MSME priority sector advances bits

MSME

1. A Small Manufacturing Enterprise unit is considered as Sick Industrial Unit: when account remains sub

standard for more than six months or there is erosion in the net worth due to accumulated cash losses to

the extent of 50% or more of its net worth during the previous accounting year and the unit has been in

commercial production for at least two years

2. A small scale unit (manufacturing) can be treated as micro unit if the original investment in plant and

machinery does not exceed : Rs.25 lac

3. A unit in service enterprise is considered as medium if the investment in equipment is: more than Rs 2

crore but up to Rs 5 crore.

4. A Unit will be called as Small Service Enterprise if investment in equipments is up to: Rs 2 crore.

5. Amount of maximum loan given to micro and small enterprises that is covered under-CGFTMSEscheme

: Rs.100 lac

6. As per Micro, small and medium enterprise development Act 2006, a small manufacturing enterprise is

one in which original investment in plant and machinery is: more than Rs 25 lakh and up to Rs 5 crore.

7. As per RBI guidelines, banks are required to provide__% of advance to small enterprises to units in

which original investment in plant & machinery does not exceed Rs 10 lac in the case of manufacturing

units and does not exceed Rs 4 lac in equipment in the case of service enterprises: 40%

8. As per RBI guidelines, Loans to Agro and food processing Units are eligible to be classified under

Agriculture Ancillary Activity under Agril. Finance Priority Per borrower Rs. 100.00 crores.

9. Bank limit for working capital based on turn over method: 20% of the projected sales turnover

10. Banks are required to make 40% of advance to Micro and Small enterprises to manufacturing units

with investment up to Rs 10 lakhs and/or service enterprises with investment in equipment up to: No

criteria (earlier Rs 4 lakh) and now Micro has to reach 7.00% by March 2016 & 7.5% by March

2017 of ANBC/ceobe which ever is higher.

11. Banks will not obtain collateral security in respect of loans to micro and small enterprises which are

covered by Credit Guarantee Scheme for Micro and Small enterprises?: Rs 1 crore

12. CGTMSE fee: For North East & women; Loan up to Rs 5 lakh – 0.75% p.a.; Loan more than

Rs 5 lakh – 0.85% p.a.

13. Composite loan limit for Small Manufacturing enterprises: Rs.1.00 crore

14. For being defined as Medium enterprise, the original investment in plant & machinery should be: More

than Rs 5 crore and up to Rs 10 crore.

15. For being eligible to be classified as small (service) enterprise, the original investment in equipment

should not exceed: Rs 2 crore.

16. Full form of CGTSME: Credit Guarantee Fund Trust for Micro & Small Enterprises.

17. If a small enterprise in manufacturing has a good track record, collateral security can be waived up

to: 25.00 lacs

18. If an MSME units holds a margin of Rs.20 lac and its projected sales are Rs.400 lac, its working

capital limit will be : Rs.80 lacs

19. In case of advance granted to Micro and small enterprises, banks will not obtain collateral security up

to: Rs 10 lakh

20. In case of advance to Micro and Small manufacturing enterprises, working capital limit by a bank as

per turnover method is calculated as: 20% of projected annual turnover.

21. In case of loan guaranteed under CGTMSE, what is the extent of cover for loan upto 50 lac granted to

a women?: 80% of amount in default.

22. In case of loan to micro and small enterprises guaranteed by CGTMSE, no collateral security is

required for loans up to: Rs 100 lac.

23. Khadi Village Industry part of MSE; irrespective of investment in P&M.

24. Maximum Guarantee coverage for loans guaranteed by CGTMSE if loan up to Rs 5 lakh: 85% of the

amount in default with a maximum of Rs 425000.

25. Micro, Small and Medium Enterprises is under which Ministry: Ministry of Micro Small & Medium

Enterprises.

26. SMERA stands for: Small & Medium Enterprises Rating Agency.

27. The definition of Micro and Small enterprise in the manufacturing Sector is based on investment in :

Plant and Machinery.

28. Under CGFT scheme for MSE, for loans up to Rs 50 lac, 80% coverage is not available for: SC/ST



29. What is the maximum amount of loan covered guarantee scheme of CGTMSE for loans made to micro

and small enterprise: Rs.100.00 Lac

30. What is the rate of guarantee fees charged under CGSMSE for loan of more than Rs 5 lac to a

women?: 0.85% p.a. of limit sanctioned.

31. Advantages of Cluster based finance to MSMEs: Risk mitigation.

GOVT. SPONSORED SCHEMES & MISC.

1. __% outstanding under General Credit Card Scheme is to be treated as__ : 100 %, Other Priority

Sector Advance

2. 100% of GCC accounts and up to 50000/- overdraft permitted in no frill accounts will be treated as:

Other Priority Sector.

3. CGFTSI: 80% coverage not allowed to SC/ST (only to beneficiaries in North East states, women

beneficiaries)

4. CGMSE - upto 5 lakhs cover in North East : 0.75% p.a. of limit sanctioned.

5. CGTMSE has been set up by: Govt of India and SIDBI

6. Cluster based approach is applicable for: a) Priority credit advance b) SME c) SHG.

7. Debt Swap meaning: To extend finance to farmers for repayment of loan taken from noninstitution

lenders

8. Discontinuation of Service Area Approach is as per recommendations of : Vyas committee report

9. Financial Inclusion aims at : The delivery of banking services at an affordable cost to the vast sections

of disadvantaged and low income group.

10. Internal Rate of Return is arrived at a point where future cash flows on Net Present Value basis should

be: Zero.

11. Jandhan tag line? Mera Khata Mera Bhagya Vidatha

12. Maximum amount of loan to DRI beneficiary was revised as per Union Budget 2007-08. What is the

maximum loan other than the Housing Loan to SC/ST that can be granted to DRI beneficiary: Rs.20,000/-

13. Maximum Number of persons in JLG? : 10 ( 4-10 )

14. Maximum people in SHG? : 20 ( 10-20 ).

15. Minimum qualification for loan under PMEGP if project cost in manufacturing more than 10 lacs: 8th

pass. If up to Rs 10 lakh no min qualification

16. Minimum women Self Help Groups in SGSY? 50% of the total Self Help Groups

17. Mudra Bank full form: Micro Units Development Refinance Agency.

18. Mudra Card will be co branded with: MUDRA Ltd and will be Rupay Card

19. PEMGP Subsidy to be kept as: 3 Years FDR without Interest

20. PMEGP - Margin / Promoter contribution : 10% Genera! & 50/s for Spi category borrowers

21. Prime Minister’s Task Force on loan to micro and small enterprises was headed by: T K A Nair

22. The Committee which issued guidelines on P.S. advances in July 2012 was headed by: M.V.Nair

23. The extent of coverage under CGTMSE for Micro units upto Rs 5 lacs: 85% with maximum amount of

claim upto Rs 4.25 lacs.

24. The maximum amount of guarantee cover for loans granted to small and micro enterprises other than

beneficiaries in the North Eastern Region and women entrepreneurs and guaranteed by CGFT is: 75% of

the amount outstanding up to Rs 50 lakh and 50% thereafter as on the date of account becoming NPA

with a maximum of Rs. 50 lacs (coverage upto 100 lac)

25. Under CGFT, for loans more than Rs 5 lac but upto Rs 50 lakh, 80 % guarantee cover is available for:

Loan to Micro and Small enterprises in NE States, Women.

26. Under CGTMSE liability upto 5 lac how much cover available to micro Enterprises: 85% ( 4.25 lacs )

27. Under MUDRA lending will be for: Non Farm sector

28. What are the benefits of covering advances under CGSMSE: Bank can finance viable projects without

insisting for collateral security.

29. What can be the maximum project cost in case of Agri clinic: Rs 20 lac per individual (Highly

successful case – max Rs 25 lac). For group it is max Rs 1 crore.

30. What does JAM represent?: Jandhan, Aadhar, Mobile

31. What is Composite fee payable to under CGFT for loans more than Rs 5 lac in North East and other

areas: .85% p.a. of limit sanctioned for loans in North East or to woman or to micro enterprise and 1%

p.a. of limit sanctioned in other cases

32. What is financial inclusion: Providing banking services to poor sections at affordable cost.

33. What is the corpus of Guarantee fund under MUDRA?: Rs 3000 crore

34. What is the corpus of MUDRA as per budget of 2015-16: Rs 20000 crore

35. What is the income criteria for classifying a person as economically weaker section for the purpose of



housing loan under Priority sector?: Annual income not more than Rs 200000 (earlier Rs120000)

36. What is the limit for classifying the loan sanctioned to Drip and Sprinker irrigation dealer, for including

under Indirect finance to Agriculture?: - Now in MSME Service irrespective of Amount.

37. What is the margin under MUDRA loans?: For Shishu — Nil; for others — 25%

38. What is the maximum amount of loan that can be granted under DRI: Rs 15000

39. What is the maximum amount of loan under "Kishore" category under MUDRA: Rs 5 lac

40. What is the maximum amount of loan under "Shishu" category under MUDRA: Rs 50000

41. What is the maximum amount of loan under "Tarun" category under MUDRA: Rs 10 lac

42. What is the maximum amount of MUDRA card?: Rs 20000

43. What is the minimum education qualification required for an entrepreneur for a manufacturing project

of Rs.10 Lakhs to be considered under PMEGP? No educational qualification required

44. What is the tenure under MUDRA loans?: Shishu — 36 EMI; Others — 36 to 60 months

45. Which of the following Committees have advised that a full service approach to cater to the diverse

needs of the MSE sector may be achieved through extending banking services to recognized MSE clusters

by adopting a 4 –C approach: Ganguly Committee

46. Which of the following is not the strength of Self Help Group - super profit orientation, saving, internal

lending, mutual help, none of these: Super profit orientation.

NPA & RECOVERY MANAGEMENT

SARFAESI

01. As per a recent judgement of the Supreme Court, while initiating action under SARFAESI, the position

in case of suit filed in DRT would be: that no permission is required from DRT and action under SARFAESI

can be initiated as both the cases can run together.

02. As per provisions of Sarfaesi Act, after taking possession, for making sale, how many days notice is

required to be given to borrower?: 30 days.

03. Bank has served the possession notice under Sarfeasi. The borrower has raised any query. The bank

has to reply within: 15 days.

04. Central Registry provision when started: 31-3-11 under SARFAESI Act.

05. Charge where SARFAESI action can not be taken: Pledge

06. For acquiring securities charged to the bank under SARFAESI, notice of __ days is required to be given

to the borrower u/s 13(2) of the Act and for sale of securities so acquired notice of__ days is required.:

60 days, 30 days

07.For enforcing right under SARFESAI Act, in the case of consortium advances, consent of which bankers

is required?: consent of 60% bankers by value is required

08. For taking action under SARFAESI, the outstanding should be: More than Rs.1.00 lac

09. In case of SARFAESI Act, before preferring appeal to DRAT, how much amount is to be deposited by

the borrower with DRAT?: 50% of the claim amount which can be reduced to 25% by the DRAT. For

making application to DRT, no amount is to be deposited.

10. NBFC with assets size of Rs.500 Crore and registered with RBI can take action under: Sarfaesi.

11. Under SARFAESI Act, in the case of Consortium lending, % of creditors to agree to bring the action

under SARFAESI: 60% of creditors by value.

12.Under SARFESAI, appeal against decision of DRT can be made to DRAT within_____ days and if appeal

by borrower, he should deposit % of bank’s claim with DRAT: 30 days; 50%

13. Which is the latest recovery channel made available to the banks for speedy recovery of NPAs backed

by security: Action can be taken under SARFAESI.

CDR

01. Corporate Debt Restructuring is applicable when a limited company has raised finance from more than

one bank and the outstanding is: Rs 10 crore and above.

02.For implementation of restructuring proposal under CDR mechanism, consent of __ % lenders in value

and __ % in Number is required: 75% by value, 60% by number.

03. CDR 2 - (classified as Doubtful ) Mechanism can be permitted only - if a minimum 75% of creditors

by value and 60% creditors by number should satisfy themselves of the viability of study.

04. For making reference under CDR -I, what are the rules regarding consent of Creditors: Consent of

20% of creditors by value is required. (There is no condition regarding number).

05. Which accounts are not eligible for CDR: Accounts under Loss category

06. In which case CDR is not valid? Finance by single bank

07. Implementation of CDR package of SME to be completed in:60 days

08. CDR covers which type of accounts for restructuring?: Accounts of corporates dealing both in

industrial and non industrial activities. -

09. What conditions have to be satisfied for a loan being eligible for CDR?: Borrowing from more than one

bank; minimum outstanding amount Rs 10 crore and above; account to be standard, sub standard or

doubtful.

PROVISIONING



01.An asset is doubtful for more than 2 years. How much provision is required to be made on the

unsecured portion of the same: 100 %

02. Banks are required to make provision on standard assets at the rate of 0.25% on__ & __accounts :

Direct agriculture and Micro & Small enterprises.

03. General provision on standard assets except specified categories is: 0.40% of the balance outstanding

on global basis.

04. How Interest suspense account is to be treated?: Reduce the balance for calculation of provisioning

purpose

05. Provision in Standard category under Direct Agriculture & SME: 0.25% of outstanding.

06. Provision in sub standard account, which are abi-initio unsecured: 25% for other than infrastructure

07. Provision on secured Sub-Standard Loan: 15% of outstanding.

08. Provisions in case of accounts classified in Doubtful category for 12 months to 3 years is _____: Deficit

+ 40% of RVS

09. Prudential accounting norms include : asset classification, income recognition, provision norms.

10. What is the rate of provision in case of doubtful assets which is in D2 category i.e. which is doubtful

for two years?: Unsecured portion 100%; secured portion: 40%

11.What is the rate of provision on secured Sub Standard Loan:15% of outstanding

12. Where provision required (Standard, Sub Standard, Doubtful, Loss): In all cases

Restructuring

01. The substandard accounts which have been subjected to restructuring, whether in respect of principal

instalment or interest amount, and has satisfactory performance, would be eligible to be upgraded to the

standard category after : one year after the date when first payment of interest or of principal, whichever

is earlier, falls due, subject to satisfactory performance during the period.

02. Decision on debt Restructuring of SME should be taken within a period of ___ days: 60 days.

03. In the case of restructuring of SME which type of accounts are not eligible for restructuring?: Loss

accounts

04. A loan account was restructured. First payment was due on 31.12.2005 and payment was promptly

made on 30.12.2005 and thereafter the-account was regular for 12 months. The account can be treated

as standard from: 31.12.2006

05. An account was restructured on 30th June 2011 and first instalment was due on 31.12.11. The

instalment was deposited on 29.12.11. The account will be considered as standard if instalments are paid

regularly for 12 months with effect from: 31.12.12.

DRT / Lok Adalat

01. Limit for filing suit in DRT: Rs.10 lacs and above

02. For referring cases to Lok Adalat, the cut-off limit is: Upto 20 lacs. More than 20 lacs Lok Adalat set up

under DRT.

Misc

01. ˜A Cash Credit account becomes NPA even if regular, when the credit limits have not been reviewed

for more than ____ from due date: 6 months (180 days)

02. ˜Agency which purchases NPA from banks is called: Assets Reconstruction Company.

03. A bank can sell its NPA account to another bank only after keeping the same as NPA in the books of

selling book for at least: Anytime

04. A bank who has purchased NPA from other bank can resell the same, after holding the same in its

books for months from the date of purchase: 12 months

05. A company which purchases NPAs from banks and reconstructs or securitises the same is called:

Asset Reconstruction Company (ARC)

06. A loan associated with a short duration crop, becomes sub-standard after remaining special mention

account for a period of : two crop seasons

07. A Sub standard account becomes doubtful after: 12 months from date of becoming NPA.

08. Account need not be classified as NPA as long as adequate margin available: Loan against FDR, Life

Insurance Policy,Govt securities.

09. An NPA has been purchased by a bank from another bank. What will be the risk weight for the

purchasing bank for this account? 100%

10. Bank can sell NPA after it has remained in its books for: No lock in period now.

11. Bank/Fls should submit the list of suit-filed accounts of wilful defaulters of Rs. as at end-March,

June, September and December every year to Credit Information Bureau (India) Ltd. (CIBIL) and submit

the quarterly list of wilful defaulters where suits have not been filed only to RBI: 25 lakh and above

12. CC account credit not enough to meet interest: Out of order.

13. CC/OD A/c out of order for a period of _____ to become NPA: 90 days.

14. Classification of NPA in consortium advances: Each bank will classify the account according to its own

record of recovery.

15. Credit in 9 months in a cc account are not sufficient to recover the interest but outstanding is within

DP. What will be the position of account: It becomes NPA



16. Debt securitisation means: Conversion of receivables into debt instrument.

17. For purpose of classification of Wilful Defaulters for reporting to RBI, the outstanding should be:

Rs.25 lakhs and above

18. Full form of CRILC: Central Repository of Information on Large Credits (CRILC)

19. If in a NPA account, the value of security both primary and collateral deteriorates so much that its

realizable value is 10% and above but less than 50% of the amount outstanding, then this account is

directly classified as: Doubtful asset.

20. If Interest debited in an account is not recovered within _____ will be treated as NPA: 90 days

from the end of the quarter.

21. IF THE PRINCIPAL OR INT PAYMENT REMAINS OVERDUE BETWEEN 31-60 DAYS: SMA 1

CATEGORY

22. If value of security is less than 50%, then sub standard account can be straight way taken to Doubtful

category.

23. Legal Expenses incurred by Bank in respect of suit filed account to be debited to : P & L account

24. Long duration crop means a crop with harvest season of: More than 12 months.

25. NPA ACCOUNT WILL NOT BE CONSIDERED AS WILFUL DEFAULT: IF DUE TO ECONOMIC

RECESSION.

26. Sale of NPA is done on: Without recourse basis

27. Short Duration and long duration crop — who fixes: Agri Deptt of the Govt.

28. State Govt loan can be treated as NPA if a/c is overdue for : 90 days

29. Supervisory Review according to which Central Bank of the country is to ensure that proper capital

has been provided for risk exposure and maintain proper system for the same is provided under?: Pillar II

of Basel IL

30. The Exposure norms for a single borrower in normal case and when .financing to Infrastructure are:

15% and 20% respectively of the capital funds of the bank.

31. The net worth of Asset Reconstruction Company should be: 15% of the assets acquired or Rs 100

crore whichever is less.

32. There is no minimum CRR or SLR as per RBI Act and B R Act.

33. Under OTS, the compromise amount is calculated after taking in _______: Opportunity Cost.

34. What does R stands in ARC: RECONSTRUCTION

35. What is Accrual concept: Mercantile. It means when the amt becomes due you recognize and take it

to P & L account irrespective of the fact that the amount has not been recovered.

36. What is full form of NPA?: Non Performing Asset

37. What is the cut off point for reporting of Willful Defaulter to Credit Information Company?: Rs.25

lakh and above.

38. What is the definition of Quick Mortality: Account becoming NPA with in 12 months from date of first

disbursement.

39. What is the purpose of adopting IRAC (Income Recognition and Asset Classification) norms in India?:

to move towards greater consistency and transparency in the published accounts.

40. When a person does not repay bank’s loan though he has profit to pay, he is called: Wilful Defaulter

41. When account will be out of order, in case of non-receipt of Stock Statement: If statement not

received for last 3 months.

42. When advance is given to a customer by discounting bills, when the account will become NPA?: When

bill is overdue for more than 90 days.

43. Which of the following can purchase NPA? a) ARC b) Banks c) Financial Institutions d) NBFC e) All of

the above.

44. Which of the following entities has released report titled as Framework for Revitalising Distressed

Assets in Economy – Guidelines on Joint Lenders and corrective Action Plan - (i) RBI (ii) Govt of India (iii)

Bank Board (iv) IBA: RBI

45. Which of the following was formed first of all : (a) DRT (b) Lok Adalat (c)SARFAESI (d) CDR

46. Which one of the following is not a method as per any law for recovery of bank loan – (a) Filing a

case with DRT (b) Action under Sarfaesi Act (c) Compromise (d) Lok Adalat: Compromise.

47. Who is not willful defaulter: Default beyond the control of the borrower

RISKS

01. ALM not responsible for: achieving budgets and targets (it helps in managing liquidity risk and

interest rate risk).

02. At present banks are required to maintain capital adequacy ratio of 9% and Tier II capital should

not be more than Tier I. It means that banks are required to bring Tier I capital of at least 4.5% of the

risk weighted assets. With effect from which date, banks will be required to bring Tier I capital of 6% of

the risk weighted assets?: 31't March 2010.

03. Documents not stamped properly is what kind of risk?: Legal Risk

04. For calculation of capital adequacy ratio, the risk weight for Commercial Real Estate for commercial

bldg is : 100%

05. For capital adequacy purposes, risk weight for personal loans is : 125%

06. Fraud – what type of risk : Operational ris



07. General Insurance works on principle of: Spreading the Risk.

08. If an Outsourcing agency does not serve properly – which type of Risk is faced by the bank?:

Reputation Risk and Operational Risk

09. Investment in perpetual bonds is risky because: the interest is not payable if the CRAR falls below

the stipulated target.

10. Legal risk is part of: operational risk.

11. Loss due to inadequacy or failure of system, process, people or due to external events is called:

Operational risk

12. Risk weight for claim on Banks which complies to Min CRAR requirement : Scheduled Banks 20%

13. Risk weight for exposure to Scheduled Commercial Bank that maintains CRAR as per RBI

requirement: 20%

14. Sub-prime is an risk. (Operational and Credit Risk)

15. The capital adequacy ratio is computed by the following formula: Capital/Risk Weighted Assets

16. Tier 2 - general provisioning & loss reserves only up to 1.25% of total risk weighted assets.

17. Tier I should be at least 6% of Risk weighted assets and should be achieved before by all scheduled

commercial banks: 31.3.2010.

18. What are the components of credit risk?: Transaction risk or default risk and portfolio risk

19. When does liquidity risk arises?: Liquidity risk arises when maturing liabilities are more than maturing

assets-

20. While doing Risk Rating, an asset is downgraded from A+ rating to A rating. What type of risk is

involved: Credit Risk.

FOREX :PreShipment

01. A Letter of Credit that contains clause for giving advance for pre-shipment is called: Red Clause LC

02. Adhoc Export Credit to be sanctioned within – 15 days.

03. As per RBI guidelines, concessional interest on Pre Shipment Credit in rupees sanctioned up to 30th June 2010,

can be extended upto days: Ans: 270 days

04. Bill of lading to be submitted within 21 days : if date of shipment is 28th Sep 08, documents to be

tendered on or before 19th Oct 08.

05. In case packing credit in foreign currency is not adjusted within 180 days, what will be the rate of

interest chargeable on such advance after 180 days: Bank's discretion

06. Packing credit is allowed against letter of credit for: purchase of raw material, payment of wages

or power.

07. Packing credit is normally allowed for a maximum period of : as per bank discretion.

08. Packing_credit loan is adjusted out of the proceeds of: Export bills, export incentives and EEFC account

09. PCFC - Refinance - Not available

10. PCFC above 180 days, the rate of interest is: as per bank's discretion.

11. Pre shipment credit is normally linked to : FOB value

12. Rate of Interest on adhoc packing credit limit is: same rate of interest as for normal packing credit loan.

13. Which of the following is not true about "special running A/c" of pre-shipment credit? Bills pertaining to other exports

14. Within how many days, Export documents and Bill of Lading to be submitted to Authorised Dealer for

realization?: 21 days of shipment

UCPDC

01. A clean bill of lading means: a bill of lading in which the condition of goods or packing is not stated to

be defective.

02. As per UCPDC 600, beginning of the Month implies: 1st to 10th of month, Middle – 11th -20th, Last – 21st – last

day of the month.

03. As per UCPDC, the insurance policy should be taken for a minimum amount of : 110% of c.i.f.

value.

04. Expansion of UCPDC: Uniform Customs & Practices for Documentary Credit.

05. If there is no mention in LC regarding type of Bill of Lading that will be acceptable, then as per

UCPDC, bank will ask for: On Board Bill of Lading.

06. In case of Letter of Credit (LC), the importer is also known as - a.beneficiary; b.remitter; c.opener

bank; d. opener: Opener

07. Liability of confirming bank in LC: Bank makes additional undertaking to make payment under

LC in addition to undertaking of issuing bank.

08. UCPDC - for examination of documents – 5 banking-days (Act 14 b)

09. UCPDC is issued by: a) ICC b) RBI c) IMF d) any of these: ICC Paris.

10. Under UCPDC 600, what is the tolerance limit of variation in Quantity, if not specifically mentioned in LC: +/-

5%

11. Which type of documents under LC are preferred? A. On board bill of lading B. Clean Bill of lading C.

Caused bill of lading : On-Board & Clean Bill of lading

12. WHICH IS LATEST UCP- : UCP 600 ( wef 01.07.2007 )

Mutual funds short notes 4

Chapter 4 : Offer Document
• The AMC decides on a scheme to take to the market. This is decided on the
basis of inputs from the CIO on investment objectives that would benefit
investors, and inputs from the CMO on the interest in the market for the
investment objectives.
• AMC prepares the Offer Document for the NFO. This needs to be approved
by the Trustees and the Board of Directors of the AMC
• The documents are filed with SEBI. The observations that SEBI makes on
the Offer Document need to be incorporated. After approval by the
trustees, the Offer Document can be issued in the market.
• Investors need to note that their investment is governed by the principle of
caveat emptor i.e. let the buyer beware. An investor is presumed to have
read the Offer Document, even if he has not actually read it. Therefore, at a
future date, the investor cannot claim that he was not aware of something,
which is appropriately disclosed in the Offer Document.
• Mutual Fund Offer Documents have two parts: Scheme Information
Document (SID), which has details of the scheme. Statement of Additional
Information (SAI), which has statutory information about the mutual fund,
that is offering the scheme.
• It stands to reason that a single SAI is relevant for all the schemes offered
by a mutual fund. In practice, SID and SAI are two separate documents,
though the legal technicality is that SAI is part of the SID.
• While SEBI does not approve or disapprove Offer Documents, it gives its
observations. The mutual fund needs to incorporate these observations in
the Offer Document that is offered in the market. Thus, the Offer
Documents in the market are “vetted” by SEBI, though SEBI does not
formally “approve” them.
• If a scheme is launched in the first 6 months of the financial year (say, April
2010), then the first update of the SID is due within 3 months of the end of
the financial year (i.e. by June 2011).
• If a scheme is launched in the second 6 months of the financial year (say,
October 2010), then the first update of the SID is due within 3 months of
the end of the next financial year (i.e. by June 2012).

• Regular update is to be done by the end of 3 months of every financial
year. Material changes have to be updated on an ongoing basis and
uploaded on the websites of the mutual fund and AMFI.
• KIM is essentially a summary of the SID and SAI. It is more easily and widely
distributed in the market. As per SEBI regulations, every application form is
to be accompanied by the KIM.
• KIM is to be updated at least once a year. As in the case of SID, KIM is to be
revised in the case of change in fundamental attributes. Other changes can
be disclosed through addenda attached to the KIM.
• The Scheme/Plan shall have a minimum of 20 investors and no single
investor shall account for more than 25% of the corpus of the
Scheme/Plan(s).
•Legally, SAI is part of the SID.


Chapter 5
• Historically, individual agents would distribute units of Unit Trust of
India and insurance policies of Life Insurance Corporation. They would
also facilitate investments in Government’s Small Savings Schemes.
Further, they would sell Fixed Deposits and Public Issues of shares of
companies, either directly, or as a sub-broker of some large broker.
• UTI, LIC or other issuer of the investment product (often referred to in
the market as “product manufacturers”) would advertise through the
mass media, while an all-India field force of agents would approach
investors to get application forms signed and collect their cheques. The
agents knew the investors’ families personally – the agent would often
be viewed as an extension of the family.
• Independent Financial Advisors (IFAs), who are individuals. The bigger
IFAs operate with support staff who handles back-office work, while
they themselves focus on sales and client relationships.
• Non-bank distributors, such as brokerages, securities distribution
companies and non-banking finance companies
• The internet gave an opportunity to mutual funds to establish direct
contact with investors. Direct transactions afforded scope to optimize
on the commission costs involved in distribution. Investors, on their

part, have found a lot of convenience in doing transactions
instantaneously through the internet, rather than get bogged down
with paper work and having to depend on a distributor to do
transactions. This has put a question mark on the existence of
intermediaries who focus on pushing paper, but add no other value to
investors.
• The institutional channels have had their limitations in reaching out
deep into the hinterland of the country. A disproportionate share of
mutual fund collections has tended to come from corporate and
institutional investors, rather than retail individuals for whose benefit
the mutual fund industry exists. Stock exchanges, on the other hand,
have managed to ride on the equity cult in the country and the power
of communication networks to establish a cost-effective all-India
network of brokers and trading terminals. This has been a successful
initiative in the high-volume low-margin model of doing business, which
is more appropriate and beneficial for the country.
• SEBI, in September 2012, provided for a new cadre of distributors, such
as postal agents, retired government and semi-government officials
(class III and above or equivalent), retired teachers and retired bank
officers with a service of at least 10 years, and other similar persons
(such as Bank correspondents) as may be notified by AMFI/ AMC from
time to time. These new distributors are allowed to sell units of simple
and performing mutual fund schemes. Simple and performing mutual
fund schemes comprise of diversified equity schemes, fixed maturity
plans (FMPs) and index schemes that have returns equal to or better
than their scheme benchmark returns during each of the last three
years.
• A fund may appoint an individual, bank, non-banking finance company
or distribution company as a distributor. No SEBI permission is required
before such appointment. SEBI has prescribed a Certifying Examination,
passing in which is compulsory for anyone who is into selling of mutual
funds, whether as IFA, or as employee of a distributor or AMC.
Qualifying in the examination is also compulsory for anyone who
interacts with mutual fund investors, including investor relations teams
and employees of call centres.
• There are no SEBI regulations regarding the minimum or maximum
commission that distributors can earn. However, SEBI has laid down
limits on what the total expense (including commission) in a scheme can
be.

•Initial or Upfront Commission, on the amount mobilized by the
distributor.
• Trail commission, calculated as a percentage of the net assets
attributable to the Units sold by the distributor.The trail commission is
normally paid by the AMC on a quarterly basis. Since it is calculated on
net assets, distributors benefit from increase in net assets arising out of
valuation gains in the market.
•Further, unlike products like insurance, where agent commission is paid
for a limited number of years, a mutual fund distributor is paid a
commission for as long as the investor’s money is held in the fund.
•A point to note is that the commission is payable to the distributors to
mobilise money from their clients. Hence, no commission – neither
upfront nor trail – is payable to the distributor for their own
investments (self business).
•Typically, AMCs structure their relationship with distributors as Principal
to Principal. Therefore, the AMC it is not bound by the acts of the
distributor, or the distributor’s agents or sub-brokers.
• In hoardings / posters, the statement, “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing”, is to be displayed in black letters of at least 8 inches height
or covering 10% of the display area, on white background.
• In audio-visual media, the statement “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing” (without any addition or deletion of words) has to be
displayed on the screen for at least 5 seconds, in a clearly legible font-
size covering at least 80% of the total screen space and accompanied by
a voice-over reiteration. The remaining 20% space can be used for the
name of the mutual fund or logo or name of scheme, etc.
• Mutual Funds shall not offer any indicative portfolio and indicative
yield. No communication regarding the same in any manner whatsoever
shall be issued by any Mutual Fund or distributors of its products.

Mutual funds short notes 3

Chapter 3
• SEBI is the regulatory authority for securities markets in India. It regulates,
among other entities, mutual funds, depositories, custodians and registrars
& transfer agents in the country. Mutual funds need to comply with RBI’s
regulations regarding investment in the money market, investments
outside the country, investments from people other than Indians resident
in India, remittances (inward and outward) of foreign currency etc.
• Mutual Funds in India have not constituted any SRO(Self Regulatory
Organizations) for themselves. Therefore, they are directly regulated by
SEBI.
• AMFI is not an SRO.
• ACE stands for AMFI Code of Ethics and AGNI stands for AMFI Guidelines &
Norms for Intermediaries.
• In the event of breach of the Code of Conduct by an intermediary, the
following sequence of steps is provided for:
- Write to the intermediary (enclosing copies of the complaint and other
documentary evidence) and ask for an explanation within 3 weeks.
- In case explanation is not received within 3 weeks, or if the explanation
is not satisfactory, AMFI will issue a warning letter indicating that any
subsequent violation will result in cancellation of AMFI registration.
- If there is a proved second violation by the intermediary, the
registration will be cancelled, and intimation sent to all AMCs.
• The intermediary has a right of appeal to AMFI.
• SEBI has mandated AMCs to put in place a due diligence process to
regulate distributors who qualify any one of the following criteria:
a. Multiple point presence (More than 20 locations)
b. AUM raised over Rs.100 crore across industry in the non-institutional
category but including high networth individuals (HNIs)
c. Commission received of over Rs. 1 Crore p.a. across industry
d. Commission received of over Rs. 50 Lakhs from a single mutual fund
• When a scheme’s name implies investment in a particular kind of security
or sector, it should have a policy that provides for investing at least 65% of
its corpus in that security or sector, in normal times. Thus, a debt scheme
would need to invest at least 65% in debt securities; an equity scheme
would need to invest that much in equities; a steel sector fund would need
to invest at least 65% in shares of steel companies.
• Schemes other than ELSS and RGESS can remain open for subscription for a
maximum of fifteen days.

• In the case of RGESS schemes, the offering period shall be not be more
than thirty days.
• Schemes, other than ELSS and RGESS, need to allot units or refund moneys
within 5 business days of closure of the NFO. RGESS schemes are given a
period of 15 days from closure of the NFO to make the refunds.
• In the event of delays in refunds, investors need to be paid interest at the
rate of 15% p.a. for the period of the delay. This interest cannot be charged
to the scheme.
• Open-ended schemes, other than ELSS, have to re-open for ongoing sale /
re-purchase within 5 business days of allotment.
• Statement of accounts are to be sent to investors as follows:
- In the case of NFO - within 5business days of closure of the NFO (15
days for RGESS).
- In the case of post-NFO investment – within 10 working days of the
investment
-
In the case of SIP / STP / SWP
• Initial transaction – within 10 working days
• Ongoing – once every calendar quarter (March, June, September,
December) within 10 working days of the end of the quarter
• On specific request by investor, it will be dispatched to investor within 5
working days without any cost.
• Statement of Account shall also be sent to dormant investors i.e. investors
who have not transacted during the previous 6 months. This can be sent
along with the Portfolio Statement / Annual Return, with the latest position
on number and value of Units held.
• Units of all mutual fund schemes held in demat form are freely
transferable. Investors have the option to receive allotment of mutual fund
units of open ended and closed end schemes in their demat account

• Only in the case of ELSS and RGESS Schemes, free transferability of units
(whether demat or physical) is curtailed for the statutory minimum holding
period of 3 years.
• Investor can ask for a Unit Certificate for his Unit Holding. This is different
from a Statement of Account as follows:
• A Statement of Account shows the opening balance, transactions during
the period and closing balance
• A Unit Certificate only mentions the number of Units held by the investor.
• In a way, the Statement of Account is like a bank pass book, while the
Unit Certificate is like a Balance Confirmation Certificate issued by the
bank.
• Since Unit Certificates are non-transferable, they do not offer any real
transactional convenience for the Unit-holder. However, if a Unit-holder
asks for it, the AMC is bound to issue the Unit Certificate within 5 working
days of receipt of request (15 days for RGESS).
• NAV has to be published daily, in at least 2 daily newspapers having
circulation all over India
• NAV and re-purchase price are to be updated in the website of AMFI and
the mutual fund
• In the case of Fund of Funds, by 10 am the following day
• In the case of other schemes, by 9 pm the same day
• The investor/s can appoint upto 3 nominees, who will be entitled to the
Units in the event of the demise of the investor/s. The investor can also
specify the percentage distribution between the nominees. If no
distribution is indicated, then an equal distribution between the nominees
will be presumed.
• The investor can also pledge the units. This is normally done to offer
security to a financier.
• Dividend warrants have to be dispatched to investors within 30 days of
declaration of the divide

• Redemption / re-purchase cheques would need to be dispatched to
investors within 10 working days from the date of receipt of transaction
request.
• In the event of delays in dispatching dividend warrants or redemption /
repurchase cheques, the AMC has to pay the unit-holder, interest at the
rate of 15% p.a. This expense has to be borne by the AMC i.e. it cannot be
charged to the scheme.
• Scheme-wise Annual Report or an abridged summary has to be mailed to
all unit-holders within 6 months of the close of the financial year.
• The appointment of the AMC for a mutual fund can be terminated by a
majority of the trustees or by 75% of the Unit-holders (in practice, Unit-
holding) of the Scheme. 75% of the Unit-holders (in practice, Unit-holding)
can pass a resolution to wind-up a scheme.
• If an investor feels that the trustees have not fulfilled their obligations,
then he can file a suit against the trustees for breach of trust.
• Under the law, a trust is a notional entity. Therefore, investors cannot sue
the trust
• The principle of caveat emptor (let the buyer beware) applies to mutual
fund investments. So, the unit-holder cannot seek legal protection on the
grounds of not being aware, especially when it comes to the provisions of
law, and matters fairly and transparently stated in the Offer Document.
• Unit-holders have a right to proceed against the AMC or trustees in certain
cases. However, a proposed investor i.e. someone who has not invested in
the scheme does not have the same rights.
• The mutual fund has to deploy unclaimed dividend and redemption
amounts in the money market. AMC can recover investment management
and advisory fees on management of these unclaimed amounts, at a
maximum rate of 0.50% p.a.
• If the investor claims the money within 3 years, then payment is based on
prevailing NAV i.e. after adding the income earned on the unclaimed
money
• If the investor claims the money after 3 years, then payment is based on
the NAV at the end of 3 years

Mutual funds short notes 2

Chapter 2
• Mutual Fund is established as a trust. Therefore, they are governed by the
Indian Trusts Act, 1882
• The mutual fund trust is created by one or more Sponsors, who are the
main persons behind the mutual fund business.
• Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund
trust, are the investors who invest in various schemes of the mutual fund.
• Day to day management of the schemes is handled by an Asset
Management Company (AMC). The AMC is appointed by the sponsor or the
Trustees.
• Sponsor should be carrying on business in financial services for 5 years.
Sponsor should have positive net worth (share capital plus reserves
minus accumulated losses) for each of those 5 years. Latest net worth
should be more than the amount that the sponsor contributes to the
capital of the AMC. The sponsor should have earned profits, after
providing for depreciation and interest, in three of the previous five
years, including the latest year. The sponsor needs to have a minimum
40% share holding in the capital of the AMC.
• Prior approval of SEBI needs to be taken, before a person is appointed as
Trustee. The sponsor will have to appoint at least 4 trustees. If a trustee
company has been appointed, then that company would need to have at
least 4 directors on the Board. Further, at least two-thirds of the trustees /
directors on the Board of the trustee company, would need to be
independent trustees i.e. not associated with the sponsor in any way.
• Day to day operations of asset management is handled by the AMC.
• The directors of the asset management company need to be persons
having adequate professional experience in finance and financial services
related field. The directors as well as key personnel of the AMC should not
have been found guilty of moral turpitude or convicted of any economic
offence or violation of any securities laws. Key personnel of the AMC
should not have worked for any asset management company or mutual
fund or any intermediary during the period when its registration was
suspended or cancelled at any time by SEBI.
• Prior approval of the trustees is required, before a person is appointed as
director on the board of the AMC. Further, at least 50% of the directors
should be independent directors i.e. not associate of or associated with the
sponsor or any of its subsidiaries or the trustees.

• The AMC needs to have a minimum net worth of Rs. 10crore. An AMC
cannot invest in its own schemes, unless the intention to invest is disclosed
in the Offer Document. Further, the AMC cannot charge any fees for its
own investment in any of the schemes managed by itself.
• The appointment of an AMC can be terminated by a majority of the
trustees, or by 75% of the Unit-holders. However, any change in the AMC is
subject to prior approval of SEBI and the Unit-holders.
• The custodian has custody of the assets of the fund. As part of this role, the
custodian needs to accept and give delivery of securities for the purchase
and sale transactions of the various schemes of the fund. Thus, the
custodian settles all the transactions on behalf of the mutual fund
schemes.
• All custodians need to register with SEBI. The Custodian is appointed by the
mutual fund. A custodial agreement is entered into between the trustees
and the custodian.
• The SEBI regulations provide that if the sponsor or its associates control
50% or more of the shares of a custodian, or if 50% or more of the directors
of a custodian represent the interest of the sponsor or its associates, then
that custodian cannot be appointed for the mutual fund operation of the
sponsor or its associate or subsidiary company.
• The custodian also tracks corporate actions such as dividends, bonus and
rights in companies where the fund has invested.
• The RTA maintains investor records. The appointment of RTA is done by the
AMC. It is not compulsory to appoint a RTA. The AMC can choose to handle
this activity in-house. All RTAs need to register with SEBI.
• Auditors are responsible for the audit of accounts. Accounts of the schemes
need to be maintained independent of the accounts of the AMC. The
auditor appointed to audit the scheme accounts needs to be different from
the auditor of the AMC. While the scheme auditor is appointed by the
Trustees, the AMC auditor is appointed by the AMC.
• The fund accountant performs the role of calculating the NAV, by collecting
information about the assets and liabilities of each scheme.

All about CKYC

Brief Introduction:
A Central Know Your Customer (CKYC) number is required by law in India if you plan to invest in mutual funds or other financial assets and even for opening a bank account. Having a CKYC number will show financial regulators that you are a legitimate investor and help to verify your identity. The process for getting a CKYC number is relatively easy and once you have it, you do not need to apply for it again. With a few key personal documents and the right information on the application form, you can get your CKYC number and start investing right away.



cKYC stands for Central KYC which is a centralised repository that stores all the personal information of the customer centrally. Previously, there was a separate KYC process for each of the financial institutions such as banks, Mutual Fund houses, Insurance companies, etc. cKYC was brought in by the Government in order to bring all the KYC processes on a single and uniform platform.



So if you complete KYC verification with any of the financial entities, say a Bank, you don’t need to go through the tedious process of completing KYC with other market entities again.

The cKYC Registry is managed by the Central Registry of Securitisation and Asset Reconstruction and Securities Interest of India (CERSAI). The cKYC programme was announced in the 2012-13 Union Budget and it went live in July 2016.



If you already KYC compliant then you don’t need to do anything to be cKYC compliant. If you are not KYC compliant and are a first-time investor, you can follow the below process:·



· Download and fill up the cKYC form.



· Attach the self-attested documents for identity proof and address proof.



· Attach a photograph



You can complete this process at any financial institution regulated by RBI, SEBI, IRDA or PFRDA. This means you can do the cKYC process with any bank, mutual fund house, insurance company etc.



Once you complete the process and your application is successful, you will receive a 14 digit KYC identification number (KIN). This KIN will help you to escape from completing the KYC process again with different financial entities.



What is ckyc in banks?



Central KYC Registry or CKYCR will now replace the existing multiple KYC submission process while opening savings bank accounts, buying life insurance or investing in mutual fund products into one time centralized process.



The Government of India has authorized the Central Registry of Securitization and Asset Reconstruction and Security interest of India (CERSAI) to manage this Central KYC Registry process. From 1st August, 2016 this new process will be applicable to all individuals.



Hence, it is important for all individuals to know the contents of Central KYC Registry or CKYCR form.



The beauty of this new CKYCR is that in the single form itself you will find the new KYC registration and modification feature. Also, the FATCA declaration is also available in same KYC form. As of now, you have to declare when you are investing. However, it is now made it mandatory of FATCA declaration while completing the KYC Process itself.



Features of Central KYC Registry (CKYCR) Form



· A single KYC for all your financial transactions.



· In existing format PAN is the sole identifier for an investor. However, in new Central KYC Registry system, the list goes beyond Aadhaar and PAN.



· A single form to create new KYC or modify the existing KYC.



· In existing KYC, mother’s name and proof of permanent address are mandatory (if your address for correspondence is not the same as permanent address).



· Three types of accounts are specified. One is Normal, second is Simplified or for low-risk customers and third is Small investors. You have to select which is applicable to you.



· If your aggregate of all credits in a financial year does not exceed rupees one lakh, the aggregate of all withdrawals and transfers in a month does not exceed rupees ten thousand or the balance at any point of time does not exceed rupees fifty thousand, then you will be considered as SMALL account type of investor.



· The simplified or low-risk customers means customers who are not able to submit anyone among 6 documents listed. They are Passport, driving license, PAN card, Voter ID, job card issued by NREGA or Aadhaar Card.



· If you will not fall in above two categories of investors like SMALL or SIMPLIFIED (Low-Risk Customers), then you have to mention it as NORMAL customers.



· FATCA declaration is also included in KYC form itself.



· You can add related persons like a guardian of minor, assignee or authorized representative KYC details in the same single form.



CKYC is a unique ID assigned to every financial entity which will help the regulators get a more accurate picture of transactions.



This has been mooted to meet a long due need of standardizing the identification process across Financial Institutions (FI). Banks, Insurance, Asset Management Companies (AMC or Mutual Fund companies) and other Non Banking Finance Companies (NBFC) were on 4 different tracks where Customer Details were being collected and maintained.



Also, the nature of documents accepted by different FIs were different. Some were okay with driving license, others were not. Credit Cards were easily issued whereas loans were not. CKYC eliminates the difference.



For the end-customer, CKYC means no more hassles of submitting KYC documents for every account opened, credit card or loan taken.



For the Government, it means better control over the monies.



CERSAI has mandated that all new accounts of Nationalized banks associate a CKYC ID. This is effective 1 Feb 2017. For co-operative banks there is more time available. Also, banks have to regularize their existing accounts that are active or dormant in their core-banking or other Customer Onboarding systems.



From a service provider perspective, CKYC is going to add considerable effort (read burden) on smaller or distant branches. Probably account opening or loan sanctions will not happen from such places where scanners and additional manpower are needed for CKYC compliance.



From Feb 1, 2017, new investors in mutual funds will have to do CYKC (Central Know Your Customer) before investing. All Nationalised Banks have to associate CKYC ID for new accounts opened.



As of now, existing investors in mutual funds who are KYC compliant can continue investing in mutual funds. No updation is required from their end.



The program was announced by the Government of India in the 2012-13 Union Budget and went live in July 2016.



When you do any transaction such as if you want to open a Bank account, or buy a Mutual Fund or buy insurance each of these institutions have to do KYC or Know your Customer. The Central KYC (cKYC) has been brought in to make the life easier for investors. So completing KYC process with any bank, Mutual Fund, or an insurance company will be enough and you won’t have to do this process again anywhere. Before the Central KYC (cKYC) there were separate KYC formats for different financial institutes like Mutual Funds, banks etc. The introduction of Central KYC (cKYC) aims to eliminate this dissimilarity across the investment platform.



Central KYC (cKYC) will store all the customer information at one central server that is accessible to all the financial institutions. After opening a KYC account, you will get a 14-digit identification number. So, you just have to show this number at the time of a new investment or purchasing a financial product with a financial institution. The number will have all your details saved centrally. It will save you and the company or bank from completing the tedious process of KYC all over again





What is the difference between KYC, eKYC, and cKYC?



The objective of the KYC guidelines is to prevent identity theft, financial fraud, money laundering and terrorist financing. Money laundering is the process of concealing the source of money usually obtained through illegal sources such as drugs and arms trafficking, terrorism, extortion and theft. Our article Know Your Customer or KYC discusses why KYC is required.







KYC or Know your Customer: is the known and regular process in the Banks/Mutual Funds whereby the identity of an investor is verified based on written details submitted by him on a form, supplemented by an In-Person Verification (IPV) process. Once the verification is done successfully, the relevant investor data is entered into their database.



eKYC or electronic KYC: is KYC done with the help of an investor’s Aadhaar number. While completing the eKYC for Mutual Funds, the authentication of the investor’s identity can be done in following ways. Our article Aadhaar eKYC,eSign: Paperless for PAN, eNPS, Mutual Funds, Insurance discusses it in detail.Aadhaar eKYC,eSign: Paperless for PAN, eNPS, Mutual Funds,Insurance discusses it in detail.





(a) Via One Time Password (Limits investments to Rs 50,000 per year per mutual funds and mandates investments via the online electronic mode)



(b) Via Biometrics (No limits on the investment amount here unless those specifically imposed by the scheme / Fund House)



This data is uploaded into the records of the KRA.



cKYC or Central KYC is an initiative of the Government of India where the aim is to have a structure in place which allows investors to do their KYC only once. CKYC compliance will allow an investor to transact/deal with all entities governed/regulated by Government of India / Regulator (RBI, SEBI, IRDA and PFRDA) without the need to complete multiple KYC formalities which are an inconvenience/hindrance as of now. It will allow for larger market participation by investors, easing their journey on the financial highway. The CKYC processing is handled by CERSAI.



Who is managing cKYC?



This new KYC platform is promoted by the Government and PSU Banks. Central KYC (cKYC) is being managed by The Central Registry of Securitization and Asset Reconstruction and Security Interest in India (CERSAI)



Banks, insurance companies, Mutual Fund companies (AMCs) are now required to hand over their KYC records to CERSAI. CERSAI has now appointed DotEx International as its only managed service provider. Financial intuitions need to upload digital copies of client KYC data on this platform within three days after they onboard a client.



Institutions have to pay an advance fee to Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI). The requisite fee is deducted from this advance payment depending on the usage. Here is the fee structure for various transactions – upload: Rs. 0.80, download: Rs. 1.10, update: Rs. 1.15 per transaction.



How does cKYC help financial institutions?



Since the records are stored digitally, it helps intuitions de-duplicate data so that they don’t need to do KYC of customers multiple times. It helps institutions find out if the client is KYC compliant based on Aadhaar, PAN and other identity proofs. If the KYC details are updated on this platform by one entity, all other institutions get a real time update. Thus, the platform helps firms cut down costs substantially by avoiding multiplicity of registration and data upkeep.



What does one have to do for CKYC?

You now have to fill the new CKYC form. information that is currently sought on the current KYC form and the new CKYC form, is not same? CKYC requires additional information (for ex. mother’s name, FATCA information etc) .



· Central KYC (cKYC) asks about other details of the customer like maiden name, the name of mother, in the case of minors details of related persons, proof of permanent address where the local or corresponding address is not same.



· Along with the form, he has to submit a self-attested copy of his PAN card, and identity and address proofs, such as passport and Aadhaar card.



· Along with the CKYC form, photocopies of documents have to be physically verified and attested, and an in-person verification of the investor has to be done.



· NRI applicants can authorize a person to attest the documents. The may also conduct the in-person verification and confirm this in the KYC form.



· If you have more than one Correspondance or local address, then you can update them in Annexure A1.



· If you have more than one related person, then you can update their details in Annexure B1.



What does a first-time investor in mutual funds have to do for CKYC?

cKYC can be done through a mutual fund distributor, or the investor will have to visit the office of a mutual fund or a registrar. Note if you are existing Mutual Fund Investor, you don’t have to do anything.



How will I know that my cKYC application is successful?

You cannot check the CKYC status online. If one is allotted the KIN, it is confirmation that the investor is CKYC compliant. The KIN will be allotted by CERSAI within 4 – 5 working days.



Once the new form is processed a 14-digit KYC Identification Number (KIN) will be issued by CKYC, which has to be used to invest in all financial products including mutual funds. An SMS / email will be sent by CERSAI to the registered mobile number of the investor as soon as the KIN is generated at their end. Since CERSAI will not be sending any physical intimation, applicants should ideally provide their mobile number and/or email ID in the CKYC application form. A sample copy of the SMS that would be received by you from CERSAI is shown in the image below.



If the CKYC application is not processed/rejected for some reason, no intimation will be sent to the applicant from CERSAI. The entity processing your CKYC application will be aware of such rejections and can approach the financial institutions in case of any queries.



How many account types are there in Central KYC Form?

There are three account types in the Central KYC form – Normal, Simplified and Small. The account type can be guessed from the naming of KIN assigned.



For Normal Account, any of six officially valid documents (PAN, AADHAAR, Voter ID, Passport, Driving license, NREGA Job Card) can be submitted for the ID of the customer. If you do not fall in SMALL or SIMPLIFIED (Low-Risk Customers) category, then you are a NORMAL customer.



Simplified or Low-risk customers: LThe KYC identifier for Simplified Measures Account will have a prefix “L”. Low-risk customers are the individuals means customers who are not able to submit any of the 6 documents: Passport, driving license, PAN card, Voter ID, job card issued by NREGA or Aadhaar Card. They often face hurdles in submitting a proof of current or permanent address while opening a bank account. For such customers As per the RBI list, one can submit a copy of utility bills of any service provider, which is not more than two months old. These include telephone, piped gas, water, electricity or postpaid mobile phone bill. They can also submit property or municipal tax receipts; bank account or post office savings bank account statements; and pension or family pension payment orders issued to retired employees by Government departments or public sector undertakings, if these contain the address, to open an account. Details for Simplified Measures Account, there are additional Officially verified documents (OVDs) that are allowed as per RBI circular RBI/2015-16/42 dated July 1, 2015 – Point no. 2.3(i) & (ii) and point 3.2.2 I.A (iv) & (v)

Small Accounts: The KYC identifier for Small Account will have a prefix “S”. People who do not possess officially valid KYC documents can open a small account with the banks. These accounts can be opened by submitting a self-attested photograph along with the application by putting a signature or thumbprint on it in the presence of the bank official. These accounts will be initially valid for 12 months. Thereafter such accounts can be extended for another 12 months provided that the account holder provides a document showing that they have applied for the officially valid document within 12 months of the account opening.However, such account has some restrictions attached to it as listed below:



· There should not be more than Rs. 1,00,000 aggregate credits in a year.



· The aggregate withdrawals should not exceed Rs. 10,000 in a month.



· Balance in the account should not be more than Rs. 50,000 at any point in time.

LARGE EXPOSURES FRAMEWORK

LARGE EXPOSURES FRAMEWORK (LEF)
The following write up on Large Exposures Framework (LEF) is based on RBI Notification No. RBI/2016-17/167 DBR.No.BP.BC.43/21.01.003/2016-17 dated December 1, 2016. Candidates are
advised to refer to the Notification for additional details.
In order to align the exposure norms for Indian banks with the BCBS standards, RBI has laid down the
guidelines on Large Exposures Framework on December 1, 2016. The guidelines are aimed at
significant tightening of norms pertaining to concentration risks of banks, especially in relation to large
borrowers. The guidelines come into effect from April 1, 2019. A large exposure is defined as any exposure to a counter-party or group of counter-parties which is
equal to 10 per cent of the bank’s eligible capital base (defined as tier-I capital). LARGE EXPOSURE LIMITS
Single Counterparty: The sum of all the exposure values of a bank to a single counterparty must not
be higher than 20 percent of the bank’s available eligible capital base at all times. In exceptional cases, Board of banks may allow an additional 5 percent exposure of the bank’s available eligible capital base. Banks shall lay down a Board approved policy in this regard. Groups of Connected Counterparties: The sum of all the exposure values of a bank to a group of
connected counterparties, as defined below, must not be higher than 25 percent of the bank’s available
eligible capital base at all times. Any breach of the above LE limits shall be under exceptional conditions only and shall be reported to
RBI immediately and rectified at the earliest but not later than a period of 30 days from the date of the
breach. Definition of connected counterparties
Bank may have exposures to a group of counterparties with specific relationships or dependencies
such that, where one of the counterparties fail, all of the counterparties are likely to fail. A group of this
sort is referred to, in this framework, as a group of connected counterparties and must be treated as a
single counterparty. In this case, the sum of the bank’s exposures to all the individual entities included
within a group of connected counterparties is subject to the large exposure limit and to the regulatory
reporting requirements. Counterparties exempted from LEF
The exposures that will be exempted from the LEF are listed below:
a. Exposures to the Government of India and State Governments which are eligible for zero percent
Risk Weight under the Basel III – Capital Regulation framework of the Reserve Bank of India;
b. Exposures to Reserve Bank of India;
c. Exposures where the principal and interest are fully guaranteed by the Government of India; d. Exposures secured by financial instruments issued by the Government of India, e. Intra-day interbank exposures;
f. Intra-group exposures;
g. Borrowers, to whom limits are authorised by the Reserve Bank for food credit;
h. Banks’ clearing activities related exposures to Qualifying Central Counterparties (QCCPs)
i. Rural Infrastructure Development Fund (RIDF) deposits placed with NABARD. However, a bank’s exposure to an exempted entity which is hedged by a credit derivative shall be
treated as an exposure to the counterparty providing the credit protection notwithstanding the fact that
the original exposure is exempted.

Guidelines on Partial Credit Enhancement to corporate

Guidelines on Partial Credit Enhancement to corporate
bonds by banks
I. Purpose
1. The credit needs of the infrastructure sector in India are huge. Resources are generally raised
through the bond market by corporates for project development. However, the Indian corporate bond
market, being at a nascent stage of development, there is excessive pressure on the banking system
to fund the credit needs of such projects thereby leading to greater asset-liability mismatch and

exposing banks to liquidity risk. The insurance and provident/pension funds, whose liabilities are long
term, may be better suited to finance such projects. 2. The regulatory requirement for insurance and provident/pension funds is to invest in bonds of high
or relatively high credit rating. 3. With a view to enabling long term providers of funds such as insurance and provident/pension
funds, as also other investors, to invest in the bonds issued for funding projects by corporates/SPVs, RBI, in its Second Quarter Review of Monetary Policy 2013-14, proposed to allow banks to offer
Partial Credit Enhancement (PCE) to corporate bonds. 4. The objective behind allowing banks to extend PCE is to enhance the credit rating of the bonds
issued so as to enable corporates to access the funds from the bond market on better terms. 5. It has been decided that, to begin with, banks can provide PCE to a project as a non-funded
subordinated facility in the form of an irrevocable contingent line of credit which will be drawn in case
of shortfall in cash flows for servicing the bonds and thereby improve the credit rating of the bond
issue.
II. Salient features of the PCE facility
6. The aggregate PCE provided by all banks for a given bond issue shall be 50 per cent of the bond
issue size, with a limit up to 20 per cent of the bond issue size for an individual bank. 7. The PCE facility shall be provided at the time of the bond issue and will be irrevocable. 8. Banks are not expected to invest in corporate bonds which are credit enhanced by other banks. 9. Banks may offer PCE only in respect of bonds whose pre-enhanced rating is BBB minus or
better. 10. Banks cannot provide PCE by way of guarantee. 11. Banks should have a board approved policy on PCE.
III. Balance sheet treatment, capital requirements, exposure and asset classification norms for
exposures arising on account of providing PCE
12. PCE facilities to the extent drawn should be treated as an advance in the balance sheet. Undrawn
facilities would be an off-balance sheet item and reported under ‘Contingent Liability – Others’. 13. The aggregate capital required to be maintained by the banks providing contingent PCE for a
given bond issue for their exposure on account of PCE provided will be computed, as if the entire
bond issue was held by banks, as the difference between (a) the capital required on the entire bond
amount, corresponding to its pre-credit enhanced rating and (b) the capital required on the bond
amount corresponding to its post-credit enhanced rating, as per the risk weights applicable to claims
on corporates in the Master Circular – Basel III Capital Regulations (as updated from time to time). To illustrate, assume that the total bond size is Rs.100 for which PCE to the extent of Rs.20 is
provided by a bank. The pre-enhanced rating of the bond is BBB which gets enhanced to AA with
the PCE. In this scenario –
a. At the pre-enhanced rating of BBB (100% risk weight), the capital requirement on the total
bond size (Rs.100) is Rs.9.00. b. The capital requirement for the bond (Rs.100) at the enhanced rating (AA, i.e., 30% risk
weight)) would be Rs.2.70. c. As such, the PCE provider will be required to hold the difference in capital i.e., Rs.6.30
(Rs.9.00 – Rs.2.70). 14. On a review of the capital requirement for PCE, it has been decided that:
a) To be eligible for PCE from banks, corporate bonds shall be rated by a minimum of two
external credit rating agencies at all times;
b) The rating reports, both initial and subsequent, shall disclose both standalone credit rating
(i.e., rating without taking into account the effect of PCE) as well as the enhanced credit rating
(taking into account the effect of PCE). c) For the purpose of capital computation in the books of PCE provider, lower of the two
standalone credit ratings and the corresponding enhanced credit rating of the same rating
agency shall be reckoned. d) Where the reassessed standalone credit rating at any time during the life of the bond
shows improvement over the corresponding rating at the time of bond issuance, the capital
requirement may be recalculated on the basis of the reassessed standalone credit rating and
the reassessed enhanced credit rating, without reference to the constraints of capital floor and
difference in notches. 15. In situations where the notional pre-enhanced rating of the bond slips below investment grade
(BBB minus), capital must be maintained as per risk weight of 1250% on the amount of PCE
provided. 16. The PCE providing bank will observe the following exposure limits:
(a) PCE exposure to a single counterparty or group of counterparties shall not exceed 5 per
cent of the bank’s Single Borrower / Group Borrower limit to the counterparty to whom the
PCE is provided, (b) The aggregate PCE exposure of a bank shall not exceed 20 per cent of its Tier 1 capital.

Current Affairs on August 25th 2018

Today's Headlines from www:

*Economic Times*

📝 Forex reserve drops by $33.2 million to $400.84 billion

📝 Dewan Housing plans to raise Rs 2,000 crore by NCDs

📝 Nearly 1.2 crore jobs created in 10 months till June: CSO report

📝 Government may force automakers to use 70 per cent galvanised steel in car body

📝 Improve governance practices or perish: RBI to UCBs

📝 Railways to replace loss making AC II-tier coaches in premium trains with AC-III

Important points for Risk Management

 Important points for Risk Management

Risk and Capital
Risk is possible unfavorable impact on net cash flow in future due to uncertainty of happening or non- happening of events. Capital is a cushion or shock observer required to absorb potential losses in future. Higher the Risks, high will be the requirement of Capital and there will be rise in RAROC (Risk Adjusted
Return on Capital). Types of Risks
Risk is anticipated at Transaction level as well as at Portfolio level. Transaction Level
Credit Risk, Market Risk and Operational Risk are transaction level risk and are managed at Unit level. Portfolio Level
Liquidity Risk and Interest Rate Risk are also transaction level risks but are managed at Portfolio level. Risk Measurement
Based on Sensitivity
It is change in Market Value due to 1% change in interest rates. The interest rate gap is sensitivity
of the interest rate margin of Banking book. Duration is sensitivity of Investment portfolio or Trading
book

Based on Volatility:
It is common statistical measure of dispersion around the average of any random variable such as
earnings, Markto market values, losses due to default etc. Statistically Volatility is Standard deviation of Value of Variables
Calculation
Example 1 : We have to find volatility of Given Stock price over a given period. Volatility may
be weekly or monthly. Suppose we want to calculate weekly volatility. We will note down Stock
price of nos. of weeks. Mean Price = 123.62 and
Variance (sum of Squared deviation from mean) is 82.70
(extracted from weekly Stock prices) Volatility i.e. sd =
∫Variance = ∫82.70 = 9.09
Volatility over Time Horizon T = Daily Volatility X ∫T
Example 2
Daily Volatility =1.5%
Monthly Volatility = 1.5 X ∫30 = 1.5 X 5.48 = 8.22
Volatility will be more if Time horizon is more. Downside Potential
It captures only possible losses ignoring profits and risk calculation is done keeping in view two
components:
7. Potential losses
8. Probability of Occurrence. The measure is more relied upon by banks/FIs/RBI. VaR (Value at Risk is a downside Risk
Measure.)
Risk Pricing Risk Premium is added in the interest rate because of the following:
6. Necessary Capital is to be maintained as per regulatory requirements. 7. Capital is raised with cost. For example there are 100 loan accounts with Level 2 Risk. It means there can be average loss of 2% on
such type of loan accounts: Risk Premium of 2% will be added in Rate of Interest. Pricing includes the following:
j) Cost of Deploying funds
k) Operating Expenses
l) Loss Probabilities
m) Capital Charge
Risk Mitigation
Credit Risk can be mitigated by accepting Collaterals, 3rd party guarantees, Diversification of
Advances and Credit Derivatives.


Interest rate Risk can be reduced by Derivatives of Interest Rate Swaps. Forex Risk can be reduced by entering into Forward Contracts and Futures etc.
If we make advances to different types of business with different Risk percentage, the overall risk will
be reduced through diversification of Portfolio. Banking Book, Trading Book and Off Balance Sheet Items
Banking Book
It includes all advances, deposits and borrowings which arise from Commercial and Retail Banking. These are Held till maturity and Accrual system of accounting is applied. The Risks involved are:
Liquidity Risk, Interest Rate Risk, Credit Default Risk, Market Risk and Operational Risk. Trading Book
It includes Assets which are traded in market. 6. These are not held till maturity. 7. The positions are liquidated from time to time. 8. These are Mark- to–market i.e. Difference between market price and book value is taken as
profit. 9. Trading Book comprises of Equities, Foreign Exchange Holdings and Commodities etc. 10. These also include Derivatives
The Risks involved are Market Risks. However Credit Risks and Liquidity Risks can also be there. Off Balance Sheet Exposures
The Off Balance sheet exposures are Contingent Liabilities, Guarantees, LC and other obligations. It
includes Derivatives also. These may form part of Trading Book or Banking Book after they become
Fund based exposure. 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.

includes Frauds Risk, Communication Risk, Documentation Risk, Regulatory Risk, Compliance Risk and
legal risks but excludes strategic /reputation risks. Two of these risks are frequently occurred. Transaction Risk: Risk arising from fraud, failed business processes and inability to maintain
Business Continuity. Compliance Risk: Failure to comply with applicable laws, regulations, Code of Conduct may attract
penalties and compensation. Other Risks are:
3. Strategic Risk: Adverse Business Decisions, Lack of Responsiveness to business changes and no
strategy to achieve business goals. 4. Reputation Risk ; Negative public opinions, Decline in Customer base and litigations etc. 5. Systemic Risks ; Single bank failure may cause collapse of whole Banking System and result into
large scale failure of banks.
In 1974, closure of HERSTATT Bank in Germany posed a threat for the entire Banking system
BASEL–I
Bank for International Settlements (BIS) is situated at Basel (name of the city in Switzerland). Moved by
collapse of HERSTATT bank, BCBS – Basel Committee on Banking Supervision consisting of 13
members of G10 met at Basel and released guidelines on Capital Adequacy in July 1988. These
guidelines were implemented in India by RBI w.e.f. 1.4.1992 on the recommendations of Narsimham
Committee. The basic objective was to strengthen soundness and stability of Banking system in India in
order to win confidence of investors, to create healthy environment and meet international standards. BCBS meets 4 times in a year. Presently, there are 27 members. BCBS does not possess any formal supervisory authority. 1996 Amendment
7. Allowed banks to use Internal Risk Rating Model. 8. Computation of VaR daily using 99th percentile. 9. Use of back-testing
10. Allowing banks to issue short term subordinate debts with lock-in clause. Calculation of CRAR (Capital to Risk Weighted Asset Ratio)
Basel – I requires measurement of Capital Adequacy in respect of Credit risks and Market Risks
only as per the following method:
Capital funds(Tier I & Tier II)/(Credit Risk Weighted Assets + Market RWAs + Operational RWAs) X
100
Minimum requirement of CRAR is as under:
As per BASEL-II recommendations 8%


As per RBI guidelines 9%
Banks undertaking Insurance business 10%
New Private Sector Banks 10%
Local Area banks 15%
For dividend declaration by the banks (during previous 2 years and current year) 9%
Tier I & Tier II Capital
Tier –I Capital
Tier –I Capital includes:
8. Paid up capital, Statutory reserves, Other disclosed free reserves, Capital Reserve representing
surplus out of sale proceeds of assets. 9. Investment fluctuation reserve without ceiling. 10. Innovative perpetual Debt instruments (Max. 15% of Tier I capital)
11. Perpetual non-cumulative Preference shares
Less Intangible assets & Losses. 5 Sum total of Innovative Perpetual Instruments and Preference shares as stated above should not
exceed 40% of Tier I capital. Rest amount will be treated as Tier II capital. Tier –II Capital
It includes:
6. Redeemable Cumulative Preference shares, Redeemable non-cumulative Preference shares
& Perpetual cumulative Preference shares, 7. Revaluation reserves at a discount of 55%, 8. General Provisions & Loss reserves up to 1.25 % of RWAs
9. Hybrid debts (say bonds) & Subordinate debts (Long term Unsecured loans) limited to 50% of
Tier –I Capital. Tier – III Capital
Banks may at the discretion of the National Authority, employ 3rd tier of Capital consisting of short term
subordinate debts for the sole purpose of meeting a proportion of capital requirements for market risks. Tier III capital will be limited to 250% of bank’s Tier –I Capital (Minimum of 28.5%) that is required to
support market risks. Tier – II capital should not be more than 50% of Total Capital. Capital adequacy in RRBs
The committee on financial sector assessment has suggested introducing CRAR in RRBs also in a
phased manner. Two ways to improve CRAR
$ By raising more capital. Raising Tier I capital will dilute the equity stake of existing investors including
Govt. Raising Tier II Capital is definitely a costly affair and it will affect our profits. $ Reduction of risk weighted assets by implementing Risk mitigation Policy.

Risk Weights on different Assets
Cash and Bank Balance 0%
Advances against NSC/KVC/FDs/LIC 0%
Govt. guaranteed Advances 0%
Central Govt. Guarantees 0%
State Govt. Guarantees 20%
Govt. approved securities 2.5%
Balance with other scheduled banks having CRR at least 9% 20%
Other banks having CRR at least 9% 100%
Secured loan to staff 20%
Other Staff loans -not covered by retirement dues 75%
Loans upto 1.00 lac against Gold/Silver 50%
Residential Housing Loans O/S above 30 lac 75%
Residential Housing loans O/S upto 30 lac 50%
Residential property if LTV ratio is above 75% 100%
Residential Housing Loans O/S above 75 lac 125%
Mortgage based securitization of assets 77.5%
Consumer Credit / Credit Cards/Shares loan 125%
Claims secured by NBFC-non-deposit taking (other than AFCs) 100%
Venture Capital 150%
Commercial Real Estates 100%
Education Loans (Basel –II -75%) 100%
Other loans (Agriculture, Exports) 100%
Indian Banks having overseas presence and Foreign banks will be on parallel run (Basel -I) and Basel-II
for 3 years commencing from 31.3.2010 up to 31.3.2013. These banks will ensure that : Basel-II
minimum capital requirement continues to be higher than 80% of Basel-I minimum capital
requirement for credit Risk and Market Risk.” Further, Tier –I CRAR should be at-least 6% up to 31.3.2010 and 8% up to 31.3.2011
BASEL II
The Committee on Banking Regulations and Supervisory Practices released revised version in the year
2004. These guidelines have been got implemented by RBI in all the banks of India. Parallel run was
started from 1.4.2006. In banks having overseas presence and foreign banks (except RRBs and local
area banks. Complete switchover has taken place w.e.f. 31.3.2008. In banks with no foreign branch, switchover will took place w.e.f. 31.3.2009. Distinction between Basel I and Basel II
Basel – I measures credit risks and market risks only whereas Basel II measures 3 types of risks i.e. Credit Risk, Operational Risk and Market Risk. Risk weights are allocated on the basis of rating of the
borrower i.e. AAA, AA, A, BBB, BB and B etc. Basel –II also recognized CRM such as Derivatives, Collaterals etc.

Three Pillars of BASEL-II
Pillar –I Minimum Capital Requirement
Pillar – II Supervisory Review Process
Pillar –III Market Discipline
Pillar - I – Minimum Capital Requirement
CRAR will be calculated by adopting same method as discussed above under Basel – I with the only
difference that Denominator will be arrived at by adding 3 types of risks i.e. Credit Risks, Market Risks
and Operational Risks. Credit Risk
Credit Risk is the risk of default by a borrower to meet commitment as per agreed terms and
conditions. In terms of extant guidelines contained in BASEL-II, there are three approaches to
measure Credit Risk given as under:
$ Standardized approach
$ IRB (Internal Rating Based) Foundation approach
$ IRB (Internal Rating Based) Advanced approach
1. Standardized Approach
RBI has directed all banks to adopt Standardized approach in respect of Credit Risks. Under
standardized approach, risk rating will be done by credit agencies. Four Agencies are approved for
external rating:
1. CARE 2. FITCH India 3.CRISIL 4. ICRA
Risk weights prescribed by RBI are as under:
Rated Corporate
Rating & Risk Percentage
$ 20%
6. 30%
6. 50%
(v) 100%
BJ. & below 150%
Education Loans 75%
Retail portfolio and SME portfolio 75% Housing
loans secured by mortgage 50 to 75%
Commercial Real Estates 100%
Unrated Exposure 100%
2. IRBA – Internal rating Based Approach
At present all advances of Rs. 5.00 crore and above are being rated from external agencies in our bank.
IRBA is based on bank’s internal assessment. It has two variants (Foundation and advanced). Bank will
do its own assessment of risk rating and requirement of Capital will be


calculated on
i)Probability of default (PD)
j)Loss given default (LD)
k) Exposure of default (ED)
l)Effective maturity. (M)
Bank has developed its own rating module system to rate the undertaking internally. The internal rating is
being used for the following purposes:
m)Credit decisions
n) Determination of Powers
o) Price fixing
Rating by Outside Agencies
The risk weights corresponding to the newly assigned rating symbols are as under:
Table : PART A – Long term Claims on Corporate – Risk Weights Long
Term Ratings
CARE CRISIL Fitch ICRA Risk Weights (%) CARE AAA
CRISIL AAA Fitch AAA ICRA AAA 20 CARE AA CRISIL
AA Fitch AA ICRA AA 30 CARE A CRISIL A Fitch A ICRA
A 50
CARE BBB CRISIL BBB Fitch BBB ICRA BBB 100
CARE BB & below CRISIL BB & below Fitch BB & below ICRA BB & below 150 Unrated
Unrated Unrated Unrated 100
How to Calculate RWAs and Capital Charge in respect of Credit risk
Ist Step : Calculate Fund Based and Non Fund Based Exposure
2nd Step: Allowable Reduction
3rd Step : Apply Risk Weights as per Ratings
4th Step: Calculate Risk Weighted Assets
5th Step : Calculate Capital Charge
Ist Step: Calculate Fund Based and Non Fund Based Exposure:
Example:
Fund Based Exposure (Amount in ‘000)
Nature of loan Limit Outstanding Undrawn portion
CC 200 100 100
Bills Purchased 60 30 30
Packing Credit 40 30 10
Term Loan 200 40 160
Total Outstanding 200
Out of Undrawn portion of TL, 60 is to drawn in a year and balance beyond 1 year.

Adjusted Exposure:
100% Outstanding(Unrated) = 200
20% of Undrawn CC, BP & PC (140*20/100) = 28
20% of Undrawn TL (1 yr) (60*20/100) = 12
50% of Undrawn TL (>1Yr) (100*50/100) = 50
Total Adjusted Exposure FB limits 290
Non Fund Based Exposure (Amount in ‘000)
Type of NBF Exposure CCF Adjusted Exposure
Financial Guarantees 90 100% 90
Acceptances 80 100% 80
Standby LC 50 100% 50
Clean LC 50 100% 50
Unconditional Take out finance 100 100% 100
Performance Guarantee 80 50% 40
Bid Bonds 20 50% 10
Conditional Take out finance 50 50% 25
Documentary LC 40 20% 8
Total Adjusted Exposure FB limits = 453
Total Adjusted Exposure = 290000+453000 = 7,43,000
2nd Step: Allowable Reduction after adjusting CRMs (Credit Risk Mitigates)
Reduction from adjusted exposure is made on account of following eligible financial collaterals:
Eligible Financial Collaterals . 7. Deposits being maintained by a borrower under lien. 8. Cash (including CDs or FDs), Gold, Govt Securities, KVP, NSC, LIC Policy, Debt Securities, Mutual Funds’ 9. Equity and convertible bonds are no more eligible CRMs. Formula for Deposits under lien: C*(1-Hfx) X Mf
(C=Amount of Deposit; Hfx =0 (if same currency), Hfx = 0.08 (if diff currency) Mf = Maturity factor). Formula for Approved Financial collaterals: C*(1-Hc-Hfx) *Mf ) - E*He
Haircuts(He–Haircut for Exposure & Hc-Haircut for Collateral)
Haircut refers to the adjustments made to the amount of exposures to the counter party and also the
value of collateral received to take account of possible future fluctuations in the value of either, on
account of market movements. Standardized Supervisory Haircuts for collateral /Exposure have been
prescribed by RBI and given in the said circular. Capital Requirement for collateralized transaction
E* = max { 0, [E X (1+He) – C X (1-Hc- Hfx) } ]
E* - exposure value alter risk mitigation
E – Current value of exposure for which coll. Qualifies
C = current value of collateral received


Hfx = Haircut appropriate for currency mismatch between collateral and exposure. E* will be multiplied by the risk weight of the counter party to obtain RWA amount.
Illustrations clarifying CRM
In the case of exposure of Rs 100 (denominated in USD) having a maturity of 6 years to a BBB rated
(rating by external credit rating agency) corporate borrower secured by collateral of Rs 100 by way of A+
rated corporate bond with a maturity of 6 years, the exposure amount after the applicable haircut @ 12%, will be Rs 112 and the volatility adjusted collateral value would be Rs 80, (after applying haircut @ 12%
as per issue rating and 8% for currency mismatch) for the purpose of arriving at the value of risk weighted
asset & calculating charge on capital. There is an exposure of Rs 100 to an unrated Corporate (having no rating from any external agency)
having a maturity of 3 years, which is secured by Equity shares outside the main index having a market
value of Rs 100. The haircut for exposure as well as collateral will be 25%. There is no currency mismatch in this case. The volatility adjusted exposure and collateral after application of haircuts works out to Rs 125 and Rs
75 respectively. Therefore, the net exposure for calculating RWA works out to Rs 50. There is a demand loan of Rs 100 secured by bank’s own deposit of Rs 125. The haircuts for
exposure and collateral would be zero. There is no maturity mismatch. Adjusted exposure and
collateral after application of haircuts would be Rs 100 and Rs 125 respectively. Net exposure for the
purpose of RWA would be zero
Other Examples
No. 1: • Exposure----------------------------------------- 100 lac with tenure 3 years
• Eligible Collateral in A+ Debt Security -----30 lac with Residual maturity 2 years
• Hair cut on Collateral is 6%
• Table of Maturity factor shows hair cut as 25% for remaining maturity of 2 years/
Calculate Value of Exposure after Risk Mitigation:
Solution:
Value of Exposure after Risk Mitigation = Current Value of Exposure – Value of adjusted collateral for Hair cut and maturity mismatch
Value of Adjusted Collateral for Hair cut = C*(1-Hc) = 30(1-6%) = 30*94% = 28.20
Value of Adjusted Collateral for Hair cut and Maturity Mismatch = C*(t-0.25) / (T-0.25) = 28.20*(2-.25)/(3-.25) = 17.95
(Where t = Remaining maturity of Collateral T= Tenure of loan )
Value of Exposure after Risk Mitigation = 100-17.95= 82.05 lac. No. 2
An exposure of Rs. 100 lac is backed by lien on FD of 30 lac. There is no mismatch of maturity.

Solution:
Hair Cut for CRM i.e. FDR is zero. Hence Value of Exposure after Risk Mitigation is 100 lac – 30 lac = 70 lac
Computation of CRAR
In a bank ; Tier 1 Capital = 1000 crore
Tier II Capital = 1200 crore
RWAs for Credit Risk = 10000 crore
Capital Charge for Market Risk = 500 crore
Capital Charge for Op Risk = 300 crore
Find Tier I CRAR and Total CRAR. Solution:
RWAs for Credit Risk = 10000 crore
RWAs for Market Risk = 500/.09 = 5556 crore
RWAs for Op Risk = 300/.09 = 3333 crore
Total RWS = 10000+5556+3333 = 18889 crore
Tier I Capital = 1000 crore
Tier II Capital can be up to maximum 1000 crore
Total Capital = 2000 crore
Tier I CRAR = Eligible Tier I Capital /Total RWAs = 1000/18889=5.29% Total
CRAR = Eligible Total Capital /Total RWAs = 2000/18889 = 10.59% We may
conclude that Tier I Capital is less than the required level. Credit Risk Mitigates
It is a process through which credit Risk is reduced or transferred to counter party. CRM
techniques are adopted at Transaction level as well as at Portfolio level as under:
At Transaction level:
4. Obtaining Cash Collaterals
5. Obtaining guarantees
At portfolio level
4. Securitization
5. Collateral Loan Obligations and Collateral Loan Notes
6. Credit Derivatives
1. Securitization
It is process/transactions in which financial securities are issued against cash flow generated from
pool of assets. Cash flow arising from receipt of Interest and Principal of loans are used to pay interest and
repayment of securities. SPV (Special Purpose Vehicle) is created for the said purpose. Originating bank transfers assets to SPV and it issues financial securities.


2. Collateral Loan Obligations (CLO) and Credit Linked Notes (CLN)
It is also a form of securitization. Through CLO, bank removes assets from Balance Sheet and issues
tradable securities. They become free from Regulatory Capital. CLO differs from CLN (Credit link notes in the following manner.
i) CLO provide credit Exposure to diverse pool of credit where CLN relates to single credit.
ii) CLO result in transfer of ownership whereas CLN do not provide such transfer.
iii) CLO may enjoy higher credit rating than that of originating bank. 3. Credit Derivatives
It is managing risks without affecting portfolio size. Risk is transferred without transfer of assets from the
Balance Sheet though OTC bilateral contract. These are Off Balance Sheet Financial Instruments. Credit
Insurance and LC are similar to Credit derivatives. Under a Credit Derivative PB (Prospective buyer)
enter into an agreement with PS (Prospective seller) for transfer of risks at notional value by making of
Premium payments. In case of delinquencies, default, Foreclosure, prepayments, PS compensates PB
for the losses. Settlement can be Physical or Cash. Under physical settlement, asset is transferred
whereas under Cash settlement, only loss is compensated. Credit Derivatives are generally OTC instruments. ISDA (International Swaps and Derivatives
Association) has come out with documentation evidencing such transaction. Credit Derivatives are:
vii) Credit Default Swaps
viii) Total Return Swaps
ix) Credit Linked Notes
x) Credit Spread Options
Operational Risk
Operational Risk is the risk of loss resulting from
iii. Inadequate or failed internal processes, people and system.
iv. External events such as dacoity, burglary, fire etc.
It includes legal risks but excludes strategic /reputation risks.
Identification
(iii) Actual Loss Data Base
(iv) RBIA reports
(v) Risk Control & Self Assessment Survey
(vi) Key Risk indicators
(vii) Scenario analysis
Four ways to manage Risk
8. Prevent
9. Reduce
10. Transfer
11. Carry/Accept


Operational Risk – Measurement
Three approaches have been defined to measure Operational Risk at the bank: • Basic Indicator approach
• Standardized approach
• AMA i.e. Advanced measurement approach
Basic Indicator Approach
15% of Average positive gross annual income of previous 3 years will be requirement of capital. To start
with banks will have to adopt this approach and huge capital is required to be maintained. In our bank, estimated requirement of capital will be about Rs. 1000 crore. The Standardized Approach
All banking activities are to be divided in 8 business lines. 1) Corporate finance 2) Trading &
Sales 3) Retail Banking 4) Commercial Banking 5) Asset Management 6) Retail brokerage 7)
Agency service 8) Payment settlement
Within each business line, Capital requirement will be calculated as under:
By multiplying the average gross income generated by a business over previous 3 years by a factor
β ranging from 12 % to 18 % depending upon industry-wise relationships as under:
Retail Banking, Retail Brokerage and Asset Management -----------12%
Commercial Banking and Agency Services--------------------------- 15%
Corporate, Trading and Payment Settlement------------------------ 18%
Advanced Measurement Approach
Capital requirement is calculated by the actual risk measurement system devised by bank’s own internal
Operational Risk Measurement methods using quantitative and qualitative criteria. Our bank has started
measuring actual losses and estimating future losses by introducing statement of Operational Risk Loss
data w.e.f. 1.4.2005. Minimum 5 year data is required for a bank to switch over to AMA. How to calculate RWAs for Operational Risk?
RWAs for Operational Risk = Capital Charge / 0.09% (If required CAR is 9%)
Operational Risk – Scenario Analysis
It is a term used in measurement of Operational Risk on the basis of scenario estimates. Banks use scenario analysis based on expert opinion in conjunction with external data to evaluate its
exposure to high severity events.
In addition, scenario analysis is used to assess impact of deviations from correlation assumptions in the
bank’s Operational Risk measurement framework to evaluate potential losses arising from operational
risk loss events. Operational Risk Mitigation
Insurance cover, if available can reduce the operational risk only when AMA is adopted for


estimating capital requirements. The recognition of insurance mitigation is limited to 20% of total
Operational Risk Capital Charge calculated under AMA. Practical Example - AMA approach
Under AMA approach, Estimated level of Operational Risk is calculated on the basis of: • Estimated probability of occurrence
• Estimated potential financial impact • Estimated impact of internal control. Estimated Probability of Occurrence: This is based on historical frequency of occurrence &
estimated likelihood of future occurrence. Probability is mapped on scale of 5 as under:
Negligible risk -----1
Low risk-------------2
Medium Risk--------3
High Risk------------4
Very High Risk------5
For Calculation, following formula is used:
Estimated level of Operational Risk = {Estimated probability of occurrence x Estimated potential
financial impact x Estimated impact of internal control} ^0.5 ^0.5 implies Under root of whole
Example:
Probability of occurrence = 2 (medium)
Probability of Financial impact = 4 (very high)
Impact of Financial control = 50%
Solution
[ 2x4x(1-0.5)] ^0.5 = ∫4 = 2 (Low)
Market Risk
It is simply risk of losses on Balance sheet and Off Balance sheet items basically in investments due to
movement in market prices. It is risk of adverse deviation of mark to Market value of trading portfolio
during the period. Any decline in the market value will result into loss. Market Risk involves the following:
d) Risk Identification
e) Risk Measurement
f) Risk monitoring and control
g) Risk mitigation