India’s $ 5 Trillion Economy

India’s $ 5 Trillion Economy The government wants to launch a scheme to invite global companies through a transparent competitive bidding to set up mega-manufacturing plants in sunrise and advanced technology areas such as semi-conductor fabrication (FAB), solar photovoltaic cells, lithium storage batteries, solar electric charging infrastructure, computer servers, laptops, etc. and provide them investment linked income tax exemptions under section 35 AD of the Income Tax Act, and other indirect tax benefits. § Go to the Economic Survey 2018-19. It too states that “To achieve the objective of becoming a USD 5 trillion economy by 2024-25, as laid down by the Prime Minister, India needs to sustain a real GDP growth rate of 8 percent. International experience, especially from high growth East Asian economies, suggests that such growth only be sustained by a "virtuous cycle" of savings, investment and exports catalysed and supported by a favourable demographic phase. § “The key word for all these plans is investment – especially private investment. It is this investment that will create jobs, drive demand, create capacity and generate wealth. But investment is not something India can bring to its territorial jurisdiction easily. India needs foreign direct investment (FDI) urgently, and lots of it. Since FDI, unlike porolio investment, is long-term patent capital, entrepreneurs and bankers like to examine proposals very carefully. Bank Credit Towards a $ 5 Trillion Economy: India is now the 6th largest economy in the world and is on its way to become $5 trillion economy by FY25, based on an assumed 12% nominal GDP growth and 5% depreciation in Rupee § India is poised to spend a massive `100 lakh crore on infrastructure over the next 5 years § Bank credit needs to grow to `188 lakh crore in FY25 from `97.7 lakh crore in FY19, with an increase in incremental credit of `90 lakh crore during FY20-FY25. § PSBs could potenally supply at least `55 lakh crore of credit and `75 lakh crore of deposits mobilization in this period. Banks need to drive credit growth in agriculture, MSME, exports, retail, infrastructure and construction. Sector-wise Incremental Credit Requirement Agriculture - `8-10 lakh crore MSME and Exports - `18-20 lakh crore Infrastructure & construction - `10-12 lakh crore Retail - `25-28 lakh crore Issues to reach $5 Trillion Economy
Asset Quality - NPAs increased due to optimistic growth projections made during boom years, inadequate appreciation of inherent risks, delay in environmental and other clearances etc,. RBI's Asset Quality Review (AQR) exercise led to the elevated levels of Gross NPAs in the banking system. NPA cycle has peaked and GNPAs have started to decline and it stands at 9.3% as on Mar '19 as against 11 .5% as on Mar18Way forward - SCBs' GNPA rao may decline further to 9.0% in March 2020. § Allowing Foreign Portfolio Investors (FPI) to acquire stressed rupee loans directly instead of present system of going through an asset reconstruction company (ARC) § Allowing eligible ECB investors to fund acquisition of stressed companies both under IBC and outside IBC Capital Requirement - Need around `3-4 lakh crore of incremental capital for `50-60 lakh crore of incremental lending to manufacturing and services (excluding retail) in the next 5 years. § PSBs to explore multiple sources of capital – government, domestic and foreign lending. Recommendations -To fulfill the Vision of the Govt, PSBs will continue their role in the transformation of the economy. However, certain issues including asset quality, capital adequacy, HR, governance, transmission etc., need to be addressed. § To instill confidence in foreign investors, IBC might be tweaked to give clarity for various asset classes/creditors. § Corporate Governance in PSBs require attention. Address open issues such as appointment of top management, stability and expertise of management team, and skilling of manpower. § Keeping in view today's banking scenario of intense competition, HR policies of PSBs need to be changed to align them with the private sector

Banking: Stepping into the next decade

Banking: Stepping into the next decade – Reinvention A tidal wave of change is sweeping across the banking industry, transforming it and shaking its core foundations. That wave is called Fin Tech and it is reshaping the world of financial services in general, and banking in particular. The soaring expectations of customers spurred by GAFA (Google, Amazon, Facebook and Apple) and other Big Tech firms seems to have been further whetted by Fin Tech firms, who have quickly stepped into the gap left by traditional firms, and whose drive towards customer centricity and seamless and delightful customer experiences seems to have forced incumbent players to re-assess what products they must offer and how those products must be delivered to each and every customer in a personalized manner. Fin Tech is a portmanteau of Financial Technology and refers to the innovative use of technology in the design and delivery of financial services and products. Fin Tech mostly refers to the startup firms that spring up every other day and challenge the might of traditional firms like Banks and other legacy financial institutions by offering low-cost, innovative, seamless and personalized products to customers. But, that is not the right way to describe Fin Tech. Fintech is an ecosystem consisting of all the players that are a part of it and are referred to as A’s and B’s and C’s and D’s of Fin Tech. The A’s are the incumbent players in the financial services industry, like JP Morgan and Citi Bank, while the B’s are the Big Tech firms like Google, Apple, Facebook, Amazon and Twitter. The C’s are the companies that provide the infrastructure or technology that provides financial services like Visa, MasterCard, Fiserv, First Data and exchanges like NASDAQ etc. The D’s are the Disruptors, the startups and the innovative technology firms like Paydiant and Stripe (mobile payments), Lending Club and Prosper (Peer-to-Peer lending), Moven (Retail Banking), Atom Bank (Business Loans), Mint and Personal Capital (Smart Budgeting and Personal Finance) and Lemonade and Celo (Insurance). What are the technologies and trends that power Fintech? Open Banking is a financial services concept that refers to the use of APIs (Application Programming Interfaces) that enables third-party service providers to build applications and services around the incumbent financial institutions. APIs are simply third party applications that enable customers to talk to their banks. Open Banking got a new impetus because of pressure from EU regulators with the enactment of the Revised Payment Services Directive (PSD2) which allows Fintech firms to access the database of the incumbent banks and financial services firms. This is akin to a financial earthquake, because customer data was a closely guarded fortress, and that was the ultimate competitive advantage upon which traditional Banks held sway over predators. With Banks forced to provide access to third-party processors (TPPs), the walls are crumbling and the monopoly of banks over customer data will end and the control will shift to the rightful owners- the customers. The open banking initiative has many advantages. It will not only lead to secure data exchange with TPPs but, will also enable them to use another very important technology, Artificial Intelligence, to provide services in a more personalized way. Artificial Intelligence (AI) combines three very important technologies-machine learning, natural language processing and cognitive computing. The purpose of artificial intelligence is to transfer the complex thinking of humans into machines using the algorithms of machine learning and natural language processing, to overcome the barriers of scalability that humans face. Artificial intelligence enables machines to perform computations much faster than humans can ever contemplate. How is AI relevant to banking? There many important applications that can transform banking. First, chatbots are AI based software applications that mimics written or spoken human speech that simulates a conversation with a real human. They are used to solve customer problems before human beings get involved. AI can improve the Bank’s customer service exponentially. AI can aggregate all the information about the customer and can tailor the interactions accordingly. Voice recognition and facial recognition could be used instead of passwords or PIN to identify customers. A few banks are using voice powered devices like Amazon Echo, Google Home and Apple’s Siri to drive their customer service. Second, AI has the potential to make banks smarter. It can study the mass of data and reveal better customer insights and intelligence and thus, offer better customer experience, which is key to differentiating banks. Suggestions offered to customers can be unique for every customer and timely. The recommendations pop up just when the customer is about to take a decision. Third, AI can be used detect patterns that ferrets out terrorist financing and money laundering activities, including financial fraud. Fourth, invisible robots can carry out investment trades based on algorithms. AI will undoubtedly transform banking in many ways but, the easiest to predict is that AI can cut costs substantially by eliminating almost 50 to 70 percent of the current jobs in banking. AI works best with unstructured customer data-emails, recorded phone conversations, social media interactions, and legal documents. AI manages this data and then applies analytics to glean hidden insights.
The third revolutionary technology that can radically change the face of banking is the Distributed Ledger Technology or DLT as it is known. What is DLT? A distributed ledger is a digital database that is held and updated by each participant in a consensual group. Each participant in the group is called a node (a computer terminal). The heart of the DLT and this seems to be a sore point for banks is that each record is constructed
independently and held by each node without the intervention of a central registry or trusted third party. There is no central validating agent. Every single node is responsible for processing every transaction and validating the same. Once there is a consensus, after everyone has validated the transaction, the distributed ledger is updated and each node has a copy. The distributed ledgers are dynamic and engender new kinds of relationships in the digital world. The key technological gain is that the ledger is shared amongst parties that may not trust one another. The crux of DLT is how it sidesteps the trusted intermediary (the banks) and completely avoids the cost of trust. DLT is a more robust and consensual trusted system. A distributed ledger, thus, increases the speed of transactions and reduces their complexity because no third party is required to validate the transactions. It enhances data accuracy and transparency because, all changes are consensual and no single node can alter the data. DLT is highly resilient because there is no central database and hence, no single point of attack. Privacy and safe storage can be handled with technologies such as asymmetric encryption, asymmetric authentication and hashing. Block chain is one version of distributed ledgers and used mainly in distributing crypto currencies. DLT dealt a body blow to banks because, it completely negates the role of banks as trusted third parties. It is to their credit that not only have banks accepted this radical change but, have moved away from the custodianship of databases to leveraging the enormous benefits of extracting value from databases. So, how can Banks leverage DLT? Banks have preferred to use private, permissioned, DLT, through which reading rights and writing permission are given to those who have been pre-approved. This can be used by banks to give writing permissions to fellow banks and viewing rights to select customers. The banking industry can use DLT for efficient and cheaper KYC (Know-your-customer process), faster cross-border payments and improved detection of money-laundering and financial frauds. Ripple net, is a block chain network that enables seamless cross-border payments and has signed up about 100 clients, some of which are big names like Standard Chartered Bank, Santander, Unicredit and UBS. Ripple net is a competitor to SWIFT. Bank Chain, an Indian Block chain consortium has launched a new KYC system, Clear chain that facilitates sharing of KYC data of customers amongst network participants. Other areas that can use DLT, are, clearing and settlement of securities transaction on the bourses; the Australian Securities Exchange has decided to shift its securities clearing and settlement to a block chain system. Trade Finance is another area which is tailor-made for restructuring through DLT. The same set of information, bill of lading, letters of credit, commercial invoices and insurance policies need to be accessed by different parties and block chain is the obvious solution. The difficulty in block chaining trade finance is that in order to be reap its benefits, the entire ecosystem has to be on boarded- the shipping companies, the freight forwarders, other transporters, insurance companies, inspection agents, ports and customs. Block chain trade first, if you want to block chain trade finance. That would be a remarkable effort, truly a game changer, if it succeeds. However, DLT is yet to become mainstream because of some unresolved issues. Since, Distributed ledgers are cross-border, how will they be regulated? Do they need to be audited? What happens if there is dispute? These questions are unresolved but they are not insurmountable. A fourth technology, the Internet of Things (IOT) has the capacity to revolutionize banking in myriad ways. Gartner predicts that by 2020, there will be 25 billion connected devices and this shows how machine connectivity can be a powerful force that alters societal behavior. Machine-to-machine connectivity can help banks to gather data about customers and offer an enriched, contextual and personalized experience. It will be possible for Banks to identify a customer through IOT and Artificial Intelligence, the moment a customer enters the branch and anticipate his requirements. IOT can also help banks to track assets financed by the bank. However, IOT can pose major security risks, including privacy issues for banks and this has to be managed. Will banking and banks survive the onslaught of Fin Tech? First, let us understand the unique position of the Bank in the financial markets. Banks have existed for so many years, uncontested but, we need to understand why that moat might be breached. The primary model of banking is based on three very important principles- Intermediation, Fractional Banking and Credit Creation. Banks primarily issue liabilities in the form of checking accounts and fixed deposits and then originate non-marketable assets in the form of loans. Since, the liabilities are highly liquid and may be withdrawn by depositors, it is possible that the Bank might face a liquidity crisis. Banks have been able to manage this liquidity risk because they have the unique advantage of information asymmetry or insider information about borrowers. They are able to predict future outlays of funds and likelihood of satisfying those outflows because of insider information from borrowers.
Can the capabilities of deposit taking and lending be duplicated? Many Fin Techs and others like Mutual Funds already offer deposit and transactional facilities and there is no bar on lending by non-banks. Also with requirement of greater disclosures by corporates, insider information is no longer a competitive advantage for Banks. What if non-banks offer deposit-taking and loaning services simultaneously? Can they replicate banks
The answer is not yet!! One of the biggest competitive advantage Banks have is the facility of credit creation or creation of money. Credit creation is possible because banks are “not” subject to “client money rules”. According to client money rules, non-banks are required by statute to segregate customer deposits from their own monies and deposit customers monies with a bank or an approved institution in segregated accounts. Banks are not subject to client money rules. This is what enables them to create money and tide over liquidity mismatches by using one depositor’s funds to pay another departing depositor. Non-banks are not able to do that. Can this unique advantage be lost? Central Banks are already experimenting with the issue of digital money by using block chain technology. It should be possible for Central Banks to, then, take over responsibility for all transaction accounts and allow transactions using Distributed Ledger Technology. All Current and Savings Accounts (CASA), may then migrate from commercial banks to Central Bank. Banks will then have to abide by client money rules and bid for deposits like other non-banks. Hence, perhaps in the next decade, Banks will lose the ability to create money and that will end Banking as we know it. Banks will then become just another financial services firm. Banking and Banks as we know them, will never be the same again. There may be no bank branches, no tellers, no cheques, no ATMs and perhaps no current and savings accounts and no credit cards. But, surely people will still need to save money, take loans and perhaps make payments? How will it all change? Banks today, are in the same position as stage coach companies of the 1860s. It was possible to correctly predict then, that the market for transportation and travel would rise by leaps and bounds; but it would have been grossly erroneous to predict such a growth in stage coaches. Banking and Financial services will grow exponentially but will banks survive? That will depend upon how banks reinvent themselves?

MCqs for banking

1) For operating in money market, G-Sec market and forex markets, the intermediaries are required to obtain
Legal Entity Identifier by if the net worth of entity is above Rs.1000 crore (Rs.10000 million).
a) 30-04-2019 b) 31-08-2019 c) 31-12-2019 d) 30-04-2020
2) For capital adequacy purpose the risk weight for commercial real estate is?
a) 50% b) 100% c) 75% d) 125%
3) For operating in money market, G-Sec market and forex markets, the intermediaries are required to obtain
Legal Entity Identifier by if the net worth of entity is between Rs.200 crore to Rs.1000 crore:
a) 30-04-2019 b) 31-08-2019 c) 31-12-2019 d) 30-04-2020
4) BCSBI has been constituted as a? a) Joint Stock Company b) Trust c) Society d) None of the above
5) For operating in money market, G-Sec market and forex markets the intermediaries are required to obtain
Legal Entity Identifier by if the net worth of entity is below Rs.200 crore (2000 million):
a) 30-04-2019 b) 31-08-2019 c) 31-12-2019 d) 30-04-2020
6) The concept of duration analysis is used by banks in connection wi th? a) Operational risk in Basel
II b) Credi t Risk c) Asset liability management d) Market risk in Basel II
7) As per RBI ECB policy for infrastructure space, what is the min average maturity period?
a) 10 years b) 7 years c) 5 years d) 3 years
8) __________ is a standard format of Bank Identifier
Codes (BIC) for banks to identify banks and financial institutions globally?
a) RTGS b) IFSC c) NEFT d) SWIFT
9) As per RBI ECB policy for infrastructure space, there is mandatory 100% hedging when the minimum average maturity
period is: a) 3 to 5 years b) 5 to 7 years c) 7 to 10 years d) Above 10 years
10) What is the time period prescribed for preservation of records under prevention of Money Laundering Act (MLA)?
a) 2 years b) 5 years c) 4 years d) 10 years
11) Bank can open branches without RBI permission in tier-3 to tier 6 centres. These centres have population upto as
per the census 2011? a) 9999 b) 49999 c) 99999 d) 100000
12) Net stable funding ratio guidelines issued by RBI during May 2018, shall come into operation w.e.f.:
a) 01-01-2019 b) 01-04-2019 c) 01-01-2020 d) 01-04-2020
13) The maximum requirement for CRR after 2006 as per RBI Act 1934 can go up to?
a) 10% b) 13% c) 15% d) RBI Discretions
14) RBI has constituted an Internal Advisory Committee for resolution under which code?
a) Bankruptcy Code 2016 b) Insolvency Code 2016
c) Bankruptcy and Insolvency Code 2016 d) Insolvency and Bankruptcy Code 2016
15) A positive confirmation is required to be sent to remitter of funds that amount has been credited in beneficiaries
account, in case of? a) ECS and NEFT b) NEFT and RTGS c) NEFT, RTGS and ECS d) All of the above
16) RBI has released the on tap universal banking license excluding which group as eligible entities from the purview?
a) Small industrial houses b) Medium industrial houses c) Large industrial houses d) None of the above
17) Under Interest Equalization Scheme of Govt. of India, the eligible MSME exporter banks receive
interest subvention of__________ % so as to pass on the benefit to MSME exporters.
a) 2% b) 3% c) 4% d) 5%
18) Which of the following action(s) allowed by RBI regarding Gold?
a) Sell Indian Gold coins b) Buy Indian Gold coins c) Both a and b d) Neither a nor b
19) What is the minimum capital requirement under Basel III norms as per Bank for International Settlement,
prescription? a) 6% b) 8% c) 9% d) 10%
20) Transfer of govt. securities from one SGL / CSGL account to another Subsidiary General Ledger (SGL) / Constituent
Subsidiary General Ledger (CSGL) account without any consideration is called:
a) Value free transfer b ) Value free transaction c) Transaction with consideration d) Free transaction
21) The Reserve Bank of India has recently relaxed Know Your Customer norms for ____?
a) Non-Banking Financial Companies b) Insurance Companies c) Banking firms d) Broker Houses
22) To calculate capital adequacy ratio, the banks are required to take into account which of the following risks?
a) Credit risk and Operational risk b) Credit risk and Market risk c) Market Risk and Operational Risk d) Credit Risk, Market risk and
Operational risk
23) Bank has allowed a loan of Rs.4 lac to a firm, as cash credit which is running regular. The firm also has a term deposit of
Rs.5 lac and there is an attachment order on the term deposit:
a) The term deposit would be attached
b) The term deposit would be attached after recovering the outstanding balance in the cash credit account
c) The amount of term deposit above Rs.4 lac would be attached d)
d) The term deposit cannot be attached as long as banks ank loan outstands
24) As per Basel III, the risk of losses in on-balance sheet and off-balance sheet positions arising from movements
in market prices is called_____?
a) Credit Risk b) Market Risk c) Pricing Risk d) Liquidity Risk
25) Attachment order is applicable, where the relationship between the customer and the bank is that of:
a) Lessor and lessee b) Trustee and beneficiary c) Debtor and creditor d) Creditor and debtor
26) SARFAESI Act 2002 is not included which of the following aspects:
a) Securitisation of Financial Assets b) Reconstruction of Assets
c) Authority to enforce without the intervention of the court d) Setting up of Central Registry
27) Bank account of which of the following customer is covered in the low risk:
a) APublic Limited Company b) A high net worth individual c) A salaried employee d) A non-resident Indian
28) At the time of take over the bad loans from 3 banks it is found that these banks have filed suits in different DRTs.
Securitisation company wants to get these cases in one DRT, which can be permitted by:
a) Central Govt. b) Supreme Court c) DRAT d) RBI
29) Under which section of Banking Regulation Act 1949, a banking company is prohibited to grant a loan or an advance
against security of its own shares: a) 19(2) b) 20(1) c) 17(2)d) 24 (3)
30) What is the maximum period allowed to a securitised company for recovery of reconstructed financial asset?
a) 2 years b) 3 years c) 6 years d) 5 years
31) For acknowledgment of debt, the Central govt. has prescribed the payment of stamp-duty at which of the following
rates? a) Re.1.0 b) Re.2.0 c) Rs.5.0 d) None of the above
32) The interest rates under MCLR system can be reset within what period?
a) 30 days or less b) 180days OR Above c) 90days or lower d) 365 days or lower
33) Exposure ceiling for infrastructure projects in case of single and group are___ of capital fund
a) 15%, 40% b) 20%, 45% c) 20%, 50% d) 25%, 55%
34) The term guilt edged securities relates to which of the following?
a) Share of the Blue Chip Company b) Share of Public Sector Undertaking c) Mutual Fund d) Govt. Securities
35) Which of the following is not correct in respect of PPF account:
a) Scheme is operated by public sector banks and private sector banks
b) Minimum amount of deposit per annum is Rs.500
c) Maximum amount of deposit p.a. is Rs.100000 d) Account is opened for 15 years.
36) As per BASEL-III implementation in India minimum tier-1 capital must be % of risk weighted assets on
ongoing basis? a) 5.5% b) 7% c) 9% d) 11%
37) Which of the following banks can issue letter of credit to the department of Govt. of India?
a) RBI b) SEBI c) Any Private Bank with which govt. has not made arrangement
d) Any commercial bank with which govt. has made arrangement
38) A Micro Enterprise dealing with your branch has received an export order on FOB terms. In this case:
a) The cost of insurance is to be borne by the exporter
b) The cost of freight is to be borne by the exporter
c) The cost of goods and also the insurance and freight is to the account of exporter
d) Cost of insurance and freight is to borne by the importer and exporter on equal basis
39) On rent payment, TDS is to be deducted when the amount of total payment in a financial year:
a) Is Rs.1,80,000 or more b) Is more than Rs.2,40,000 c) Is Rs.1,20,000 or more d) Is more than Rs.1,20,000
40) As per BASEL-III the value of revaluation reserve is to be taken at % discount to include tier-1 capital?
a) 55% b) 75% c) 60% d) 45%
41) What is not true of the following in connection with the payment to DICGC for deposit insurance?
a) It is payable half yearly
b) Insurance is obtained on mandatory basis
c) Deposits of govt. departments are not to be got insured
d) Maximum eligible amount of deposit for insurance is restricted to Rs.1 lac.
42) The risk that the interest rate of different assets and liability may change in different magnitude is called?
a) Embedded Risk b) Maturity Risk c) Basis Risk d) Price Risk
43) Interest in agriculture advances is to be charged on:
a) Monthly basis b) Quarterly basis c) Half-yearly basis
d) Yearly basis or any of the above as per discretion of the bank
44) When the bank is selling 3rd party products which type of risk is involved?
a) Reputational Risk b) Operational Risk c) Credit Risk d) Liquid Risk
45) The quarterly return on Form 26Q, of TDS is to be submitted
a) Within 31 days, but for March by May 31
b) Within 15 days, but for March by May 31
c) Within 30 days, but for March by May 15
d) Within 30 days, but for March by May 31
46) In case of credit card the customer can lodge a complaint with the bank within a period of?
a) 15 days b) 30 days c) 45 days d) 60 days
47) If the account number, to which an amount is to be credited, has been conveyed incorrectly in an RTGS transaction,
who will be responsible:
a) Customer, if he has conveyed the incorrect details
b) Customer, irrespective of the fact whether he has conveyed the correct details or not, if indemnity has been obtained
c) Concerned bank in all circumstances
d) The settlement authority
48) On payment of brokerage TDS is to be deducted when the amount of total payment in a financial year is?
a) 50000 or more b) More than 15000 c) 2500 or more d) More than 20000
49) An Administrator is:
a) A person appointed by court, when a person dies without a will.
b) A person appointed by share holders at the time of winding up a Company
c) A person appointed at the time of insolvency of a firm
d) a and b
50) Which of the following loan is exempted from application of MCLR?
a) Loan given as export credit
b) Loan given by a consortium of banks
c) Loan given by a direct agriculture purpose
d) None of these
51) According to Banking Companies Nomination Rules 1985, nomination in favour of a nonresident person:
a) Is allowed with RBI permission
b) Is not allowed
c) Is allowed
d) a and c
52) Which of the following qualifies to be the business of financial services as per RBI guidelines under Banking Regulation
Act 1949?
a) Business of credit information companies
b) Operations of a depository under Depositories Act
c) Business of a credit rating agency d) All the above
53) Which of the following falls in the category of Non-bank financial company: (a) asset finance company (b)
investment company (c) loan company (d) infrastructure finance company (e) core investment company (f)
infrastructure debt fund NBFC (g) NBFC-micro finance institution:
a) a to g all b) a to e only c) a to d only d) a, c, d, e and f only
54) A corporate shall be eligible to issue Non-Convertible Debentures if it fulfills the following criteria (which one is not
correct):
a) The corporate has a tangible net worth of not less than Rs.4 crore, as per the latest audited balance sheet;
b) The corporate has been sanctioned working capital limit or term loan by bank/s or all-India financial institutions for minimum amount
of Rs.5 crore;
c) The borrowal account of the corporate is classified as a Standard Asset by the financing bank/s or institution/s.
d) None of the above
55) On the information that the draft has been lost, a duplicate has been issued after taking indemnity bond. The
original and duplicate are presented for payment through clearing, by two different banks on the same day. Both
the drafts have been branded with the stamp payee’s account credited. The bank:
a) Will pay the duplicate b) Will pay the original c) Will return both d) Both will have to be paid
56) When a bank grants a loan to a borrower on the basis of hypothecation of the assets, with whom does the possession
and ownership remain?
a) Possession with borrower & ownership with bank
b) Possession with bank and ownership with borrower
c) Both with bank d) Both with borrower
57) In a trust, one of the trustees who is singly authorised to operate the account has been declared insolvent. Your branch
receives a cheque drawn by him for payment.
a) You can return the cheque
b) You can pay the cheque
c) You can pay if other trustees confirm it
d) a and b
58) A usance bill of exchange is presented by the payee to its drawee Mr. NarayanDutt who accepts the same. It is endorsed
by the payee Mr. SarwanLal to Mr. Ramesh Kumar, who is a handicap. Looking into this fact, Mr. SarwanLal also writes
that in case of dishonour, he may not be given notice and would continue to be liable. Which of the following kinds of
endorsement has been made by Mr. SarwanLal:
a) Conditional endorsement
b) Facultative endorsement
c) Sans recourse endorsement
d) Blank endorsement
59) In which of the following cases, the population-group wise classification of a particular centre as per RBI, does not
match:
a) Rural: population up to 10000 b) Semi-urban: 10000 to 99999 c) Urban: 100000 to 999999 d) Metro: 10 lac and above
60) Generally interest on current account balances cannot be paid. But it can be paid in accounts in the name of:
a) Insolvent customers b) Insane customers c) Deceased customers d) All the above
61) For which among the following instruments, the amount of stamp duty can be different in different States:
a) Promissory Note b) Bill of Exchange c) Money Receipt d) Guarantee Deed
62) A fixed deposit receipt is maturing for payment on Sunday. It shall be deemed to be payable with interest on:
a) Succeeding day i.e. Monday b) Same day c) Preceding day i.e. Saturday d) Any day after that
63) A customer of a current account has deposited two cheques worth Rs.15000 which have been
sent in clearing and have been credited, but the time for returning of the clearing has yet not expired. Meanwhile a
garnishee order is received in the account:
a) Order will be applicable on the amount of cheques.
b) Order will not be applicable on the amount of cheques
c) Order will be applied after seeking confirmation from paying banker
d) Order will become applicable from next day if cheques have not been returned unpaid
64) What is the limitation period available to a holder of cheque dishonoured due to insufficiency of funds, to file suit u/s
138 of NI Act?
a) 3 years from date of nonpayment after expiry of the notice period
b) One month from date of refusal by the drawer
c) One month from date of cause of action
d) 15 days from date of nonpayment
65) The foreign shareholding in a new private universal bank, in the form of FDI, can be _____ of paid up capital:
a) Maximum 74% b) Maximum 51% c) Maximum 26% d) Maximum 24%
66) Which of the following case would not require a report to RBI, as:
a) Fraud a theft, burglary only
b) Theft, robbery only
c) Burglary, dacoity and robbery only
d) Theft, burglary, dacoity and robbery all
67. In the Interim Budget for FY 2019-20 proposals, Central Govt. has fixed the income tax exemption limit at: (which one is
wrong) a Rs.250000, b Rs.300000 for senior citizens c Rs.500000 for very senior citizens d Rs.500000 for all
68. In the Interim Budget for FY 2019-20 proposals, Central Govt. has proposed that persons with taxable income up to
Rs.____ need not pay any income tax?
a Rs.250000 b Rs.300000 c Rs.500000 d Rs.650000
69 In the Interim Budget for FY 2019-20 proposals, Central Govt. has enhanced the threshold for TDS on interest income
from deposits with banks and post offices from ___ to ____:
a Rs.10000 to Rs.30000 b Rs.10000 to Rs.40000 c Rs.20000 to Rs.40000 d Rs.10000 to Rs.50000
70 In the Interim Budget for FY 2019-20 proposals, Central Govt. has enhanced the threshold for TDS on rent payment from
___ to ___:
a Rs.180000 to Rs.210000 b Rs.180000 to Rs.220000 c Rs.180000 to Rs.240000 d Rs.180000 to Rs.250000
71 In the Interim Budget for FY 2019-20 proposals, Central Govt. has enhanced the amount of gratuity from ___ to ___
a Rs.10 lac to Rs.25 lac b Rs.10 lac to Rs.20 lac c Rs.10 lac to Rs.15 lac d Rs.5 lac to Rs.10 lac
72 In the Interim Budget for FY 2019-20, Central Govt. has proposed that interest subvention of 2% shall be available to farmer
covered by relief measures for:
a one year b 2 years c 5 years d entire period of re-schedulement
73 In the Interim Budget for FY 2019-20 proposals, Central Govt. has proposed that interest subvention of 2% and
additional subsidy of 3% for prompt payment shall be available to ___ also?
a agri clinic and agro business centres b agro and food processing c animal husbandry and fisheries activities d al l
74 In the Interim Budget for FY 2019-20 proposals, Central Govt. has proposed to credit a fixed sum to the bank accounts of
farmers with land holding up to ___, as a direct income support:
a 1 ac re b 2 acres c 1 hectare d 2 hectares
75 In the Interim Budget for FY 2019-20 proposals, Central Govt. has proposed to credit a fixed sum of Rs.__ to bank
accounts of marginal and small farmers?
a Rs.2000 b Rs.3000 c Rs.5000 d Rs.6000
76 In the Interim Budget for FY 2019-20 of Central Govt. unorganized sector workers with monthly income up to Rs. ____
are eligible to be covered under PM Sharam Yogi Maandhan Yojna:
a 20000
b 15000
c 10000
d 5000
77 In the Interim Budget for FY 2019-20 proposal of Central Govt. unorganized sector workers shall receive assured pension
of Rs.____ at age of 60 years.
a 5000
b 4000
c 3000
d 2000
78 In the Interim Budget for FY 2019-20 of Central Govt. for assured pension, the unorganized sector worker has to deposit
Rs.___ monthly, if the scheme is joined at 18 years:
a Rs.45 b Rs.55 c Rs .65 d Rs.100
79 The process of crystallisation of export bills means, which of the following:
a return of the export bills due to non-payment by the drawee
b permission to the drawee for c. delivery of goods without making payment
c conversion of the foreign currency liability into the home currency liability by selling the FC back to the exporter
d initiation of legal action against the exporter for the overdue export bill
80 A doubtful above 1 year but below 3 year loan account has a balance of Rs.8 lac. The principal security is Rs.4 lac, the
collateral security Rs.3 lac and net worth of the guarantor is Rs.4 lac. The amount of provision shall be:
a Rs.8 lac b Rs.2.40 lac c Rs.3.10 lac d Rs.4.12 lac
81 What is the highest amount of denomination of bank note which RBI can issue, as per provisions of RBI Act:
a Rs . 10 0 b Rs . 50 0 c Rs . 2000 d Rs.10000
82 Which of the following types of operations modes are permitted under the Senior Citizens Saving Scheme 2004:
a generally single account b joint mode with the spouse c joint operation with any one d a and b only
35 Mr. Akash Khanna is having his personal saving account with United Bank’s Chandigarh branch. He is also the sole
trustee of Khanna Charitable Trust and operates the account of the trust which is also maintained with the bank. In
connection with an important personal work he proposes to proceed abroad for 6 months and seeks your guidance for
smooth operations in the accounts:
a he can give mandate in favour of some of his friend or relative for operations in the accounts.
b he can execute a power of attorney in favour of a known person for operations in both the accounts
c he can give mandate or power of attorney for his personal account
d he cannot delegate the powers to any one in case of trust account and could leave some cheque leaves properly
signed for use in case of trust account
e c a nd d
83 All transactions, involving payment of interest on FCNR (B) deposits shall be rounded off to ____ decimal places:
a 4 decimal points b 3 decimal points c 2 decimal points d at bank discretion
84 Frauds of Rs.500 lac and above are to be reported to RBI on FMR-1 and a DO letter to DBS, RBI, within _____:
a 2 we ek s b 1 we e k c 3 we ek s d immediately
85 What is the maximum time limit for the banks to settle the claims in respect of a deceased depositors and release
payments to the survivors/nominees :
a 7 days b 10 days c 15 days d 30 days e no time limit
86 A partnership firm wants to open a Current Account with your branch, but it is not registered with Registrar of Firms.
a Is the registration of a partnership firm essential ?
b It is not essential as it is only optional
c It depends on will of creditors of the firm
d It depends on will of the bank
e c a nd d
88 A term deposit matured on July 12, being Sunday. It is presented for payment by the customer on Jul 13. The contracted
rate of interest is 8.5%. Bank changed the interest rate to 8% from Jul 11. In this connection which of the following
option is appropriate?
a bank shall pay interest till Jul 12 at 8.5% b bank shall pay interest till Jul 12 at 8.0%
c bank shall pay interest till Jul 13 at 8.5% d bank shall pay interest till Jul 13 at 8.0%
89 What is the maximum amount of outward remittance that can be made by an AD for capital account transaction under
Liberalised Remittance Scheme of RBI:
a not permitted for capital account transaction b USD 75000 in a calendar year
c USD 125000 in a financial year d USD 250000 per financial year
90 Under Interest Equalization Scheme of Govt. of India, the eligible MSME exporter banks receive interest subvention of
___% so as to pass on the benefit to MSME exporters.
a 2% b 3 % c 4% d 5%
91 Under National Urban Livelihood Mission (NRLM), which of the following statement is correct regarding repayment period
and moratorium period a. repayment period 3 to 7 years and moratorium as per bank discretion
b repayment period 3 to 7 years and moratorium 6 to 18 months
c repayment period 5 to 7 years and moratorium 6 to 18 months
d repayment period 5 to 7 years and moratorium as per bank discretion
92 X opened an account with your branch under the Senior Citizens Saving Scheme 2004 for 3 years. He needs the funds to
meet his medical expenses by raising a loan on the basis of security of the deposit. What precautions would be taken by
the bank:
a the loan cannot be sanctioned under the scheme
b the loan amount should not be more than 80% of the amount of original deposit
c the loan amount will be linked to present maturity value of the deposit
d the loan would be allowed after obtaining a written request supported by a estimate from hospital
93 When a seller undertakes to make the goods available for export, at his factory, such arrangement is called, as per
International Commercial Terms:
a Ex-wor ks b FO B c C I F d FOR on ship
94 A high value customer issued 5 cheques of above Rs.1 cr each from his account, which have been dishonoured, due to
insufficiency of funds. Which of the following type of action can be taken by bank?
a bank can stop the operations
b bank can withdraw cheque book facility c. bank can close the account
d bank can take suitable action as deemed appropriate
95 International Bank Limited negotiated documents worth Euro 15000 against a without-recourse irrevocable letter of credit
issued by a bank in UK. When the documents were sent to the opening bank in UK, these were returned with the reason
that the bill of lading and the insurance certificate attached to the documents are fake. Opening bank also refused to
make the payment against these documents, which are otherwise as per terms of the letter of credit. What is the position
of International Bank Limited?
a Bank has acted negligently by accepting fake documents due to which it cannot recover the money from opening bank
b Bank has the option to recover the money from the seller who has tendered fake documents
c Bank can rightly claim the money from opening bank under UCPDC provisions since the bank was to see the regularity of
the documents and was not responsible for their being fake
d Bank will have to approach international court
e a and b above
96 A borrower is aggrieved by the decision of DRT under SARFAESI Act and wants to approach DRAT. How much amount (of
the amount decided by DRT) he is required to deposit before his appeal is heard and to what extent, this amount can be
reduced to:
a 75%, 25% b 75%, 50% c 50%, 25% d 50%, ni l e. 75%, ni l
97 Which of the following can be member of joint liability group (JLG) ? (1) landless farmers cultivating land as tenant
farmers, oral lessees or share croppers (2) small / marginal farmers (3) other poor individuals:
a 1 to 3 all b 1 and 2 only c 2 and 3 only d 1 and 3 only
98 Under Liberalized Remittance Scheme (LRS) of RBI, the AD banks can allow remittances by a resident individual up to
prescribed amount per financial year for permitted capital account transaction. Which of the following are included in the
capital account transactions:
a opening of foreign currency account abroad with a bank b purchase of property abroad
c making investments abroad d all the above
99 If a counterfeit note is returned by the police, it is to be carefully preserved for a period of ___ from date of receipt from
the police authorities:
a 1 y ea r b 3 ye ar s c 5 y ea r s d 8 year s
100.All transactions, involving payment of interest on rupee deposits shall be rounded off to ___
a nearest 25 paise b nearest 50 paise c nearest Re.1 d at bank description of bank as per Board approved policy
ANSWER
1 A 2 B 3 B 4 C 5 D 6 C 7 D 8 D 9 A 10 B
11 B 12 D 13 D 14 D 15 B 16 C 17 D 18 C 19 B 20 A
21 A 22 D 23 A 24 B 25 D 26 B 27 C 28 C 29 B 30 C
31 D 32 D 33 C 34 D 35 C 36 B 37 D 38 D 39 B 40 A
41 D 42 C 43 D 44 B 45 A 46 D 47 A 48 B 49 A 50 C
51 C 52 D 53 A 54 B 55 A 56 D 57 B 58 B 59 A 60 C
61 D 62 A 63 B 64 C 65 A 66 D 67 D 68 C 69 B 70 C
71 B 72 D 73 C 74 D 75 D 76 B 77 C 78 B 79 C 80 C
81 D 82 D 83 E 84 C 85 B 86 C 87 B 88 C 89 D 90 D
91 C 92 A 93 A 94 D 95 C 96 C 97 A 98 C 99 B 100 C

Forex operations recollected questions on 23.02.2020

Recalled questions forex...

Forex operations  recollected questions on 23.02.2020


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NTP for foreign bill...
Corporate donation can be done for which of the following purposes...
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Refinance of ecb ....
Ecb eligibility for startups ...
Short medium long term loans def...
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counsel invoice...
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GSTP which country not in list...
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Prohibited capital investments...
Stale document in lc...
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High sea sales happens at ...
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Software export happens through which package....
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Lc is opened against ? Confirmed order / po confirmed by seller ...
Avalising meaning ...
Counselor invoice meaning

TYPE OF RISKS, CREDIT RISK MEASUREMENT ASSESSMENT & CREDIT RISK MITIGATION

TYPE OF RISKS, CREDIT RISK MEASUREMENT ASSESSMENT & CREDIT RISK
MITIGATION

Risk is inherent in banking business, but the question before us is how we will
define risk and to identify what types of risk is being faced by banks.
Risk can be defined is the likelihood of an adverse deviation of the actual
result from an expected result. Banks that run on the principle of avoiding risks
cannot meet the legitimate credit requirements of the economy or the
shareholders’ expectations of reasonable, normal and adequate profits. On the
other hand, a bank that takes excessive risks is likely to run into difficulty .So a
balanced approach is required to be taken , where a calculative risk is required
to be taken by the banks.

Types of Risks faced by Banks
Banks face a number of risks in different areas of their operations, some of the
prominent risks faced by them are Credit Risk, market Risk, Operational Risk,
Liquidity Risk etc. One by one ,we will discuss some of the prominent risks faced
by the banks.
Credit Risk has been defined as “The possibility of losses associated with
diminution in the credit quality of borrowers or counterparties. In a bank’s
portfolio, losses stem from outright default due to inability or unwillingness of a
customer or counterparty to meet commitments in relation to lending, trading,
settlement and other financial transactions. Alternatively, losses result from
reduction in portfolio value arising from actual or perceived deterioration in
credit quality.”
Credit risk is the most common & predominant risk in banking and possibly the
most important in terms of potential losses. This risk relates to the possibility
that loans will not be paid or that investments will deteriorate in quality or go
into default resulting into potential loss for the bank. Credit risk is not confined
to the risk that borrowers are unable to pay; it also includes the risk of
payments of the bills being delayed beyond the maturity time, which can also
cause problems for the bank. some of the related risks to credit risk are
Counterparty Default Risk: This refers to the possibility that the other party
in an agreement will default.
Securitization Risk: Securitization is a process of distributing risk by
aggregating debt instruments in a pool and then issuing new securities backed
by the pool. There are two types of securities, viz. traditional and synthetic
securitizations. A traditional securitization is one in which an originating bank
transfers a pool of assets that it owns to an arm’s length special purpose
vehicle. A synthetic securitization is one in which an originating bank transfers
only the credit risk associated with the underlying pool of assets through the use
of credit-linked notes or credit derivatives while retaining legal ownership of
the pool of assets.
Concentration Risk: A concentration risk is any single exposure or group of
exposures with the potential to produce losses large enough (relative to a bank’s
capital, total assets, or overall risk level) to threaten a bank’s health or ability
to maintain its core operations.
Market Risk: Market risk generally refers to risks which result from changes in
market variable viz. price changes in the currency, money and capital markets
etc. Market risk also results from sensitivity to foreign exchange fluctuations
due to open foreign exchange positions and (in the broadest sense) open term
positions.
Interest Rate Risk (IRR): Interest rate risk (IRR) is defined as the change in
investors’ portfolio value due to interest rate fluctuations. The IRR
management system is concerned with measurement and control of risk
exposures, both in trading book (i.e. assets that are regularly traded and are
liquid in nature) and in banking book (i.e., assets that are usually held till
maturity and rarely traded).
Equity Price Risk: This risk arises due to fluctuations in market prices of equity
due to general market-related factors.
Foreign Exchange Risk: This risk arises due to fluctuations in exchange rates.
Operational Risk: The risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events is called Operational
Risk. This definition includes legal risks, but excludes strategic and reputation
risk.
Compliance / Legal Risk: Compliance/Legal risk includes, but is not limited to,
exposure to fines, penalties or punitive damages resulting from supervisory
actions, as well as private settlements. Legal/compliance risk arises from an
institution’s failure to enact appropriate policies, procedures, or controls to
ensure it conforms to laws, regulations, contractual arrangements, and other
legally binding agreements and requirements.
Documentation Risk: The unpredictability and uncertainty arising out of
improper or insufficient documentation which gives rise to ambiguity regarding
the characteristics of the financial contract is referred to as documentation risk.
Liquidity Risk: Liquidity risks arise from a bank’s inability to meet its
obligations when they fall due, and refer to situations in which a party is willing
but unable to find counterparty to trade an asset.
Term Liquidity Risk: The risk arises due to an unexpected prolongation of the
capital commitment period in lending transactions (unexpected delays in
repayments).
Withdrawal / Call Risk: The risk that more credit lines will be drawn or more
deposits withdrawn than expected is referred to as withdrawal or call risk. This
brings about the risk that the bank will no longer be able to meet its payment
obligations without constraints.
Structural Liquidity Risk: This risk arises when the necessary funding
transactions cannot be carried out (or can be carried only on less favourable
terms). This risk is sometimes also called funding liquidity risk.
Contingent Liquidity Risk: Contingent liquidity risk is the risk associated with
finding additional funds or replacing maturing liabilities under potential, future
stressed market conditions.
Market Liquidity Risk: This risk arises when positions cannot be sold within a
desired time period or can be sold only at a discount (market impact). This is
especially the case with securities/derivatives in illiquid markets, or when a
bank holds such large positions that they cannot be sold easily. These market
liquidity risks can be accounted for by extending the holding period in risk
measurements (e.g. the holding period for VaR) or by applying expected values
derived from experience.
Other Risks
Strategic Risk: Strategic risk refers to negative effects on capital and earnings
due to business policy decisions, changes in the economic environment,
deficient or insufficient implementation of decisions, or a failure to adapt to
changes in the economic environment.
Reputation Risk: Reputation risk refers to the potential adverse effects which
can arise from bank’s reputation deviating negatively from its expected level. A
bank’s reputation refers to its image in the eyes of the interested public
(investors/lenders, employees, customers, etc.) with regard to competence,
integrity and reliability).
Capital Risk: Capital risk results from an imbalanced internal capital structure
in relation to the nature and size of the bank, or from difficulties associated
with raising additional risk coverage capital quickly, if necessary.
Earning Risk: Earning risk arises due to inadequate diversification of a bank’s
earnings structure or its inability to attain a sufficient and lasting level of
profitability.
Outsourcing Risk: While there are many ways to categorize outsourcing risk,
four of the most convenient are operational disruption risk, data risk, quality
risk and reputation risk.
Though lot number of risks is faced by banks, but Basel Committee on Banking
Supervision (BCBS) in their Basel II accord has elaborated three types of risks
viz. Credit Risk, Operational Risk and Market Risk, under Pillar 1 (component on
Minimum Capital Requirements). However, their Pillar 2 (component on
Supervisory Review Process) involves bank management to develop systems that
support the internal capital assessment process and it should also allow for
setting targets for capital that are commensurate with the Bank’s particular risk
profile and control environment.
Risk Management today is more than Compliance of Regulatory Guidelines. It is
about building value by optimizing, rather than minimizing risk. Risk
management is not about avoiding risk. It helps banks to be aware of the risks
inherent in the business and take advantage of this knowledge to gain a
competitive edge and enhance shareholders value.
Risk creates opportunity >>> Opportunity creates value >>> Value creates
stakeholders’ wealth.

Assessment of Working Capital Limit, Assessment of NFB limits

Assessment of Working Capital Limit
Under Assessment of WC limits, give comments on holding levels of Inventory, receivables, sundry creditors and OCA by comparing the same with last year estimates and actuals. Give comments on the reasons for variation, if any between the estimates and actuals. Further, also explain the reasons for the current year estimates like change in - order book position, capacity utilization etc. Similarly, give comments on funding pattern of TCA by NWC, SC, BF etc. Ideally see that contribution by BF not to exceed 50% and NWC with a minimum of 25% while funding TCA.
Any increase/ decrease in operating cycle has a cascading effect on the performance of the unit too. Hence, analyse the reasons like variation in sales, inventory, receivables vis-à-vis utilization of WC limits in the last as well as current year.
Always remember that whatever enhancement in CC limits is proposed to be recommended, it should have proportionate increase in sales. For example, in the last year, if the unit has achieved Rs 10 cr of sales with a CC limit of Rs 1 cr and now requested for Rs 2 cr of CC limit for achieving an estimated turnover of Rs 15 cr…there is no proportionate jump in sales when compared with the limits. This aspect has to be looked into critically.
Assessment of Term Loan
If any project report is available, ensure that the report is prepared by any of our empaneled agencies. Always ensure stipulated DE (Debt/ Equity), DSCR, various statutory approvals required for establishing the unit starting from Municipality approvals to PCB/ Coastal regulatory clearances if any for all the projects which we are going to finance.
DSCR: While structuring instalments, stipulate repayment as per cash flows during a year. See that DSCR always stands above 1.50 in all the years of repayment.

Assessment of NFB limits
Bank Guarantee:
1. In respect of BG limits, apart from qualitative data, focus on giving certain qualitative information on:
(a) Unit’s track record of executing the works timely.
(b) Position of invocation of BG’s, if any during previous years.
(c) Analyse the reasons for previous extensions, if any by putting focus on delay in release of drawings by clients, delay in handing over the sites, delay in environmental clearances, frequent revision in work scope, delay in release of funds causing execution delays etc.
2. Further, if any enhancement is proposed, write comments on:
✓ Orders bagged/ expected to be bagged by the unit during the current year.
✓ Success rate of the unit in the tenders participated during the previous years and arrive at the average strike rate.
Letter of Credit:
Understand the purpose for which the LC is proposed to be opened. In majority of the cases, it is for the purpose of procurement of raw material. If LC is requested for CAPEX purposes, invariably recommend for term loan too.
User has to be careful here, if the unit is also enjoying CC limit, so that double financing in the form of LC/ CC needs to be avoided.
Usance period: Always, ensure that usance period should not be more than the operating cycle of the unit, which may lead to diversion of funds.
In respect of LC’s, have the position of devolvement of LC’s, if any during previous years in order to understand the ability of the unit to pay bills on time.

APPRAISAL OF LOAN...MSME/CCP

APPRAISAL OF LOAN...MSME/CCP

The purpose of appraisal of term loan is to ascertain
whether the cash flows (mainly profits) of the firm will be
Appraisal of Term Loan
adequate to repay the term loan in installments over a
repayment schedule.
The cash flows/ profits depend on successful installation
of suitable machinery, the marketability of the products and
profitability of operations. Accordingly, the appraisal of term
loan covers the following stages:
I. Prima facie acceptability
II. Technical Feasibility.
III. Economic Viability
IV. Financial Feasibility.
V. Commercial Viability.


1. Prima facie Acceptability
A proposal, at this stage, needs to be checked to ascertain
if it conforms to the overall guidelines of the Bank. The
proposal is considered prima facie acceptable if it
conforms to:
• RBI guidelines & Govt regulations.
• Bank’s Loan policy guidelines, including prudential
exposure norms, industry exposure norms, takeover
norms, RBI Defaulters List & credit appraisal
standards (e.g. debt:equity ratio).
• The object clause and borrowing powers of the
company.
More than ordinary care should be taken while
entertaining proposals relating to industries (a) which
might face govt / sociological sanctions (e.g. polluting
industries, breweries, projects involving land acquisition
etc (b) whose profitability is not predictable (e.g. feature

films) and (c) where past experience of the Bank has
not been encouraging.
It is also required to examine the managerial competence.
The ‘man behind the project’ should have the necessary
competence to implement the project. His experience,
financial status etc as well as the firm’s organizational
structure, quality of management team etc should match
the demands of the project.

2. Technical Feasibility
Technical feasibility refers to vetting of the proposal to
ascertain if the project is technically capable of producing
the goods for the quantity envisaged. It depends on a
large number of factors of production, suitability of the
machinery and the production process.
The factors to be considered are:
• Location of plant & accessibility to critical inputs
• Size of the plant
• Technical arrangements
• Suitability of technology.
• Manufacturing process
• Availability of skilled labour etc
3. Economic Viability
Economic viability means whether the products of the
firm can be sold at the price and for the volume as
envisaged. It requires a thorough market analysis.
The factors to be examined here are:
• The nature of product (and the extent of regulation
over the product)
Appraisal of Term Loan
• The overall market potential for the product
• The existing level of demand and the likely increase
in demand for the product
• The existing players in the market & the degree of
competition
• The new projects in pipeline
• The areas where the products will be marketed and
the dependence on other industries/markets (as
ancillary industry, export oriented unit, intermediate
product etc)
• Overall demand-supply gap and the future trends in
demand/supply
• Market prospects for the unit
• Selling arrangement
• Pricing policy etc
The projections should be critically examined to rule out
over-ambitious projections, if any. In fact, the projections
should bear a relation to the similar existing units and
allow for uncertainties of a new unit.

4. Financial Feasibility
Financial feasibility refers to examination of the cost of
the project and the means of financing for the project.
The cost estimates of the project should be reasonably
accurate and the pattern of financing of the project should
be sound and acceptable.
Cost of the project includes the following:
• Land (Including site development) and building.
• Plant & machinery.
• Miscellaneous Fixed Assets.
• Technical know-how fees, etc.
• Preliminary & Pre-operative expenses.
• Contingencies.
• Margin on WC requirements (which needs to be
available for the project before it goes for working
capital finance).
Means of Finance for the project are generally the
following sources:
• Equity Share Capital from promoters/other
shareholders.
• Preference Share Capital from Preference
shareholders.
• Debentures.
• Unsecured Loans.
• Deposits.
• Loans from Friends & Relatives.
• Term Loans from Banks & FIs.
• Government subsidies.
• Internal accruals.
Each of the above components of cost of project and
source of finance needs to be critically examined to know
their reasonableness.

5. Commercial Viability
Commercial viability refers to the process of examining
whether the cost and profitability estimates are
reasonable and the cash accrual of the project is adequate
to service the term loan.

Balance Sheet

Balance Sheet


Liabilities                                      Assets
Share Capital                               Fixed Assets
Reserves & Surplus                      Investments
Secured Loans                              Current Assets, Loans &Advances
Unsecured Loans                           Miscellaneous Expenditure
Current Liabilities & Provisions   Profit & Loss A/c (Dr balance,if any)



A. LIABILITIES
(a) Share Capital
Capital is the amount contributed by the promoters to
the business. As the firm is seen as different from its
promoters, capital becomes a part of the firm’s ‘liability’
to the promoters.
For a company, the capital has a few stages:
• Authorized capital: the maximum amount which can
be raised by way of capital.
• Issued capital: the amount of authorized capital
which has been offered to shareholders.
• Subscribed capital: the amount of issued capital
which has been subscribed by the shareholders.
• Paid up capital: the amount of subscribed capital
which has actually been paid up (balance is unpaid).
(b) Reserves & Surpluses
Reserves are the earnings kept aside for a specific
purpose. Surpluses are the earnings not so earmarked.
The components of Reserves are:
• Capital Reserve: It includes
o Capital Redemption Reserve: for payment of
preference shares.
o Revaluation Reserve: as market value of fixed
assets.
o Debenture Redemption Reserve: for repayment
of debentures.
o Subsidy Reserves: subsidy held for use in a project.
(d) Unsecured Loans
Unsecured loans are the loans raised without offering
security. These loans include:
• Fixed deposits
• Loans & advances from subsidiaries
• Short term loans and advances from banks and
others
• Other loans and advances.
(e) Current Liabilities & Provisions
These are the liabilities which are payable within 1 year
from the date of balance sheet. Major components of
current liabilities are:
• Acceptances, i.e. the bills accepted for payment
• Sundry Creditors, i.e. the trade creditors against
receipt of materials and other creditors towards
expenses incurred
• Advance payments received- from dealers,
customers etc
• Unclaimed Dividends, i.e. the dividends declared
which are yet to be paid off
• Interest Accrued but not Due, which can arise in
respect of all loans and deposits
• Other liabilities, if any, which are payable within 1 year.
Major components of Provisions are:
• Provisions for Taxation, which are kept aside from
profit for eventual payment to income tax authorities

• Proposed Dividends, i.e. the amount provided for
pending declaration of dividends
• Other Provisions, viz, for contingencies, for provident
fund etc.



B. ASSETS


(a) Fixed Assets
Fixed assets are those assets which are held for use in
production or for providing goods and services over a
long run. In other words, fixed assets facilitate the
production process although these assets do not directly
go into the process of production.
A list of fixed assets appears in Sch VI of the Companies
Act. The fixed assets include land and building, plant and
machinery, furniture and fittings, patents, goodwill etc.
Fixed assets are presented as Gross Block and Net Block.
Gross Block represents the original cost of the fixed assets
and Net Block is the book value of the fixed assets which
is calculated as the original cost less accumulated
depreciation of each category of assets.
(b) Investments
Investments generally refer to the money deployed in
securities or assets which are not directly related to the
main activities of the company. A firm having surplus
cash invests the same in securities to earn returns instead
of holding the idle cash with it. A firm may also have
investments in real estates, subsidiary companies etc.
(c) Current Assets, Loans & Advances
Current assets are the assets which can be turned over
into cash within the operating cycle, maximum 1 year
The following types of current assets find mention in the
Sch VI of the Companies Act:
- Interest accrued on investments - Stores and spares
- Loose tools - Stock-in-trade
- Work-in-progress - Sundry debtors
- Cash balance on hand and Bank balances
Loans and advances are in the nature of short term
advances generally given in course of the business.
Examples of loans and advances are:
• Advances recoverable in cash or kind or for value to
be received
• Bill of exchange
• Balances with customs, port trusts etc
• Advances and loans to subsidiaries/ partnership firms
(d) Miscellaneous Expenditure
Miscellaneous Expenditure is the expenditure against
which the firm does not hold any tangible asset and,
hence, Miscellaneous Expenditure is also called ‘Intangible
Assets’. Such expenditure needs to be written off over a
period of time. Miscellaneous Expenditure which is not
written off appears on the asset side of the balance sheet.
Examples of the miscellaneous expenditure are:
• Preliminary expenses
• Exchange, commission, brokerage and other expenses
incurred or discount allowed on underwriting or
subscription of shares/debentures
• Interest paid out of capital during construction
period.
Balance in Profit and Loss Account
It represents the loss of the firm carried forward. While
the profit carried forward appears on the liability/credit side,
the loss carried forward appears on the asset/debit side. The
firm may adjust the loss against the uncommitted reserves,
if any, and carry forward the balance amount of loss in asset
side.
Banker’s Approach to Analysis of Balance Sheet
The balance sheets of the companies are drawn from
the point of view of their shareholders who are interested in
‘solvency’ of the business. However, the lending banker’s
approach to balance sheet is mainly a study in ‘liquidity’ of
the firm. The lending banker, therefore, re-classifies the
Balance Sheet with emphasis on proper identification of
current assets and current liabilities. The banker identifies
the ‘eligible current assets’ which can be financed. All
other items of “Current assets, Loans and Advances” in the
balance sheet are placed in CMA format as ‘non-current
assets’. Similarly, the banker identifies all current liabilities
payable within current year. In the process, some part of
term liabilities of the balance sheet is shown as current liability
in CMA format.
The guidelines for re-classification of current assets and
current liabilities are as under:
i. Cash margin for LCs and guarantees relating to working
capital can be taken as current assets.
ii. Fixed deposits in banks and trustee securities are to be
classified as current assets. Temporary investment of
surplus liquidity in MF, money market instruments
(CD, MMME etc) can be taken as current assets. All other
investments, like ICDs, investments in shares and bonds
etc will be excluded from current assets.
iii. Slow moving/obsolete inventory and overdue receivables
(say over 6 months) are to be removed from current assets
iv. Stores and spares should bear a relation to the
consumption of the unit (max 12 months consumption
taken as current assets for imported spares and 9 months
consumption for domestic spares)
v. Advances paid to employees, suppliers for raw materials
etc can be taken as current assets only for the amount
as realizable within 1 year.
vi. Investment in shares, advance to companies etc not
connected with business of the unit should be excluded.
Advance to interconnected companies can be taken as
current asset only if these are on market terms and at
reasonable level/period.
vii. Security deposits (for electricity, customs etc)/tender
deposits are to be excluded from current assets.
viii. Outstanding advance payments received from customers
are to be taken as current liability (unless specifically
payable after 1 year). Advance payments received against
works in progress are to be netted off.
ix. Deposits received from dealers are to be treated as
current liabilities unless payable on termination of
dealership.
x. Current liabilities would include: bank borrowings, usance
bills discounted, short term borrowings from banks/friend
and relatives, sundry creditors for materials and
expenses, interest accrued but not due, dividend and
other expenses payable. The instalment on term loan,
public deposits etc payable within 1year is classified as a
current liability.
xi. Provision for taxation should be netted off against the
Adavance Tax Paid for all years.
xii. Provision for disputed liabilities (e.g. excise duty, sales
tax etc) should be treated as current liability unless these
are payable in instalments as per the written orders of
the concerned authorities. If the amount is invested in
fixed deposits, the same should be netted off.
xiii. Provisions for all known/accrued liabilities should be
made, including those for prior period, events after
balance sheet date etc. If some known liabilities may be
payable eventually from general reserves in future, an
estimated amount should be taken as current liabilities.
xiv. ICDs taken will be shown as current liability/short
term borrowing (and also under additional information
in Form III)
xv. Bills negotiated under LCs: The facility of purchase of
demand and usance bills under LCs is provided outside
assessed bank finance (ABF). Therefore, receivables
under sale bills drawn under LCs (inland/export) will not
be included in current assets in Form III and bank
borrowings under LC Bills Purchase limit will be excluded
from projected bank finance under current liabilities.
However, the same will be shown as contingent liability
under ‘Additional Information’.
Above re-classification would give the lending banker a
true and fair view of the liquidity position of the firm and
helps him proper assessment of working capital requirement.

FINANCIAL STATEMENT ANALYSIS.Very Useful

FINANCIAL STATEMENT ANALYSIS

Financial statements are the statements that convey
information about the firm in financial terms. All the activities
of the firm (including HR, production, marketing etc) have
financial implications which are captured and presented
through financial statements.
IMPORTANT FINANCIAL STATEMENTS
Two commonly used financial statements are Profit and
Loss Account and Balance Sheet. Other financial statements,
which have specific uses, are the Funds Flow Statement and
Cash Flow Statement. In case of the companies, the audited
financial statements are supported by Schedules, Notes to
Accounts, Director’s Report, Auditor’s Report etc. Various
aspects of the financial statements are presented below mainly
from banker’s point of view.
1. PROFIT & LOSS ACCOUNT
Profit & Loss Account (P&L Account) presents the net
result of operations of the firm over a period of time. It is,
therefore, called the Operating Statement or Income
Statement.
A. Features of P&L Account:
(i) It is prepared for an accounting period, which is
normally one year. (i.e. accounting period concept).
However, the companies may prepare their financial
statements for an accounting period of maximum
15 months (or 18 months with approval of Registrar
of Companies).
(ii) Income is captured in P&L Account on accrual basis
(i.e. accrual concept) - hence, income is different
from cash.
(iii) For any income, the matching expense needs to be
accounted for (i.e matching concept)
(iv) Income is to be reckoned only if it is reasonably
certain whereas expense is to be provided if it is
reasonably possible (i.e. prudence concept)
(v) It records only revenue receipts and revenue
expenditure (and not capital receipts/expenses)
pertaining to the period.
B. Components of P&L Account
P&L Account can be studied broadly at 4 stages:
(i) Net Sales (i.e. revenue generated)
(ii) Cost of Sales (i.e. manufacturing cost of goods sold)
(iii) Operating Profit (i.e. income from main operations)
and
(iv) Net Profit (i.e. net result available for shareholders).
i. Net Sales:
It is computed as Gross Sales less Excide Duty and
adjusted for Sales Returns, Discounts etc.
Gross Sales: It is the number of units sold multiplied
by the average unit price. ‘Gross Sales’ is also adjusted for
Sales Returns and Discounts. Sales Returns represent goods
sold but subsequently returned. Thus, ‘Sales Returns’ reduce
the ‘quantity sold’. Discounts (which are given for bulk
purchase, timely payment, cash purchase etc) represent the
reduction in ‘unit price’. Thus, both Sales Returns and
Discounts effectively lower the sales figure during the period
and, hence, should be reduced from Gross Sales.
Excise Duty: It is deducted from Gross Sales because
excise duty is applicable as soon as the manufacturing process
is completed to make the product saleable (in other words,
excise duty is linked to production and precedes sale). Excise
duty is also collected for the government and, hence, does
not constitute a part of revenue of the firm. Moreover the
rate of excise duty may differ from year to year, which may
mislead while comparing sales over consecutive years.
For above reasons, ‘net sales’ is a more meaningful
parameter for analysis than ‘Gross Sales’.
ii. Cost of Sales
It is also called the Cost of Goods Sold. It is computed in
two stages, namely (a) Cost of Production and (b) Cost of
Sales.
(a) Cost of Production: It includes only those expenses
which directly go into producing the goods during the
period (regardless of whether the goods are sold or not).
These expenses, called direct expenses, include:
(a) raw materials and stores & spares consumed
(b) direct labour (i.e wages of manpower engaged in
production)
(c) power & fuel (on factory side)
(d) other manufacturing expenses (e.g. repairs &
maintenance)
(e) depreciation of fixed assets and
(f) adjustments for semi-finished goods or Stocks-In-
Process (i.e. add opening SIP and subtract closing
SIP)
‘Raw materials consumed’ is the value of raw materials
which go into production. It is different from raw materials
purchased as under
Raw materials consumed =
Raw materials purchased + Opening Stock - Closing Stock
of raw materials
Similar method is used for calculation of stores and spares
consumed during the accounting period.
Direct Labour and Power & Fuel: Only those expenses
which pertain to the manufacturing side are taken here. For
example, the direct wages and the salaries of the production
staff form a part of direct labour whereas the salary of
administrative staff is excluded.
Depreciation: It is a notional charge towards wear and
tear of the fixed assets through use or efflux of time or
obsolescence. It needs to be fully provided for replacement
of fixed assets in future. (In fact, companies are not
permitted to pay dividends or managerial remuneration before
providing for dividend in full). Being notional, it is a non-cash
expense.
Calculation of depreciation is based on three factors: (a)
the original cost of fixed asset (b) its estimated scrap value
and (c) its useful life. The original cost less scrap value is
depreciated over the useful life of the asset.
Two commonly used methods of depreciation (which are
also recognized by the Companies Act 1956) are the Straight
Line Method and Written Down Value Method.
In Straight Line Method(SLM), the depreciable value of
the fixed asset is divided equally over the number of years of
its useful life:
Annual Depreciation = (Original Cost - Scrap Value)/
Useful Life
Thus, in SLM, the depreciation is a constant amount every
year.
In Written Down Value (WDV) Method, the depreciation
is calculated with reference to the book value of the asset
(and not the original cost). Here, the applicable rate of
depreciation is first determined (based either on useful life
or as given in statutes) and then the book value is multiplied
by the rate of depreciation. Since the book value is more in
initial years, the amount of depreciation is more in initial
years than in later years.
A comparison of SLM and WDV methods of depreciation
would show the following:
• The amount of depreciation is constant in SLM whereas
it is progressively reducing in WDV method. It is less in
SLM than in WDV method in initial years and more in
later years
• The resultant net profit of the firm with SLM will be more
in initial years (as depreciation expense is less under
SLM) than with WDV method.
Accounting Standard (AS-6) permits change in method
of depreciation in case of (a) change in statute (b) change in
accounting standard or (c) to present information in a more
appropriate manner. Many companies change the method of
depreciation to suit their needs and the financial analyst needs
to probe into the same.
Stock-In- Process (SIP): The manufacturing expenses
are adjusted for the SIP consumed in production. For the
purpose, the opening SIP is added (as it is used in production
in current period) and the closing SIP is subtracted (as it is
not used in current period).
Above expenses added together give the Cost of
Production (COP) of goods.
(b) Cost of Sales: It is the Cost of Production adjusted for
the stock of finished goods. The opening stock of finished
goods is added to COP and the closing stock of finished
goods is subtracted to ascertain the Cost of Sales
(because the opening stock of finished goods has gone
into sales whereas the closing stock is still left out).
iii. Operating Profit
Operating Profit is profit generated from operations. It is
ascertained at three stages (a) Gross Profit (b) Operating
Profit before Interest and (c) Operating Profit after Interest.
(a) Gross Profit: It is computed as Net Sales – Cost of
Sales. It is the net amount that the production process
has given to the firm to sell the goods and make profits.
It is a measure of business risk (i.e. more gross profit
means lower risk in business).
(b) Operating Profit Before Interest: It is calculated as
the amount of Gross Profit less Selling, General and
Administrative (SGA) expenses. SGA expenses include
the staff salaries, bonus, marketing expenses,
administrative expenses and all non-manufacturing
expenses (except interest cost).
Operating Profit Before Interest is also called the Earnings
Before Interest & Tax (EBIT). It measures the operating
efficiency of the firm (prior to financing charges/interest)
(c) Operating Profit After Interest: It is calculated as
the amount of Operating Profit before Interest less
Interest expenses.
Interest expense: It is the amount of financing cost of
the firm, i.e. its expense towards borrowed funds. The
borrowings can be by way of loan from banks, public deposits,
debentures etc. Interest cost should bear a relationship to
the outstanding borrowing amount and the applicable rate of
interest. Other expenses like discounts, ancillary costs,
financial charges, exchange differences etc should be
segregated.
Operating Profit After Interest shows the overall operating
efficiency of the firm.
iv. Net Profit
This is the amount of profit available to the shareholders.
It is calculated in 2 stages: (a) Profit Before Tax (PBT) and
(b) Profit After Tax (PAT).
(a) Profit Before Tax: It is the profit earned by the
firm after all operating, financing and non-operating
expenses are accounted for. PBT is, therefore,
calculated as Operating Profit (after Interest) plus
net non-operating income. The non-operating
income (Other Income) and non-operating expenses
(Other Expenses) are kept ‘below the line’ of
operating profit for financial statement analysis as
they do not accrue from core operations.
(b) Profit After Tax: It is calculated as the PBT less
Provision for Tax. Net Profit is the net amount
available to the firm (and its shareholders) after all
expenses are paid for.
In case of companies, dividend, if declared, is paid out
of the net profit. In such a case, the balance amount is called
the Retained Profit, which is transferred to Reserves & Surplus
Account of Balance Sheet.
Banker’s Approach to Analysis of P&L Account
The approach of bankers to analysis of P&L account
differs from that of the shareholders mainly in following
respects:
(i) Bankers break down the income and expenses into
operating and non-operating items in their CMA format
as they are interested in operating efficiency of the firm.
(In contrast, companies present the P&L Account as
Income & Expenditure Statement, where the Total
Income and Total Expenditure are given over major
heads). Bankers also segregate the revenue of core
operations from non-core operations (e.g. trading profit)
(ii) Secondly, bankers look for full provision of various
expenses in the P&L account (e.g. depreciation, prior
period expenses, events after balance sheet date etc).
(iii) Thirdly, they ignore pure accounting transactions like
revaluation of fixed assets, deferred tax accounting etc.
(iv) Fourthly, they look for consistency in presentation of
various components of P&L account for inter-year
comparison of efficiency of operation.
The resultant profitability will show a reasonably correct
picture of viability of operations.

CHECKLIST FOR INSPECTION OF UNITS

CHECKLIST FOR INSPECTION OF UNITS
1 Take a copy of the latest Stock Statement of the Unit & also the immediate previous
stock statement.
2 Ensure that If limits granted on the basis of book debts, then list of Debtors (classified
age-wise / country-wise)
3 Make a Note of the details viz.
a) The Latest Limit
b) Drawing power
c) Outstanding
d) Notes on the promises made during last visit & notings made during the last
inspection
e) Average Sales (Monthly) as per “projections’ given
f) No. of Shifts / Average employees during each shift
g) Average Creditor and Debtor Level
h) Rejection Level / Sales Returns data
4 Observe & make a note of the present ‘Activity level” at the Unit (No. of shifts worked,
Avg. No. of employees, Sales, Creditor elves, Debtor level) & compared with the
previous levels
5 Ensure that all the machineries are in effective use.
6 a
6 b
Ascertain any machinery discarded if so How the Sale Proceeds were utilized
Similarly ascertain if any machinery has been purchased new – if so what was the
source of funds for the purchase.
7 Observe about the labour situation and also make casual but purposive enquiries
thereon.
8 Notice the Key change in Management Positions within the Unit.
9 Observe the Production levels & make a critical comparison with the “Projections”. If
substantial variance observed, then reasons for the shortfall ascertained and made
note of.
10 Note the quantity of Rejections / Sales returns, ascertain reasons, compare with data
for the previous month / quarter.
11 Notice the Average Sales levels and make a critical comparison with the ‘Projections’ /
check for the reasons.
12 Conduct a random check of the stocks with focus on
a) The present levels of stocks - should commensurate with production cycles
b) Quantity of slow-moving items - should be minimum or nil
c) Inclusion of obsolete items as part of stocks – should not be done
d) Sudden but phenomenal increase / decrease in stocks in comparison to those
as per latest stock statement – the reasons should be clarified with the
borrower
13 Ensure that the ‘Statutory Dues” like PF, ESI, Sales Tax, Income Tax, Property Tax,
EB dues etc have been paid and are evidenced by presence of receipts thereof on
record.
14 Observe that books of accounts are written-up, up to date.
15 If accounts remain irregular, then a meaningful discussion on regularization of
accounts to be held with borrower / executives.
16 Make a note of any difficulty in verifying stocks / book debts or in carrying out
inspection at the Unit.
17 Ensure that The commitments given during last inspection have been met or
acceptable reasons for not meeting the commitments given.
18 Ensure that the suggestions given by the Bank during last inspections have been
implemented.
19 Record any positive / negative developments that are likely to befall the Unit.
20 Discuss the adverse features observed during Inspection with the borrower /
executives of the Unit.
21 Submit the observations regarding the inspections holistically to the next higher
authority in the prescribed format and in time.
22 Ensure to record the visit in the Inspection Register maintained at the Bank as well as
in the Unit Inspection Register at the Unit and NOT in any other forms / registers of the
Unit thereat.