Most important AFB recollected

MOST IMPORTANT AFB Recollected::

1. Preference share option related voting rights were given

2. Foreign exchange dollar hkd and rupees cross currency was asked in rs

3. Eosp when it is issued or employees has buy predermined rates

4. Depreciation wdv 2 questions and sum of years 1

5. Error of principle

6. Gold loan rules for sanctioning

7. Bond volatility

8. spot rate meaning

9. Value date

10. e-commerce is?

11. Computer software is developed by?

12. Cost of sales gross profit net profit

13. Reconciliation

14. Closing stock apear-trading and balance sheat

15. Contingent liability-bank garanty

16. AS 13 relates to investment

17. Medium risk-8 years

18. SHG- kyc not required of all member

19. Sinking fund formula same as - FV anuity

20. Prepaid exp-current liability

21. Depriciation 2 qtns from wdv method and one from wtd average method

22. Outstanding salary - personal act

23. Expenses and incomes - nominal act

24. Real a/c debited-what comes in

25. Statement record all ledger balance-trial balance

26. Small account credit in a year - 1 lakh

27. Govt Company - 51% share

28. Question on kyc

29. Saving ac interest calculation....

30. Question in cash book and pass book

31. Long term Liabilities changes

32. Effect on assets

33. No question on SI, CI and EMI

34. Question from trial Balance

35. Real account, Personal account, Nominal account

36. 1 question is that Representative personal acc is 1

37. Question on wdv depreciation method

38. 2 marks question on foreign exchange rate

39. 1 question on ESOS

40. Floating rates are called ......

41. Back office may be situated in ......

42. Long term liabilities are payable after ......

43. High Financial Leverage means ......

44. Expenditure & Income reales to ......

45. Non Voting Shares

46. Double entry system means ......

47. Vaule date

48. Residual Value

49. YTM bond is ......

50. Spot

51. Call & Short Money

52. Credit & Debit Voucher

53. Chq clearing

54. Net profit value

55. Gross profit

56. Debt equity ratio

57. Issued shared

58. Banking manual

59. Question on cross currency rate 2 marks

60. Gross profit & net profit 2 marks

61. YTM 2 marks

62. Debit in real account refers to.....

63. KYC verification for shg group members....

64. CA cannot opened by....

65. Gross profit

66. Present value

67. Cash book passbook

68. Real nominal accounts

69. Fixed n floating rate

70. Call money notice money

71. Numerical Questions on gross profit, bond value, current yield, depreciation, present

value of some amount

72. Petty cash - 3question

73. Bank reconcile-2ques

74. 2 question from prepaid expenses

75. Main function of bank

76. Gross profit

77. Present annuity

78. Proprietorship firm

79. Meaning of holding company

80. Cash flow 55000, Useful Life 5 years, IRR 15%, Cost of capital 11%. Find NPV

81. What is consolidated voucher

82. Representative personal account

83. DE ratio owen fund current ratio total assets given n find the current asset

84. Sweat equity share

85. KYC - 2 questions

86. Salvage value in depreciation method 2 questions

87. Forex arithmetic 3ques's

88. Depreciation of machinery after 2 years written down value

89. kyc risks

90. STR report

91. Risk mgmt

92. BCSBI 1 question

93. Credit bal

94. Debit bal 2ques

95. Forfeiture of shares

96. Preference share

97. Dual concept

98. Accrual concept

99. Formula of depreciation

100. Sinking value 2 ques's

101. NPV VALUE OF Firm Calculation 2 Questions

102. Debt equity ratios...

103. Depreciations on fixed value...2-3ques...

104. Depreciation on straight line (residual value) ques...

105. Company having 51% share of another company...

106. Maximum limit of transaction in small (ovd )accounts in a year....

107. Current a/c cant be opened by....options were ...pardanashin women....minor

....blind...a ccompany..

108. Sweat equity shares...

109. GAAR full form...

110. Money market mutual funds are regulated by...

111. If a person transfer a/c frm one branch to another branch den required kyc???

112. Companiesare classified on the basis of...options were

...location...capital...managemnt...incorporation etc...

113. Bond value.....

114. Insurance premium for 45 days???

115. Typs of clerical errors.....

116. Periferal devices of computer...options were...keyboard windows..

117. A Suspesious Transion report where the report ( FIU-Ind)

118. Objective PMLA

119. When a minor open self operated account

120. Deleting Drawing 2 Questions debit or credit account

121. What is bond maturity value (YTM)

122. What is coupon rate

123. Prepaid expenses or outstanding account adjustment done or not

124. Samll account time

125. Rectification of error 4-5 Questions

126. Depreciation 4-5 Questions (3 Numerical)

127. Final Account 5-6 Questions

128. Foreign exchange 3 Questions all numerical

129. YTM 3 Questions

130. Education loan - 2 Question

131. Gold loan-1 Question

132. Consolidate voucher

133. Bank General ledger

134. Ratio 3 Question

135. How to improve current ratio

136. Inventory turnover ratio

Find cost of good sale if opening is80000; purchase is 120000;direct expense 5500;

indirect expense 4000 ;closing is9000

Bond par value is 100, market rate is 12% and 15% is .....find bond price

Ravi wants 500 at every quarter for 5 year , at the rate 10%.find initial deposite

When bond price is equal to Face value.

Interest paid in advance is a type of account

In which depreciation rate of interest is constant

Car purchase by a company is which type of expense

Auditor of a bank is appointed by

In cbs branch computer is connected to the server and all server are connected to main

data centre server

In India 1$=66.56-66.74and 1 euro=1.1456-1.1765$ then relation betwn rupee and

euro

Wages for installation of machine is debited wages acct is which type of error

Find closing balance if cost of goods sold ,puchase,indirect expense, opening balance is

given - For 1year, For 3years

A company deposited 5000at the beginning of the year to puchase amachinary for

20year at the rate 10% find present value of annuity

Schedule AS6 define

Which are the peripheral related to computer

Which of the work out sourced by bank - Ans loan recovery

Which work is not done at back office

Calculation of EMI

Calculation of interest on loan

E kyc is done at periodically to which type of customer

Why Ekyc is usefull

A loan is sanctioned and disbursed 100000 but after 1 year it shows outstanding of

101000. Than what is 1000

4 questions from identifying type of error

Gold loan eligibility

Bond face value one numerical pbm

Bank reconciliation statement given passbook balance and asked cash book balance and

viceversa-2numerical question and 2 case study type question in above

Cost sales netprofit numerical pbm

Given coupon rate,rate of interest and par value asked market price.

Accounting concepts AS29

Business entity,matching concept - give situation asked to find the type of concept

Benefits of CBS

Bill drawn by A on B endorsed it to c....After due date the entries are bills

receivable,noting charges-wat could have happened?

1. WDV Depreciation> 2problems

2. Who cannot open a Current a/c>minor, illiterate, blind or unregistered society

3. Balance sheet given. Calculate gross profit and net profit

4. Capital paid by shareholders >Paid up capital

5. Calculate PV and bond price>2 problems

6. Which is not true abou Company a/c

7. Cross currency problem

8. What is Spot

9. Due date of a bill from 29june(3months)

10. Suspicious transaction report to >FI UNIT

11. closing stock apear-trading and balance sheat

12. contingent liability-bank garanty

13. AS 13

14. medium risk-8 years

15. SHG- kyc not required of all member

16. sinking fund formula same as - FV anuity

17. Prepaid exp-current liability

18 depriciation 2 qtns from wdv method and one from wtd average method

19. outstanding salary - personal act

20. expenses and incomes - nominal act

21. real a/c debited-what comes in

22. statement record all ledger balance-trial balance

23. current yeild

24. bond value

25. mehod of accepting proposal-irr, npv,payback

Limited company pvt compny

account opening of huf

huf Kyc computerised a ccounting

simple interest que

wrongly credited de bited type question 3-4

Theoretical question on IRR and NPV

maximim 10 numericals 5 of 2 marks

2 marks numerical from ratio analysis

Depricition digit sum method numeric al

Acid test ratio=........... quick ratio

person who makes Promissory not e called - debtor (buyer)

gross profit, NPV numerical

related to cbs

according stan dards

capital or revenue ex penditure

earning per share theory quest ion

Dept turn over ratio problem

Bill receivable comes under a sset or liability

Under bills of exchange, which ac Dr.

Under bills of exchange, which ac Dr.

Sales and cost of goods sold gross pro fit

Foreign exchange and cross currency cal c

cross currency u have to add premiums an d sub discount

Composite voucher

Composition, redee mable, share preferential shares

1. Who prepared Bank Reconciliation Statement?

2. Who will bear the expenses charge creation?

3.cost of mationary is RS 12 lacs, scrap value is 0; useful life is 10 yrs; then find out the

book value for the 4th year.

4. P =10000; A= 11200; r=6℅ p.a then find out time?

5. Classification of ratios?

6. Credits = assets - ?

7. P= 10000 r= 8.5℅ pa compounded quarterly; T=4 yrs then find out A=?

8. Find out current yield on bond is RS 5000/- r = 12℅ pa and market value = 4500

9. Sweat equity shares will be given to ?

Document mgnrega card on identification on a/c opening.

Back office to be establised in ......

No of digits in Adhar, min no of persons in public ltd company

adhar card..bond value..irr.npv..com interest..cash book and passbook od..nominal act

real act ..expendture

balance sheet was given and profit was asked , how deaf is calculated, ytm npv,

bcsbi..kyc year..housing loan ...slm..and wdv method .interest differential..eroor

clerical...net profit ratio.5 qus on trial bal...

virus 1)affect hardware 2) is software 3) like virus of human 4) can not affect data - 2

Present value of bond

Which r 2 types of trial balance

Writing from journal to ledger is called?

2-3 qustns from foreign exchange arithmetic

Calculate amount given to petty cashier using imprest method

Current ratio based questions

Quick ratio is another name of -------?

Depreciation problems using wdv

Straight line method and sum of digits method

……………………………………………………………………

1) bond theorem -2 question 
2) bond sum
3) quick ratio 2sum
4) current ratio 1 sum
5) depreciation 4 sum
6) NPV
7) Pay back method 
8) ARR method _1 
9) Capital budgeting 1
10) Compound interest 2 sum 
11) Bond ARR value 
12) Concept of covertism 
13) Concept of consistency 
14) Full disclosure 
15) Accounting method -3 
16) Cost method 
17) Material method
18) Matching method 
19) Small savings bank account - who all can open , look 
20) EMI
21) Coupon rate 
22) Kyc 
23) Bcbsi account 
24) Trail balance error 
25) Company types - how it vil be registered 
26) LAN WAN - networking of 27)computreconcilation in which entry is required .... In which rectification entry not require 
28) Which error affects two accounts 
29) forward point - dollar to euro, euro to rupee 3 questions

Direct simple question on EMI
Twisted but very simple question in depreciation
Ratios some questions
KYC
LAN and WAN
Computer password
Reconsiliation
3 questions from cash book pass book. In this one question is sum others are theoretical
Conversion from euro to one unit of rupee
Direct questions on forward point
2-3 questions currency conversion dollars
Quick and current ratio - 4-5 questions
Emi 5 Lakhs 12% - monthly EMI for 2 years
Deprecation 3-4 questions numerical
The value get double at 9.75% in how many years
Single sided corr - 2-3 questions
RTGS related
Computer security related
Advantage of computerisation
Balance sheet
Prepaid expenses is what ...
Personal account
One more on real account based
Loan processing - 2 questions

Current Affairs on 12.03.2019

Today's Headlines from:

 *Economic Times*
📝 Nifty50 sets eyes on 11,250 level as bulls tighten grip
📝 Etihad may infuse Rs 1,600-1,900 cr in Jet: Sources
📝 Brexit talks deadlocked ahead of key Parliament vote
📝 Crisis-hit Jet Airways defaults on repayment of ECBs
📝 Ambani needs investors for his next disruptor Optic Fibre
📝 RBI faces trouble getting banks to cut rates.Most banks in the country have trimmed lending rates by a ‘token’ 10 basis points.


 *Business Standard*
📝 Global brokerages bullish on Indian stocks despite poll-related uncertainty
📝 ICICI-Videocon loan case: Deepak Kochhar may be probed for benami assets
📝 Ebix makes $336 million bid for Yatra.com, plans expansion in Indian market
📝 Morgan Stanley raises 2019 targets for MSCI EM, MSCI Asia Pacific indices
📝 Standard Life to sell 4.93% stake in HDFC Life for Rs 3,557 crore


 *Mint*
📝 FMCG sales at organized retail stores grew 22% in 2018: Nielsen India report
📝 ONGC plans to invest more than $500 million in Mumbai High Field
📝 Coca-Cola wants to set up an R&D centre in India: CEO James Quincey
📝 Power sector gets regulatory relief, deft execution now need of the hour
📝 PE/VC exits up threefold in February, says report
📝 Puravankara partners Morgan Stanley fund for a warehousing platform


 *Financial Express*
📝 Amazon's Global Store spooked by e-commerce FDI policy; product count almost vanished

📝 Shadow casts over Modi govt’s ambitious solar target as capacity addition slows down, says report
📝 Moody's upgrades ratings of Central Bank, IOB to Ba2;
📝 Complete real estate projects or Authority will get them completed, UPRERA’s clear message to developers
📝 IFCI sells stakes in 2 power projects for Rs 1,174 crore
📝 RCom lead lender SBI slammed for giving false hope over sale to Jio.

Limitation period of various documents

 Temporary Overdraft without DPN 3 years from date of loan
Demand Loan 3 years from the date of loan
Demand Promissory Note 3 years from date of DPN
Bill of exchange_payable on demand 3 years from date of Bill.
Usance bill of exchange or promissory note 3 years from the due date of the bill or PN •
-Suit for Money_ Decree 3 years from the date right is due
Term Loans payable by instalments 3 years from due date of each instalment . .
Mortgage 12 years from the due date of the loan
Right of foreclosure by the mortgagee 30 years
Right of redemption 30 years
Cash credit against hypothecation or overdraft 3 years from the date of document.
Cash Credit Pledge Not applicable
Any suit by State/Central Government 30 years from the date when limitation would start
Deposit like SB, CA, FD with a bank 3 years from date of demand
Execution of Decree 12 years from the date of decree
Recovery of loss caused by fraud 3 years from the date of detection of fraud
Claim under Consumer Protection Act 2 year from the date light accrues
Dishonour of cheque under sec 138 of NI Act 1 month from the date right accrues
Appeal to High Court against Lower court 90 days from date of decree
Appeal to other courts on the decree at Lower court 30 days from date of decree

Tips to crack jaiib caib

5 TIPS TO CRACK JAIIB-CAIIB IN 1st ATTEMPT.

If you've just joined the Banking Industry, you must have applied for JAIIB/CAIIB or If not, you'll be applying room & 1 thing everyone wants to know is how to pass JAIIB/CAIIB is get an extra increment. So sooner you pass the Exam, earlier you get an extra increment. If you've as Officer JMGS-I (PO), your initial basic salary would be ₹.23700. If You Clear JAIIB/CAIIB, you get 2 increments & your basic salary increase by ₹.1940. So if you miss it 1st time, your Increment gets delayed by 6months. That means loss of ₹.11640+DA. So it becomes important to clear JAIIB/CAIIB Exam in 1st attempt itself.
Around JAIIB 1.50lacs & CAIIB 1lac candidates appear for the Exam. Only 22-25% candidates are able to clear the exam each time. So does it mean that JAIIB/CAIIB is difficult to crack? What should be the Strategy to clear the Exam in 1st Attempt? How 1 should prepare for Exam?
Passing marks for JAIIB are 50% aggregate & 45% in each Subject. If aggregate marks less than 50% or Marks in a particular paper less than 45%, but you score 50%/more in any other 2 sub. You don't qualify the exam but need not give that particular paper in 2nd,3rd,4th attempt, in which you score 50%/more. The best part of Exam is that result of each paper is shown to you immediately after submit your online Exam.

Simple 5 Steps to Prepare for the JAIIB/CAIIB Exam:
Take off the burden from your mind, you're required to score only 50% which's not very difficult & the Good thing is that there's No NEGATIVE (-) Marking.
Here is a simple step by step guide which will help the Bankers to be prepared for JAIIB/CAIIB.
If you come from Commerce/Finance background  (BBA/MBA), It's relatively easy to break the JAIIB/CAIIB. Because you would have studied atleast 65% of topics covered. If you're not from Commerce/Finance backgroue you need to make little Extra Efforts.
1. GET THE RIGHT BOOKS: After reg. for JAIIB/CAIIB, 1st thing you should do is to get the Books for all 3 Subjects. Best books available for JAIIB/CAIIB are by McMillan, which IIBF also suggest. these Books are available on Amazon:
-JAIIB (PPB-AFB-LRAB)
-CAIIB (ABM-BFM-OPTIONAL SUB).
These Books might seem bulky but has covered the entire syllabus & has everything you need to know. The Book is designed in a way that 1can easily be prepared by just reading the definition & summary. the MCQs will give you a fair Idea of level of preparations.
If you don't have enough time & don't want to study IIBF Books, you can by the Books JAIIB/CAIIB by N.S.Toor, which are in QA format.
2. KNOW YOUR SYLLABUS: As a Banker it's likely that there will not be a lot of time left for studies after a hectic day of work. Hence it's best to start early. the Idea is to plan for the Syllabus & Time them so that the Level of Preparedness is High. Knowing your syllabus will give Idea, how much time need to prepare.
If you've been a Commerce student, you'll find the AFB & some part of LRAB, you've already covered during your studies earlier. So 60% of your Job is already done. You can mark these topics & focus on those topics which you've not studied earlier.
If You've been Arts/Science & Engg Student, everything is New for you & need to prepare for everything..

3. MAKE A STRATEGY FOR STUDYING: ( I've already posted about JAIIB-CAIIB Study Strategy & Study Plan a Month Ago, You must keep follow them out of action).

4. PRACTICE & ATTEMPT SOME MOCK TESTS: Another great step is to find out previous 3years Question Papers. Prepare them all leaving 1 which will work as a model test before you actually face the Exam. the Idea is to practice a lot of question type compared to cramming. You can attempt in JAIIB-CAIIB Forum, Blogs website 'Free Mock Tests for JAIIB-CAIIB', which will give you an Idea how the actual exam is held. attempting Mock Test help you practice the actual Exam conditions.
5. ON THE ACTUAL TEST DAY: Choose the easy questions 1st as they will give you an estimate of the Score. then come back to the Questions which were missed. Also, there's No NEGATIVE (-) Marking, so attempt all Questions. If you stuck in a question, leave that by Marking & Go ahead..

ALL THE VERY BEST.
WISH YOU GOOD LUCK...

Normal transit time

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.

BFM

BFM 

The strategy for the study of Bank Financial Management which many people finds difficult to clear. If you study properly, it is easy to clear the BFM. This subject also contains 4 modules, they are;
-International Banking
-Risk Management
-Treasury Management
-Balance Sheet Management
Many people do not correlate the syllabus of the subject with day to day banking activity. So they find it difficult to score and understand this subject. But this not true, this subject is very much important which will increase your knowledge regarding top management & middle management functioning of your bank as well as banking as a whole industry.
All the modules are equally important, but you may clear the paper with three modules study also. Module A & B are relatively easy and scoring as well. Let us discuss strategy for each module.
Module A-International Banking
Important topics are Exchange Rates and Forex Business, Basics for Forex Derivatives, Documentary LC, and Facilities for Exporters & Importers
Rapid reading or bullet point reading is quite useful for this module. Practice numerical again and again.
Many numerical/case studies are asked from this module which are quite easy as compared to Module B & Module D case studies. Refer the case studies from McMillan given at the end of the topic. Also N.S.Toor book has many numerical and case studies. Questions are asked on Exchange rates, Shipment Finance etc.
Module B-Risk Management
All chapters are equally important as they are interlinked to each other. Again focus more on case studies/numericals given in Apendix at the end of chapter. Maximum case studies are asked from this module. Though short notes are useful for this module I would suggest McMillan reading for this module because some questions are twisted type for which you require details of the concept which is hard to get from short notes. RBI website contains FAQs which are quite useful for this modules, you should read them at least once.
Module C- Treasury Management
Important topics are Introduction, Types of treasury products, Treasury Risk Management, Treasury and Asset-Liability Management.
Mostly questions asked on this module are theoretical type, so through reading of McMillan is important. If you don’t get time then you can skip this module or read short notes since the weighted of this module for exam point of view is low according to me as compared to Module A&B. But those who wish to make carrier or work in treasury department, this is the best module to learn.
Module-D Balance Sheet Management
Important chapters are Components of ALM in Bank’s Balance Sheet, Capital and banking Regulation,, Capital Adequacy, Asset Classification and Provisioning Norms, Interest rate Risk management.
Though McMillan book contain sufficient material but I would suggest you to refer RBI website for this module. In this module focus more on Case Studies as compared to theoretical questions. Do not skip this module as it is much important for exam as well as knowledge point of view. No need to read McMillan line by line.
Overall you have to keep balance between theoretical reading as well as case studies/numerical since the paper would contain 40-45% case studies. N.S.Toor book contains good case studies and MCQs. Also there are many resources available on the internet from where you will get case studies for this module. After giving this paper you will realized that BFM is easier as compared to ABM and no need to worry for BFM.

ABM

ABM is one of the compulsory subjects for CAIIB. Most of the people find difficult to clear this paper. Today, I will tell you how to study for ABM subject.
This subject also contains 4 modules
MODULE – A: Economic Analysis
MODULE – B : Business Mathematics
MODULE – C : HRM in banks
MODULE – D : Credit Management
As we are bank employees we get very less time for study, so how to decide which topics to be read, which topics to be skipped?
-As I had told you in my previous blog article that generally paper consists of 60% theoretical & 40% numerical or case studies, so choose the module to be study in deep so as to clear the paper easily depending upon your personal strength and weakness.
If you observed all the modules, you will realize that Module A and Module C are most scoring modules. Do not skip these modules. Module B contains Business Mathematics which many people find difficult to study as the level of mathematics is tough, especially for non-engineering background people. Those who works in Credit/Loan Department will find that Module D easy as well as interesting. Module D is most important not only exam point of view but also for your daily working in Credit Department. So do not skip Module D.
IMPORTANT TOPICS FROM EACH MODULE
Module A- Supply and Demand, Money Supply and Inflation, Business Cycles, GDP Concepts and Union Budget.
No need to read McMillan Book line by line for thise module, short notes will be quite useful for studying this module. Don’t read stats given in these chapters. In GDP Concepts and Union Budget chapters numerical are asked which are quite easy provided you know the components and formula.
Module B-Time Value of Money, Sampling Methods, Simulation, Bond Investment
Don’t go to deep for study this module as mathematical calculations are difficult to understand especially for non engineering background people. Practice the examples given in McMillan. Those who are not good at math can skip this module and focus more on remaining modules.
Module C-Development of Human Resources, Human Implications of Organisations, Performamce Management, HR & IT
You need to read thoroughly all the topics from this module from McMillan. It is quite easy and theoretical only. Repeatedly read MCQs from N.S. Toor book of this module.
Module D-Overview of Credit Management, Analysis of Financial Statement, Working Capital Finance, Credit Control and Monitoring, Rehabilitation and Recovery.
Read this module from McMillan book only. The chapters in this module are not lengthy as compared to other modules. Practice Numerical from Financial statement and balance sheet.
Overall, you have to study at least three modules in detail so as to achieve the 50 score. You can choose the modules to study more depending upon your strength. I would suggest that you can keep module B at last, just read formulas from this module, as this module is quite boring, lengthy and hard to understand.

Risk management

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

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