OVERVIEW OF FOREIGN EXCHANGE MANAGEMENT ACT

OVERVIEW OF FOREIGN EXCHANGE MANAGEMENT ACT

BACKGROUND – EVOLUTION OF FOREIGN EXCHANGE REGULATIONS IN INDIA
Exchange regulations have always remained at the centre of Indian economy. Exchange controls
were first introduced in India during the Second World War (1942). Soon after independence, they
were formally reaffirmed in form of the first Foreign Exchange Regulation Act, 1949 (FERA). This was
followed by FERA, 1973. The control framework under FERA was essentially transaction based in
terms of which all transactions in foreign exchange including those between residents to nonresidents
were prohibited unless specifically permitted.
Transformation from control-to-management: FERA to FEMA
The 1970s and 1980s saw the rise of large external sector imbalances on account of persistent
increase in adverse balance of payments situation. There was over dependence on official foreign
aid. It was this balance of payment crisis that triggered the wave of economic liberalization. The
Indian rupee became market determined in 1993. The need was felt to consolidate and amend the
law relating to foreign exchange with the objectives of facilitating external trade and payments and
for promoting the orderly development and maintenance of foreign exchange market in India.
Accordingly, on June 1, 2000, the Foreign Exchange Management Act, 1999 (FEMA) was brought in
force to replace the then existing Foreign Exchange Regulation Act, 1973 (FERA). FEMA has been
enacted with an objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market tin India. As such it is quite opposed to
FERA which was enacted to regulate or control the foreign exchange. FEMA provided a de jure status
to the shift in policies with regard to the external sector reforms that began in 1990-91.
STRUCTURE OF FEMA
The present framework of exchange controls in India, consist of basic legislation (FEMA, 1999) and
Notifications, Rules and Circulars [known as Authorized Persons Directions – AP (Dir Series)] issued
by RBI. FEMA applies to the whole of India and all branches, offices and agencies outside India which
are owned or controlled by a person resident in India. It also applies to any contraventions
committed outside India by any person to whom FEMA applies.
There are 49 sections under FEMA, of which 9 sections (section 1 to 9) are substantive and the rest
are procedural / administrative provisions as tabulated below:
Section Description
1 Application and Commencement of FEMA
2 Definitions
3 to 9 Provisions relating to Regulations and Management of Foreign Exchange
10 to 12 Provisions relating to Authorized Person
13 to 15 Provisions relating to Contraventions and Penalties
16 to 38 Provisions relating to Adjudication, Appeal and Directorate of Enforcement
39 to 49 Miscellaneous Provisions
Section 46 of FEMA grants power to the Central Government to make rules to carry out the
provisions of FEMA and Section 47 of FEMA grants power to the Reserve Bank of India (RBI) to make
regulations to implement provisions and the rules made under FEMA. Thus RBI is entrusted with the
administration and implementation of FEMA.
CAPITAL ACCOUNT TRANSACTION AND CURRENT ACCOUNT TRANSACTION:
In August 1994 India accepted Article VIII of the Articles of agreement of the International Monetary
Fund and became fully convertible on the current account. Since India is fully convertible on the
current account, all current account transactions (barring a small list of restricted items) are allowed
through the normal banking channels. In case of capital account transactions, only the transactions
which are explicitly enabled under the guidelines are allowed, remaining require specific approvals
under FEMA.
Accordingly it is very important to understand the concept of Capital and Current Account
Transactions to Comprehend FEMA.
A. Capital Account Transaction:
“Capital Account transaction” is defined under section 2(e) of FEMA as ‘a transaction which
alters the assets or liabilities, including contingent liabilities, outside India of persons resident in
India or assets or liabilities in India of persons resident outside India, and includes transactions
referred to in sub-section (3) of section 6.’
Thus any transaction as a result of which the assets or liabilities outside India of a person who is
resident in India and assets or liabilities in India of a person who is resident outside India are
altered i.e. either increased or decreased, is a capital account transaction.
To put it in example, if a person resident in India acquires shares of a foreign company, his/her
overseas assets will increase. Similarly, if the same person borrows from a non resident through
External Commercial Borrowings (ECBs) his/her liability is created outside India. Hence, both the
transactions lead to creation of asset or liability outside India of a person resident in India. Both
the transactions are capital account transactions.
In case of a person resident outside India, if he acquires shares of an Indian company, his/her
asset is created in India and if same person borrows from an institution in India for acquiring
house in India, his/her liability will be created in India. Both these transactions lead to creation
of asset or liability in India of a person resident outside India. Hence, both the transactions are
capital account transactions.
The concept of Capital and Current Account transaction is to be seen from Balance of Payment
point of view. If after the completion of transaction there remains any obligation to either pay
or receive foreign exchange, the transaction would get colour of Capital Account transaction.
For example, import of Plant & Machinery is a current account transaction, as upon import the
machinery is received in India and overseas supplier is say paid within six months from import
and accordingly there is no future obligation on India as a country to honour foreign exchange
obligation. In this example, from accounting perspective, though Plant & Machinery would be
capital goods, but for FEMA it would be a current account transaction.
RBI has been empowered under section 6(2) of FEMA to specify, in consultation with the Central
Government, any class or classes of Capital Account transactions which are permissible [i.e. over
and above the transactions permitted under section 6(3)]. Section 6(3) of FEMA specifies the
classes of capital account transactions which are regulated by RBI. Every transaction listed in this
section is regulated by a corresponding notification/regulation.

FEMA Notification No. 1/2000-RB dated 3-5-2000 contains the list of permissible capital account
transactions as well as list of prohibited capital account transactions.
Prohibited Capital Account Transactions:
General Prohibition:
A person shall not undertake or sell or draw foreign exchange to or from an Authorized person
for any capital account transactions other than those permitted in the Schedules, provided the
transaction is within the limit.
Special Prohibition:
No person resident outside India shall make investment in India, in any form, in any company or
partnership firm or proprietary concern or any entity, whether incorporated or not, which is
engaged or proposes to engage-
 In the business of chit fund, or
 As nidhi company, or
 In agricultural or plantation activities, or
 In real estate business, or construction of farm houses, or
 In trading in Transferable Development Rights (TDRs)
(real estate shall not include development of townships, construction of residential/commercial
premises, roads or bridges).
B. Current Account Transaction:
“Current account transaction” is defined under section 2(j) of FEMA to mean ‘a transaction
other than a capital account transaction and without prejudice to the generality of the foregoing
such transaction includes,-
(i) payments due in connection with foreign trade, other current business, services and shortterm
banking and credit facilities in the ordinary course of business,
(ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of parent, spouse and children residing abroad, and
(iv) expenses in connection with foreign travel, education and medical care of parents, spouse
and children.’
All Current Account transactions are generally permitted unless specifically prohibited whereas
all Capital Account transactions are generally prohibited unless specifically permitted.
Current Account transactions are divided into 3 schedules in Current Account Transaction rules:
Schedule I – Prohibited Transactions
Schedule II – Transactions requiring prior approval of Government of India
Schedule III – Transactions requiring prior approval of RBI
EXAMPLES TO UNDERSTAND CAPITAL AND CURRENT ACCOUNT TRANSACTIONS:
a. Import of Machinery on hire purchase:
In this transaction the person has created future obligation for making payment to nonresident
and hence has liability towards the non-resident. Therefore the said transaction is a
capital account transaction.
b. Transaction representing creation or acquisition of wealth, shares, loans or immovable
properties:
Since such types of transactions would lead to creation of assets in or outside India by
person resident outside or in India, as the case may be, the same are in nature of capital
account transactions.
c. Remittances out of winnings from lottery:
This comes under Prohibited list (Schedule I) of the Current account transaction. Hence
although the same is in nature of current account such transactions are prohibited.
However, an entity engaged in lottery business, imports any software or machinery to be
utilized in lottery business in India, the same is a permissible transaction. Import of software
or machinery will not result in violation of FEMA regulations in relation to current account
transactions.
But any type of technical collaboration for lottery business including licensing for franchise,
trademark, brand name, management contract or any contract for payment of royalty as
such for such collaboration is prohibited under both current account transaction rules and
also under FDI Policy. Hence, such transactions are not permissible.
d. Options premium payable under NASDAQ:
Options premium is the price paid by a person to buy an option contract, whether it is a call
or put. So option premium is paid to acquire only specified rights for a contract. Under
option contract there is no future obligation in addition to option premium paid at the time
of entering into contract so it does not result into creation of any contingent liability and
hence is a current account transaction. Whereas future contract would be a capital account
transaction. Option contract may result into creation of contingent asset, and such
contingent asset is not covered in the definition of Capital Account transaction.
e. Opening a branch outside India:
Opening a branch outside India is a current account transaction as it does not result into
alteration of any assets and liabilities overseas, since overseas branch would be regarded as
Resident of India. If however, such overseas branch proposes to acquire immovable
property (say office premises) outside India, such acquisition would be regarded as Capital
Account Transaction.
Opening a branch outside India is a permissible current account transaction and regulated
by Notification No. 10/2000-RB dated 3-5-2000 dealing with Foreign Currency accounts by a
person resident in India.
OTHER IMPORTANT SECTIONS – SEC 6(4) AND SEC 6(5):
Section 6(4):
A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or
any immovable property situated outside India if such currency, security or property was acquired,

held or owned by such person when he was resident outside India or inherited from a person who
was resident outside India.
However, there was no clarity on the type of transactions that would be covered under section 6(4).
Hence, RBI with a view to resolve the doubts, vide its A. P. (DIR Series) Circular No. 90 dated January
9, 2014 clarified that the following transactions shall be covered under Section 6(4) of FEMA, 1999:
a. Foreign currency accounts opened and maintained by such a person when he was resident
outside India.
b. Income earned through employment or business or vocation outside India taken up or
commenced, or from investments made, or from gift or inheritance received while such a person
was resident outside India.
c. Foreign exchange including any income arising there from, and conversion or replacement or
accrual to the same, held outside India acquired by way of inheritance from a person resident
outside India.
d. A person resident in India may freely utilize all their eligible assets abroad as well as income on
such assets or sale proceeds thereof received after their return to India for making any
payments or to make any fresh investments abroad without prior approval of RBI
Thus, section 6(4) gives liberty to a person resident in India to keep with him any foreign currency or
foreign security or immovable property which he might have acquired when he was resident outside
India, without any compliance and reporting under FEMA.
Section 6(5):
A person resident outside India may hold, own, transfer or invest in Indian currency, security or any
immovable property situated in India if such currency, security or property was acquired, held or
owned by such person when he was resident in India or inherited from a person who was resident in
India.
This section allows a person resident outside India to keep with him any currency, security or
immovable property which he might have acquired when he was resident in India. In case if the
person liquidates his investment owned by him in India, he can keep the funds in his NRO account.
RBI vide Notification 13 (Remittance of assets) allows to remit the balances of sales proceeds of
assets held by NRI subject to the limit of USD 1 million per financial year.

The Indian Contract Act, 1872

The Indian Contract Act, 1872

PREAMBLE

Whereas it is expedient to define and amend certain parts of the law relating to
contract; it is hereby enacted as follows :-
1. Short title
This Act may be called be the Indian Contract Act, 1872.
Extent, commencement - It extends to the whole of except the State of Jammu and
Kashmir; and it shall come into force on the first day of September, 1872.
Enactment repealed - Nothing herein contained shall affect the provisions of any
Statute, Act or Regulation not hereby expressly repealed, nor any usage or customs
of trade, nor any incident of any contract, not inconsistent with the provisions of this
Act.
2. Interpretation -clause
In this Act the following words and expressions are used in the following senses,
unless contrary intention appears from the context:
(a) When one person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal;
(b) When a person to whom the proposal is made, signifies his assent thereto, the
proposal is said to be accepted. A proposal, when a accepted, becomes a promise;
(c) The person making the proposal is called the "promisor", and the person
accepting the proposal is called "promisee",
(d) When, at the desire of the promisor, the promisee or any other person has done
or abstained from doing, or does or abstains from doing, or promises to do or to
abstain from doing, something, such act or abstinence or promise is called a
consideration for the promise;
(e) Every promise and every set of promises, forming the consideration for each
other, is an agreement;
(f) Promises which form the consideration or part of the consideration for each other,
are called reciprocal promises;
(g) An agreement not enforceable by law is said to be void;
(h) An agreement enforceable by law is a contract;
(i) An agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of the other or others, is a voidable contract;
(j) A contract which ceases to be enforceable by law becomes void when it ceases to
be enforceable.
Chapter I Of the communication, acceptance and revocation of proposals
3. Communication, acceptance and revocation of proposals
The communication of proposals, the acceptance of proposals, and the revocation of
proposals and acceptance, respectively, are deemed to be made by any act or
omission of the party proposing, accepting or revoking, by which he intends to
communicated such proposal, acceptance or revocation, or which has the effect of
communicating it.
4. Communication when complete
The communication of a proposal is complete when it becomes to the knowledge of
the person to whom it is made.
The communication of an acceptance is complete -as against the proposer, when it is
put in a course of transmission to him so at to be out of the power of the acceptor;
as against the acceptor, when it comes to the knowledge of the proposer.
The communication of a revocation is complete -as against the person who makes it,
when it is put into a course of transmission to the person to whom it is made, so as
to be out of the power of the person who makes it;as against the person to whom it
is made, when it comes to his knowledge.
5. Revocation of Proposals and acceptance
A proposal may be revoked at any time before the communication of its acceptance
is complete as against the proposer, but not afterwards.
An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but no afterwards.
6. Revocation how made
A proposal is revoked -

The Banking Ombudsman Scheme 2006

The Banking  Ombudsman Scheme 2006
  The Reserve Bank hereby directs that all commercial banks,
regional rural banks and scheduled primary co-operative banks shall comply with
the Banking Ombudsman Scheme, 2006 as amended hereby.
2. The amendments in the Scheme shall come into force from February 3, 2009
(Usha Thorat)
THE BANKING OMBUDSMAN SCHEME, 2006
The Scheme is introduced with the object of enabling resolution of complaints
relating to certain services rendered by banks and to facilitate the satisfaction or
settlement of such complaints.
CHAPTER I
PRELIMINARY
1. SHORT TITLE, COMMENCEMENT, EXTENT AND APPLICATION
(1) This Scheme may be called the Banking Ombudsman Scheme, 2006.
(2) It shall come into force on such date as the Reserve Bank may specify.
(3) It shall extend to the whole of India.
(4) The Scheme shall apply to the business in India of a bank as defined under
the Scheme.
2. SUSPENSION OF THE SCHEME
(1) The Reserve Bank, if it is satisfied that it is expedient so to do, may by order
suspend for such period as may be specified in the order, the operation of all or
any of the provisions of the Scheme, either generally or in relation to any
specified bank.
(2) The Reserve Bank may, by order, extend from time to time, the period of any
suspension ordered as aforesaid by such period, as it thinks fit.
3. DEFINITIONS
(1) ‘award’ means an award passed by the Banking Ombudsman in accordance
with the Scheme.
(2) ‘Appellate Authority’ means the Deputy Governor in charge of the Department
of the Reserve Bank implementing the Scheme.
(3) ‘authorised representative’ means a person duly appointed and authorised by
a complainant to act on his behalf and represent him in the proceedings under
the Scheme before a Banking Ombudsman for consideration of his complaint.
(4) ‘Banking Ombudsman’ means any person appointed under Clause 4 of the
Scheme.
(5) ‘bank’ means a ‘banking company’, a ‘corresponding new bank’, a ‘Regional
Rural Bank’, ‘State Bank of India’ a ‘Subsidiary Bank’ as defined in Section 5 of
the Banking Regulation Act, 1949 (Act 10 of 1949), or a ‘Primary Co-operative
Bank’ as defined in clause (c) of Section 56 of that Act and included in the
Second Schedule of the Reserve Bank of India Act, 1934 (Act 2 of 1934), having
a place of business in India, whether such bank is incorporated in India or
outside India.
(6) ‘complaint’ means a representation in writing or through electronic means
containing a grievance alleging deficiency in banking service as mentioned in
clause 8 of the Scheme.
(7) ‘Reserve Bank’ means the Reserve Bank of India constituted by Section 3 of
the Reserve Bank of India Act, 1934 (2 of 1934).

BANKING COMPANIES (ACQUISITION AND TRANSFER OF UNDERTAKINGS) ACT,1970

BANKING COMPANIES
(ACQUISITION AND TRANSFER
OF UNDERTAKINGS) ACT,1970
(5 of 1970)
[As amended by The Banking Companies (Acquisition and Transfer of
Undertakings) and Financial Institutions Laws (Amendment) Act,
2006 vide amendment dated 25.9.2006, effective 16.10.2006]
An Act to provide for the acquisition and transfer of the undertakings of
certain banking companies, having regard to their size, resources,
coverage and organisation, in order to control the heights of the economy
and to meet progressively and serve better, the needs of development of
the economy in conformity with national policy and objectives and for
matter connected therewith or incidental thereto.
Be it enacted by Parliament in the Twenty-first Year of the Republic of India
as follows:-
CHAPTER I
Preliminary
1. Short title and commencement.
(1) This Act may be called the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970.
(2) The provisions of this Act (except section 21, which shall come into
force on the appointed day) shall be deemed to have come into force
on the 19th day of July, 1969.
2. Definitions.--
In this Act, unless the context otherwise requires,-
(a) "appointed day" means the 14th day of February, 1970, being the
day on which the Banking Companies (Acquisition and Transfer
of Undertakings) Ordinance, 1970 (3 of 1970), was promulgated;
(b) "banking company" does not include a foreign company within the
meaning of section 591 of the Companies Act, 1956 (1 of 1956);
(c) "commencement of this Act" means the 19th day of July, 1969;
(d) "corresponding new bank", in relation to an existing bank,
means the body corporate specified against such bank in
column 2 of the First Schedule;
(e) "Custodian" means the person who becomes, or is appointed,
a Custodian under section 7;
(f) "existing bank" means a banking company specified in column 1
of the First Schedule, being a company the deposits of which, as
shown in the return as on the last Friday of June, 1969, furnished
to the Reserve Bank under section 27 of the Banking Regulation
Act, 1949, (10 of 1949), were not less than rupees fifty crores;
(fa) “prescribed" means prescribed by regulations made under this Act;
(g) "Schedule" means a Schedule to this Act;
(h) words and expressions used herein and not defined but
defined in the Banking Regulation Act, 1949 (10 of 1949), have
the meanings respectively assigned to them in that Act.
(i) Words and expressions used herein and not defined either in this
Act or in the Banking Regulation Act, 1949 (10 of 1949) but defined
in the Companies Act, 1956 (1 of 1956) shall have the meanings
respectively assigned to them in the Companies Act, 1956.
CHAPTER II
Transfer of the Undertakings of Existing Banks and Share Capitals of
the Corresponding New Banks
3. Establishment of corresponding new banks and business thereof.
(1) On the commencement to this Act, there shall be constituted such
corresponding new banks as are specified in the First Schedule.
(2) The paid-up capital of every corresponding new bank
constituted under sub-section (1) shall, until any provision is
made in this behalf in any scheme made under section 9, be
equal to paid-up capital of the existing bank in relation to
which it is the corresponding new bank.
(2A) Subject to the provisions of this Act, the authorised capital of
every corresponding new bank shall be one thousand five
hundred crores of rupees divided into one hundred fifty crores
fully paid-up shares of ten rupees each:
PROVIDED that the Central Government may, after consultation with
the Reserve Bank and by notification in the Official Gazette, increase
or reduce the authorised capital as it thinks fit, so however that after
such increase or reduction, the authorised capital shall not exceed
three thousand crores or be less than one thousand five hundred
crores, of rupees.

LATEST RBI POLICY GUIDE LINES ON BASEL & RISK MANAGEMENT

Eligible Credit Rating Agencies- Rating of NBFC-FD by Infomerics Valuation and Rating Private Limited (IVRPL) As perMaster Direction
dated 25.08.16, the names of six approved Credit Rating Agencies and theirminimuminvestment grade credit ratings have been listed. RBI
decided on 14.07.17, that NBFCs can also use the ratings of Infomerics Valuation and Rating Private Limited for rating the fixed deposit
portfolios of NBFCs with IVR BBB as theminimuminvestment grade credit rating.
RiskManagement and Interbank Dealings- Reports to the Reserve Bank
In terms RBI circular dated July 05, 2016, the Head/Principal Office of AD Category-I banks are required to submit a statement in form BAL
giving details of their holdings of all foreign currencies on fortnightly basis through Online Returns Filing System(ORFS) within seven
calendar days fromthe close of the reporting period towhich it relates. RBI decided (on 10.08.17) that w.e.f. August 16, 2017 (i.e. for
the statement of first fortnight of August 2017), this statement may be submitted through the web portal at https:// bop.rbi.org.in
as per prescribed format. Head/Principal Office of AD Cat-I banks earlier required to submit a monthly statement of Nostro/Vostro
account balances are to discontinue this report.
Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure
Standard
In partial modification of extant guidelines, RBI decided (02.08.17) that Level 1 assets of banks would comprise of following. These
assets can be included in the stock of liquid assets without any limit as also without applying any haircut: i. Cash including cash
reserves in excess of required CRR.
(a). For banks incorporated in India,
 Reserves held with foreign Central Banks in excess of reserve requirement, where a foreign sovereign has been assigned a
0% risk weight as per rating by an international rating agency.
(Central bank’s reserves would include banks overnight deposits with central banks, and term deposits with the central banks that:
(i) are explicitly and contractually repayable on notice from the depositing bank; or (ii) that constitute a loan against which the bank
can borrow on a term or on an overnight basis but automatically renewable basis (only where the bank has existing deposit with the
relevant central bank). Other term deposits with central banks are not eligible for the stock of HQLA. However, if the term expires
within 30 days, the term deposits could be considered as an inflow).
 Reserves held with foreign Central Banks in excess of the reserve requirement, to the extent these balances cover the
bank’s stressed net cash outflows in that specific currency, in cases where a foreign sovereign has been assigned a non-0% risk
weight as per rating by an international rating agency, but a 0% risk weight has been assigned at national discretion under Basel II
Framework.
ii. Government securities in excess of the minimum SLR requirement.
iii. Within the mandatory SLR requirement, Government securities to the extent allowed by RBI, under Marginal Standing Facility
(MSF). (Government securities to the extent of 2 per cent of NDTL may be included i.e. currently allowed under marginal standing
facility (MSF).
iv. Marketable securities issued or guaranteed by foreign sovereigns satisfying all the following conditions:
(These securities will include only marketable securities which attract a 0% risk-weight in terms RBI Master Circular dated 01.07.13.
In cases where a foreign sovereign has been assigned a non-0% risk weight as per rating by an international rating agency, but a 0%
risk-weight has been assigned at national discretion under Basel II Framework, marketable securities issued or guaranteed by that
foreign sovereign within its domestic jurisdiction will be allowed to the extent those securities cover a bank’s stressed net cash
outflows in that specific foreign currency stemming from the bank’s operations in the jurisdiction where the bank’s liquidity risk is
being taken.)
(a) assigned a 0% risk weight under the Basel II standardized approach for credit risk;
(b) Traded in large, deep and active repo or cash markets characterised by a low level of concentration; and proven record as a
reliable source of liquidity in the markets (repo or sale) even during stressed conditions.
(c) not issued by a bank/FI/NBFC or any of its affiliated entities.
(d) Prudential Guidelines on Capital Adequacy andMarket Discipline- New Capital Adequacy Framework (NCAF) - Eligible Credit
Rating Agencies— INFOMERICS Valuation and Rating Pvt Ltd. (INFOMERICS)
(e) In terms exant guidelines, six domestic credit rating agencies viz. CARE, CRISIL, FITCH India,, ICRA/, Brickwork Ratings and

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

TREASURY RISK MANAGMENT

TREASURY RISK MANAGMENT

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

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


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

DERIVATIVE PRODUCTS

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

TREASURY & ASSET LIABILITY.MANAGEMENT MCQs

1 The significance of Treasury operations in Asset Liability management is:
a) It operates in financial markets directly.
b) Treasury is a link between core banking functions and market operations
c) Treasury identifies and monitors the market risk d) All of these
2_ How the Treasury operations are useful in minimizing Asset Liability mismatch?
a) Through uses of derivatives
b) Use of new products
c) Through Bridging the liquidity and rate sensitivity gaps d) All of these
3 Which of the following statements is correct?
a) Trading in securities is exposed to market risk
b) At times the Risks are compensatory in nature and help to minimize the mismatches.
c) Options can be economic only in marketable size d) All of these
4. Treasury operations also help in effective monitoring and implementation of Asset
Liability management process in view of the:
a) Credit instruments can be replaced by Treasury instruments
b) Treasury products are more liquid.
c) Treasury operations monitor exchange rate and interest rate movements
d) All of these
5. Which of the following statements is not correct regarding Treasury operations in
Asset Liability management process?
a) Derivatives can be widely used in Treasury operations
b) Derivatives increases liquidity risk
c) The capital requirement for derivative operations is small.
d) Derivatives replicate market Movements.
6. Asset Liability mismatches can be reduced through use of derivatives in Treasury
operations because:
a) Derivatives can be used to hedge high value transactions
b) It can also minimize aggregate risk in Asset liability mismatches
c) (a) and (b) both d) None of these
7 Suppose a Bank is fundingmedium term loan of 3 years with deposits having
average maturity of 3 months as short term deposits or borrowings are cheaper than
3 years deposits. what would be the consequences and what a bank should do?
a) Bank would resort to short term resources to increase the spread.
b) The (a) above will have liquidity risk
c) This will also have interest Risk since every time the deposits would be priced.
d) The Bank should swap 3 month interest rate into a fixed rate for 3 years.
8. Suppose a Bank prices the 3 month deposit at 91 day T-Bill + 1% and swap rate of
the loan yield T-Bill+3%. What is the impact?
a) Fixed interest of the loan is swapped into floating rate
b) Bank has a spread of 2%
c) The Risk is protected during the period of loan. d) All of these
9. Suppose a Bank borrows US dollars at 3% and lends in domestic market at 8.5%.
The Bank pays forward premium of 1.5% to cover exchange Risk. What is the overall impact?
a) The Bank earns a spread of 2% without any exchange Risk.
b) A bank through Treasury operations can supplement domestic liquidity.
c) The above process is known as arbitrage. d) All of these
10. A Bank under the Treasury operations can buy call options to protect foreign
currency obligations as under:
a) This will help the Bank to protect rupee value of foreign currency receipts and payments
b) The Bank will gain if the spot rate of call option on the exercise date is more favourable than the strike
price of the option.
c) (a) and (b) both d) none of the above
11. Which of the followings is relevant when interest rate is linked to the rate of

inflation?
a) Index linked Bonds b) Treasury Bonds
c) Corporate Debt Instruments d) All of these
12. The significance of index linked bonds is:
a) It provides protection against inflation rate rise.
b) It is inbuilt in the process.
c) (a) and (b) both d) None of these
13. Suppose a Bank- issues 7 year Bond with a put option at the end of 31-6 year. What
does it signify?
a) It is as good as 3 year investment
b) The investment becomes more liquid
c) (a) and (b) both d) None of these
14. The limitations of Derivatives are:
a) If interest rate on deposits and loans are not based on benchmar-k
rates interest rate swaps may not be that useful.
b) The product prices may not move in line with market rates.
c) The Treasury operations may not provide perfect hedge. d) All of these
15'. Which of the followings is correct?
a) Treasury operations are concerned with market risk
b) Treasury operations has no link with the credit risk
c) Credit risk in Treasury operations are contained by exposure limits
d) All the above
16. Why the corporate prefer to issue debt paper than to Bank credit?
a) The cost of debt paper is much lower
b) The procedure is easy
c) (a) and (b) both d) None of these
17. A Bank may prefer to invest in corporate Bonds because:
a) Bbnd is more liquid Asset
b) Bond has an easy exit
c) Bond can be sold at discount d) All of these
18. Which of the following is not credit substitute?
a) Commercial paper b) Mortgage loan
c) Corporate bond d) Certificate of Deposit
19. The difference between a Bond and loan is:
a) The loan has normally fixed rate of interest. Bond price is dependent on Market interest rate movements.
Bonds are more liquid
Yield to maturity value can be known easily in a bond d) All of these
What is securitization?
A process which converts conventional credit into tradable Treasury Assets.
Credi t receivabl es of the Bank can be conver ted into Bonds i .e. .pass through
certificates
These certificates can be traded in the market
The advantages of securitization for a Bank is:
It provides liquidity to the issuing Bank
The Bank capital does not get blocked
Securitization proceeds can be used for fresh lending
22. Which of the following loans cannot be securitized?
a) Long term loans b) Short term loans
c) Medium term loans d) Retail loans
23. Which of the followings is true?
a) Surplus funds with the banks can be invested in pass through certificates
b) This will be indirect expansion of credit portfolio
c) (a) and (b) both d) None of these
24. The features of credit derivatives are:
a) It segregates credit Risk from loan
b) The Risk is transferred from the owner of the Asset to another person for a fee.

c) The instrument is known as credit linked certificates d) All of these
25. The constituents of a credit Derivatives are:
a) Protection Buyer b) Protection Seller
c) Reference Asset d) All of these
26. The process of credit Derivative involves:
a) The protection seller guarantees payment of principal and interest or both of the Asset owned by the
protection Buyer in case of credit default.
b) The protection Buyer pays a premium to the protection Seller
c) (a) and (b) both d) None of these
27. The advantages of credit Derivatives are:
a) It helps the issuer to diversity the credit risk
b) The capital can be used more efficiently
c) Credit Derivative is a transferable instrument d) All of these
28. What is transfer pricing under Treasury operations?
a) It is the process of fixing the cost of resources and return on Assets of a Bank in rational manner.
b) The Treasury buys and sells deposits and loans of Bank. -
c) The price fixed by the treasury becomes the basis for assessing profitability of a Bank
d) All the above
29. The parameters for fixing price by a Treasury are:
a) Market interest rate
b) Cost of hedging market Risk
c) Cost of maintaining reserve assets of the Bank d) All of these
30. Which of the following statements is correct regarding transfer pricing under Treasury operations?
a) If Bank procures deposit at 7% but the Treasury buys at a lower cost, the difference being the cost would be borne by the
Bank.
b) If the Bank lends at higher rate and sells the loan to Treasury at lower rate, the Balance being risk premium
would be the income for the Bank.
c) (a) and (b) both d) None of these
31. An integrated Riskmanagement policy under Asset Liabilitymanagement should focus on: a) Riskmeasurement andmonitoring b) Risk
Neutralisation, c) Product pricing d) All of these
32. Liquidity policy survival prescribe: a) Minimum liquidity to be maintained b) Funding of Reserve Assets c) Exposure limit
to money market d) All of these
33. The derivative Policy should consist:
a) Capital Allocation b) Restrictions on Derivative Trading
c) Exposure limits d) All of these
34. The investment policy should contain:
a) Permissible investments b) SLR and non SLR investments
c) Private placement d) All of these
35. The investment policy need not contain:
a) Derivative Trading b) Trading in Securities and Repos
c) Valuation and Accounting policy d) Classification of Investments
36. The composite Risk policy under Treasury operations should include the following:
a) Norms for Merchant and Trading positions b) Securities Trading
c) Exposure limits d) All of these
37. Composite Risk policy should also contain the following:
a) Intra-day and overnight positions b) Stop loss limits
c) Valuation of Trading positions d) All of these
38. Transfer pricing policy shduld prescribe:
a) Spread to be retained by the Treasury
b) Segregation of Administrative and Hedging cost
c) Allocation of cost d) All of these
39. According to RBI, policy of Investment and Risk should be supplemented with:
a) Prevention of money laundering policy
b) Hedging policy for customer Risk_ c) (a) and (b) -d) None of these
40. Which of the following are essential requirements for formulation of policy
guidelines?

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


Answers

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

TT Rates and Bill Rates

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

Foreign Exchange

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

Interest Rate Risk Management

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

Liquidity Management

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

Provisioning related numericals

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

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

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

Today Forex for individual recollected questions

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

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

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

Foreign exhange facilities for individuals

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

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

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

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

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

Treasury and ALM

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

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

Derivative Products Treasury management

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

Types of Risks Risk mangement

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

EXIM BANK

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

FOREIGN TRADE RISKS AND ECGC

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


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

IMPORTS

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