with Foreign Govt., UNO, and IMF etc.
 Deputation officially.
 Study abroad.
PIO - Persons of
Indian Origin
PIO is a person who is citizen of any other country, but he at any time:
 Held Indian Passport
 He or his grand-parents or grand grand parents were Indian citizens
by virtue of constitution of India or under Indian Citizenship Act.
 The person is spouse of Indian Citizen.
OCB – Overseas
Corporate
Bodies
OCBs are firms, Cos, Society owned directly or indirectly to the extent of atleast
60% by NRIs.
It also includes overseas trusts where at-least 60% irrevocable beneficial
interest is held by non-residents directly or indirectly.
NRE Deposit
Accounts
Only non-resident Indians can open following NRE accounts with banks:
 Fixed Deposits & Recurring Deposits
 SB and CA Deposits
The other features are:
 Deposits are held in Indian currency.
 The Principal and Interest both can be repatriated.
 Account holder bears the risk of fluctuations in currency rates.
 Account will be opened with proceeds from abroad.
 Funds originating in India cannot be deposited.
 Interest rates Have since been deregulated by RBI..
 No lien is permitted to be marked against SB deposits.
 Joint account with Indians can be opened as Former or
Survivor.
 Cheque book and IBS allowed.
 Nomination in favor of NRI/Resident Indian allowed.
 Interest Income is exempt from Income Tax, Gift Tax or Wealth Tax.
 TOD allowed up to Rs. 50000/- for maximum 2 weeks.
 Account can be operated in India through mandate also.
 Loans against FDR to 3rd parties allowed provided NRI is personally
present for documentation.

Caiib materials

Caiib materials

https://drive.google.com/file/d/1xUWB_vZwOuUslbE8GcqVyGJRaC-hbIf_/view?usp=sharing


https://drive.google.com/file/d/1MWMwiFjzuzEpoV2xDz4iuDmj_B4GzGUF/view?usp=sharing


https://drive.google.com/file/d/1spdCrDQZewRC_Ma67z1s11zocUXyrk1_/view?usp=sharing


https://drive.google.com/file/d/1LNsDr9k4usMSH5g_RoHibp-v3YiSaZXA/view?usp=sharing


https://drive.google.com/file/d/1I6wbwggy140-8wGw9qXV4i6Va0PUi5yU/view?usp=sharing


https://drive.google.com/file/d/1bZ3T-cuSXTWXGVjwo-ap4JtTpyD64hKg/view?usp=sharing


https://drive.google.com/file/d/1BtkVyjuWWUx8JHMDe2Pc56eToadGRE0a/view?usp=sharing