Treasury products

TREASURY PRODUCTS

1) Which of the following currency is not fully convertible?

a) USD b) EURO c) INR d) GBP

2) What are the Spot Trades?

a) It is the process of settlement where payment and receipts of funds are settled in respective currencies.

b) The settlement takes place within 2 working days from the trade date.

c) Currency may be bought or sold with settlement on the same date i.e. To day (TOD)

d) The settlement can be on the -next day he. Tomorrow (TOM)

3) Which of the following is significant about spot trade?

a) All rates quoted on the screen are for spot trade unless otherwise mentioned

b) TOD and TOM rates are generally quoted at a discount to the spot rate.

c) TOD and TOM rates are less favourable to buyer d) All these

4) What is forward contract?

a) It is a contract for purchase and sale of currency at a future date.

b) The exchange rate for a future contract is quoted on the day of contract.

c) The contract between buyer and seller is called forward contract.

d) All the above

5) Which of the following is true regarding a forward contract?

a) Treasury may have forward contracts with customers or Banks as counterparties.

b) Customers cover currency risk through forward contract.

c) Treasury may cover its customer exposure by taking reverse position in Inter-Bank market.

d) All the above

6) The features of forward rates are:

a) They are not projected on the basis of exchange rate movement in the market

b) Forward rates are decided on the basis of interest rate differential of two currencies.

c) The interest rate differential is added to the spot rate for low interest yielding currency and deducted

from the spot rate for high interest yielding currency

d) All the above

7) Which of the following are True?

a) Forward rate reflects interest rate differential only in prefect markets.

b) Perfect markets are where currency is fully convertible and highly liquid.

c) When currency is not fully convertible the demand for forward contract influences

the forward exchange rate d) All these

8) The features of a swap are:

a) A combination of spot and forward transactions is called a swap.

b) Buying in the spot market and selling same amount in forward market or vice-versa is swap.

c) Swap is mainly used for funding requirements_ d) All these

9) A Bank may have foreign exchange surpluses from the following sources:

a) Profit from overseas Branch operations

b) Forex Borrowing in foreign domestic market

c) Foreign currency and convertible rupee deposits with branches

d) All the above



10) A Treasury may have surplus forex from the following sources:

a) Surpluses net of Bank's -lending in foreign currency

b) Floating funds on account of customer transactions

c) EEFC funds maintained in current account d) All these

11) The surplus forex can be invested by a Treasury in:

a) Inter-Bank loans b) Short term investments c) Nostro Account

d) Any or all of these

12) Which of the followings are the sources for short-term investments?

a) Treasury Bills issued by foreign governments

b) Commercial paper

c) Other debt instruments issued by multi lateral institutions

d) All the above

13) What is a Nostro Account?

a) This is a current account denominated in foreign currency maintained by a Bank with the correspondent Bank in the

home country of the currency.

b) Nostro Account does not attract any interest.

c) Many correspondent Banks provide automatic investment facility for funds held

overnight which earn nominal interest. d) All these

14)What is Money Market?

a) It is place for raising and deploying short term resources where maturity does not exceed one year.

b) Inter-Bank market is divided as call money and term money.

c) Call money market is also overnight market where borrowed funds are repaid on the next working day.

d) Notice money market is where funds are placed beyond overnight and upto 14 days.

15) The participants in call/notice money market are:

a) The major players are Banks and primary dealers.

b) Non-Banking financial companies can only lend the surplus funds upto specified limit_

c) NBFC can not participate in this market d) Both (a) and (c)

16) Which of the followings are the features to Treasury Bills?

a) The T-Bills are issued by the RBI on behalf of central govt. for pre-determined amount.

b) The interest is by way of discount.

c) The price is determined through an auction process d) All these

17) The maturity period of T-Bills is:

a) 91 days b) 364 days c) (a) and (b) both d) None of these

18) Which of the followings is relevant to T-Bills?

a) Each issue of 91 days T-Bill is for Rs_ 500 crore and auction is conducted weekly onWednesday.

b) Each issue of 364 days is for Rs. 1000 crore and it is auctioned fortnightly

c) The Banks park short term funds in T-Bills d) All these

19) The Benefits of T-Bills are:

a) It is Risk free investment

b) It yields interest higher than the call money market.

c) It is possible to trade T-Bill in secondary market d) All these

20) Which of the followings is correct regarding T-Bill?

a) It is in the Electronic form and held in SGL Account maintained by Banks with RBI.

b) Depository participants can also operate through SGL Account.

c) The settlement of T-Bills is through Clearing Corporation of India d) All these

21) If a T-Bill is of 91 days is priced at 99.26, what does it signify?

a) It will yield interest at 2.99%

b) This is known as implicit yield.

c) (a) and (b) both d) None of these

22) The_ features of the commercial paper are:

a) It is an unsecured money market instrument issued in the form of promissory note.

b) The highly rated corporate Borrowers can raise short term funds through this instrument.

c) It is an additional instrument to the investing community d) All these

23) -The time limit for issuing a CP is:

a) Minimum maturity 7 days b) Maximum maturity one year

c) (a) and (b) both d) None of these

24) The requirements for issuing a commercial paper are:



a) The company issuing CP should have minimum credit rating of P2.

b) Banks can invest in CP only if it is issued in D-mat form

c) The minimum amount of CP is Rs. 5 lac d) All these

25) Who issues guidelines for issue of CP?

a) RBI

b) Market practices prescribed by FIMMDA (Fixed Income and Money Market and Derivatives Association of India) c) (a)

and (b) both d) None of these

26) A company issuing CP must satisfy the conditions:

a) Tangible Net worth of the company should not be less than Rs. 4 crore

b) The company should be enjoying working capital limit with Bank/financial institution

c) The Borrowal Account should be classified as standard Asset d) All these

27) How does Tangible Net Worth is arrived at?

a) Capital b) Free Reserves c) (a) + (b) — Intangible Assets if any

d) None of these

28) Which of the following is relevant about commercial paper?

a) It is issued for discounted amount i.e. less than face value

b) The price is quoted for face value

c) It is negotiable instrument d) All these

29) Which of the following statements regarding commercial paper is

not correct?

a) CP is a substitute to working capital

b) Interest rates are at par with PLR

c) It should be compulsory in D-mat form

d) Purchase and sale of CP is effected through the depository participants

30) Banks prefer to invest in CP through Treasury because :

a) Credit Risk is relatively low.

b) Yield on CP is higher than inter-bank money market.

c) There is no liquidity risk d) All these

31) Which of the following- Credit Rating Agencies have been authorized by RBI for

Rating?

a) ICRA b) CRISIL c) CARE and FITCH Ratings India Ltd. d) All these

32) The provisions for issue of commercial paper are:

a) Maximum period for subscription to an issue of CP is two weeks from the date of opening of issue.

b) CPs can be issued on a single date or in parts on different dates.

c) The same issue of CP should have the same date of maturity d) All these

33) The process of issue a CP involves:

a) The Bank is appointed as issuing and paying agent.

b) The Bank would assess the requirement and the extent to which the CP issue is linked with credit limit.

c) The potential investors are given a copy of IPA certificates d) All these

34) The features of certificate of Deposit are:

a) It is a debt instrument issued-by Bank against deposit of funds

b) It is a negotiable instrument

c) It bears interest rate higher than regular deposits of the Bank. d) All these

35) The requirements of certificate of Deposit are:

a) Minimum amount of deposit is Rs. 1 lac

b)_ The maturity period may range from 7 days to one year

c) It is an additional source for investment to Banks and corporates d) All these

36) What is a Reverse Repo?

a) It is a contract to buy securities and then to sell them back at an agreed future date and price.

b) It provides opportunity for short term investments of surplus funds

c) (a) and (b) both d) None of these

37) What is Repo?

a) It is an instrument of borrowing funds for a short period.

b) It involves selling a security and simultaneously agreeing to repurchase it at a future date for a slightly higher price.

c) The price difference is called interest d) All these

38) The significance of Repo is:

a) It is a tool used by RBI for open market operations.



b) It affects liquidity in the system.

c) None of these d) Both (a) and (b)

39) The commercial Banks participate in Repo transactions because of:

a) To meet short fall of CRR --

b) To meet short fall in SLR

e) The interest on Repo is lower than call market d) All these

40) Repo transactions are regulated by:

a) RBI b) Securities Contracts Regulations Act c) (a) and (b) both d) None

41) Which of the following statements is correct?

a) Repo is a short term money market instrument

b) The Repo Rate and period is announced by RBI,c) (a) and (b) both d) None of these

42) What is the Repo Rate with effect from 16th Sept 2010?

a) 5% b) 5.25% C) 5.75% d) 6% e) None of these

43) What is the Reverse Repo Rate with effect from lSept 2010?

a) 4% b) 4.25% c) 4.75% d) 5% e) None of these

44) The process of Repo transaction is:

a) A Bank may sell securities to the counterparty with an agreement to repurchase the same securities after a certain

period at pre determined price.

b) The bank gets cash in exchange of securities and pays back the cash after a certain period and get back the securities.

c) The difference between sale price and repurchase price is interest d) All these

45) The advantage to the counterparty under a Repo transaction is:

a) It earns interest on secured [ending.

b) It holds securities which serves the purpose of meeting SLR requirements.

c) The value of securities is higher by a margin to cover price Risk. d) All these

46) Which of the following statements is correct? .

a) The margin maintained on Repo securities is called hair cut as principal amount exchanged against

securities is lower than the market value of securities

b) RBI uses Repo to control liquidity

c) Banks and primary dealers sell govt. securities to RBI and avail liquidity d) All these

47) Which of the following statements is not correct?

a) RBI uses Repo Transactions under liquidity adjustment facility

b) Liquidity is not affected through lending to Banks under a Repo Transaction.

c) Absorption of liquidity is done by accepting deposits from Banks.

d) Absorption of liquidity by accepting deposits from Banks is known as Reverse Repo.

48) Which of the following statements is correct?

a) RBI has commercial repo auctions on overnight basis.

b) Repo and Reverse Repo Rates have been pre-fixed.

c) RBI has full discretion to change the frequency of auction. d) All these

49) The process of Bill Re-discounting is:

a) Treasury will discount Bill of Exchange of short term nature which are already discounted with the banks.

b) Rediscounting is done at money market rates.

c) The rediscounting rates are negotiable between the lending Bank and borrowing Bank. d) All the above

50) The advantage to the lending Bank is:

a) The surplus funds are invested at term money rate

b) Credit Risk is low as lending Bank has recourse to the discounting Bank

c) (a) and (b) both d) None of these

51) The benefits to borrowing Bank is :

a) It is able to infuse liquidity from out of existing Assets

b) Its capital adequacy ratio is improved or rediscounted bills are added to Inter-Bank liability c) (a) and (b) both

d) All these

52) Which of the followings is significant regarding government securities?

a) They are issued by Public Debt Office of RBI.

b) State govts. Issue state development Bonds.

c) Govt. securities are sold through auction conducted by RBI d) All these

53) Which of the followings is correct?

a) Interest is paid on face value of the bond at coupon rate.

b) RBI arrives at a cut off price based on bids submitted by Banks and primary dealers.





c) The price may be higher or lower than the face value d) All these

54) Price movement of Bond depends on:

a) Demand of the Bond which depends on liquidity in the system.

b) The yield on Bond is different from coupon rate.

c) (a) and (b) both d) None of these

55) If 10 years G. sec. at 7.37 per cent is priced at 104.80, what would be the yield'

a) 6.67% b) 5.42% c) 6.15% d) None of these

56) The interest rates in the economy depends on:

a) Rate of inflation b) GDP growth c) Other economic indicators

d) A combination of all these

57) The variety of Bonds may include: a) Step up coupons b) Coupons linked to inflation c) Floating rate coupons

d) Any of these

58) What is STRIPS:

a) Separately registered interest and principal securities

b) Under this process principal and interest are treated as separate zero coupon securities c) (a) and (b) both

d) None of these

59) What is corporate debt paper?

a) It includes medium and long term bonds and debentures issued by corporates and financial institutions

b) Yield on Bonds is higher than the govt. securities

c) They are called non-SLR securities where banks can invest d) All these

60) Which of the following statements is not correct?

a) Tier-2 capital Bonds issued by Banks fall under the category of corporate debt paper.

b) Bonds issued by corporates are not that liquid_

c) The bonds are issued in D-mat form.

d) Bank Treasury finds an attractive investment in corporate debt paper.

61) Which of the following statements is correct regarding corporate debt paper?

a) Higher the credit risk higher is the yield.

b) Global ratings are necessary if the debt paper is issued in International market.

c) Treasury can invest FCNR deposit funds and other forex surpluses in global debt paper. d) All the above

62) Which of the followings is correct?

a) Debentures are issued by private companies.

b) Bonds mainly issued by public sector companies.

c) Government does not provide guaranter on PSU Bonds d) All these

63) The material difference between debentures and bonds is:

a) Debentures are governed by relevant provisions of company law.

b) Debentures are transferable on registration

c) Bonds are negotiable instrument governed by Law of Contract. d) All these

64) The Bond can be : a) Zero Coupon Bond b) Floating Rate Bond c) Deep Discount Bond

d) Any of these

65) Which of the followings is not correct?

a) Debenture and Bonds can be issued with redemption in instruments over a period.

b) They can be issued with a premium or redemption.

c) There are no Bonds with put and call option

d) Bonds secured by stocks or other collateral are called collaterised obligations

66) Which of the followings is relevant regarding issue of Bonds and debentures?

a) The holders have prior legal claim over the equity and preference stock holders.

b) The Trustee appointed by issuing company protects the rights of debenture holders.

c) The Trustee can initiate legal action against the company in case of any default.

d) All of the above

67) Companies i s suing unsecured debentures and bonds have to compl y wi th the

provision of :

a) Companies Acceptance of Deposit Rules 1975 b) SEBI

c) (a) and (b) both d) None of these

68) What is a convertible Bond?

a) It is a mix of Debt and Equity.

b) Bond holder has an option to convert debt into equity on a fixed date.





c) The conversion price is pre-determined d) All these

69) The advantages of convertible Bonds are:

a) If the stock price is higher than prefixed conversion price, the investor would convert debt into Equity.

b) Company will have no debt repayment

c) The Equity of the company will be strengthened d) All these

70) Which of the followings are derivative products treated on stock exchange?

a) Index features b) Index options c) Stock futures and options d) All these

71) Provisions to invest in Equities are:

a) Banks can invest in Equities upto 20% of their net owned funds

b) Stock prices are highly volatile

c) Banks prefer low risk investments d) All these

72) The provision on Fll investments are:

a) Foreign currency funds are converted into rupee for portfolio investors.

b) Rupee funds with profits are converted into foreign currency for repatriation

c) Flls are allowed to invest in debt market d) All these

73) What is External Commercial Borrowings?

a) Indian companies can borrow on global market through Bank loan or issue of debt paper.

b) The debt can be repaid by reconversion of rupee funds into foreign currency

c) (a) and. (b) both d) None of these

74) The guidelines for investment of foreign currency funds of Banks are?

a) FCNR deposits can be invested in overseas market and for domestic lending :n foreign currency.

b) Banks are permitted to borrow/invest in overseas market 50% of Tier-I Capital.

c) (a) and (b) both d) None of these

75) What is Export Earners Foreign Currency Account?

a) Exporters are allowed to hold 100% export proceeds in a Current Account. wtth

b) No interest is paid on such deposits

c) (a) and (b) both d) None of these

76) What is Gilts?

a) Securities issued by government or Treasuries.

b) They do not have any credit Risk, c) (a) and (b) both d) None of these

77) SGL Account is:

a) Subsidiary General Ledger

b) It is maintained by public debt office of RBI

c) Banks maintain exclusively government Securities Accounts d) All of these

78) Which of the followings is correct?

a) Counterparty is the other party to a Transaction

b) Yield is internal rate of return where interest is also reinvested at original coupon rate.

c) Foreign currency deposits are denominated in foreign currency d) All of these

79) The features of FCNR deposit are:

a) They are denominated either in USD, GBP, JPY or EURO, Can- Dollar and Aus Dollar.

b) The deposits are maintained by non-resident Indians.

c) Interest on FCNR deposits is regulated by RBI d) All of these

80) Broad money or M3 consists of :

a) Currency in circulation b) Demand and time deposits with Banks

c) Deposits of Banks and other deposits with RBI d) All of these

81) Monetary policy of RBI aims at:

a) Controlling rate of inflation b) Ensuring stability of financial market

c) Regulating money supply d) All of these

82) The tools in the hands of RBI for direct control of money supply are:

a) CRR b) SLR c) (a)-and (b) both d) None of these

83) CRR is calculated on net Demand and Time liabilities which contain:

a) Demand deposits and Time deposits

b) Overseas Borrowings

c) Foreign outward remittances and other demand and time liabilities d) All of these

84) The Demand deposits include:

a) Current and Savings Deposits b) Margin Money for Letter of Credits

c) Overdue Fixed Deposits d) All these

85) Other Demand and Time Liabilities include:

ayAccrued Interest b) Credit Balance in Suspense Account

c) Any other liability d) All these

86) In which of the following categories only 3% minimum CRR is required to be

maintained?

a) Net Inter-Bank call borrowing/deposits where maturity does not exceed 14 days,

b) Credit Balance in ACU (Asian Currency Unit) Accounts

c) Demand and Time liabilities in respect of off shore Banking units d) None of these

87) Banks need not maintain CRR on :

a) Paid up capital, reserves, retained profits, refinance from apex institutions.

b) Excess provision for Income tax .

c) Claims received from DICGC/ECGC d) All these

88) Which of the followings is correct?

a) CRR need not be maintained on Inter-Bank term deposits of original maturity upto one year

b) RBI does not pay interest on CRR Balance

c) The Demand and Time l iabil i ties as on the report ing Friday of second previous

fortnight will be basis for CRR calculation d) All these

89) SLR can be maintained in the form of following Assets:

a) Cash Balance in excess of CRR requirements

b) ,Gold at current market price

c) Approved securities valued as per RBI norms d) All these

90) What is Liquidity Adjustment Facility?

a) It is the mechanism whereby RBI lends funds to Banking sector through repo instrument

b) This is used to monitor day to day market liquidity

c) This is exclusively applicable to repo and reverse repo transactions with RBI

d) All these

91) The features of Negotiated Dealing System are:

a) This is a system where securities clearing against assured payment is handed by Clearing Corporation of India.

b) Physical delivery of cheques are not required.

c) All Inter-Bank Money Market deals are done through Negotiated Dealing System

d) All the above

92) The feature of Real Time Gross Settlement System are:

a) All Inter-Bank payments are settled instantly.

b) Banks' Accounts with all the Branch offices of RBI are also integrated.

c) Since it is instant payment system, Banks need to maintain adequate funds

throughout the day.

d) All the above

93) Which of the following is correct?

a) Asian currency unit is a mechanism for payment to/from members of Asian clearing union.

b) Off shore Banking units render special Banking services only to overseas customers.

c) SWIFT is a secure worldwide financial messaging system exclusive to Banks.

d) All the above

94) What is DVP?

a) Delivery vesus Payment system where one account is debited and another account is credit at the same time.

b) In case of securities purchase funding account is debited and securities account is credited.

c) This facilitates prompt settlement of security transactions. d) All these





1 C 2 A 3 D 4 D 5 D 6 D 7 D 8 D 9 D 10 D

11 D 12 D 13 A 14 A 15 A 16 D 17 C 18 D 19 D 20 D

21 C 22 D 23 C 24 D 25 A 26 D 27 C 28 D 29 B 30 D

31 D 32 D 33 D 34 D 35 D 36 C 37 D 38 D 39 D 40 C

41 C 42 D 43 D 44 D 45 D 46 D 47 B 48 D 49 D 50 C

51 C 52 D 53 D 54 A 55 A 56 D 57 D 58 C 59 D 60 B

61 D 62 D 63 D 64 D 65 C 66 D 67 C 68 B 69 D 70 D

71 D 72 D 73 C 74 D 75 C 76 C 77 D 78 D 79 D 80 D

81 D 82 C 83 D 84 D 85 D 86 D 87 D 88 D 89 D 90 D

91 D 92 D 93 D 94 D

Caiib BFM strategy

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.

Caiib BFM 150 mcqs

1. A company has four branches at Bangalore, Chennai, Delhi and Mumbai. IEC number should be
obtained by.
A. all bran ches simultaneously.
B. each branch separately.
C. any one branch, which c an be used by all branches.
D. the head office, which can be used by all branches.
ANSWER: D
2. An exporter who deals in multi products should get Registration-cum-Membership Certificate from.
A. all export promotion councils relevant to the products dealt in.
B. export promotion council nearest to the head office of the expo rter.
C. export promotion council of main line of activity or FIEO.
D. none of the above.
ANSWER: D
3. An exporter cannot obtain details about prospective buyers from.
A. yellow pages.
B. web sites.
C. Indian em bassy abroad.
D. none of the above.
ANSWER: D
4. A thorough buyer evaluation may be waived in case of.
A. buyers from advanced countries.
B. buyers from countries having bil ateral relations with India.
C. buyers having import licences.
D. transactions covered by full ad vance payment.
ANSWER: D
5. Force majuere clause in an export .
A. relates to penalty for non-fulfilm ent of contract.
B. exempts the exporter from liability from non-ful filment of contract due to reasons beyond his control.
C. provides for enforcing the contract compulsorily.
D. none of the above.
ANSWER: B
6. Obtaining quality certification is compulsory for.
A. export of commodities falling under mandator y inspection requirements of the government.
B. export of items meant for human consumption
C. all exports.
D. none of the above.
ANSWER: A
7. Booking of shipping space in advance is helpful to an exporter in.
.
A. saving in freight charges.
B. availing bank finance.
C. getting priority on inla nd movement of cargo by rail.
D. none of the above.
ANSWER: C
8. Under advance remittance as a method of payment the credit risk is borne by.
A. the importer.
B. the exporter.
C. importers ba nk
D. none.
ANSWER : A
9. Open account when used as a method of payment indicates.
A. the transactions are legal
B. the buyer has no money t o pay immediately.
C. the seller wants to sell desperately.
D. none of the above.
ANSWER: D
10. Open account method of payment is beneficial to
A. the buyer.
B. the seller.
C. the buying agent.
D. both the buyer an d the seller.
ANSWER: A
11. Cash on delivery method is normally used for.
A. bulk cargo with immediate market.
B. small but valuable items sent by po st.
C. slow moving items.
D. exports to countries with balance of payments problems.
ANSWER: B
12. Documents against payment term indicates
A. the documents are sent by post.
B. the export is risky.
C. the collecting bank will hand the documents to the buyer against payment.
D. the exporter delivers the documents to the bank against advance.
ANSWER: C
13. The best form of method of payment for an importer would be.
A. advance remittance.
B. letter of credit.
C. documents aga inst payment.
D. open account.
ANSWER: D
14. When goods are sent to an agent of an exporter in the importing country, the method of payment
adopted is.
A. open account.
B. letter of credit .
C. consignment sa le.
D. documents agains t acceptance.
ANSWER: C
15. The method of payment where the exporter relies on the undertaking of a bank to pay is.
A. bank guarantee.
.

B. letter of credit.
C. letter of comfo rt.
D. none of the above .
ANSWER: B
16. Letter of credit transactions are generally governed by the provisions of.
A. Uniform customs and Procedures for Documentary Credits.
B. United Conference on Practices for Documentary Credits.
C. Uniform Customs and Practice for Documentary Credits.
D. Uniform Code and Procedure for Documentary Credits.
ANSWER: C
17. A letter of credit for a commercial transaction is.
A. a guarantee by the issuing bank to the exporter that bills drawn by the latter will be met.
B. undertaking by the issuing bank to the exporters bank that the exporters bills will be met by the
issuing bank.
C. undertak ing by the issuing bank to the exporter that documents conforming to the requirements of the
credit will be negotiated/paid against by the bank.
D. none of the above
ANSWER: C
18. The beneficiary under a letter of credit is.
A. the bank opening the credit.
B. the customer of the opening bank.
C. the confirming bank.
D. the exporter.
ANSWER: B
19. A letter of credit is opened on behalf of.
A. exporter customers.
B. importer customers.
C. any party wishing to make payment abroad.
D. none of the above.
ANSWER: B
20. A letter of credit is addressed to.
A. the beneficiary.
B. the negotiating bank.
C. the reimbursing bank .
D. the importer.
ANSWER: A
21. Bank B of Baroda nrgotiated on 12.3.2005 documents ynder a recovable letter of credit opened by
Bank C of California. On 13.3.2005 before the documents were dispatched by Bank B to Bank C, it
receives a notice from the latter, dated 11.3.2005 cancelling the letter of credit.
A. Bank B cannot get reimbursement from Bank C since the documents are n egotiated after the
cancellation of the letter of credit.
B. Bank B cannot get reimburse ment from Bank C, but have recourse to the exporter.
C. Bank B can get reimbursement from Bank C because the documents were negotiat ed before the
notice of cancellation could reach it.
D. Bank B can get reimbursement from Bank C since the notice of cancellation is invalid.
ANSWER: D
22. When a letter of credit does not indicate whether it is revocable or irrevocable, it is treated as.
A. revocable.
B. irrevocable .
C. revocable or irrevocable at the option of the beneficiary.
D. revocable or irrevocable at the option of the negotiating bank.
.

ANSWER: B
23. Payment for bills drawn under letter of credit should be made by the negotiating bank.
A. immediately in all cases.
B. after the documents are a pproved by the issuing bank.
C. immediately or on a future date depending upon the te rms of credit.
D. only in foreign currency.
ANSWER: C
24. Under an acceptance letter of credit, the responsibility of the issuing bank is.
A. only to accept the bill.
B. to pay against the bill.
C. to accept the immediat ely and also to pay the amount of the bill on its due date.
D. to get the acceptance of the importer on the bill.
ANSWER: C
25. A confirmed letter of credit is one.
A. confirmed by a bank (other than t he opening bank) in the exporters country.
B. confirmed by the importer to be correct.
C. confirmed by the exporter that he agrees to the conditions.
D. confirmed to be authentic.
ANSWER: A
26. Under the confirmed letter of credit the undertaking the confirming bank is.
A. in addition to that of the opening bank.
B. in substitution of the undertaking of the opening bank.
C. subject to government policies to the exporter country.
D. none of the above.
ANSWER: A
27. A credit which provides for reinstatement of the amount as and when bills are drawn under it is called.
A. reinstatement credit.
B. reimbursement credi t
C. revolving credit.
D. back-to-back cre dit.
ANSWER: C
28. A transferable credit is one.
A. . which can be negotiated.
B. which can be transferred b y the importer to any other person.
C. which can be transferred by the beneficiary to any other perso n.
D. which provides for transfer of liability to another bank.
ANSWER: C
29. A transferable credit can be transferred.
A. once.
B. twice .
C. thrice.
D. any nu mber of times.
ANSWER: A
30. A transferable credit can be transferred to a third person in.
A. the same country.
B. a third country.
C. the same countr y or any third country.
D. none of the above.
ANSWER: C
.
31. A transferable letter of credit.
A. can be transferred to more th an one person even if partial shipment is prohibited.
B. can be transferred to more than one person only if partial shipment is allowed.
C. is one which contains words such as fractionable, assignable, etc.
D. . is transferred free of charge.
ANSWER: B
32. A back to back letter of credit.
A. is always an inland letter of c redit.
B. is a new letter of credit issued on th e strength of the letter of credit which is not transferable.
C. can be issued only when the original letter of credit is transferable.
D. can also be transferred.
ANSWER: B
33. A letter of credit that provides for granting of pre-shipment finance as well as storage of goods in the
name of the bank is.
A. a red clause let ter of credit.
B. a standby letter of credit.
C. a green clause letter of cr edit.
D. a secured letter of credit.
ANSWER: C
34. A letter of credit carries an undertaking of the opening bank to pay up to a specified amount in case of
non-performance of certain obligation by the applicant. This letter of credit is.
A. invalid.
B. an antic ipatory letter of credit.
C. standby letter of credit.
D. performance letter of cr edit.
ANSWER: C
35. The responsibility of an advising bank of a letter of credit is to.
A. vouch the genuineness of the letter of credit.
B. negotiate documents under the letter of credi t.
C. negotiate documents under the letter of credit, if the opening bank fails.
D. none of the above
ANSWER: A
36. Bank of Mumbai receives a bill under letter of credit opened by it. The importer instructs the bank not
to pay because he says the goods received are defective. The bank should.
A. return the bill with the reason payment refused.
B. seek clarification from the drawer; meanwhile k eep the bill with it.
C. refer the matter to International Chamber of Commerce.
D. make payment to the negotiating bank since the importe rs reason is untenable.
ANSWER: D
37. While scrutinizing the documents tendered under a letter of credit, the negotiating bank and issuing
bank should apply the doctrine of.
A. strict compliance
B. force majeure.
C. indemnity.
D. major com pliance.
ANSWER: A
38. Bank A has opened a letter of credit on behalf of its customers Imports India. When a bill under the
letter of credit is presented for payment by the negotiating bank it is found that Imports India do not have
sufficient balance in the account to pay the bill. The bank should.
A. intimate the negotiating bank by cable.
B. sue the customer for non-compliance w ith the letter of credit terms.

C. defer payment to the negotiating bank.
D. make payment to the negotiating bank immediately if documents are in order.
ANSWER: D
39. The expiry date of a letter of credit falls on 1st November, a bank holiday at exporters place.
A. The documents can be presented for negotiation the next working day.
B. The documents should be negotiated latest by the preceding working d ay.
C. Last date of negotiation and last date of shipment get postponed by a day.
D. The last date for shipment gets postponed but not the last date of negotiati on.
ANSWER: A
40. A letter of credit stipulates that the shipment should be made at the beginning og August 2005. It
means, the shipment can be made.
A. only on 1st August 2005.
B. during the first week of A ugust 2005.
C. any date between 1st and 10th of Aug ust 2005.
D. before the commencement of April 2005.
ANSWER: C
41. The letter of credit provides that shipment shall be made during the first half of February 2006. It
means the shipment can be made on any date between.
A. 1st and 4th of February 2006.
B. 1st and 15th of February 2006 .
C. 1st and 14th of February 2006; generally, with discretion to the negotiating bank to accept on 15th
February 2006 also.
D. 1st and 14th of February 2006; on 15th only if the port did not work on 14th.
ANSWER: B
42. If the letter of credit indicates the amount as about a specified amount, the drawing under the credit can
be.
A . 30% more than the specified amount.
B. 30% more or less than the Specified a mount.
C. 10% more than the specified amount.
D. 10% more or less than the specified a mount.
ANSWER: D
43. A letter of credit is opened for 100 kg of coffee for GBP 800. Documents for 102 kg of coffee for GBP
800 is presented for negotiation.
A. The bill cannot be accepted because quantity exceeds the letter of credit limit.
B. The bill cannot be accepted as the unit price get varied.
C. The bill can be accepted as it is beneficial to the import er.
D. The bill can be accepted since a tolerance of $5% in quant ity is allowed under UCP.
ANSWER: D
44. A teletransmission will be considered an operative instrument where.
A. it states full details to follow
B. it states mail confirmation w ill be the operating instrument.
C. it states airmailing our irrevocable letter of credit
D. none of the above.
ANSWER: D
45. A bank which issues a preliminary advice of issuance of an irrevocable credit.
A. A bank which issues a preliminary advice of issuance of an irrevocable credi t.
B. can later convert it as operative instrument.
C. may issue the operative instrument with dif ferent terms.
D. may issue the operative instrument with different terms.
ANSWER: A

46. A letter of credit is required to be completer and precise. It means.
A. it should not contain excessive details.
B. it should not refer to a previous credit w hich was amended.
C. both 1 and 2.
D. none of the a bove.
ANSWER: C
47. Expiry date of a letter of credit refers to.
A. the last date for shipment.
B. the last date for negotiatio n.
C. the last date for presentation of documents to issuing bank.
D. the last date of the month in which shipment can be made.
ANSWER: B
48. Unless otherwise required by the credit, the authentication of a document cannot be indicated by.
A. facsimile signature.
B. mark or stamp.
C. electronic meth od of authentication.
D. none of the above.
ANSWER: D
49. The obligation of the applicant of the credit to the beneficiary is.
A. to get the letter of credit opened confirming to terms of sale con tract.
B. to remain liable for the payment if the issuing bank fails to pay.
C. both 1 and 2 options.
D. only to get the credit opened.
ANSWER: C
50. Applicant for a letter of credit is not liable to the issuing bank.
A. for the charges of the issuing bank when collectable from the beneficiary, but he fails to pay.
B. actions of the intermediary bank.
C. the obligations imposed by foreig n laws and usages.
D. none of the above.
ANSWER: D
51. The responsibility of an accepting bank in a letter of credit is to.
A. accept bills drawn under the credit.
B. pay bills drawn under the credit.
C. accept and pay bills drawn under the credit.
D. accept the bill and get the payment from the issuing bank.
ANSWER: C
52. The responsibility of a negotiating bank is to.
A. verify that it negotiating only bills drawn und er credit advised by it.
B. the goods covered by the bill are safe and properly insured.
C. the documents tendered are as per the terms of credit.
D. both 2 and 3 above.
ANSWER: C
53. The responsibility of the confirming bank of a letter of credit is.
A. to negotiate and pay documents drawn under the credit.
B. vouchsafe the authenticity of the credit.
C. pay, if the issuing bank fails to pay docu ments that are in order.
D. pay, if the payment cannot be made by issuing bank due to gove rnment action.
ANSWER: A
54. Reimbursing bank under a letter of credit.
A. same as the issuing bank.
.

B. the paying bank.
C. the bank from wh ich the negotiating bank can claim reimbursement.
D. branch of the issuing bank in the exporters country.
ANSWER: C
55. Under UCP, the banks involved in a letter of credit transaction are responsible for.
A. genuineness of documents submitted by the beneficiary.
B. non-fulfillment of obligations by the other banks.
C. delay in transmission of messages.
D. none of the above.
ANSWER: D
56. Under a letter of credit, the bill of exchange should be drawn on.
A. the issuing bank.
B. the issuing bank or any other bank as indicated in the credit.
C. the issuing bank or the importer as indicated in the credit.
D. any party as indicated in the credit.
ANSWER: B
57. As per Negotiable Instruments Act, the following will be a foreign bill.
A. A bill drawn in Mumbai on a party in New York and payable at Delhi .
B. A bill drawn in Chennai on a party in Kolkata and payable at Colombo .
C. A bill drawn in Bangalore on a party in Sydney and payable there.
D. none of the above.
ANSWER: C
58. As per UCP, the minimum amount for which marine insurance should be effected is.
A. FOB value.
B. CIF value.
C. FOB value plus 10%.
D. CIF value plus 10%.
ANSWER: D
59. The following document is not acceptable under a letter of credit unless specifically authorized by the
credit.
A. m arine insurance policy.
B. insurance document whic h specifies that the cover is subject to a excess.
C. certificate of insurance.
D. cover notes issued by br okers.
ANSWER: D
60. The currency in which the insurance policy is obtained should be the currency of .
A. the importers country.
B. the exporters country.
C. the letter of credit.
D. any country, which is easily exchangeable.
ANSWER: C
61. The date from which the marine insurance policy should be effective should be.
A. same as the date of the transport document.
B. same or later than the date of the transport d ocument.
C. same or earlier than the date of the transport documen t.
D. earlier than the date of the transport document.
ANSWER: C
62. General Average loss under marine insurance is.
A. the basis for calculation of premium.
B. losses suffered to compensate extraor dinary sacrifice made to save the property in common.

C. risks for which only average cost will be reimbursed.
D. none of the above.
ANSWER: B
63. Marine policy clause that currently gives widest coverage against risks is.
A. Institute Cargo Clause A.
B. Institute Cargo Clause B.
C. Institute Cargo Clause C.
D. All Risks Clause.
ANSWER: C
64. For Claiming under marine policy, the claimant should have insurable interest.
A. at the time of taking the policy.
B. when damage to or loss of good s occurs.
C. both at the time of taking the policy and o ccurrence of damage/loss.
D. either at the time of taking the policy or at the time of occurrence of damage/loss.
ANSWER: B
65. The description of goods in the following document should agree exactly with the description in the
letter of credit.
A. Bill of lad ing.
B. Commercial in voice.
C. Packing list.
D. all the above .
ANSWER: B
66. A certified invoice is one.
A. certified as correct by th e importers agent in the exporters country.
B. certified as correct by the consul of the importers country
C. certified as correct by Chamber of Commerce.
D. which includes a certificate of origin.
ANSWER: B
67. Certificate of origin indicates.
A. the country of shipment of g oods.
B. the place of manufacturer/product ion of goods.
C. the country of manufacturer/production of good s.
D. whether the product belongs to plant or animal ki ngdom.
ANSWER: C
68. Details about the exact contents of each package can be found in.
A. packing list.
B. packing cert ificate.
C. commercial invoice .
D. none of the above.
ANSWER: A
69. The following invoice does not evidence sale.
A. consular invoice.
B. certified invoice.
C. visaed invoice.
D. proforma invoi ce.
ANSWER: D
70. The following transport document is a document of title to goods.
A. bill of lading.
B. multimodal tr ansport document.
C. airway bill.
.

D. none of the above.
ANSWER: A
71. A bill of lading is.
A. a non-negotiable instrument.
B. a quasi-negotiable.
C. fully negotiable ins trument.
D. partly negotiable instrument .
ANSWER: B
72. A mates receipt is.
A. Document signed by an officer of a vessel evidencing receipt of a shipment on board the vessel.
B. a substitute bill of lading.
C. bill of lading evidencing g oods carried on deck.
D. a draft bill of lading.
ANSWER: A
73. In a bill of lading the consignees name is mentioned as to order. It means the goods will be delivered to
the order of.
A. consign or.
B. the bank.
C. the consig nee.
D. the shipping ag ent.
ANSWER: A
74. As per UCP, unless specifically authorized in the letter of credit, a bank will not accept.
A. through bill of lading.
B. short form bill of ladin g.
C. bill of lading indicating t hat the carrying vessel is propelled by sail only.
D. none of the above.
ANSWER: D
75. In the absence of specific mention in the letter of credit, under UCP a transport document is considered
stale.
A. if presented for negotiation 21 days after its issue.
B. if presented for negotiation after its issue.
C. if presented after expiry of the letter of cre dit.
D. if presented for negotiation after the goods rea ch the destination.
ANSWER: A
76. A straight bill of lading is one.
A. covering both land and water transport.
B. the goods covered by which are delivera ble to the consignee.
C. which is sent directly to the consignee.
D. none of the above.
ANSWER: B
77. Freight to pay bill of lading is acceptable if.
A. the contact term is CIF.
B. the contract term is CFR .
C. the contract term is FOB.
D. goods are carried by a for eign vessel.
ANSWER: C
78. The drawback of non-negotiable sea waybill is.
A. . it does not evidence contract of affreightmen t.
B. it increases the incidence of fraud.
C. goods will not be delivered withou t the waybill even if indemnity is executed.
.

D. the buyer cannot sell the goods in transit by surrendering a paper document to a new buyer.
ANSWER: D
79. The following transport document is acceptable under a letter of credit.
A. house air waybill
B. house bill of ladin g.
C. warehouse receipt.
D. tramp bill of lading .
ANSWER: A
80. According to the Multimodal Transportation of Goods Act, a multimodal transport document cannot
be.
A . a bearer instrument.
B. an order instrument.
C. a non-negotiable inst rument.
D. none of the above.
ANSWER: D
81. Air waybill is prepared in.
A. three originals.
B. quadruplicate.
C. as many copie s as required by the exporter.
D. one original only.
ANSWER: A
82. Incoterms cover.
A. trade in intangi bles.
B. ownership and trans fer rights.
C. contracts of carriage
D. rights and obligation s of parties to contract of sales.
ANSWER: D
83. The following incoterms cannot be used for contracts providing for transportation of goods by sea.
A. CFR.
B. DDP.
C. DES.
D. DEQ.
ANSWER : B
84. The incoterm providing least responsibility to seller is.
A. EXW.
B. DDP.
C. FOB.
D. CIF.
ANSWE R: B
85. The group of incoterms under which the sellers responsibility is to obtain freight paid transport
document for main carriage is.
A. E terms.
B. C terms.
C. D terms.
D. F terms.
ANSWER: B
86. The incoterm should indicate the place of shipment in case of.
A. F terms
B. E terms .
C. C terms.
D. Dterms.
ANSWER: A
87. Incoterm is specific about the responsibility for marine insurance in case of.
A. FOB and EXW.
B. FOB and CIF.
C. CIF and CIP.
D. CPT and DD P.
ANSWER: C
88. The importer under FOB terms requests the exporter to book shipping space on vessel convenient to
the exporter. The exporter.
A. is bound to book the shipping space as it is his duty under FOB term.
B. Should refuse the request as it is the duty of the importer to book the shipping space.
C. may accept the request, but cannot recover the additional cost from the importer.
D. may accept and execute the request at the cost of the importer.
ANSWER: D
89. The group of terms arranged in order of increasing responsibility of exporter is.
A. C, D, E and E terms.
B. D, E, F and C terms.
C. E, F, C and D terms.
D. F, C, E and D terms.
ANSWER: C
90. The price quoted by the seller for the product.
A. Will vary depending upon the incoterm chos en.
B. is irrespective of the incoterm.
C. Will be the base price; the effe ct of incoterm to be added later.
D. none of the above.
ANSWER: A
91. Adoption of incoterms is.
A. compulsory for all intern ational contracts.
B. compulsory for all letter of credit transacti ons.
C. optional for the parties to the contract.
D. mandatory for transactions with Europ e.
ANSWER: C
92. Packing credit is.
A. an advance mad e for packing goods for export.
B. pre-shipment finance for export.
C. a priority sector advance.
D. none of the above.
ANSWER: B
93. The amount of packing credit should not normally exceed.
A. the local cost of manufacture for the exporter.
B. FOB value of the export contract.
C. CIF value of the export contract.
D. The cost of manufacture or the F OB value of the export contract, whichever is lower.
ANSWER: D
94. The following person is not eligible for packing credit.
A. merchant exporter.
B. a person making de emed exports.
C. sub-supplier to manufacturer expo rter.
D. supplier to sub-supplier to manufactur er exporter.
.
ANSWER: D
95. The running account facility for packing credit is available for.
A. status holders only.
B. exporters of specifi ed goods.
C. exporters with good track rec ord.
D. exporters with orders above Rs.10 0 crores.
ANSWER: C
96. The advantage to the exporter of running account facility of packing credit is.
A. production of letter of credit or firm order is completely waived.
B. the period of facility need not be adhered to.
C. production of letter of credit or firm order is waived immediately; they must be produced within
reasonable time.
D. the rate of i nterest is low.
ANSWER: C
97. The exemption from the condition that packing credit should not exceed domestic cost of production is
not waived for.
A. commodit y eligible for duty drawback.
B. commodity imported under advance lic ence.
C. HPS groundnuts.
D. agro based produ cts like tobacco.
ANSWER: B
98. The substitution of commodity/fresh export for adjustment of packing credit is not available for.
A. advance against sensitive commodities.
B. transactions of sister/associate/group co ncerns.
C. exporters availing running account facility.
D. none of the above.
ANSWER: B
99. Normally the maximum period for which packing credit advances are made in.
A. 90 days.
B. 135 days .
C. 180 days.
D. 360 days.
ANSWER: C
100. A per-shipment advance is not expected to be adjusted by .
A. proceeds of export bill.
B. export incentives.
C. post shipment fina nce.
D. local funds.
ANSWER: D
101. A packing credit was granted against an export order, but the export could not take place.
A. It should be reported to Reserve Bank of India.
B. The exporter should be blacklisted
C. Claim should preferred with ECGC .
D. Interest at domestic rate should be ch arged on the advance from the date of advance.
ANSWER: D
102. For direct exporters, the packing credit should normally be granted only against.
A. a letter of credit.
B. firm order.
C. export licen ce.
D. a letter of credi t or firm order.
.

ANSWER: D
103. For packing credit in rupees, the interest for the period up to 180 days is chargeable at.
A. BPLR minus 2.5%.
B. BPLR minus 3%.
C. not exceeding BP LR minus 2.5%.
D. . not less than BPLR minus 2.5%.
ANSWER: C
104. Pre shipment Credit in Foreign Currency is available for a period of.
A. maximum 180 days.
B. minimum 180 days.
C. maximum 270 days.
D. maximum 360 days.
ANSWER: A
105. Pre-shipment Credit in Foreign Currency can be availed in.
A. US dollar only.
B. The currency of export only.
C. The currency of import only.
D. any permitted currency.
ANSWER: D
106. Advising of letter of credit will be done by the bank.
A. only to its customers.
B. to any person provide d the letter of credit is issued by its correspondent bank.
C. free of charge to its customers and for a cost to others.
D. . to any beneficiary and from any issuing bank.
ANSWER: B
107. The following is not a post-shipment advance.
A. Negotiation of bill under letter of credit.
B. Purchase of foreign bill.
C. Advance against bill for collection.
D. None of the above.
ANSWER: D
108. A bill drawn under the letter of credit contains discrepancies.
A. the bank should refuse to negotiate the documents.
B. take the bill on collection basis only.
C. must negotiate irrespective of the dis crepancies.
D. may purchase it or take it for collection, but sho uld not refuse to handle the bill.
ANSWER: D
109. The following is a must for an exporter
A. IEC number.
B. Exporters cod e number allotted by Reserve Bank.
C. A minimum local turnover of Rs 50 lakhs.
D. an export licence.
ANSWER: A
110. An export to Pakistan by post parcel should be declared in.
A. GR form.
B. EP form.
C. PP form.
D. GRX For m.
ANSWER: C

111. Realization of export proceeds in a period of 15 months from the date of shipment is allowed in the
case of.
A. all consignment exports.
B. exports on deferred paym ents terms.
C. exports to Nepal.
D. exports to Indian owned warehouses in Europe.
ANSWER: D
112. Generally, on exports the proceeds are to be realized within.
A. six months from the date of shipment.
B. one year from the date of shipment.
C. six months from the date of negotiat ion of documents.
D. one year from the date of negotiation of documents.
ANSWER: A
113. Availment of post shipment credit in foreign currency is compulsory for.
A. exports who have not availed packing credit.
B. all exporters who have availed packing credit .
C. exporters who have availed pre-shipment cred it in foreign currency.
D. none.
ANSWER : C
114. Post-shipment credit in foreign currency can be availed by.
A. use of on-shore foreign currency funds.
B. banks raising foreign currency funds ab road.
C. exporters arranging funds abroad.
D. Any of the above methods.
ANSWER: D
115. Advance remittance from the importer can be accepted by an exporter in India provided
A. the advance does not carry interest payment.
B. shipment will be made only after one year fro m the date of receipt of advance payment.
C. the advance does not exceed 25% of the export value.
D. the rate of interest, if payable, does not exceed Libor p lus 1%.
ANSWER: D
116. A bank may refuse to accept an export bill for collection.
A. when the customer has sufficient limits under bill discoun ting facility.
B. when the documents have discrepancies as compared to letter of credit requirements.
C. when the documents are received from a non-customer.
D. none of the above.
ANSWER: C
117. If the importer refuses to accept the bill drawn on him the exporter.
A. should reimport the goods.
B. must find an alternate buye r.
C. may reimport or sell to altern ate buyer depending upon commercial expediency.
D. sue the importer.
ANSWER: C
118. If export cargo is lost in transit, the exporter should.
A. claim under marine insurance.
B. claim with ECGC
C. seek write off of p ost-shipment credit.
D. forseek refund of customs duty.
ANSWER: A
119. Deferred payment export is a form of.
.
A. sellers credit.
B. buyers credit.
C. mutual credit.
D. market credit.
ANSWER: A
120. Buyers credit takes the form of.
A. exporters bank financing the bu yer directly.
B. exporters bank financing the buyers bank
C. both (a) and (b) above.
D. neither (a) nor (b) abov e.
ANSWER: C
121. Deferred payment exports refer to contracts where.
A. payment is to be made by the importer over 3 years and above.
B. payment is to be made by the importer after 6 months from the date of shipment.
C. the export for which the exporter avails deferred payment credit
D. lending in international markets on long-term basis.
ANSWER: B
122. Working Group for approval of project exports does not include.
A. Reserve Bank of India.
B. Financing bank.
C. Exim bank.
D. DGFT.
ANSWER: D
123. For project exports fulfilling norms for period of credit, in principle sanction can be given by.
A. the financing bank.
B. Exim bank.
C. The financin g bank for contracts worth up to Rs 25 crores and Exim bank for contracts worth up to
RS 100 crores.
D. the financ ing bank for contracts worth up to Rs 100 crores and Exin bank for contracts worth up to
Rs 25 crores.
ANSWER: C
124. Export of services on deffered payment terms requires clearance of the Working Group for.
A. contracts beyond Rs 5 crores.
B. all contracts.
C. contracts bey ond 20 crores
D. contracts beyond 10 crores .
ANSWER: B
125. In case of failure of the exporter, the liability of the bank which has issued the performance guarantee
is to.
A. c ompel the exporter to fulfil his obligation.
B. find alternative contractor who can execute the contract.
C. financially compensate the beneficiary up to the value of the contract.
D. financially compensate the beneficiary up to the guaranteed amount.
ANSWER: D
126. Advance payment guarantee assures.
A. the beneficiary that the exporter will make advance payments.
B. the exporter that the importer will make advance payments.
C. the importer to refund the money he has advanced to the exp orter, if the latter fails.
D. the exporter that the bank will extend credit for the contract
ANSWER: C
.

127. Indian parties are prohibited from making investment in foreign entity engaged in the business of.
A. real estate.
B. real estate or banking.
C. real estate or banking or agriculture.
D. none of the above.
ANSWER: B
128. Export Credit Guarantee Corporation(ECGC) policies do not cover risk against.
A. buyers protracted default to pay for the goods.
B. war in buyers country.
C. buyers failure to obtain necessary import licence or exchange authorization from authorities in his
country
D. ca ncellation of export licence. Answer:C
ANSWER: C
129. The standard policy of ECGC covers risk of.
A. buyers failure to obtain import licence.
B. cancellation of import license in the bu yers country.
C. insolvency of the collecting bank.
D. all the above.
ANSWER: B
130. The standard policy of ECGC protects loss to the extent of.
A. 90% for political risk and 60% for commercial risk.
B. 90% for both political and commercial risks.
C. 60% for political risk and 90% for commerci al risk.
D. 60% for both political and commercial risks.
ANSWER: B
131. The maximum amount of claim against an individual buyer that ECGC will accept under its standard
policy issued to an exporter is known as.
A. maximum liability.
B. credit limit.
C. individual li mit.
D. there is no such ceiling.
ANSWER: B
132. The standard policy of ECGC is issued.
A. on whole turnover for 12 months.
B. on whole turnover basis for 24 mo nths.
C. against each consignment separately.
D. on monthly basis.
ANSWER: B
133. The Small Exporters Policy of ECGC is issued to.
A. any exporter in the SSI category.
B. any exporter who is exempt from excise duty.
C. an exporter with an anticipated turnover in the next 12 months not exceeding 1 crore.
D. an exporter with an anticipated turnover in the next 12 months not exceeding 25 lakhs .
ANSWER: D
134. Which of the following information about the Small Exporters Policy is wrong?
A. Risk coverage is 95% for commercial risk and 100 % for political risk.
B. The policy is issued for a period of 12 months.
C. The premium payable is lower than under the s tandard policy.
D. All the above.
ANSWER: D
.
135. Under its maturity factoring facility ECGC offers which of the following services?
A. Credit protection and sales ledger maintenance.
B. Credit protection, sales ledger maintenance and collection.
C. Financing exports.
D. Invoice discountin g and sales ledger maintenance.
ANSWER: B
136. The maturity factoring of ECGC protects the exporter against.
A. failure of the buyer to obtain authority as per the regulations o f his country.
B. risk normally covered by General Insurers.
C. failure of the buyer to pay.
D. none of the above.
ANSWER: C
137. Cover under the guarantee of ECGC is available to.
A. the bank against the default of the importer.
B. the bank against the default of the exporter.
C. the exporter against the failure of the export er.
D. the bank and the exporter against the failure of the buyer.
ANSWER: B
138. Pre-shipment advances granted in excess of the FOB value of contract in anticipation of duty
drawback can be covered under.
A. Packing Credit Guarantee.
B. Whole Turnover Packing C redit Guarantee.
C. Export Production Finance Guarantee.
D. Export Finance Guarantee.
ANSWER: C
139. . Export Finance(Overseas Lending) Guarantee of ECGC protects.
A. banks providing foreign currency loans to their correspondents.
B. banks providing foreign currency loans to contractors executing projects abroad.
C. overseas branches financing Indian exports.
D. none of the above.
ANSWER: B
140. Post-shipment advances against export incentives can be covered under.
A. Post-shipment Export Credit Guarantee.
B. Whole Turnover Post-shipment Credit G uarantee.
C. Export Production Finance Guarantee.
D. Export Finance Guarantee.
ANSWER: D
141. The rate of premium payable to ECGC for eligible advances covered under Whole Turnover Packing
Credit Guarantee is.
A. 6 paise per Rs 100 p.a. on daily average products.
B. 6 paise per Rs 100 p.m. on monthly average produ cts.
C. 6 paise per Rs 100 p.m. on yearly average products.
D. 6% per annum.
ANSWER: A
142. The risk to a bank in confirming a letter of credit is covered by ECGC under
A. Export Performance Guarantee.
B. Transfer Guarantee.
C. Export Finance Gua rantee.
D. none of the above.
ANSWER: B

143. Under Exchange Fluctuation Risk Cover, the ECGC provides cover.
A. to the exporters on deferred payment terms against exchange fluctua tions.
B. to banks for advances made in foreign currency to importers abroad.
C. to banks against advances for deferred payments exports.
D. none of the above.
ANSWER: A
144. . In case of exports to countries placed by ECGC in its restricted cover categories.
A. the risk will be covered by ECGC only if specific applications from exporters are approved by them.
B. The corporation will not cover the exports.
C. the risk will be covered on intimation to EC XGC.
D. none of the above.
ANSWER: A
145. The Board of Trade is.
A. a wing of the board of Directors in companies engaged in foreign trade.
B. the authority that appraises foreign investment in India.
C. a consultative and advisory body for the Government if India on foreign trade policy.
D. an organization of exporters from India.
ANSWER: C
146. Commodity Boards do not differ from Exports Promotion Councils in respect of the following.
A. Commodity Boards deal with problems relating to production also.
B. . Commodity Board is a statutory body.
C. Commodity Board covers a specific pro duct.
D. none of the above.
ANSWER: C
147. Which of the following organization does not specialize in training activity?
A. Indian Institute of Foreign Trade.
B. Indian Trade Promotion Organisa tion
C. Indian Institute of Packaging.
D. none of the above.
ANSWER: B
148. The institution specializing in organizing fairs and exhibitions is.
A. Indian Institute of Foreign Trade.
B. Federation of Indian Export Orga nisations.
C. Indian Trade Promotion Oraganisations.
D. none of the above.
ANSWER: C
149. Market Access Initiative is not available for.
A. conducting market studies.
B. participation in internationa l trade fairs.
C. testing charges for engineering products .
D. none of the above.
ANSWER: D
150. Market Development Assistance is available to.
A. exporters with annual turnover up to Rs 10 cror es.
B. exporters with annual turnover up to Rs 5 crores.
C. exporters with annual turnover above Rs 10 crore s.
D. all exporters.
ANSWER: A
.

CAIIB BFM:



Balance sheet of a bank provides the following information:

Fixed Assets - 1000cr

Investment in central Govt Securities - Rs 10000cr

In standard loan accounts

Housing Loans - RS 6000c r (Secured, below Rs 10 lac)

the Retail loan - Rs 4000cr

Other loans - Rs 8000cr

sub-standard secured loans - Rs 1000cr

sub-standard unsecured loans - Rs 500c r

Doubtful loans (D-1, secured) - Rs 800cr

Doubtful loans (D-1, unsecured) - Rs 600c r

Doubtful loans (D-2, secured) - Rs 500cr

Doubtful loans (D-2, unsecured) - Rs 1000 cr

Doubtful loans (D-3, secured) - Rs 1000cr

Doubtful loans (D-3, unsecured) - Rs 600cr

Loss Assets - 50cr and

other assets - Rs 500cr .

Answer the following questions, based on this information, by using standard Approach for credit risk.

1. What is the amount of RWAs for investment in govt securities?

a. Rs 5000cr

b. Rs 3500cr

c. Rs 2500cr

d. Nil

2. What is the amount of RWAs for sub-standard unsecured accounts?

a. Rs 500cr

b. Rs 7500cr

c. Rs 1000cr

d. Rs 1500cr

3. What is the amount of RWAs for doubtful (D-1, unSecured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

4. What is the amount of RWAs for doubtful (D-2, unSecured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

5. What is the amount of RWAs for doubtful (D-3, unSecured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

6. What is the amount of RWAs for retail loans?

a. 3000cr

b. 4000cr

c. 5000cr

d. 6000cr

7. What is the amount of RWAs for housing loans?

a. 3000cr

b. 4000cr

c. 5000cr

d. 6000cr

Solution :

1. d

RW against Govt Securities = 0 %

So, RWA

= 10000 x 0%

= 0 Cr

2. a

If th e provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50 %

Provision in Sub-Standard Un-Secured - 25 %, and so, RW = 100 %

So, RWA

= 500 x 1 00 %

= 500 Cr

3. a

If th e provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50 %

Provision in doubtful (D-1, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 600 x 5 0 %

= 300 Cr

4. b

If th e provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50 %

Provision in doubtful (D-2, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 1000 x 50 %

= 500 Cr

5. a

If th e provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50 %

Provision in doubtful (D-3, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 600 x 5 0 %

= 300 Cr

6. a

RW on retail loans = 75 %

So, RWA

= 4000 x 75%

= 3000 Cr

7. a

RW on housing loans = 50 %

So, RWA

= 6000 x 50%

= 3000 Cr

Gist of fedai rules

Gist of Important FEDAI Rules

Rule 1: Hours of Business

1.1 The exchange trading hours for Inter-bank forex market in India would be from

9.00 a.m. to 5.00 p.m. No customer transaction should be undertaken by the

Authorised Dealers after 4.30 p.m. on any working day. 1.2 Cut-off time limit of 05.00 p.m. is not applicable for cross- currency transactions.

In terms of paragraph 7.1 of Internal Control Guidelines over Foreign Exchange

Business of Reserve Bank of India (February 2011), Authorised Dealers are

permitted to undertake cross-currency transactions during extended hours, provided

the Managements lay down the extended dealing hours. 1.3 For the purpose of Foreign Exchange business, Saturday will not be treated as

a working day. 1.4 “Known holiday” is one which is known at least 4 working days before the date. A holiday that is not a “known holiday” is defined as a “suddenly declared holiday”. Rule 2: Export Transactions

2.1. Post-shipment Credit in Rupees

(c) Application of exchange rate: Foreign Currency bills will be

purchased/discounted/ negotiated at the Authorised Dealer’s current bill buying rate

or contracted rate. Interest for the normal transit period and/or usance period shall

be recovered upfront simultaneously. (d) Crystallization and Recovery:

(ii) Authorized Dealers should formulate own policy for crystallization of foreign

currency liability into rupee liability, in case of non-payment of bills on the due

date. (iii) The policy in this regard should be transparently available to the customers. (iv) For crystallization into Rupee liability, the Authorised Dealer shall apply its TT

selling rate of exchange. The amount recoverable, thereafter, shall be the

crystallized Rupee amount along with interest and charges, if any.



(v) Interest shall be recovered on the date of crystallization for the overdue period

at the appropriate rate; and thereafter till the date of recovery of the

crystallized amount. (vi) Export bills payable in countries with externalization issues shall also be

crystallized as per the policy of the authorised dealer, notwithstanding receipt

of advice of payment in local currency. (d) Realization of Bills after crystallization: After receipt of advice of realization,

the authorised dealer will apply TT buying rate or contracted rate (if any) to convert

foreign currency proceeds. (e) Dishonor of bills: In case of dishonor of a bill before crystallization, the bank

shall recover:

(ii) Rupee equivalent amount of the bill and foreign currency charges at TT selling rate. (iii) Appropriate interest and rupee denominated charges. 2.2. Application of Interest

(c) Rate of interest applicable to all export transactions shall be as per the

guidelines of Reserve Bank of India from time to time. (d) Overdue interest shall be recovered from the customer, if payment is not

received within normal transit period in case of demand bills and on/or before

notional due date/actual due date in case of usance bills, as per RBI directive. (e) Early Realization: In case of early realization, interest for the unexpired period

shall be refunded to the customer. The bank shall also pay or recover notional swap

cost as in the case of early delivery under a forward contract. 2.3. Normal Transit Period:

Concepts of normal transit period and notional due date are linked to concessional

interest rate on export bills. Normal transit period comprises the average period

normally reckoned from the date of negotiation/purchase/discount till the receipt of

bill proceeds.

It is not to be confused with the time taken for the arrival of the goods at the destination. Normal transit period for different categories of export business are laid down as below:

(c) Fixed Due Date: In the case of export usance bills, where due dates are fixed, or are reckoned from date of shipment or date of bill of exchange etc, the actual due

date is known. Therefore, in such cases, normal transit period is not applicable. (d) Bills in Foreign Currencies – 25 days

(e) Exports to Iraq under United Nations Guidelines – Max. 120 days

(g) Bills drawn in Rupees under Letters of Credit (L/C)

(i) Reimbursement provided at centre of negotiation - 3 days

(ii) Reimbursement provided in India at centre different from centre of

negotiation - 7 days

(iii) Reimbursement provided by banks outside India - 20 days

(iv) Exports to Russia under L/C where reimbursement is provided by RBI - 20 days. (h) Bills in Rupees not under Letter of Credit - 20 days

(i) TT reimbursement under Letters of Credit (L/C)

(i) Where L/C provides for reimbursement by electronic means - 5 days

(ii) Where L/C provides reimbursement claim after certain number of days

from the date of negotiation - 5 days + this additional period. 2.4. Substitution/Change in Tenor:

(o) In case of change in the usance of a bill, interest on post-shipment credit shall

be charged to the customer, as per RBI guidelines. In addition, the bank shall

charge or pay notional swap difference. Interest on outlay of funds for such

swaps shall also be recovered from the customer at rate not below base rate

of the bank concerned. (p) It is optional for banks to accept delivery of bills under a contract made for

purchase of a clean TT. In such cases, the bank shall recover/pay notional

swap difference for the relative cover. Interest at the rate not below base rate

of the bank would be charged on the outlay of funds. 2.5. Export Bills sent for collection:

(a) Application of exchange rates: The conversion of foreign currency proceeds of

export bills sent for collection or of goods sent on consignment basis shall be

done at prevailing TT buying rate or the forward contract rate, as the case

may be. The conversion to Rupee equivalent shall be made only after the

foreign currency amount is credited to the nostro account of the bank. (b) On receipt of credit advice/statement of nostro account and compliances of

guidelines, requirements of the Bank and FEMA, the Bank shall transfer funds

for the credit of exporter’s account within two working days. (c) If the above stipulated time limit is not observed, the Bank shall pay

compensation for the delayed period at the minimum interest rate charged on

export credit. Compensation for adverse movement of exchange rate, if any, shall also be paid as per the compensation policy of the bank.



Rule 3: Import Transactions

3.1 Application of exchange rate:

(a) Retirement of import bills - Exchange rate as per forward sale contract, if

forward contract is in place. Prevailing Bills selling rate, in case there is no

forward contract. (b) Crystallization of Import - same as above bill (vide para 3.3 below)

(c) For determination of stamp - As per exchange rate provided by the duty on

import bills authority concerned. 3.2. Application of Interest:

(a) Bills negotiated under import letters of credit shall carry commercial rate of

interest as applicable to banks’ domestic advances from time to time. (b) Interest remittable on interest bearing bills shall be subject to the directive of

Reserve Bank of India in this regard. 3.3. Crystallization of Import Bill under Letters of Credit. Unpaid foreign currency import bills drawn under letters of credit shall be

crystallized as per the stated policy of the bank in this respect. Rule 4 Clean Instruments:

4.1. Outward Remittance: Outward remittance shall be effected at TT selling rate of

the bank ruling on that date or at the forward contract rate. 4.2. Encashment of foreign currency notes and instruments, Foreign currency

travelers’ cheques, currency notes, foreign currency in prepaid card, debit/credit

card will be encashed at Authorised Dealer’s option at the appropriate buying rate

ruling on the date of encashment. 4. 3. Payment of foreign inward remittance, Foreign currency remittance up to an

equivalent of USD 10,000/- shall be immediately converted into Indian Rupees. Remittance in excess of equivalent of USD 10,000 shall be executed in foreign

currency. The beneficiary has the option of presenting the related instrument for

payment to the executing bank within the period prescribed under FEMA. 4.4. The applicable exchange rate for conversion of the foreign currency inward

remittance shall be TT buying rate or the contracted rate as the case may be. 4.5. Compensation for delayed payment: Authorised Dealers shall pay or send

intimation, as the case may be, to the beneficiary in two working days from the date

of receipt of credit advice / nostro statement. In case of delay, the bank shall pay

the beneficiary interest @ 2 % over its savings bank interest rate. The bank shall

also pay compensation for adverse movement of exchange rate, if any, as per its

compensation policy



Rule 5 Foreign Exchange Contracts:

5.1. Contract amounts: Exchange contracts shall be for definite amounts and

periods. When a bill contract mentions more than one rate for bills of different

deliveries, the contract must state the amount and delivery against each such rate. 5.2. Option period of delivery: Unless the date of delivery is fixed and indicated in

the contract, the option period may be specified at the discretion of the customer

subject to the condition that such option period of delivery shall not extend beyond

one month. If the fixed date of delivery or the last date of delivery option is a known

holiday, the last date for delivery shall be the preceding working day. In case of

suddenly declared holidays, the contract shall be deliverable on the next working

day. Contracts permitting option of delivery must state the first and last dates of

delivery. For Example: 18th January to 17th February, 31st January to 29th Feb. 2012. “Ready” or “Cash” merchant contract shall be deliverable on the same day. “Value next day” contract shall be deliverable on the working day immediately

succeeding the contract date. A spot contract shall be deliverable on second

succeeding working day following the contract date. A forward contract is a contract

deliverable at a future date, duration of the contract being computed from spot value

date at the time of transaction”. 5. 3. Place of delivery: All contracts shall be understood to read “to be delivered or

paid for at the Bank” and “at the named place”. 5.4. Date of delivery: Date of delivery under forward contracts shall be:

(i) In case of bills/documents negotiated, purchased or discounted - the date of

negotiation/purchase/ discount and payment of Rupees to the customer. However, in case the documents are submitted earlier than, or later than the

original delivery date, or for a different usance, the bank may treat it as proper

delivery, provided there is no change in the expected date of realization of

foreign currency calculated at the time of booking of the contract. No early

realization or late delivery charges shall be recovered in such cases. (ii) In case of export bills/documents sent for collection - Date of payment of

Rupees to the customer on realization of the bills. (iii) In case of retirement/crystallization of import bills/documents - the date of

retirement/ crystallization of liability, whichever is earlier?

5.5. Option of delivery: In all forward merchant contracts, the merchant, whether a

buyer or a seller will have the option of delivery. 5.6. Option of usance: The merchant purchase contract should state the tenor of

the bills/documents. Acceptance of delivery of bills/documents drawn for a different

tenor will be at the discretion of the bank



5.7. Merchant quotations: The exchange rate shall be quoted in direct terms i.e. so many Rupees and Paise for 1 unit or 100 units of foreign currency. 5.8. Rounding off: Rupee equivalent of the foreign currency Settlement of all

merchant transactions shall be effected on the principle of rounding off the Rupee

amounts to the nearest whole Rupee i.e. without paise. RULE 6 Early Delivery, Extension and Cancellation of Foreign Exchange

Contracts

6.1. General

(i) At the request of a customer, unless stated to the contrary in the provisions of

FEMA, 1999, it is optional for a bank to: (a). Accept or give early delivery; or

(b). Extend the contract. (ii) It is the responsibility of a customer to effect delivery or request the bank for

extension / cancellation as the case may be, on or before the maturity date of

the contract. 6.2. Early delivery: If a bank accepts or gives early delivery, the bank shall

recover/pay swap difference, if any. 6.3. Extension: Foreign exchange contracts where extension is sought by the

customers shall be cancelled (at an appropriate selling or buying rate as on the date

of cancellation) and rebooked simultaneously only at the current rate of exchange. The difference between the contracted rate, and the rate at which the contract is

cancelled, shall be recovered from/paid to the customer at the time of extension. Such request for extension shall be made on or before the maturity date of the

contract. 6.4. Cancellation

(i) In case of cancellation of a contract at the request of a customer, (the request

shall be made on or before the maturity date) the Authorised Dealer shall

recover/ pay, as the case may be, the difference between the contracted rate

and the rate at which the cancellation is effected. The recovery/payment of

exchange difference on cancellation of forward contracts before the maturity

date may be either upfront or back-ended at the discretion of banks. (ii) Rate at which cancellation is to be effected:

(a) Purchase contracts shall be cancelled at T.T. selling rate of the

contracting Authorised Dealer

(b) Sale contracts shall be cancelled at T.T. buying rate of the contracting

Authorised Dealer



(c) Where the contract is cancelled before maturity, the appropriate forward

T.T. rate shall be applied. (bi) Notwithstanding the fact that the exchange contract between the customer

and the bank becomes impossible of performance, for whatever reason,

including Government prohibitory orders, the exchange contract shall not be

deemed to have become void and the customer shall forthwith apply to the

Authorised Dealer for cancellation, as per the provisions of paragraph 6.4.(i)

and (ii) above. (iv)

(d) In the absence of any instructions from the customer, vide para 6.1(ii), a

contract which has matured shall be cancelled by the bank on the 7th working

day after the maturity date. (e) Swap cost, if any, shall be recovered from the customer under advice to him. © When a contract is cancelled after the maturity date, the customer shall not be entitled

to the exchange difference, if any, in his favour, since the contract is cancelled on

account of his default. He shall, however, be liable to pay the exchange difference

against him. 6.5. Swap cost/gain:

(ii) In all cases of early delivery of a contract, swap cost shall be recovered from

the customer, irrespective of whether an actual swap is made or not. Such

recoveries should be made either back-ended or upfront at discretion of the

bank. (iii) Payment of swap gain to a customer shall be made at the end of the swap period. 6.6. Outlay and Inflow of funds:

Authorised Dealer shall recover interest on outlay of funds for the purpose of

arranging the swap, in addition to the swap cost in case of early delivery of a

contract.

If such a swap leads to inflow of funds, interest shall be paid to the customer. Funds

outlay / inflow shall be arrived at by taking the difference between the original

contract rate and the rate at which the swap could be arranged. The rate of interest

to be recovered / paid should be determined by banks as per their policy in this

regard.

Types of LCs

Different Types of LC



1. Irrevocable LC. This LC cannot be cancelled or modified without consent of the beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other party.



2. Revocable LC. This LC type can be cancelled or modified by the Bank (issuer) at the customer's instructions without prior agreement of the beneficiary (Seller). The Bank will not have any liabilities to the beneficiary after revocation of the LC.



3. Stand-by LC. This LC is closer to the bank guarantee and gives more flexible collaboration opportunity to Seller and Buyer. The Bank will honour the LC when the Buyer fails to fulfill payment liabilities to Seller.



4. Confirmed LC. In addition to the Bank guarantee of the LC issuer, this LC type is confirmed by the Seller's bank or any other bank. Irrespective to the payment by the Bank issuing the LC (issuer), the Bank confirming the LC is liable for performance of obligations.



5. Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this LC.



6. Transferable LC. This LC enables the Seller to assign part of the letter of credit to other party(ies). This LC is especially beneficial in those cases when the Seller is not a sole manufacturer of the goods and purchases some parts from other parties, as it eliminates the necessity of opening several LC's for other parties.



7. Back-to-Back LC. This LC type considers issuing the second LC on the basis of the first letter of credit. LC is opened in favor of intermediary as per the Buyer's instructions and on the basis of this LC and instructions of the intermediary a new LC is opened in favor of Seller of the goods.



8. Payment at Sight LC. According to this LC, payment is made to the seller immediately (maximum within 7 days) after the required documents have been submitted.



9. Deferred Payment LC. According to this LC the payment to the seller is not made when the documents are submitted, but instead at a later period defined in the letter of credit. In most cases the payment in favor of Seller under this LC is made upon receipt of goods by the Buyer.



10. Red Clause LC. The seller can request an advance for an agreed amount of the LC before shipment of goods and submittal of required documents. This red clause is so termed because it is usually printed in red on the document to draw attention to "advance payment" term of the credit.

Basel 3

BASEL-III:

Originally set in 1974, the most recent set of norms, called Basel III. These are common set of global standards to be implemented by banks across countries. In India, lenders have to adhere to these regulations from 2019. After the 2008 financial crisis, need arose to strengthen the banking system further so that they could meet further risks. To meet these dangers, banks were asked to maintain a certain minimum level of capital and not lend all the money they receive from deposits. This acts as a buffer during hard times.

The Basel III norms also consider liquidity risk. The capital norms recommend Capital Adequacy ratio (CAR) be increased to 8 per cent internationally, while in India it is 9 per cent. CAR is a ratio of a bank‘s capital to its risk. This capital is further classified into two – Tier 1 (the main portion of the banks‘ capital, usually in the form of equity shares) and Tier 2 capital.

Domestic Systemically Important Banks (D-SIBs):

D-SIB means that the bank is too big to fail. According to the RBI, some banks become systemically important due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection. Banks whose assets exceed 2% of GDP are considered part of this group. The RBI stated that should such a bank fail, there would be significant disruption to the essential services they provide to the banking system and the overall economy.

The too-big-to-fail tag also indicates that in case of distress, the government is expected to support these banks. Due to this perception, these banks enjoy certain advantages in funding.It also means that these banks have a different set of policy measures regarding systemic risks and moral hazard issues.

As per the framework, from 2015, every August, the central bank has to disclose names of banks designated as D-SIB. It classifies the banks under five buckets depending on order of importance. ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three. Based on the bucket in which a D-SIB is, an additional common equity requirement applies. Banks in bucket one need to maintain a 0.15% incremental tier-I capital from April 2018. Banks in bucket three have to maintain an additional 0.45%.

"Too big to fail" describes the concept whereby a business has become so large that a government will provide assistance to prevent its failure because not doing so would have a disastrous ripple effect throughout the economy.

Capital Adequacy Ratio (CAR):

Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR) is the ratio of a bank‘s capital to its risk. Central Bank regulates bank‘s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.

It is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures.

This ratio is used to protect depositors and promote stability and efficiency of financial systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

CAR = Tier I Capital + Tier II Capital / Risk Weighted Assets

TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & brought-forward losses)

TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts

The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.



Credit Risk:

Credit risk refers to the risk that a borrower may not repay a loan and that the lender may lose the principal of the loan or the interest associated with it or both.

This can occur on account of poor financial condition of the borrower, and it represents a risk for the lender.

Credit risks are calculated based on the borrowers' overall ability to repay. To assess credit risk on a consumer loan, lenders look at the five C's: an applicant's credit history, his capacity to repay, his capital, the loan's conditions and associated collateral

Operational Risk:

Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies.

 Employee errors

 Systems failures

 Fraud or other criminal activity

 Any event that disrupts business processes

This definition includes legal risk but excludes strategic and reputational risk.

Operational risk can play a key role in developing overarching (comprehensive) risk management programs that include business continuity and disaster recovery planning, and information security and compliance measures.

A first step in developing an operational risk management strategy can be creating a risk map -- a plan that identifies, assesses, communicates and mitigates risk.

Market Risk:

Market risk is the risk of losses in positions arising from movements in market prices.

There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most commonly used types of market risk are

 Equity Risk: The risk that stock or stock indices prices or their implied volatility will change.

 Interest rate Risk: The risk that interest rates or their implied volatility will change.

 Currency Risk: The risk that foreign exchange rates or their implied volatility will change.

 Commodity Risk: The risk that commodity prices (e.g. corn, crude oil) or their implied volatility will change.

Liquidity Risk:

Liquidity risk is the risk that a company or bank may be unable to meet short term financial demands. This usually occurs due to the inability to convert a security or hard asset to cash without a loss of capital and/or income in the process.

Liquidity risk generally arises when a business or individual with immediate cash needs, holds a valuable asset that it cannot trade or sell at market value due to a lack of buyers, or due to an inefficient market where it is difficult to bring buyers and sellers together.

Reputational Risk:

Reputational risk is the risk of damage to a bank‘s image and public standing that occurs due to some dubious actions taken by the bank. Sometimes reputational risk can be due to perception or negative publicity against the bank and without any solid evidence of wrongdoing. Reputational risk leads to the public‘s loss of confidence in a bank.

The bank‘s failure to honor commitments to the government, regulators, and the public at large lowers a bank‘s reputation. It can arise from any type of situation relating to mismanagement of the bank‘s affairs or non-observance of the codes of conduct under corporate governance.

Risks emerging from suppression of facts and manipulation of records and accounts are also instances of reputational risk. Bad customer service, inappropriate staff behavior, and delay in decisions create a bad bank image among the public and hamper business development.

RCSA:

RCSA (Risk Control Self-Assessment) is an empowering method/process by which management and staff of all levels collectively identify and evaluate risks and associated controls. It is a technique that adds value by increasing an operating unit‘s involvement in designing and maintaining control and risk systems as well as identifying risk exposures and determining corrective action. It aims to integrate risk management practices and culture into the way staff undertake their jobs, and business units achieve their objectives. It provides a framework and tools for management and employees to:

 Identify and prioritize their business objectives

 Assess and manage high risk areas of business processes

 Self-evaluate the adequacy of controls

 Develop risk treatment action plans

 Ensure that the identification, recognition and evaluation of business objectives and risks are consistent across all levels of the organization

Paripassu Charge:

A ‗Paripassu‘ charge gives lenders a right to the property on which a charge is created in proportion to the amount lent to the debtor. Let us assume two banks ‗X‘ and ‗Y‘ have lent to a company with the outstanding at Rs 70 lakh and Rs 30 lakh respectively and have‗paripassu‘ charge over the assets hypothecated. In case of liquidation of that company, the lenders ‗X‘ and ‗Y‘ will share the proceeds from liquidation in proportion to the outstanding loan amount, that is, 70:30

Reverse Mortgage and how does it work:

A reverse mortgage is a loan extended to senior citizens against the security of a house property owned by them. The loan is given in lump sum or in installments and it provides important cash flow to the senior citizens who require money during their old age. They continue to be the owners of the house and occupy it. The loan obligation is deferred till the death of the homeowner. The legal heirs of senior citizens can repay the loan amount after the death of the borrower and the bank will release the security on the house property.