ECGC

ECGC
OBJECTIVE of ECGC
To PROMOTE EXPORTS Mainly by Protecting Exporters against COMMERCIAL &
POLITICAL RISKS in realising export proceeds
Protecting Banks against RISK OF DEFAULT in export credit
Protecting Investors against POLITICAL RISKS in Shareholders’ equity and loan In
overseas investments
ECGC details:
Established in 1957
Fully owned by GOI
Under administrative control of MOCI
Capital Base
Highest ICRA rating of IAAA
5 Regional Offices and 51 Branch Offices
All Branches ISO 9001:2000 certified
Member of Berne Union
MOU with GOI
Key Performance Highlights
What is Risk?
Uncertainty about future outcome due to :
Unexpected occurrence of events
Uncontrollable factors
Lack of Information
Risk Perceptions
What is Credit Risk
Definition: The potential that a debtor will fail to meet its payment obligations in
accordance with agreed terms.
Export credit risk:
 a) Buyer related problems
 b) Country related
Risk Management
Analysis, acceptance or mitigation
Risk avoidance

Risk Transfer
Risk Sharing
Risk retention
Payment Risks
Role of ECGC as an Export Credit Insurer
Providing export credit insurance covers to Exporters against loss in export of goods &
services under ST & MLT (POLICY Scheme)
Providing export credit insurance covers to Banks & FI’s to enable exporters obtain
better facilities from them (ECIB) (formerly known as Guarantees)
Role of ECGC as an Export Credit Insurer
Providing cover for Buyers Credit/ Line of Credit to Banks/ FIs
Providing Overseas Investment Insurance to - Indian Investors in Overseas Ventures
(Equity/Loans)
Risks covered -
Political
Commercial
Credit
Risks NOT considered Credit risk
Non fulfillment of contractual obligations by exporter including quality dispute.
Default or insolvency or any omission /commission of any agent of exporter/ buyer
Failure of buyer to obtain necessary approvals for imports
Causes inherent in nature of goods

Exchange fluctuation risks
Physical loss/damage to goods
Principles of Credit Insurance
Good Faith
Co-insurance
Spread of risks
Buyer & Country Underwriting
Premium Structure Basis
Country Grouping - 7 fold (237 countries)
 ( A1, A2, B1, B2,….. D)- Higher the country group, lower the premum rates
Terms of Payment- More superior the payment terms, lower the premium rate
Specific approval required for Restricted Cover countries
Shipments (Comprehensive Risks) Policy
Whole Turnover principle
Selective options for exclusion- LC/ Associates/ Consignments 90% cover
Minimum premium of Rs.10,000/-
Policy Period - 2 years
Buyer wise Credit limit
Discretionary limit
Monthly declarations with premium
No Claim Bonus – yearly 5%; max 50%

Small Exporters Policy
Turnover not exceeding Rs.50 Lakhs p.a.
Minimum Premium Rs.2000/-
Policy Period - one year
Higher percentage of cover-
Commercial risks 95%;
Political risks 100%
No Claim bonus
Quarterly Declarations
Specific Shipment Policy (SSP)
Covering one shipment or One contract
Processing fee of Rs.1000/-
80% cover
Premium higher than standard premium rates
Upfront premium before issue of Policy
Commercial / Political risks and L/C comprehensive risks covered
Submission of Shipment Statement and realisation report
SME POLICY (Small Exporter Policy)
For exporters with Export Turnover not exceeding Rs10 Lakhs and registered under
MSME Act, 2006
Cover available upto Rs10 lakhs.


Annual premium Rs 5,000 and processing fee of Rs1,000
90% cover
Maximum claim payable is Rs3 lakhs on any buyer
No requirement of monthly declaration of shipments
Benefits For Exporters
Protection for account receivable
Reduction in Bad debt
Improvement in quality of financial planning
Enhancement in risk taking capacity
Easy access to bank finance on liberal terms
ECIB’S ( Export Credit Insurance for Banks) TO BANKS
Contract of insurance between bank & ECGC
Protects banks against losses in export credit due to
- Insolvency of exporter
- Protracted default of exporter

Benefits For Banks
Protection For Pecuniary Liabilities Against Funded and Non Funded Credit Facilities To
Exporters
Enables To Waive Collateral Securities

• Lesser Capital Deployment requirement.

Export credit useful for CAIIB and certified credit professionals

Export credit useful for CAIIB and certified credit professionals
Export Credit
Export credit is allowed in two stages namely pre shipment or packing credit and post
shipment. Salient
features of packing credit are as under:
1. For packing credit eligibility conditions are (a) Exporter should have Import Export
Code Number
(b)Exporter should not be on the caution list of RBI
(c) Exporter should not be on the specific approval list of ECGC
(d) He should have confirmed order of LC. However, if running packing credit facility has
been allowed confirmed order can be submitted later on.
2. Amount of PCL: on the basis of FOB value
3. Period of PCL: As per need of exporter. If pre-shipment advances are not adjusted by
submission of export documents within 360 days fromthe date of advance, the
advances will cease to qualify for prescribed rate of interest for export credit to the
exporter ab initio.
Adjustment of PCL: Normally through proceeds of export bills or export incentives or
debit to EEFC account.
Post shipment credit
1. As per Exchange Control Regulations, bills should be submitted for negotiation within
21 days of shipment.
2. Export proceeds should in general be realized within 12months fromdate of shipment.
(Earlier it was 6 months and for status holder exporters, 100%EOU, units in EHTP/STP,
the period was 12months fromthe date of shipment). In case of export for warehousing
the period of realization is 15months. In case of exports by units in Special Economic
Zone there is nomaximumperiod prescribed by RBI.
3. Authorised Dealer can grant extension up to 6months if invoice amount is up to USD
1 million.
4. If any export is not realized within 180 days of date of shipment, in all cases, a report
should be sent to RBI on XOS statement which is a half yearly statement submitted as
at the end of June & Dec of each year. This is to be submitted by 15th of July / January.
5. Normal Transit Period is the period between negotiation of bills and credit to Nostra
account. It is fixed by FEDAI and presently it is 25 days irrespective of the country.
Interest Rate on Export Credit
1. Export credit in rupees: Interest rates applicable for all tenors of rupee export credit
advances sanctioned on or after July 01, 2010 will be at or above Base Rate. Interest
Rates under the BPLR system effective upto June 30, 2010 will be 'not exceeding BPLR
minus 2.5 percentage points per annum' for the following categories of Export Credit:
 Pre-shipment Credit (fromthe date of advance) : (a) Up to 270 days (b)Against
incentives receivable from Government covered by ECGC Guarantee up to 90 days. If
pre-shipment advances are not liquidated from proceeds of bills on purchase, discount,
etc. on submission of export documents within 360 days from the date of advance, the
advances will cease to qualify for prescribed rate of interest for export credit ab initio.
 Post-shipment Credit (from the date of advance):
(a) On demand bills for transit period (as specified by FEDAI);


(b) Usance bills (for total period comprising usance period of export bills, transit period
as specified by FEDAI, and grace period, wherever applicable): i) Up to 180 days; ii) Up
to 365 days for exporters under the Gold Card Scheme.
(c) Against incentives receivable from Govt. (covered by ECGC Guarantee) up to 90
days
(d) Against undrawn balances (up to 90 days);
(e) Against retention money (for supplies portion only) payable within one year from the
date of shipment (up to 90 days)
(f) In respect of overdue export bills also interest rate should be charged at not
more than BPLR minus 2.5%up to 180 days from date of advance.
2. Export Credit in Foreign Currency:
 Pre-shipment Credit in foreign currency (from the date of advance):
(i) up to 180 days not more than LIBOR/ EURO LIBOR/ EURIBOR plus 200 basis
points.
(ii) Beyond 180 days and up to 360 days: Rate for initial period of 180 days
prevailing at the time of extension plus 200 basis points.
(iii) Beyond 360 days as per bank discretion
 Post shipment in foreign currency:
(a) On. demand bills for transit period: Not exceeding 200 basis points over
LIBOR/EURO LIBOR/EURIBOR.
(b) Against usance bills for total period comprising usance period of export bills, transit
period and grace period up to 6 months from the date of shipment: Not exceeding 200
basis points over LIBOR/EURO LIBOR/EURIBOR
(c) Export Bills (Demand or Usance) realized after due date but up to
date of crystallization: 200 basis points over the rate charged up to due date.
Interest Subvention on export credit in rupees:
TheGovernmentof India has decided to extend Interest Subvention of 2% from
April1,2010 upto March31,2011 on pre and post shipment rupeeexport credit, for
certain employment oriented export sectors as under: (i)Handloom (ii)Handicrafts
(iii)Carpets (iv)Small & Medium Enterprises, (v)Leather and Leather Manufactures (vi)
Jute Manufacturing including Floor covering (vii)EngineeringGoods (viii)Textiles.
The items marked bold added vide circulardated 9thAug 10.However, the total
subvention
Will be subject to the condition that the interest rate, after subvention will not fall
below7%which is the rate applicable to the agriculture sector under priority sector
lending. The interest subvention will be available even in cases where Base Rate
system has been introduced and banks can grant export credit below Base Rate after
considering subvention provided it is not less than 7%p.a.
Export Refinance
1. Who will provide? Export Refinance is provided by RBI.
2. Maximum period of refinance is 180 days.
3. Extent of Refinance: 15%(w.e.f. 27.10.2009) of eligible export finance outstanding on
the reporting Friday of the preceding fortnight. Outstanding Export Credit for the
purpose of working out refinance limits
will be aggregate outstanding export credit

minus export bills rediscounted with other banks/Exim Bank/Financial Institutions,
export credit against which refinance has been obtained from NABARD/Exim Bank, pre-
shipment credit in foreign currency (PCFC), export bills discounted/rediscounted under
the scheme of 'Rediscounting of Export Bills Abroad', overdue rupee export credit and
other export credit not eligible for refinance.
4. Interest rate is Repo Rate. 5. Packing Credit in Foreign Currency is not eligible for
export refinance.
Export Declaration Forms for goods and services
Every exporter of goods or software in physical form or through any other form, either
directly or indirectly, to any place outside India, other than Nepal and Bhutan, shall
furnish to the specified authority, a declaration in one of the forms set out below
containing the full export value of the goods or software.
a) FormGR: To be completed in duplicate for export otherwise than by Post including
export of software in physical form i.e.magnetic tapes/discs and papermedia.
b) Form SDF: To be completed in duplicate and appended to the shipping bill, for
exports declared to Customs Offices notified by the Central Government which have
introduced Electronic Data Interchange (EDI) system for processing shipping bills
notified by the Central Government.
c) Form PP: To be completed in duplicate for export by Post.
d) Form SOFTEX: To be completed in triplicate for declaration of export of software
otherwise than in physical form, i.e. magnetic tapes/discs, and paper media. Declaration
forms are submitted in two copies except Softex forms which are submitted in three
copies. As per
current guidelines no declaration ismandatory for exports with value up to $ 25,000 or
its equivalent. Duplicate copy of the declaration form which is submitted to the AD is-
now required to be retained by the AD for the purpose of audit and not to be forwarded
to RBI.
Gold Card Scheme for Exporters
1. Exporters with good track record eligible for the Card. Their account should have
been Standard for 3 years continuously with no irregularity.
2. Gold Card Scheme is not applicable to those exporters who are blacklisted by ECGC
or included in RBI's defaulter's list/ caution list ormaking losses for the past three years
or having overdue export bills in excess of 10 per cent of the 'previous year's turnover'.
However, RBI has advised (Oct 09) that in view of difficulties faced by exporters on
account of weakening of external demand and in realizing the dues within the stipulated
time, the requirement of
overdue export bills not exceeding 10%of the previous year's export turnover, has been
dispensed with for one year i.e. from April 1, 2009 toMarch 31, 2010.
3. Limits to Card holder exporters to be sanctioned for 3 years with provision for
automatic renewal subject to fulfilment of terms and conditions. For disposal of fresh
applications the period is 25 days, 15 days for renewal of limits and 7 days for sanction
of ad-hoc limits.
4. A stand by limit of not less than 20% of the limits sanctioned should be ma
de
available for executing sudden orders.



5. Gold Card holder exporters will be given preference in,the matter of sanction of
PCFC.
6. Gold Card holders are entitled for concessional interest on post shipment credit up to
365 days.
Trade and Exchange Control Regulations for Imports
1. Importer can import goods either on the basis of OGL or on the strength of specific
import licence issued by DGFT.While issuing letter of credit or retiring import bills, the
AD is required tomake relative endorsement in the exchange control copy of import
licence.When fully utilized, it is to be retained by the AD for verification by the
auditor/inspector.
2. Payment for imports should bemade within 6months from date of shipment.
3. Advance payment against imports is allowed up to any amount. However, where the
amount of advance, remittance for services exceedsUS $ 500,000 or its equivalent, or
for goods exceeds USD50,00,000, the same can be allowed against guarantee of an
international bank of repute or guarantee of a bank in India against counter guarantee of
an international bank.However, in respect of Public Sector Company or aDepartment/
Undertaking of theGovernment of India/ StateGovernments, approval fromtheMinistry of
Finance,Government of India is required for advance remittance for import of goods or
services without bank guarantee for an amount exceeding USD100,000.
4. Bill of Entry is documentary evidence of physical arrival of goods into India. For
advance remittance exceeding US $ 1,00,000, it should be submitted within 6 months of
remittance. In case importer does not furnish the same within 3 months from the date of
remittance, the Authorised Dealer should rigorously follow-up for the next 3months. AD
is required to submit to RBI, statement on form BEF on half- yearly basis (within 15
days from the close of the half-year) as at the end of June & December of every year, in
respect of importers who have defaulted in submission of Bill of entry within 6 months
from the date of remittance.
5. Delinking or Crystallisation of Export and Import bills: Crystallisationmeans converting
a foreign currency liability to rupee liability. In the case of overdue export bills it will be
done as per bank discretion and exchange rate will be TT selling rate. In the case of
import bills conversion will be at Bills selling rate. In demand bills it will be on 10th day
and in case of usance bills it will be done on due date.
6. Banks are permitted to make remittances for imports, where the import bills I
documents have been received directly by the importer from the overseas supplier and
the value of import bill does not exceed USD 300,000.
7. Banks are allowed to issue guarantees in favour of a non-resident service provider,
on behalf of a resident customer who is a service importer, for an amount up to USD
500,000 or its equivalent. In the case of a Public Sector Company or a Department/
Undertaking of theGovernment of India/ StateGovernments, approval from the Ministry
of Finance, Government of India for issue of guarantee for an amount exceeding USD
100,000 or its equivalent would be required.
8. For release of forex for imports, application should be made on Form Al if the amount
of

remittance exceeds USD 500. For release of forex for purpose other than import,
application should be made on Form A2 if the amount of remittance is more than USD
5000.
Risk in Foreign Exchange
1. Risk in foreign exchange arises when a bank has open position in forex i.e either it is
overbought or oversold. A bank is said to be overbought when purchase is more than
sale and it is oversold when sale is more than purchase.
2. When a bank is overbought and it wants to square its position it will gain if rate of
forex goes up and will lose if rate of forex goes down.
3. When a bank is oversold and it wants to square its position, it will gain if rate of forex
goes down and will lose if rate of forex goes up.
4. The Daylight open position will be generallymore than the overnight open position.
Important points on Diamond Dollar Account (DDA)
a. Exporters-importers dealing in rough and polished diamonds or diamond-studded
jewellery can open up to 5 DDAs
b. Exporter should have a track record, of at least, three years and average export
turnover of Rs 3.00 crores, can open Diamond dollar account with an AD, for
transacting business in foreign exchange.
Who can open (Exchange Earners Foreign Currency Account) EEFC accounts
with an authorised dealer in India ?
a. Any person resident in India, who is an earner of foreign currency
b. Including Special Economic Zones, Software Technology Parks, Export
Processing Zones and status account holders
How much of the foreign exchange can be credited to EEFC account?
a. Can currently credit up to 100% of the inward payments received in foreign
currency to this account.
EEFC accounts are:
a. In the nature of current account, and are non-interest bearing.
b. Balances in EEFC accounts can be used for any current account transactions,
including repayment of packing credit advances, whether availed in Rupee or
foreign currency.
The finance to exporters, both Pre-Shipment and Post –shipment, by Banks in
India is:
a. to make exporters compete with their competitors from other countries, as also to
boost the exports from the country and can be in Indian Rupees
b. to make exporters compete with their competitors from other countries, as also to
boost the exports from the country and can be in foreign currency
Finance allowed to an exporter, to fund the expenses needed for procurement of raw
material, manufacturing, packing, local transportation, labour charge and all expenses


upto the stage of packing and shipment, is called Pre-Shipment Finance/Loan or
Packing Credit Loan (PCL)

Finance against export bills, when the shipment is already made, is called Post-
shipment Credit or Post-Shipment Export finance (PSEF)
Pre-shipment finance can be of two types: Packing Credit (PCL) and Advance against
Govt, receivables, i.e. Duty Drawback, etc.
Post-shipment finance can be of various types, as under:
a. Export bills purchased/discounted/negotiated (FBP/FUBD/FBN)
b. Advance against bills sent on collection, exports on consignment basis, undrawn
balances or duty Drawback
Before sanctioning Packing Credit Loan to a customer, following precautions need to be
taken, besides normal KYC norms:
a. He should have Export/Import Code number (IEC) and his name should not
appear under the caution list of RBI.
b. He should not be under the Specific Approval list of ECGC.
c. He has the capacity to execute the order within stipulated time and has a
genuine and valid export order or Letter of Credit for export of goods.
 Before sanctioning Packing Credit Loan to a customer, following precautions need to
be taken, besides normal KYC norms:
a. No PCL has been availed by him against the same order/LC from any other
bank.
b. Bank should call for Credit Report/Status reports on the foreign buyers, their Bank
and their country .
c. The exporter should submit an undertaking to submit stock statements for the goods
on which PCL has been allowed.
While sanctioning Packing Credit Loan to a customer, following precautions need to be
taken, besides normal KYC norms:
a. The total period sanctioned should be as per the manufacturing cycle or the
process cycle of the goods being manufactured.
b. Normally the total period of PCL should not exceed 180 days.
The following is correct with regards to rate of interest on preshipment finance:
a. Normally the total period of PCL should not exceed 180 days. Banks can grant
extensions beyond 180 days up to 360 days, based on their assessment and
need of the customer. Any extension beyond 360 days, would cease to qualify for
concessional rate of interest to the exporter, ab initio.
Following is correct with regards to calculation of Pre-shipment Finance:

a. If the contract or the LC is on CIF basis, the FOB value will be arrived at by
deducting 13% to 14% (representing freight and insurance) from the CIF value, if
the dispatch is through sea and around 25% if the dispatch is by air.
b. After arriving at the FOB value, the usual margin, i.e., profit margin stipulated in
the terms of sanctions to be deducted
Following is correct with regards to calculation of Pre-shipment Finance:
a. Quantum of finance will be fixed on the FOB value of the contract/ LC or the
domestic value of the goods whichever is less after deducting the profit margin
b. Advance for the freight and insurance charges are not to be disbursed at the
initial stage itself
Following is correct with regards to calculation of Pre-shipment Finance:
a. Banks may adopt a flexible attitude with regard to debt-equity ratio, margin and
security Norms
b. There could be no compromise in respect to viability of the proposal and the
integrity of the borrower
Following precautions are to be taken by the bank after sanctioning the pre-shipment
finance:
a. Bank should inform ECGC the details of limit sanctioned in the prescribed format
within 30 days from the date of sanction. (Wherever advances are covered under
Whole Turnover Policies of ECGC.)
b. The advance should be liquidated on submission of relative export bills, by way
of allowing post shipment finance against those bills or with any other export
proceeds against which no packing credit has been availed by the exporter .
c. The end use of the funds disbursed should be tracked by the banks
In case after allowing PCL, exports do not take place: the advance is treated as local
advance, and interest at domestic penal rates is to be charged, ab initio.
Can Packing Credit be sanctioned to sub-suppliers?
a. Packing credits can be allowed to sub-suppliers also at the first level(supplier to
Export order holder) under the Rupee credit scheme.
b. Packing credit can be granted on the basis of the inland LC opened by a bank at
the request of the Export Order holder
Banks have been authorized to grant pre-shipment advances on RUNNING ACCOUNT
basis, provided:
a. there need for 'Running Account' facility and exporters’ track record is good
b. letters of credit/firm orders should be produced within a reasonable period of
time (generally one month)

In case of PCL allowed for purchase of seeds, for export of de-oiled cake, the proceeds
from local sale of oil can be used to liquidate PCL, within a period of 30 days from the
date of advance.
What is true regarding post-shipment finance? Post-shipment finance is an advance
against export documents. It involves handling of export documents, sending it to the
foreign bank/buyer and collecting proceeds thereof
In case of rupee finance, the bill is to be purchased/discounted/negotiated at
appropriate bill
______ rate of the bank, keeping in view the tenor or notional due date of the bill.
Buying
The rate of interest should be within the broad guidelines fixed by RBI and: FEDAI
Which of the following is true? Sight Documents are purchased, Usance documents are
discounted and documents under LC are negotiated
To cover the risks for the documents which are not sent under LC, banks should advise
the customers :
a. for coverage of credit risks through the guarantees/ policies for post-shipment
advances, offered by ECGC
a. exporter should be advised to go for a separate buyer-wise policy to get wider
coverage will be available to the exporter in case of any default
b. to make vigorous follow-up for due dates, and payments for bills
Banks generally cover their post shipment advance under _____policy of ECGC:
a. Whole Turnover Post-Shipment Guarantee Scheme
"Deemed Exports" refers to those transactions in which the goods supplied do not
leave the country and the payment for such supplies is received either in Indian rupees
or in free foreign exchange.
The following categories of supply of goods by the main/ sub-contractors shall be
regarded as "Deemed Exports" under this Policy, provided the goods are manufactured
in India:
(a) Supply of goods against Advance Licence/Advance Licence for annual
requirement/DFRC under the Duty Exemption /Remission Scheme;
(b) Supply of goods to Export Oriented Units (EOUs) or Software Technology Parks
(STPs) or Electronic Hardware Technology Parks (EHTPs) or Bio Technology
Parks (BTP);
(c) Supply of capital goods to holders of licences under the Export Promotion
Capital Goods (EPCG) scheme;
(d) Supply of goods to projects financed by multilateral or bilateral agencies/funds
as notified by the Department of Economic Affairs, Ministry of Finance under
International Competitive Bidding in accordance with the procedures of those
agencies/ funds, where the legal agreements provide for tender evaluation
without including the customs duty;
(e) Supply of capital goods, including in unassembled/ disassembled condition as
well as plants, machinery, accessories, tools, dies and such goods which are
used for installation purposes till the stage of commercial production and spares
to the extent of 10% of the FOR value to fertiliser plants.
(f) Supply of goods to any project or purpose in respect of which the Ministry of
Finance, by a notification, permits the import of such goods at zero customs duty
.
(g) Supply of goods to the power projects and refineries not covered in (f) above.
(h) Supply of marine freight containers by 100% EOU (Domestic freight containers–
manufacturers) provided the said containers are exported out of India within 6
months or such further period as permitted by the Customs; and
(i) Supply to projects funded by UN agencies.
(j) Supply of goods to nuclear power projects through competitive bidding as
opposed to International Competitive Bidding.

Most important KYC AML terms useful forever

Account Monitoring Order
In the United Kingdom and several other countries, an order
from a government authority requiring a financial institution
to provide transaction information on a suspect account for a
specified time period.

Affidavit
A written statement given under oath before an officer of
the court, notary public, or other authorized person. It is
commonly used as the factual basis for an application for a
search, arrest or seizure warrant.

Alternative Remittance System (ARS)
Underground banking or informal value transfer systems.
Often associated with ethnic groups from the Middle East,
Africa or Asia, and commonly involves the transfer of values
among countries outside of the formal banking system. The
remittance entity can be an ordinary shop selling goods that
has an arrangement with a correspondent business in another
country. There is usually no physical movement of currency
and a lack of formality with regard to verification and recordkeeping.
The money transfer takes place by coded information
that is passed through chits, couriers, letters or faxes, followed
by telephone confirmations. Almost any document that carries
an identifiable number can be used by the receiver to pick up
the values in the other country. The systems are referred to
by different names depending upon the country: Hawala (an
Arabic word meaning “change” or “transform”), Hundi (a Hindi
word meaning “collect”), Chiti banking (referring to the way the
system operates), Chop Shop banking (China), and Poey Kuan
(Thailand).



Anti-Money Laundering Program
The system designed to assist institutions in their fight against
money laundering and terrorist financing. In many jurisdictions,
government regulations require financial institutions, including
banks, securities dealers and money services businesses,
to establish such programs. At a minimum, the anti-money
laundering program should include:
1. Written internal policies, procedures and controls;
2. A designated AML compliance officer;
3. On-going employee training; and
4. Independent review to test the program.



Bank Draft
Vulnerable to money laundering because it represents a
reputable international monetary instrument drawn on a
reputable institution, and is often made payable—in cash—
upon presentation and at the issuing institution’s account in
another country.

Bank for International Settlements (BIS)
An international organization that serves as a bank for central
banks and which fosters international monetary and financial
cooperation with the purpose of attaining stability in the world
economy. It hosts the Secretariat of the Basel Committee on
Banking Supervision. The Committee has formulated broad
supervisory standards and guidelines on Know Your Customer
issues. See www.bis.org.


Bank Secrecy
Refers to laws and regulations in countries that prohibit
banks from disclosing information about an account—or even
revealing its existence—without the consent of the account
holder. Impedes the flow of information across national borders
among financial institutions and their supervisors. One of
FATF’s 40 Recommendations states that countries should
ensure that secrecy laws do not inhibit the implementation of
the FATF Recommendations.

Bank Secrecy Act (BSA)
The primary U.S. anti-money laundering regulatory statute
(Title 31, U.S. Code Sections 5311-5355) enacted in 1970 and
most notably amended by the USA Patriot Act in 2001. Among
other measures, it imposes money laundering controls on
financial institutions and many other businesses, including the
requirement to report and to keep records of various financial
transactions.

Bank Secrecy Act (BSA) Compliance Program
A program that U.S.-based financial institutions—as defined by
the Bank Secrecy Act—are required to establish and implement
in order to control money laundering and related financial
crimes. The program’s components include at a minimum: the
development of internal policies, procedures and controls; the
designation of a compliance officer; ongoing employee training;
and an independent audit function to test the program.

Bare Trust

Also known as a dry, formal, naked, passive, or simple trust, in
which the trustees have no duties other than to convey the trust
property to beneficiaries when called upon to do so. Bare trusts
are vulnerable


Basel Committee on Banking Supervision (Basel Committee)
The Basel Committee was established by the G-10’s central
bank of governors in 1974 to promote sound supervisory
standards worldwide. Its secretariat is appointed by the Bank
for International Settlements in Basel, Switzerland. It has
issued, among others, papers on customer due diligence for
banks, consolidated KYC risk management, transparency in
payment messages, due diligence and transparency regarding
cover payment messages related to cross-border wire
transfers, and sharing of financial records among jurisdictions
in connection with the fight against terrorist financing. See
www.bis.org/bcbs.

Batch Processing
A type of data processing and data communications
transmission in which related transactions are grouped together
and transmitted for processing, usually by the same computer
and under the same application.

Batch Transfer
Transfer comprising a number of individual wire transfers that
are sent to the same financial institution, and which may be
ultimately intended for different persons.



Benami Account
Also called a nominee account. Held by one person or entity on
behalf of another or others, Benami accounts are associated
with the hawala underground banking system of the Indian
subcontinent. A person in one jurisdiction seeking to move
funds through a hawaladar to another jurisdiction may use a
Benami account or Benami transaction to disguise his/her true
identity or the identity of the recipient of the funds.

Beneficial Owner
The natural person who ultimately owns or controls an account
through which a transaction is being conducted. It also
incorporates those persons who exercise ultimate effective
control over a legal person or arrangement.

Beneficiary
All trusts (other than charitable or statutory-permitted noncharitable
trusts) must have beneficiaries, which may include
the settlor. Trusts must also include a maximum time frame,
known as the “perpetuity period,” which normally extends up
to 100 years. While trusts must always have some ultimately
ascertainable beneficiary, they may have no defined existing
beneficiaries. Trusts may only have objects of a power until
some person becomes entitled as beneficiary to income
or capital on the expiry of a defined period, known as the
“accumulation period.” The latter period is normally coextensive
with the trust perpetuity period, which is usually
referred to in the trust deed as the “trust period.”

Bureau de Change
Also called “casa de cambio” or “exchange office,” a bureau
de change offers a range of services that are attractive to
money launderers: currency exchange and consolidation of
small denomination bank notes into larger ones; exchange of
financial instruments such as travelers checks, money orders
and personal checks; and telegraphic transfer facilities. In some
countries, such businesses are not as heavily scrutinized for
money laundering as are traditional financial institutions. Also,
their customers are often occasional, making it more difficult for
these businesses to “know their customers.”


Caribbean Financial Action Task Force (CFATF)
A FATF-style regional body comprising Caribbean states,
including Aruba, the Bahamas, the British Virgin Islands, the
Cayman Islands and Jamaica. See www.cfatf.org.


Clearing Account
Also called an “omnibus” or “concentration account.” Held by a
financial institution in its name, a clearing account is used
primarily for internal administrative or bank-to-bank transactions
in which funds are transmitted and commingled without
personally identifying the originators. The USA Patriot Act
prohibits the use of such accounts for customer transactions.

Collection Accounts
Immigrants from foreign countries deposit many small amounts
of currency into one account where they reside, and the
collected sum is transferred to an account in their home country
without documentation of the sources of the funds. Certain
ethnic groups from Asia or Africa may use collection accounts
to launder money.

Payable through accounts

In some correspondent relationships, the respondent bank’s
own customers are permitted to conduct their own transactions
— including sending wire transfers, making and withdrawing
deposits and maintaining checking accounts — through the
respondent bank’s correspondent account without needing to
clear the transactions through the respondent bank. Those
arrangements are called payable-through accounts (PTAs). PTAs
differ from normal correspondent accounts in that the foreign
bank’s customers have the ability to directly control funds at
the correspondent bank. This is different from the traditional
correspondent relationship, where the respondent bank will
take orders from their customers and pass them on to the
correspondent bank. In these cases, the respondent bank has the
ability to perform some level of oversight prior to executing the
transaction.
PTAs can have a virtually unlimited number of sub-account holders,
including individuals, commercial businesses, finance companies,
exchange houses or casas de cambio, and even other foreign
banks. The services offered to the “subaccount holders” and the
terms of the PTAs are specified in the agreement signed by the
correspondent and the respondent banks.
PTA accounts held in the names of respondent banks often involve
checks encoded with that bank’s account number and a numeric
code to identify the sub-account, which is the account of the
respondent bank’s customer. Sometimes the sub-account holders
are not identified to the correspondent bank.
Elements of a PTA relationship that can threaten the correspondent
bank’s money laundering defenses include:


Risks andMethods of Money Laundering and terrorist financing
􀂄 PTAs with foreign institutions licensed in offshore
financial services sectors with weak or absent bank
supervision and weak licensing laws.
􀂄 PTA arrangements where the correspondent bank
regards the respondent bank as its sole customer and
fails to apply its Customer Due Diligence policies and
procedures to the customers of the respondent bank.
􀂄 PTA arrangements in which sub-account holders have
currency deposit and withdrawal privileges.
􀂄 PTAs used in conjunction with a subsidiary,
representative or other office of the respondent bank,
which may enable the respondent bank to offer the
same services as a branch without being subject to
supervision.
Example
Lombard Bank — a bank licensed by the South
Pacific island of Vanuatu, which is considered by
many experts as a tax and money laundering haven
— opened a payable-through account at American
Express Bank International (AEBI) in Miami. The
Vanuatu bank offered its Central American customers
virtually full banking services through its payablethrough
account at AEBI. The customers were given
checkbooks allowing them to deposit and withdraw
funds from Lombard’s payable-through account.
Lombard was permitted to have multiple authorized
signatures on the account. The Lombard customers
had no relationship with AEBI. The sub-account
holders would bring cash deposits to Lombard
representatives in four Central American countries.
Lombard couriers would transport the cash to its
Miami affiliate, Lombard Credit Corporation, for deposit
in the payable-through account at AEBI. Lombard
customers also brought cash to the Lombard office
in Miami, which was located in the same building as
AEBI. That cash also was deposited in the payable

through account at AEBI. Over two years, ending June
1993, as much as $200,000 in cash was received by
Lombard’s Miami affiliate on 104 occasions.

Politically Exposed Person

Politically Exposed Person

As per the RBI definition, PEPs are individuals who are or have been entrusted with
prominent public functions in a foreign country e.g., Heads of States or Governments,
senior politicians, senior government/judicial/military officers, senior executives of
state-owned corporations, important political party officials, etc.
Such individuals are considered risky from a money laundering perspective and
require additional due diligence and transactional scrutiny. For the Bank, the risks
associated with these individuals are not just from a compliance perspective but also
from a reputational one.
Companies such as Dow Jones and LexisNexis provide customized PEP lists for a fee
and the Bank can also conduct an Internet search using Google. For guidelines on
how to search the Internet using Google, please refer to Annexure A, Guidelines on
Performing Background Checks using Google.
Once a customer or a person associated with an account is identified as a PEP or the
close relative of a PEP, the Bank is required to perform the following steps:
− The CRO or the BM should gather all the available information on the PEP
and confirm it against information available on the public domain;
− The CRO or BM must obtain information on the identity of the PEP and
source of funds for the account; and
− The PO at the Bank must sign off on the acceptance of the customer,
categorize him as high risk and perform EDD. The account must also be
subjected to enhanced transaction monitoring.

In the event that an existing customer or beneficial owner is identified as PEP, the PO
along with the AML Compliance Group will be required to sign off on continuing the
relationship. The account and the individual will then be subject to the same process
as above for a new PEP account.

Customer Classification KYC

Customer Classification
In order to determine the appropriate information and documentation that must be collected,
all the customers at the bank are classified into distinct constitution types and categories
within them.

1 Constitution
The information required from the customer is based on the customer type of the
account holder and is referred to as the constitution. The following constitution types
are applicable to the Bank:
− Individuals: All accounts opened by individuals or groups acting in an
individual capacity (e.g. Joint Accounts, Hindu Undivided Family) are present
in this category.
− Business Entities: Accounts of specific corporate entities, separate and
distinct from the individuals who finance it.
− Financial Institutions: Institutions that provide financial services to its
members or clients including private, public and co-operative sector banks as
well as non-banking institutions such as money-services businesses and chit
funds.
− Government, Government Agency or Entity: Any permanent or nonpermanent
organization in the machinery of the government including
departments, ministries and other types of public bodies.
− Trust: Trusts are classified into two types - Public trusts that are generally
formed for charitable and religious purposes and are not intended for
commercial activities while private trusts generate income for specified
beneficiaries.

− Non Profit Organizations: Non-profit organizations or charities can be
registered as trusts, societies or a private limited non-profit company under
Section 25 of the Companies Act. These exist independently of the
government, are self-governed, produce benefits for individuals or groups
outside the membership of the organization and are prohibited from
disbursing monetary residual to members. Religious organizations are set up
primarily for religious purposes and must be registered with the Income Tax
Department.

− Societies and Associations: A society or an association is an institution
owned by its members in that the funds are raised from membership and are
then used to provide common services to all the members of the organization.
Based on these definitions, a particular customer could fit into one or more
constitutions listed above but will hold the same customer risk categorisation value
from a KYC, AML and CFT compliance standpoint.


2 Categories

All the categories for the constitutions can be broadly grouped under individual and
entity constitution types as listed below:

2.1 Individuals
The constitution type individual consists of the following sub-categories:
Non-Resident Indian: A Non-Resident Indian (NRI) is an Indian citizen who resides
out of India for employment, business or other reasons for an uncertain duration of
stay. NRI accounts may provide for special tax and repatriation benefits due to the
status of the account holder.
Foreign National: A foreign national is an individual not of Indian nationality but
currently residing in the country for various purposes.
Persons of Indian Origin: A person of Indian origin is an individual who is not a
citizen of India but has Indian ancestry and has obtained a valid PIO card.
Minor: A minor account is an account created and operated in the name of a minor
(under the age of 18) and represented by a guardian or custodian. Upon the minor
attaining majority, the right of the guardian to operate the account shall cease.
Staff: Account created and operated by current or past employees of the bank.
Hindu Undivided Family: The Hindu Undivided Family (HUF) is a joint family
consisting of members descending from a common ancestor. A senior member is
designated as the ‘Karta’ responsible for managing the account for the HUF.
Single: Any Indian citizen above the age of 18 and not falling under any of the
categories listed above account is considered a single account holder.
Joint: A joint account type is created in the combined name of all the depositors,
each of whom acting in his or her own individual capacity. A joint account can be
created between any number of Individual, Minor, Staff and NRI constitution types.

2.2 Entities
Each constitution in the entity section consists of obvious categories as listed below:
Business Entities
− Proprietorship
− Private Limited Company
− Partnership
− Co-operative
− Public Limited Company
− Joint Hindu Family Business
− Limited Liability Partnership

Financial Institutions
− Private Banks
− Public Sector Banks
− Regional Rural Banks
− State Co-operative Banks
− District Co-operative Banks
− Urban Co-operative Banks
− Money Service Businesses
− Non-Banking Financial Company
Government, Government Agency or Entity
− State Government
− Central Government
− State Government Undertaking
− Government of India Undertaking
− Government Authorities, Autonomous & Regulatory Bodies
− Liquidator
− Local Bodies
Trusts
− Public
− Private
Non Profit Organizations
− Trust
− Society
− Section 25 Company
− Unregistered Entity
Societies and Associations
− Registered
− Unregistered

Very important Roles and Responsibilities As per KYC, AML and CFT Norms

Roles and Responsibilities

1 Board of Directors

As per the RBI guidelines the Board of Directors of the Bank is responsible for
ensuring that an effective KYC, AML and CFT programme is put in place by
establishing procedures and ensuring their effective implementation. The programme
set by the Board of Directors shall contain:
− Application procedures for AML measures developed by senior management;
− Roles and responsibilities;
− Training for bank officials;
− Systems and controls for implementation;
− Approving methodology for customer risk categorization; and
− Management oversight for the KYC, AML and CFT programme.

It is the responsibility of the Board of Directors to appoint the Principal Officer
(PO) of the Bank.
All pertinent KYC, AML and CFT topics must be discussed by the Board of Directors
in their quarterly meeting.

2 Senior Management/ Designated director

The Senior Management is tasked with the creation of policies and procedures and
their responsibilities include but are not limited to:

− Creation of KYC, AML and CFT policies subject to approval of the Board;
− Deployment of suitable personnel and providing them with sufficient authority
to ensure the effective implementation and administration of KYC, AML and
CFT programmes;
− Obtain periodic reports regarding transaction monitoring, KYC, AML and CFT
initiatives, identified compliance deficiencies and corrective actions taken; and
− Create updates or make changes to the existing policies and procedures
which will be required to be ratified by the Board of Directors.

3 Principal Officer
As per the guidelines7, the Principal Officer (PO) is the officer-in-charge vested with
the authority to ensure the overall implementation of the Bank’s KYC, AML and CFT
policy. The PO is also responsible for:
− Ensuring the monitoring and reporting requirements of the Bank under the
PMLA are met;
− Reviewing the adequacy of systems and controls with respect to KYC, AML &
CFT;
− Coordinating with regulatory and law enforcement agencies; and
− Assisting Senior Management and Compliance Groups in their function.

4 AML Compliance Group

The AML Compliance Group is responsible for all transaction monitoring related
activity at the bank level. It is comprised of the PO and Senior Managers from the
various departments of the Bank including Banking, Internal Audit and Compliance.
The group is responsible for:
− Receiving Transaction Alerts escalated by the Branch Manager (BM) and
either further escalating or closing out the report;
− Sampling of Transaction Alerts reports closed out by the BM to check for
correctness of BM decisions relating to transaction monitoring; and
− Providing periodic reports to Senior Management regarding compliance and
transaction related activities.

5 Audit and Compliance Department
The Bank’s internal audit and compliance department is responsible for the following:
− Providing an independent evaluation of the policies and procedures deployed
within the bank and their effectiveness; and
− Periodically checking the KYC, AML and CFT compliance levels at the
branches of the Bank and providing reports of the same to the audit
committee of the Board.

6 Customer Relationship Officer
The Customer Relationship Officer (CRO) or Account Opening Officer owns the
relationship with the customer and is responsible for:
− Information review and approval for all new customers. While certain portions
of the information collection process may be delegated to the Staff Assistant
(SA), the CRO remains ultimately responsible;
− Obtaining, maintaining and updating customer KYC information and
documentation in the Bank’s management systems;
− Interacting with the customer or customer contact in order to make sure that
the customer identification requirements are understood;
− Forming a reasonable belief regarding the true identity of the customers; and
− Performing periodic reviews and refresh of customer’s KYC information on
file.

7 Branch Manager
The BM at the bank is the branch level decision making authority for all KYC & AML
policy decisions. The responsibilities of the Officer include:
− Responsible for Implementation of KYC, AML and CFT policy at the Branch
level;
− Implements policy on closure or freezing of accounts for non-compliance;
− Responsible for submitting monthly Cash Transaction Reports; and
− Escalating transaction monitoring alerts from the branch level to the
Bank level.

8 .Staff

Bank staff that are interacting with customers and or handling customer
transactions/instructions will be a Bank’s strongest defence against money
laundering. Hence the communication of a Bank’s KYC, AML and CFT Programme
and related training in how to apply the programme, is key to the success of antimoney
laundering and counter funding of terrorism strategies. Therefore as much as
it is important for the Bank to communicate the KYC, AML & CFT Programme with
the staff, it is equally important for the staff to keep themselves updated with the
policies and procedures related to their role in the organisation
Bank staff is also obligated to report transactions that are suspicious of nature and
could be potentially money laundering or terrorist financing activity. An employee is
required to report transaction activity based on mere suspicion even if he or she is
not precisely sure about the underlying criminal activity or whether illegal activities
have occurred

KYC AML MCQs

Q1. KYC is --A One-time project

                 To be carried out every 5 years

                 To be carried out every 2 years

                 An ongoing process*

                 -

Q2. Is India a member of FATF?

                 Yes*

                 No

                 Has applied for inclusion

                 Is likely to be made a member

Q3.Is adopting Anti Money Laundering practices compulsory for Banks in India?

                 Yes

                 No

                 Not Sure

                 Will be made compulsory soon

Q4.What is CFT under KYC /AML regulations ?

                 Combating the financing of terrorism*

                 Calculating financial terrorism

                 Commission on financial terrorism

                 Committee on financial terrorism

Q5.The process of money laundering is perpetrated by -

                 Placement & Layering

                 Organisation & Controlling

                 Depositing & Withdrawing

                 All of the these*

Q6.Letter of thanks is sent to introducer/s because it is -

                 laid down in the banks’ manual

                 a routine practice followed by banks for years

                 recommended by the Auditors of banks

                 assisting banks in verification of genuineness of account opened*

Q7 .Which of the following is the cardinal rule for bankers in anti-money laundering efforts -

                 Know Your Customer & Know Your Employee*

                 Know the Customer of the other Banks

                 Know the income of the Customers of your Bank

                 Know the Assets Position of the customers of the Bank

Q8.Money Laundering means –

                 Conversion of illegal money into legitimate money*

                 Conversion of cash into gold to make them legitimate

                 Conversion of assets into cash to make them legitimate

                 Conversion of assets to invest in Laundromat

Q9.For opening account of a limited company, the following document/s is/are to be obtained -

                 Roles and responsibilities of the Company

                 Memorandum and Articles of Association of the Company*

                 Instructions of the Registrar of the Company

                 Organisation Chart of the company

Q10.FATF means -

                 Financial Accounting Trade Federation

                 Financial Association of Traders in France

                 Foreign Authority Traders Federation

                 Financial Action Task Force*

Q11. Due diligence is done at the time of opening an account to enable banks to ensure -

                 identification of the customer at the time of opening an account

                 correctness of the various denominations of notes given by the customer while opening an account

                 authenticity of the signatures of the customer at the time of opening an account*

                 speeding up the process of account opening of the new customers

Q.12  The term “Hawala” is an ----- word

                 Telugu

                 English

                 Arabic*

                 Islamic

Q13.Anti Money Laundering measures were originally introduced by?

                 DICGC

                 EXIM Bank

                 FDIC

                 SEBI

Q14.FATF is located at -

                 Mumbai

                 New York

                 Paris*

                 Japan

Q15.What is NCCT -

                 National commission for cooperation in trade

                 National committee for cooperation in trade

                 Non Cooperative Countries and Territories*

                 None of the above

Q 16  One of the possible steps to be taken while opening NRI account by the bank branch is -

                 Authentication / verification of signature by Indian Embassy

                 Authentication / verification of signature made by the relative of NRI in India

                 Authentication / verification of signature made by friends of the NRI who are staying abroad

                 All of the above

Q17 In case of societies, the important document to be verified is -

                 Copy of Bye-Laws*

                 Certificate given by the ROC

                 Certificate given by the Local Authorities

                 No document is to be verified in case of societies, as it is exempted

Q18.For opening accounts in the case of Hindu Undivided Family (HUF), the following document/s is/are important -

                 Declaration of all family members

                 Declaration of the Karta of the family*

                 Declaration of all guardians on behalf of minors

                 Declaration can be exempted as per Hindu Succession Act

Q 19.While opening an account in case of partnership firm, one of the vital document to be produced by the firm is -

                 Partners MOU

                 Partnership Deed*

                 Registration certificate of Partnership

                 Signatures of the partners

Q19 Customer’ is defined as:

                 a person or entity that maintains an account and/or has a business relationship with the bank

                 an entity that maintains an account and/or has a business relationship with the bank

                 a person or entity that maintains only a business relationship with the bank

                 a person or entity that only maintains an account with the bank

Q20.Banks should not make payment of cheques/drafts/pay orders/banker’s cheques bearing that date or any subsequent date, if they are presented beyond -

                 the period of six months from the date of such instrument

                 the period of three months from the date of such instrument*

                 the period of three months from the date of presentment of such instrument

                 the period of three months from the date of lodging such instrument

Q21 . Under KYC norms Banks should prepare :

                 a profile for each new customer based on risk categorisation.

                 a profile for each new customer based on constitution.

                 a profile for each new customer based on financial status.

                 a profile for each new customer based on own funds.

 Q22 While opening an account UCIC means –

                 Unique Customer Identification Character

                 Unique Customer Index Code

                 Unique Customer Identification Code*

                 Unique Customer Identification Criterion

 Q23.Under KYC norms the expression (PEPs)While opening an account in case of partnership firm, one of the vital document to be produced by the firm is -

                 Politically Exposed Persons*

                 Politically experienced persons

                 Politically exiled persons

                 Politically exempted persons

Q24.In case of small account under KYC norms -

                 the aggregate of all credits in a financial year does not exceed rupees one lakh*

                 

                 the aggregate of all withdrawals and transfers in a month does not exceed rupees ten thousand

                 

Q25. Under KYC norms (STRs) opening an account in case of partnership firm, one of the vital document to be produced by the firm is -

                 Suspicious Transfer Reports

                 Suspicious Transaction Reports*

                 Suspicious Transaction References

                 Suspicious Transaction Regularisation

Q26.Correspondent banking is : opening an account in case of partnership firm, one of the vital document to be produced by the firm is -

                 the provision of depository services by one bank (the “correspondent bank”) to another bank (the “respondent bank”)

                 the provision of money market services by one bank (the “correspondent bank”) to another bank (the “respondent bank”)

                 the provision of capital market services by one bank (the “correspondent bank”) to another bank (the “respondent bank”)

                 the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank”)

Very Important Risk management terms Useful for CAIIB & other exams also

Accrued interest Interest that is due on a bond or other fixed income security since the
last interest payment was made.

Additional termination event (ATE) Pre-defined event (such as a ratings downgrade)
that allows a transaction to be terminated at (mid-) market rates.

Annuity A series of payments of fixed size and frequency.

Arbitrage A transaction that generates a profit without any associated financial risk.
Asset swap A swap contract used to convert one type of investment into another.
Usually, a fixed investment such as a bond with guaranteed coupon payments is swapped
into floating payments.
At the money An option is at the money if the strike price of the option equals the
current (spot) market price of the underlying security. At-the-money forward refers to
the forward value of the underlying security and not the spot price.

Backwardation The situation where spot prices exceed futures prices. Backwardation
implies a downward-sloping (or inverted) forward curve and can imply an immediate
shortage of the underlying asset (such as an oil shortage due to political reasons).
Bankruptcy A legally declared inability of an individual or entity to pay its creditors.
The bankruptcy may be voluntary and filed by the individual or organisation concerned
or it may be involuntary and filed by the creditors. Creditors may file a bankruptcy
petition in an effort to recoup a portion of what they are owed or initiate a restructuring.
Basis The difference in price or yield between two underlying rates or indices.
Basis points per annum (bps or bp pa) A basis point is one one-hundredth of a
percentage point so, for example, 50 basis points is the same as a 0.5%. We will typically
use basis points (bps) to indicate a running premium and so 50 bps refers to a annual
premium of 50 basis points or 0.5%.

BCVA (see also CVA) CVA taking into account one’s own default as well as that of
one’s counterparty.

Bermudan option An option where the buyer has the right to exercise at a set of
discretely spaced times. It is intermediate between a European option (which allows
exercise only at expiry) and an American option (which allows exercise at any time).
Bilateral netting (see also netting and multilateral netting) A netting agreement between
two parties.

Black–Scholes formula A closed-form formula for valuing plain-vanilla options developed
by Fischer Black and Myron Scholes in 1973 that led to the birth of pricing by
replication for derivatives products.

Capital (see regulatory capital and economic capital)

Capital asset pricing model (CAPM) A model that describes the relationship between
risk and expected return in the pricing of risky securities. The CAPM postulates that
investors need to be compensated for the risk-free rate of interest and the additional
investment risk they take. The model states that an investor will require a return equal to
the risk-free rate of interest plus a risk measure (beta) that depends on the correlation
between the returns of the asset and those of the market.
Carry Net gain or expense on a position due to interest, dividends and other payments,
normally expressed in annual terms (such as basis points per annum).
Cashflow An individual fixed or floating payment made on a specific date, such as a
bond coupon.

Centralised counterparty An entity that interposes itself as the buyer to every seller and
as the seller to every buyer of a specified set of contracts.

Clean price The price of a bond without accrued interest.

Clearing To settle a trade by the seller delivering securities and the buyer delivering
funds in the proper form. A trade that does not clear is said to fail.
Clearing house A corporation, normally used in conjunction with an exchange, that
facilitates the execution of trades by transferring funds, assigning deliveries and guaranteeing
the performance of all obligations.

Collateral (or margin) agreement A contractual agreement under which one party must
supply collateral to a second counterparty when an exposure of that second counterparty
to the first counterparty exceeds a specified level.
Collateralisation The process of agreeing to and exchanging collateral or margin
between two or more parties.

Collateralised debt obligation (CDO) A broad type of instrument that repackages
individual (usually debt) securities into a product that can be sold on the secondary

market. The underlying securities may be, for example, auto loans, credit card debt,
corporate debt or even other types of CDOs.

Conduit An entity set up to assemble securities into a pool and issue other securities to
investors that are ultimately guaranteed by the original pool of securities.
Contango The situation where futures prices exceed spot prices (the opposite of backwardation).
Contango implies an upward-sloping forward curve often due to the underlying
cost of storage.
Contingent CDS (see also CDS) A CDS contract that has a notional value linked to the
value of another contract and therefore isolates counterparty credit risk arising from a
reference derivative.
Convexity A financial instrument is said to be convex if the price increases (decreases)
faster (slower) than corresponding changes in the price of the underlying.
Correlation Correlation measures linear dependence between variables. A correlation
coefficient provides a measure of the degree to which random variables are linked in a
linear fashion.Acorrelation coefficient will be positive when relative large or small values
are associated together and vice versa. Financial instruments that move together in
the same direction to the same extent have highly positive correlations. Instruments
that move in the opposite direction to the same extent have highly negative correlations.

Credit default swap (CDS) A specific swap transaction involving the transfer of a third
party’s credit risk from one party to another.
Credit event Trigger event in a credit default swap, determined at the outset of the
transaction. Markets standards include the existence of publicly available information
confirming the occurrence, with respect to the reference credit, of bankruptcy, repudiation,
restructuring, failure to pay, cross-default or cross-acceleration.
Credit exposure (see exposure)

Credit-linked note (CLN) A funded credit derivative structure which is structured as a
security with an embedded credit default swap allowing the issuer to transfer a specific
credit risk to credit investors in note form.

Counter party Credit Risk Abbrevetions

ABS Asset-Backed Security
AIG American International Group Inc.
AIGFP AIG Financial Product
ASW Asset SWap
ATE Additional Termination Event
BCBS Basel Committee on Banking Supervision
BCVA Bilateral Credit Value Adjustment
BSM Black–Scholes–Merton
CAPM Capital Asset Pricing Model
CCDS Contingent Credit Default Swap
CCF Credit Conversion Factor
CCP Central CounterParty
CDO Collateralised Debt Obligation
CDPC Credit Derivative Product Company
CDS Credit Default Swap
CEM Current Exposure Method
CF CashFlow
CFTC Commodity Futures Trading Commission
CLN Credit-Linked Note
CPPI Constant Proportion Portfolio Insurance
CPU Central Processing Unit
CRG Counterparty Risk Group
CSA Credit Support Amount
CSO Collateralised Synthetic Obligation
CVA Credit Value Adjustment
DBL Drexel–Burnham–Lambert
DC Determination Committee
DD Distance to Default
DPC Derivatives Product Company (or Corporation)
EAD Exposure At Default
EDF Expected Default Frequency
EE Expected Exposure

EEPE Effective Expected Positive Exposure
EPE Expected Positive Exposure
ERM Enterprise Risk Management
ETO Early Termination Option
EVT Extreme Value Theory
FX Foreign eXchange
G10 Group of Ten
GCM General Clearing Member
ICM Individual Clearing Member
IMM Internal Model Method; International Monetary Market
IRB Internal Ratings Based
IRS Interest Rate Swap
ISDA International Swaps and Derivatives Association
LGD Loss Given Default
LHP Large Homogeneous Pool
LIBOR London Inter-Bank Offer Rate
LSS Leveraged Super Senior
LTCM Long Term Capital Management
MA Maturity Adjustment
MBS Mortgage-Backed Security
MMR Modified Modified Restructuring
MR Modified Restructuring
MTA Minimum Transfer Amount
MtM Mark-to-Market
NA North American
NAV Net Asset Value
NCM Non-Clearing Member
NGR Ratio of current Net exposure to current GRoss exposure
NN No Netting
NS Netting Set
OTC Over The Counter
PD Probability of Default
PFE Potential Future Exposure
PWC PriceWaterhouseCooper
RC Regulatory Capital
RED Reference Entity Database
S&P Standard & Poor
SFAS Standards of Financial Accounting Statement
SFT Structured Finance Transaction
SIV Structured Investment Vehicle
SM Standardised Method
SPAN Standard Portfolio Analysis of Risk
SPE Special Purpose Entity
SPV Special Purpose Vehicle
TRS Total Return Swap
VAR Value-at-Risk
WR Withdrawn Rating

Certified Credit professional Numericals

Assets
Net Fixed Assets - 800
Inventories - 300
Preliminary Expenses - 100
Receivables - 150
Investment In Govt. Secu - 50
Total Assets - 1400
Liabilities
Equity Capital - 200
Preference Capital - 100
Term Loan - 600
Bank C/C - 400
Sundry Creditors - 100
Total Liabilities – 1400
1. Debt Equity Ratio = ?
a. 1:1
b. 1:2
c. 2:1
d. 2:3
Ans - c
Explanation :
600 / (200+100) = 2 : 1
2. Tangible Net Worth = ?
a. 100
b. 200
c. 300
d. 400
Ans - b
Explanation :
Only equity Capital i.e. = 200
3. Total Liabilities to Tangible Net Worth Ratio = ?
a. 7:2
b. 11:2
c. 13:2
d. 15:2
Ans - b
Explanation :
Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200 = 11 : 2
4. Current Ratio = ?
a. 1:1
b. 1:2
c. 2:1
d. 3:1
Ans - a

Explanation :
(300 + 150 + 50 ) / (400 + 100 ) = 1 : 1

Q.2

Assets

Net Fixed Assets - 265

Cash - 1

Receivables - 125

Stocks - 128

Prepaid Expenses - 1

Intangible Assets - 30

Total - 550

Liabilities

Capital + Reserves - 355

P & L Credit Balance - 7

Loan From S F C - 100

Bank Overdraft - 38

Creditors - 26

Provision of Tax - 9

Proposed Dividend - 15

Total - 550

1. Current Ratio = ?

= (1+125 +128+1) / (38+26+9+15)

= 255/88

= 2.89 : 1

2. Quick Ratio = ?

(125+1)/88

= 1.43 : 11

3. Debt Equity Ratio = ?

= LTL / Tangible NW

= 100 / (362 – 30)

= 100 / 332

= 0.30 : 1

4. Proprietary Ratio = ?

= (T NW / Tangible Assets) x 100

= [(362 - 30 ) / (550 – 30)] x 100

= (332 / 520) x 100

= 64%

5. Net Working Capital = ?

= CA - CL

= 255 - 88

= 167

6. If Net Sales is Rs.15 Lac, then What would be the Stock Turnover Ratio in Times ?

= Net Sales / Average Inventories/Stock

= 1500 / 128

= 12 times approximately

7. What is the Debtors Velocity Ratio if the sales are Rs. 15 Lac?



= (Average Debtors / Net Sales) x 12

= (125 / 1500) x 12

= 1 month

8. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac?

= (Average Creditors / Purchases ) x 12

= (26 / 1050) x 12

= 0.3 months

.............................................



Q.3 Current Ratio of a firm is 1 : 1. What will be the Net Working Capital ?

a. 0

b. 1

c. 100

d. 200

Ans - a

Explanation :

It suggest that the Current Assets is equal to Current Liabilities hence the NWC would be

0

(since NWC = C.A - C.L)

.............................................

Q.4 Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What is the amount of Current

Assets ?

a. 10000

b. 30000

c. 40000

d. 50000

Ans - c

Explanation :

Let Current Liabilities = a

4a - 1a = 30,000

a = 10,000 i.e. Current Liabilities is Rs.10,000

Hence Current Assets would be

4a = 4 x 10,000 = Rs.40,000/-

.............................................

Q.5 The amount of Term Loan installment is Rs.10000/ per month, monthly average interest

on TL is Rs.5000/-. If the amount of Depreciation is Rs.30,000/- p.a. and PAT is

Rs.2,70,000/-. What would be the DSCR ?

a. 1

b. 1.5

c. 2

d. 2.5

Ans - C

Explanation :

DSCR = (PAT + Depr + Annual Intt.) / Annual Intt + Annual Installment

= (270000 + 30000 + 60000 ) / 60000 + 12000

= 360000 / 180000

= 2

.............................................

Q. 6     A Company has Net Worth of Rs.5 Lac, Term Liabilities of Rs.10 Lac. Fixed Assets worth

RS.16 Lac and Current Assets are Rs.25 Lac. There is no intangible Assets or other Non

Current Assets. Calculate its Net Working Capital.

a. 1 lac

b. 2 lac

c. - 1 lac





d. - 2 lac

Ans - c

Explanation :

Total Assets = 16 + 25 = Rs. 41 Lac

Total Liabilities = NW + LTL + CL = 5 + 10 + CL = 41 Lac

Current Liabilities = 41 – 15 = 26 Lac

Therefore Net Working Capital = CA – CL = 25 – 26 = (-) 1 Lac

.............................................

Q. 7  Merchandise costs - Rs. 250000, Gross Profit - Rs. 23000, Net Profit - Rs. 15000. Find

the amount of sales.

a. 227000

b. 235000

c. 265000

d. 273000

Ans - d

Explanation :

Amount of sales = Merchandise costs + Gross Profit

= 250000 + 23000

= 273000

.............................................

Q.8 Total Liabilities of a firm is Rs.100 Lac and Current Ratio is 1.5 : 1. If Fixed Assets and

Other Non Current Assets are to the tune of Rs. 70 Lac and Debt Equity Ratio being 3 :

1. What would be the Long Term Liabilities?

a. 40 Lacs

b. 60 Lacs

c. 80 Lacs

d. 100 Lacs

Ans - b

Explanation :

Total Assets = Total Liabilities = 100 Lac

Current Asset = Total Assets - Non Current Assets

= Rs. 100 L - Rs. 70 L

= Rs. 30 L

If the Current Ratio is 1.5 : 1

then Current Liabilities works out to be Rs. 20 Lac.

That means, Net Worth + Long Term Liabilities = Rs. 80 Lacs.

If the Debt Equity Ratio is 3 : 1,

then Debt works out to be Rs. 60 Lacs and equity Rs. 20 Lacs.

Therefore the Long Term Liabilities would be Rs.60 Lac.

.............................................

Q.9 Current Ratio = 1.2 : 1.

Total of balance sheet being Rs.22 Lac.

The amount of Fixed Assets + Non Current Assets is Rs. 10 Lac.

What would be the Current Liabilities?

a. 10 Lacs

b. b. 12 Lacs

c. 16 Lacs

d. 22 Lacs

Ans - a

Explanation :

Total Assets is Rs.22 Lac.

Fixed Assets + Non Current Assets is Rs. 10 Lac

Then Current Assets = 22 – 10 = Rs. 12 Lac.

Current Ratio = 1.2 : 1

Current Liabilities = Rs. 10 Lac

.............................................


Q.10 M/s Raj&co's balance sheet included the following accounts:

Cash: 10,000

Accounts Receivable: 5,000

Inventory: 5,000

Stock Investments: 1,000

Prepaid taxes: 500

Current Liabilities: 15,000

Find the Quick Ratio

Quick Ratio = Cash + Cash Equivalents + Short Term Investments + Marketable

Securities + Accounts Receivable) / Current Liabilities

= (10000+5000+1000) / 15000

= 16000 / 15000

= 1.07

.................................

Q.11 M/s Raj&co's balance sheet included the following accounts:

Inventory : 5,000

Prepaid taxes : 500

Total Current Assets : 21,500

Current Liabilities : 15,000

Find the Quick Ratio

Quick Ratio = (Current assets – Inventory - Advances - Prepayments Current Liabilities) /

Current Liabilities

= (21500 - 5000 - 500) / 15000

= 16000 / 15000

= 1.07

.................................



Q.12 XYZ Pvt Ltd has the following assets and liabilities as on 31st March 2015 (in Lakhs) :

Non Current Assets

Goodwill 75

Fixed Assets 75

Current Assets

Cash in hand 25

Cash in bank 50

Short term investments 45

Inventory 25

Receivable 100

Current Liabilities

Trade payables 100

Income tax payables 60

Non Current Liabilities

Bank Loan 50

Deferred tax payable 25

Find the Quick Ratio

Quick Ratio = (Cash in hand + Cash at Bank + Receivables + Marketable Securities) /



Current Liabilities

= (25+50+45+100) / 160

= 220 / 160

= 1.375

.................................





Q.14 GHI Ltd. manufacturers two products :Product G and Product H. The Variable cost of the manufacture is as

follows:

Product G Product H

Direct Material 3 10

Direct Labour (Rs.6 per hour) 18 12

Variable Overhead 4 4