UCP 600

UCP 600


Why Documentary Credits
• Exchange of goods and services across national boundaries brings greater problems
to both buyer and seller than does domestic business.
• Diversity of customs, standards, currencies, local regulations, languages and legal
systems
• The Documentary Letter of Credit is widely used to reduce the financial risks of
trade.
• Importer wants to ensure performance while exporter wants to secure payment.
• Few of the rules are subject to any national or international law. Provisions of
International Chamber of Commerce & Industry (ICC) important, but not foolproof.
• Generally adopted set of rules for credits known as the Uniform Customs and
Practice for Letters of Credit (UCP) issued by ICC, publication no.600, 2007 (earlier
version no. 500, 1993).
Introduction
• This revision of the Uniform Customs and Practice for Documentary Credits
(commonly called "UCP") is the sixth revision of the rules since they were first
promulgated in 1933.
• The objective of UCP, since attained, was to create a set of contractual rules that
would establish uniformity in that practice, so that practitioners would not have to
cope with a plethora of often conflicting national regulations. The universal
acceptance of the UCP by practitioners in countries with widely divergent economic
and judicial systems is a testament to the rules' success.
• It is important to recall that the UCP represent the work of a private international
organization, not a governmental body.

Important Articles
Article 1 Application of UCP
• The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC
Publication no. 600 ("UCP") are rules that apply to any documentary credit ("credit")
(including, to the extent to which they may be applicable, any standby letter of
credit) when the text of the credit expressly indicates that it is subject to these rules.
They are binding on all parties thereto unless expressly modified or excluded by the
credit.
Article 2: Definitions
• Advising bank means the bank that advises the credit at the request of the issuing
bank.
• Applicant means the party on whose request the credit is issued.
• Beneficiary means the party in whose favour a credit is issued.

Confirmation means a definite undertaking of the confirming bank, in addition to
that of the issuing bank, to honour or negotiate a complying presentation.
Confirming bank means the bank that adds its confirmation to a credit upon the
issuing bank's authorization or request.
• Issuing bank means the bank that issues a credit at the request of an applicant or on
its own behalf.
• Negotiation means the purchase by the nominated bank of drafts (drawn on a bank
other than the nominated bank) and/or documents under a complying presentation,
by advancing or agreeing to advance funds to the beneficiary on or before the
banking day on which reimbursement is due to the nominated bank.
• Nominated bank means the bank with which the credit is available or any bank in
the case of a credit available with any bank.
Article 3: Interpretations
• The expression "on or about" or similar will be interpreted as a stipulation that an
event is to occur during a period of five calendar days before until five calendar days
after the specified date, both start and end dates included.
• The words "to", "until", "till", "from" and "between" when used to determine a
period of shipment include the date or dates mentioned, and the words "before"
and "after" exclude the date mentioned.
• The terms "first half" and "second half" of a month shall be construed respectively as
the 1st to the 15th and the 16th to the last day of the month, all dates inclusive.
• The terms "beginning", "middle" and "end" of a month shall be construed
respectively as the 1st to the 10th, the 11th to the 20th and the 21st to the last day
of the month, all dates inclusive.
Article 4: Credits vs Contracts
• A credit by its nature is a separate transaction from the sale or other contract on
which it may be based. Banks are in no way concerned with or bound by such
contract, even if any reference whatsoever to it is included in the credit.
Article 5: Documents v. Goods, Services or Performance
• Banks deal with documents and not with goods, services or performance to which
the documents may relate.
Article 6 Availability, Expiry Date and Place for Presentation
• A credit must state the bank with which it is available or whether it is available with
any bank. A credit available with a nominated bank is also available with the issuing
bank.
• A credit must state whether it is available by sight payment, deferred payment,
acceptance or negotiation.
• A credit must state an expiry date for presentation.
• The place of the bank with which the credit is available is the place for presentation.


Article 9 Advising of Credits and Amendments
• A credit and any amendment may be advised to a beneficiary through an advising
bank. An advising bank that is not a confirming bank advises the credit and any
amendment without any undertaking to honour or negotiate.
• By advising the credit or amendment, the advising bank signifies that it has satisfied
itself as to the apparent authenticity of the credit or amendment and that the advice
accurately reflects the terms and conditions of the credit or amendment received.
• A bank utilizing the services of an advising bank or second advising bank to advise a
credit must use the same bank to advise any amendment thereto.
Article 10 Amendments
• The terms and conditions of the original credit (or a credit incorporating previously
accepted amendments) will remain in force for the beneficiary until the beneficiary
communicates its acceptance of the amendment to the bank that advised such
amendment. The beneficiary should give notification of acceptance or rejection of an
amendment. If the beneficiary fails to give such notification, a presentation that
complies with the credit and to any not yet accepted amendment will be deemed to
be notification of acceptance by the beneficiary of such amendment. As of that
moment the credit will be amended.
• Partial acceptance of an amendment is not allowed and will be deemed to be
notification of rejection of the amendment.
Article 11 Teletransmitted and Pre-Advised Credits and Amendments
• An authenticated teletransmission of a credit or amendment will be deemed to be
the operative credit or amendment, and any subsequent mail confirmation shall be
disregarded.
• If a teletransmission states "full details to follow" (or words of similar effect), or
states that the mail confirmation is to be the operative credit or amendment, then
the teletransmission will not be deemed to be the operative credit or amendment.
The issuing bank must then issue the operative credit or amendment without delay
in terms not inconsistent with the teletransmission.
Article 13 Bank-to-Bank Reimbursement Arrangements
• An issuing bank must provide a reimbursing bank with a reimbursement
authorization that conforms with the availability stated in the credit. The
reimbursement authorization should not be subject to an expiry date.
• An issuing bank will be responsible for any loss of interest, together with any
expenses incurred, if reimbursement is not provided on first demand by a
reimbursing bank in accordance with the terms and conditions of the credit.
• A reimbursing bank's charges are for the account of the issuing bank.
Article 14 Standard for Examination of Documents
• A nominated bank acting on its nomination, a confirming bank, if any, and the issuing
bank must examine a presentation to determine, on the basis of the documents
alone, whether or not the documents appear on their face to constitute a complying
presentation.

• A nominated bank acting on its nomination, a confirming bank, if any, and the issuing
bank shall each have a maximum of five banking days following the day of
presentation to determine if a presentation is complying. This period is not curtailed
or otherwise affected by the occurrence on or after the date of presentation of any
expiry date or last day for presentation.
• A presentation must be made by or on behalf of the beneficiary not later than 21
calendar days after the date of shipment as described in these rules, but in any event
not later than the expiry date of the credit.
Article 16 Discrepant Documents, Waiver and Notice
• When a nominated bank acting on its nomination, a confirming bank, if any, or the
issuing bank determines that a presentation does not comply, it may refuse to
honour or negotiate.
• When an issuing bank determines that a presentation does not comply, it may in its
sole judgement approach the applicant for a waiver of the discrepancies.
• When a nominated bank acting on its nomination, a confirming bank, if any, or the
issuing bank decides to refuse to honour or negotiate, it must give a single notice to
that effect to the presenter.
• The notice must state:
• i. that the bank is refusing to honour or negotiate; and
• ii. each discrepancy in respect of which the bank refuses to honour or negotiate; and
• iii. a) that the bank is holding the documents pending further instructions from the
presenter; or
• b) that the issuing bank is holding the documents until it receives a waiver from the
applicant and agrees to accept it, or receives further instructions from the presenter
prior to agreeing to accept a waiver; or
• c) that the bank is returning the documents; or
• d) that the bank is acting in accordance with instructions previously received from
the presenter.
• The notice required in sub-article 16 (c) must be given by telecommunication or, if
that is not possible, by other expeditious means no later than the close of the fifth
banking day following the day of presentation.
Article 20 Bill of Lading
• A bill of lading, however named, must appear to:
• i. indicate the name of the carrier and be signed by:
• the carrier or a named agent for or on behalf of the carrier, or
• the master or a named agent for or on behalf of the master.
• ii. indicate that the goods have been shipped on board a named vessel at the port of
loading stated in the credit by:
• pre-printed wording, or
• an on board notation indicating the date on which the goods have been shipped on
board.
• be the sole original bill of lading or, if issued in more than one original, be the full set
as indicated on the bill of lading.


Other Transport Documents
• Non-Negotiable Sea Waybill (Article 21)
• Charter Party Bill of Lading (Article 22)
• Multimodal Transport Document (Article 19)
• Air Transport Document (Article 23)
• Road, Rail or Inland Waterway Transport Documents (Article 24)
• Courier Receipts, Post Receipt or Certificate of Posting (Article 25)
Article 26 "On Deck”
• A transport document must not indicate that the goods are or will be loaded on
deck. A clause on a transport document stating that the goods may be loaded on
deck is acceptable.
Article 27 Clean Transport Document
• A bank will only accept a clean transport document. A clean transport document is
one bearing no clause or notation expressly declaring a defective condition of the
goods or their packaging. The word "clean" need not appear on a transport
document, even if a credit has a requirement for that transport document to be
"clean on board".
Article 28 Insurance Document and Coverage
• Cover notes will not be accepted.
• The date of the insurance document must be no later than the date of shipment,
unless it appears from the insurance document that the cover is effective from a
date not later than the date of shipment.
• The insurance document must indicate the amount of insurance coverage and be in
the same currency as the credit.
• If there is no indication in the credit of the insurance coverage required, the amount
of insurance coverage must be at least 110% of the CIF or CIP value of the goods.
Article 29 Extension of Expiry Date or Last Day for Presentation
• If the expiry date of a credit or the last day for presentation falls on a day when the
bank to which presentation is to be made is closed for reasons other than those
referred to in article 36, the expiry date or the last day for presentation, as the case
may be, will be extended to the first following banking day.
Article 30 Tolerance in Credit Amount, Quantity and Unit Prices
• The words "about" or "approximately" used in connection with the amount of the
credit or the quantity or the unit price stated in the credit are to be construed as
allowing a tolerance not to exceed 10% more or 10% less than the amount, the
quantity or the unit price to which they refer.
• A tolerance not to exceed 5% more or 5% less than the quantity of the goods is
allowed, provided the credit does not state the quantity in terms of a stipulated
number of packing units or individual items and the total amount of the drawings
does not exceed the amount of the credit.


Article 31 Partial Drawings or Shipments
• Partial drawings or shipments are allowed.
Article 34 Disclaimer on Effectiveness of Documents
• A bank assumes no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any document, or for the general or
particular conditions stipulated in a document or superimposed thereon; nor does it
assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods, services or other
performance represented by any document, or for the good faith or acts or
omissions, solvency, performance or standing of the consignor, the carrier, the
forwarder, the consignee or the insurer of the goods or any other person.
Article 35 Disclaimer on Transmission and Translation
• A bank assumes no liability or responsibility for the consequences arising out of
delay, loss in transit, mutilation or other errors arising in the transmission of any
messages or delivery of letters or documents, when such messages, letters or
documents are transmitted or sent according to the requirements stated in the
credit, or when the bank may have taken the initiative in the choice of the delivery
service in the absence of such instructions in the credit.
• If a nominated bank determines that a presentation is complying and forwards the
documents to the issuing bank or confirming bank, whether or not the nominated
bank has honoured or negotiated, an issuing bank or confirming bank must honour
or negotiate, or reimburse that nominated bank, even when the documents have
been lost in transit between the nominated bank and the issuing bank or confirming
bank, or between the confirming bank and the issuing bank.
• A bank assumes no liability or responsibility for errors in translation or interpretation
of technical terms and may transmit credit terms without translating them.
Article 36 Force Majeure
• A bank assumes no liability or responsibility for the consequences arising out of the
interruption of its business by Acts of God, riots, civil commotions, insurrections,
wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its
control.
• A bank will not, upon resumption of its business, honour or negotiate under a credit
that expired during such interruption of its business.
Article 37 Disclaimer for Acts of an Instructed Party
• A bank utilizing the services of another bank for the purpose of giving effect to the
instructions of the applicant does so for the account and at the risk of the applicant.
• An issuing bank or advising bank assumes no liability or responsibility should the
instructions it transmits to another bank not be carried out, even if it has taken the
initiative in the choice of that other bank.
Article 38 Transferable Credits
• A bank is under no obligation to transfer a credit except to the extent and in the
manner expressly consented to by that bank.

• Transferable credit means a credit that specifically states it is "transferable". A
transferable credit may be made available in whole or in part to another beneficiary
("second beneficiary") at the request of the beneficiary ("first beneficiary").
• Transferring bank means a nominated bank that transfers the credit or, in a credit
available with any bank, a bank that is specifically authorized by the issuing bank to
transfer and that transfers the credit. An issuing bank may be a transferring bank.
Transferred credit means a credit that has been made available by the transferring
bank to a second beneficiary.
• A credit may be transferred in part to more than one second beneficiary provided
partial drawings or shipments are allowed.
• A transferred credit cannot be transferred at the request of a second beneficiary to
any subsequent beneficiary. The first beneficiary is not considered to be a
subsequent beneficiary.
• Any request for transfer must indicate if and under what conditions amendments
may be advised to the second beneficiary. The transferred credit must clearly
indicate those conditions.
• The transferred credit must accurately reflect the terms and conditions of the credit,
including confirmation, if any, with the exception of:
- the amount of the credit,
- any unit price stated therein,
- the expiry date,
- the period for presentation, or
- the latest shipment date or given period for shipment,
any or all of which may be reduced or curtailed.
• The first beneficiary has the right to substitute its own invoice and draft, if any, for
those of a second beneficiary for an amount not in excess of that stipulated in the
credit, and upon such substitution the first beneficiary can draw under the credit for
the difference, if any, between its invoice and the invoice of a second beneficiary.

Summary of Major Issues in LC Transactions
Check List for Issuing/Accepting L/C
• Quality of Issuing Bank
• Method of Payment: Sight or Deferred Basis
• Transport Documents
• Other Documents
• Documents: Banks deal in documents not in goods, services or performance
• Should not refer to underlying contract
• Timing: UCP norm is max. 21 days after shipment date for presentation of
documents
Responsibilities and Obligations of Banks
• Irrevocable unless otherwise mentioned
• Issuing Bank: Prime obligation
• Advising Bank: Only obligation to authenticate the credit and passing it on promptly
to beneficiary

• Confirming Bank: takes over payment responsibilities of the issuing bank as far as the
beneficiary is concerned
• Reimbursing Bank: Responsibility of Issuing Bank to provide proper reimbursement
instructions
• Applicability of Force Majeure clause limiting banks’ liability on account of Acts of
God, riots, etc.
• Banks have five banking days to examine documents after receipt of documents
• Banks will examine documents with reasonable care
• Documents should be consistent with each other and complete
• Documents should conform with the terms of the credit
• Documents should comply with the provisions of UCP
Common Defects in Documentation
Commonly found discrepancies between the letter of credit and supporting documents
include:
• Letter of Credit has expired prior to presentation of draft.
• Bill of Lading evidences delivery prior to or after the date range stated in the credit.
• Stale dated documents.
• Changes included in the invoice not authorized in the credit.
• Inconsistent description of goods.
• Insurance document errors.
• Invoice amount not equal to draft amount.
• Ports of loading and destination not as specified in the credit.
• Description of merchandise is not as stated in credit.
• A document required by the credit is not presented.
• Documents are inconsistent as to general information such as volume, quality, etc.
• Names of documents not exact as described in the credit. Beneficiary information
must be exact.
• Invoice or statement is not signed as stipulated in the letter of credit.
Options for Banks dealing in Discrepant Documents
• Ask beneficiaries to make corrections
• Accept minor discrepancies and pay under reserve
• Obtain indemnity from seller
• Telex/fax details of discrepancies to the issuing bank and request permission to pay
• Send the documents on collection
Marine or Ocean Bill of Lading
• They are documents of title. Should be signed by ship’s master or his named agent
• If stated that goods are on board, then dated
• Load port and disport should be named
• `On Deck’ transport document not allowed
• Clean Transport Document
• Quasi-negotiable: transferable by endorsement and physical delivery, but no
recourse
• Transhipment allowed unless prohibited in L/C

Other Transport Documents
• Some multi-modal transport operators (MTOs) also issue negotiable documents for
transport operations where the goods are carried by several different modes of
transport.
• Today goods often travel faster than the related documents. Rail, road and air
transport documents are issued only in non-negotiable form with the goods
consigned direct to a named consignee. Usually this will be the buyer unless the
goods are consigned to a bank
Non-Transport Documents
• Insurance Documents (Article 28): Same currency as the Credit, Minimum amount to
be CIF or CIP plus 10%,
• Commercial Invoices (Article 18)
• Consular Invoice
• Certificate of Origin
• Weight List
• Packing List
• Inspection or Survey Certificate
• Test Certificates

ECGC guarantee::

ECGC guarantee::

In the case of advances classified as doubtful and guaranteed by ECGC, provision should be made only for the balance in excess of the amount guaranteed by the Corporation. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the Corporation and then provision made as illustrated hereunder:

Example::

Outstanding Balance Rs. 4 lakhs
ECGC Cover 50 percent
Period for which the advance has remained doubtful More than 2 years remained doubtful (say as on March 31, 2014)
Value of security held Rs. 1.50 lakhs
Provision required to be made
Outstanding balance Rs. 4.00 lakhs
Less: Value of security held Rs. 1.50 lakhs
Unrealised balance Rs. 2.50 lakhs
Less: ECGC Cover
(50% of unrealisable balance) Rs. 1.25 lakhs
Net unsecured balance Rs. 1.25 lakhs

Provision for unsecured portion of advance Rs. 1.25 lakhs (@ 100 percent of unsecured portion)
Provision for secured portion of advance (as on March 31, 2012) Rs.0.60 lakhs (@ 40 per cent of the secured portion)

Total provision to be made Rs.1.85 lakhs (as on March 31, 2014)

Treasury Management :: (Read nice article)

Treasury Management ::
 (Read nice article)
Banks not only lend money to customers but also invest in securities such as Bonds and
Debentures of Government as well as Corporates. These instruments are easily tradable
in the capital and money market. The tradability of securities makes investments an
attractive option for banks for deployment of their funds. Further, banks buy securities
not only to trade but also to hold them till maturity to take advantage of the attractive
returns with relatively lower risk. Banks are allowed to invest in shares of companies.
However, the volumes are low due to associated high risk besides regulatory restrictions.
The investment portfolio of the banks broadly divided into three groups viz.,
Trading Book – Securities purchased with the intention of selling them within 90 days
are held in the trading book. Trading opportunities arise in the market on account of
fluctuation in interest rates and arbitrage opportunities.
Available for Sale (AFS) – Securities which are bought with the intention of selling
them but not necessarily within 90 days is considered to be AFS securities. They are also
part of the trading portfolio of the bank but only the time frame is different. Both the
trading and AFS securities have to be “Marked to Market” every quarter while finalization
of quarterly results.
Held to Maturity (HTM) – These securities are meant to be held till their date of
maturity and the purpose investing in them is to earn reasonable steady income. These
securities are carried in the books at cost or purchase price till maturity. Hence, HTM
securities need not be “Marked to Market” as the bank is certain of receiving the
maturity value on the specified date. Banks are not allowed to shift securities freely from
trading and AFS to the HTM book as this may lead to overstating of profit figures.
However, banks can opt for shifting only once in a year to adjust their overall portfolio.
Banks are permitted to exceed the limit of 25% of total investments under HTM category
provided (a) the excess comprises of only of SLR securities and (b) the total SLR
securities held in the HTM category is not more than 23% by March 2014.
Call Money Markets: Call and notice money market refers to the market for short term
funds ranging from overnight funds to funds for a maximum tenor of 14 days. Under Call
money market, funds are transacted on overnight basis where as in case of notice
money market; funds are transacted for the period of 2 days to 14 days.
Coupon Rate: It is a rate at which interest is paid, and is usually represented as a
percentage of the par value of a bond. It refers to the periodic interest payments that
are made by the borrower (who is also the issuer of the bond) to the lender (the
subscriber of the bond) and the coupons are stated upfront either directly specifying the
number (e.g.8%) or indirectly tying with a benchmark rate (e.g. MIBOR+0.5%).
Zero Coupon Bond / Deep Discount Bond: The bond is issued at a discount to its
face value, at which it will be redeemed. When such a bond is issued for a very long
tenor, the issue price is at a steep discount to the redemption value. The effective
interest earned by the buyer is the difference between the face value and the discounted
price at which the bond is bought. The essential feature of this type of bonds is the
absence of intermittent cash flows.
Commercial Paper (CP): It is a short-term instrument to enable non-banking
companies to borrow short-term funds through liquid money market instruments. CPs is
therefore part of the working capital limits as set by the maximum permissible bank
finance (MPBF). CP issues are regulated by RBI Guidelines issued from time to time
stipulating term, eligibility, limits and amount and method of issuance. CP can be issued
for maturities between a minimum of 7 days and a maximum up to one year from the
date of issue. The maturity date of the CP should not go beyond the date up to which the
credit rating of the issuer is valid. CP can be issued in denominations of `5 lakh and
multiples thereof. It is mandatory that CPs should be rated by credit rating agencies. In
a bid to make CPs attractive, the RBI has allowed issuers to buyback these instruments
through the secondary market before maturity. It attracts stamp duty.
Certificates of Deposits (CDs): It is a negotiable money market instrument and
issued in dematerialized form or as a Usance Promissory Note, for funds, deposited at a
bank or other eligible financial institutions to raise short-term resources within the
umbrella limit fixed by RBI. CDs may be issued at a discount on face value. CDs differ
from term deposit as they involve the creation of paper, and hence have the facility for
transfer and multiple ownerships before maturity. Banks use the CDs for borrowing
during a credit pickup, to the extent of shortage in incremental deposits. Minimum
amount of a CD should be one lakh and in multiples thereof. The maturity period of CDs
should be not less than 7 days and not more than one year. However FIs are allowed to
issue CDs not exceeding 3 years from the date of issue. Banks have to maintain the
appropriate reserve requirements (CRR/SLR) on the issue price of the CDs. It attracts
stamp duty. Banks/Fis cannot grant loans against CDs.
Mumbai Inter Bank Offered Rate (MIBOR) - Currently there are two calculating
agents for the benchmark viz., Reuters and the National Stock Exchange (NSE). The NSE
MIBOR benchmark is the more popular of the two and is based on rates polled by NSE
from a representative panel of 31 Banks / Institutions / Primary Dealers. It is used by
different Indian banks either for interbank lending of the surplus funds or for interbank
borrowing for meeting their short term liquidity requirements. MIBOR has been in use as
a reference/benchmark rate by the financial institutions for deciding interest rates for
the different financial instruments like Interest Rate Swaps, Forward Rate Agreements,
Floating Rate Debentures and Term Deposits, Loans of different maturities and
mortgages, etc. It is also the benchmark for the Call Money Market Rates.
Securitization is an effective tool to reduce the mismatches in the maturities of assets
and liabilities. It is a financing technique that involves pooling and re-packing of illiquid
financial assets in to marketable securities. There are six players viz., Borrowers,
Lending Banker (who becomes an originator for the Securitization transaction), Special
Purpose Vehicle (SPV), Credit Rating Agency, Investors and Service Providers. The
process of securitization involves identification of financial assets, rating of these assets
by the rating agency, creation of a SPV for handling the securitization transaction,
assignment of future receivables in favour of the SPV, issuance of marketable securities
based on these underlying financial assets and selling the same to the investors. The
service providers recover the amount periodically and remit to the SPV and who in turn
pass the benefit to the investors.
Asset and Liability Management – RBI Guidelines: Of late, it is observed that PSBs
have been accepting Bulk Deposits/Certificate of Deposits route to increase balance
sheet size at very high interest rates, adversely affecting the profitability besides
exposing the banks to ALM Risk. RBI directed banks not to accept Bulk Deposits beyond
10% of the total deposits and the total of Bulk Deposits & Certificates of Deposits should
not exceed 15% of total deposits of the bank at any given point of time. An appropriate
time-bound strategy for reduction of such existing bulk deposits should be put in place.
Adjusted Net Bank Credit (ANBC) denotes Net Bank Credit plus investments made
by banks in non-SLR bonds held in HTM category. However, investments made by banks
in the Recapitalization Bonds and Inter-bank exposures will not be taken into account for
the purpose of priority sector lending targets/sub-targets.
Subordinate Debt is a debt owed to an unsecured creditor that in the event of
liquidation can only be paid after the claims of secured creditors have been met.
Normally, subordinate debt ranks below other secured loans with regard to claims on
assets or earnings.

Treasury Management::

Treasury Management::

1) Leverage means ability of a business concern:
a) To with stand pressures in the times of crisis
b) To meet its liabilities in time
c) To borrow or build up assets on the basis of given capital d) none of these
2) In case of banks, lev-erage is expressed by:
a) Return on Assets b) Net NPA ratio c) Capital adequacy ratio
d) Capital to outside liabilities e) None of these
3) Treasury deals are normally done over phone or over a dealing screen_ The deal
terms are-con-firmed in writing by
a) Front office b) back office c) middle office d) any of these
4) Delivery versus payment means one account is debited and another is credited:
a) on the same day b) by next day c) at the same time d) none of these
5) lh Treasury Operations, the term 'carry' means
a) Interest cost of funds locked in a trading position
b) Carrying forward the contract to next trading period
c) Carrying forward the settlement to next day d) none of these
6) "Marked to Market" means valuation of trading positions applying
a) Purchase price b) current market value
c) current market value or purchase price whichever is lower d) None of these
7) Mismatch refers to:
a) Difference in interest rates paid and received
b) Difference in sale and purchase price
c) Difference in duration of assets and liabilities d) all of these a) None of these
8) Which of the following is a reason for importance of Treasury risk management
a) Adverse market movements may result in instant losses
b) Treasury transactions are of high value needing relatively low capital
c) Large size of transactions done at the sole discretion of the Treasurer
d) Both (a) & (b) only e) All of these
9) High leverage means:
a) Very low capital requirement
b) Very high capital requirement
c) Very high profits compared to capital
d) Very high productivity e) None of these
10) Which of the following is/are not a conventional tool of management control on a
treasury function
a) Back office which checks all transactions of dealers
b) Exposure limits for counterparties avoiding concentration risk
c) Intra day and overnight ceiling on open positions and stop loss limits
d) Value at risk and duration techniques e) None of these
11) Which of the following is not a function of Back office of a treasury
a) Generating deals i.e. purchase and sale of foreign exchange, securities etc.
b) Settling the trade after verifying internal controls
c) Obtaining independent confirmation of deal from the counterparty
d) Verifying that rates / prices mentioned in the deal slip are conforming to the market
rates at the time of the deal e) None of these
12) Which of the following is responsible for ensuring compliance with various risk limits
imposed by the Management and RBI as well as accuracy and objectivity of the transaction?
a) front office b) back office c) middle office
d) both (a) & (b) only e) All of these
13) Middle office in a treasury is responsible for:
a) Validating deal wise information from accounting point of view
b) Overall risk management and MIS
c) Both (a) & (b) d) None of these
14) Default risk in Treasury means:
a) Failure of the borrowing bank in the call money market to repay the amount on due date to the lending bank
b) Possible failure of the counterparty to the transaction to deliver I settle their part of transaction
Compiled by Sanjay Kumar Trivedy, ChiefManager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 61 | P a g e
c) Both (a) & (b) d) None of these
15) The exposure limits for counterparties are fixed on the basis of counterparty's
a) net worth b) market reputation c) track record
d) size of treasury operations e) all of these
16) The Exposure limits for counterparties are:
a) Vary in relation to period of exposure
b) Remain same irrespective of period
c) Fixed only as per net worth irrespective of period d) none of these
17) In which of the following areas trading limits are not fixed by management?
a) limits on deal size b) limits on open position c) stop loss limits
d) all of these e) None of these
18) Open Position refers to:
a) Trading positions where the buy / sell positions are not matched
b) Trading positions where the securities are bought in the open market
c) Open market operations d) none of these
19) Limit on open positions are fixed because
a) There may be loss if there is adverse movement in rates
b) There is 'carry' cost
c) Both (a) & (b) d) None of these
20) Which of the following is incorrect regarding open position in forex?
a) Position limits are prescribed currency wise as also for aggregate position in Rupees
b) There are separate limits for 'day light' and 'over night' c) None of these

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

TREASURY PRODUCTS

TREASURY PRODUCTS
1) Which of the following currency is not fully convertible?
a) USD b) EURO c) INR d) GBP
2) What are the Spot Trades?
a) It is the process of settlement where payment and receipts of funds are settled in respective currencies.
b) The settlement takes place within 2 working days from the trade date.
c) Currency may be bought or sold with settlement on the same date i.e. To day (TOD)
d) The settlement can be on the -next day he. Tomorrow (TOM)
3) Which of the following is significant about spot trade?
a) All rates quoted on the screen are for spot trade unless otherwise mentioned
b) TOD and TOM rates are generally quoted at a discount to the spot rate.
c) TOD and TOM rates are less favourable to buyer d) All these
4) What is forward contract?
a) It is a contract for purchase and sale of currency at a future date.
b) The exchange rate for a future contract is quoted on the day of contract.
c) The contract between buyer and seller is called forward contract.
d) All the above
5) Which of the following is true regarding a forward contract?
a) Treasury may have forward contracts with customers or Banks as counterparties.
b) Customers cover currency risk through forward contract.
c) Treasury may cover its customer exposure by taking reverse position in Inter-Bank market.
d) All the above
6) The features of forward rates are:
a) They are not projected on the basis of exchange rate movement in the market
b) Forward rates are decided on the basis of interest rate differential of two currencies.
c) The interest rate differential is added to the spot rate for low interest yielding currency and deducted
from the spot rate for high interest yielding currency
d) All the above
7) Which of the following are True?
a) Forward rate reflects interest rate differential only in prefect markets.
b) Perfect markets are where currency is fully convertible and highly liquid.
c) When currency is not fully convertible the demand for forward contract influences
the forward exchange rate d) All these
8) The features of a swap are:
a) A combination of spot and forward transactions is called a swap.
b) Buying in the spot market and selling same amount in forward market or vice-versa is swap.
c) Swap is mainly used for funding requirements_ d) All these
9) A Bank may have foreign exchange surpluses from the following sources:
a) Profit from overseas Branch operations
b) Forex Borrowing in foreign domestic market
c) Foreign currency and convertible rupee deposits with branches
d) All the above

10) A Treasury may have surplus forex from the following sources:
a) Surpluses net of Bank's -lending in foreign currency
b) Floating funds on account of customer transactions
c) EEFC funds maintained in current account d) All these
11) The surplus forex can be invested by a Treasury in:
a) Inter-Bank loans b) Short term investments c) Nostro Account
d) Any or all of these
12) Which of the followings are the sources for short-term investments?
a) Treasury Bills issued by foreign governments
b) Commercial paper
c) Other debt instruments issued by multi lateral institutions
d) All the above
13) What is a Nostro Account?
a) This is a current account denominated in foreign currency maintained by a Bank with the correspondent Bank in the
home country of the currency.
b) Nostro Account does not attract any interest.
c) Many correspondent Banks provide automatic investment facility for funds held
overnight which earn nominal interest. d) All these
14)What is Money Market?
a) It is place for raising and deploying short term resources where maturity does not exceed one year.
b) Inter-Bank market is divided as call money and term money.
c) Call money market is also overnight market where borrowed funds are repaid on the next working day.
d) Notice money market is where funds are placed beyond overnight and upto 14 days.
15) The participants in call/notice money market are:
a) The major players are Banks and primary dealers.
b) Non-Banking financial companies can only lend the surplus funds upto specified limit_
c) NBFC can not participate in this market d) Both (a) and (c)
16) Which of the followings are the features to Treasury Bills?
a) The T-Bills are issued by the RBI on behalf of central govt. for pre-determined amount.
b) The interest is by way of discount.
c) The price is determined through an auction process d) All these
17) The maturity period of T-Bills is:
a) 91 days b) 364 days c) (a) and (b) both d) None of these
18) Which of the followings is relevant to T-Bills?
a) Each issue of 91 days T-Bill is for Rs_ 500 crore and auction is conducted weekly onWednesday.
b) Each issue of 364 days is for Rs. 1000 crore and it is auctioned fortnightly
c) The Banks park short term funds in T-Bills d) All these
19) The Benefits of T-Bills are:
a) It is Risk free investment
b) It yields interest higher than the call money market.
c) It is possible to trade T-Bill in secondary market d) All these
20) Which of the followings is correct regarding T-Bill?
a) It is in the Electronic form and held in SGL Account maintained by Banks with RBI.
b) Depository participants can also operate through SGL Account.
c) The settlement of T-Bills is through Clearing Corporation of India d) All these
21) If a T-Bill is of 91 days is priced at 99.26, what does it signify?
a) It will yield interest at 2.99%
b) This is known as implicit yield.
c) (a) and (b) both d) None of these
22) The_ features of the commercial paper are:
a) It is an unsecured money market instrument issued in the form of promissory note.
b) The highly rated corporate Borrowers can raise short term funds through this instrument.
c) It is an additional instrument to the investing community d) All these
23) -The time limit for issuing a CP is:
a) Minimum maturity 7 days b) Maximum maturity one year
c) (a) and (b) both d) None of these
24) The requirements for issuing a commercial paper are:

a) The company issuing CP should have minimum credit rating of P2.
b) Banks can invest in CP only if it is issued in D-mat form
c) The minimum amount of CP is Rs. 5 lac d) All these
25) Who issues guidelines for issue of CP?
a) RBI
b) Market practices prescribed by FIMMDA (Fixed Income and Money Market and Derivatives Association of India) c) (a)
and (b) both d) None of these
26) A company issuing CP must satisfy the conditions:
a) Tangible Net worth of the company should not be less than Rs. 4 crore
b) The company should be enjoying working capital limit with Bank/financial institution
c) The Borrowal Account should be classified as standard Asset d) All these
27) How does Tangible Net Worth is arrived at?
a) Capital b) Free Reserves c) (a) + (b) — Intangible Assets if any
d) None of these
28) Which of the following is relevant about commercial paper?
a) It is issued for discounted amount i.e. less than face value
b) The price is quoted for face value
c) It is negotiable instrument d) All these
29) Which of the following statements regarding commercial paper is
not correct?
a) CP is a substitute to working capital
b) Interest rates are at par with PLR
c) It should be compulsory in D-mat form
d) Purchase and sale of CP is effected through the depository participants
30) Banks prefer to invest in CP through Treasury because :
a) Credit Risk is relatively low.
b) Yield on CP is higher than inter-bank money market.
c) There is no liquidity risk d) All these
31) Which of the following- Credit Rating Agencies have been authorized by RBI for
Rating?
a) ICRA b) CRISIL c) CARE and FITCH Ratings India Ltd. d) All these
32) The provisions for issue of commercial paper are:
a) Maximum period for subscription to an issue of CP is two weeks from the date of opening of issue.
b) CPs can be issued on a single date or in parts on different dates.
c) The same issue of CP should have the same date of maturity d) All these
33) The process of issue a CP involves:
a) The Bank is appointed as issuing and paying agent.
b) The Bank would assess the requirement and the extent to which the CP issue is linked with credit limit.
c) The potential investors are given a copy of IPA certificates d) All these
34) The features of certificate of Deposit are:
a) It is a debt instrument issued-by Bank against deposit of funds
b) It is a negotiable instrument
c) It bears interest rate higher than regular deposits of the Bank. d) All these
35) The requirements of certificate of Deposit are:
a) Minimum amount of deposit is Rs. 1 lac
b)_ The maturity period may range from 7 days to one year
c) It is an additional source for investment to Banks and corporates d) All these
36) What is a Reverse Repo?
a) It is a contract to buy securities and then to sell them back at an agreed future date and price.
b) It provides opportunity for short term investments of surplus funds
c) (a) and (b) both d) None of these
37) What is Repo?
a) It is an instrument of borrowing funds for a short period.
b) It involves selling a security and simultaneously agreeing to repurchase it at a future date for a slightly higher price.
c) The price difference is called interest d) All these
38) The significance of Repo is:
a) It is a tool used by RBI for open market operations.

b) It affects liquidity in the system.
c) None of these d) Both (a) and (b)
39) The commercial Banks participate in Repo transactions because of:
a) To meet short fall of CRR --
b) To meet short fall in SLR
e) The interest on Repo is lower than call market d) All these
40) Repo transactions are regulated by:
a) RBI b) Securities Contracts Regulations Act c) (a) and (b) both d) None
41) Which of the following statements is correct?
a) Repo is a short term money market instrument
b) The Repo Rate and period is announced by RBI,c) (a) and (b) both d) None of these
42) What is the Repo Rate with effect from 16th Sept 2010?
a) 5% b) 5.25% C) 5.75% d) 6% e) None of these
43) What is the Reverse Repo Rate with effect from lSept 2010?
a) 4% b) 4.25% c) 4.75% d) 5% e) None of these
44) The process of Repo transaction is:
a) A Bank may sell securities to the counterparty with an agreement to repurchase the same securities after a certain
period at pre determined price.
b) The bank gets cash in exchange of securities and pays back the cash after a certain period and get back the securities.
c) The difference between sale price and repurchase price is interest d) All these
45) The advantage to the counterparty under a Repo transaction is:
a) It earns interest on secured [ending.
b) It holds securities which serves the purpose of meeting SLR requirements.
c) The value of securities is higher by a margin to cover price Risk. d) All these
46) Which of the following statements is correct? .
a) The margin maintained on Repo securities is called hair cut as principal amount exchanged against
securities is lower than the market value of securities
b) RBI uses Repo to control liquidity
c) Banks and primary dealers sell govt. securities to RBI and avail liquidity d) All these
47) Which of the following statements is not correct?
a) RBI uses Repo Transactions under liquidity adjustment facility
b) Liquidity is not affected through lending to Banks under a Repo Transaction.
c) Absorption of liquidity is done by accepting deposits from Banks.
d) Absorption of liquidity by accepting deposits from Banks is known as Reverse Repo.
48) Which of the following statements is correct?
a) RBI has commercial repo auctions on overnight basis.
b) Repo and Reverse Repo Rates have been pre-fixed.
c) RBI has full discretion to change the frequency of auction. d) All these
49) The process of Bill Re-discounting is:
a) Treasury will discount Bill of Exchange of short term nature which are already discounted with the banks.
b) Rediscounting is done at money market rates.
c) The rediscounting rates are negotiable between the lending Bank and borrowing Bank. d) All the above
50) The advantage to the lending Bank is:
a) The surplus funds are invested at term money rate
b) Credit Risk is low as lending Bank has recourse to the discounting Bank
c) (a) and (b) both d) None of these
51) The benefits to borrowing Bank is :
a) It is able to infuse liquidity from out of existing Assets
b) Its capital adequacy ratio is improved or rediscounted bills are added to Inter-Bank liability c) (a) and (b) both
d) All these
52) Which of the followings is significant regarding government securities?
a) They are issued by Public Debt Office of RBI.
b) State govts. Issue state development Bonds.
c) Govt. securities are sold through auction conducted by RBI d) All these
53) Which of the followings is correct?
a) Interest is paid on face value of the bond at coupon rate.
b) RBI arrives at a cut off price based on bids submitted by Banks and primary dealers.


c) The price may be higher or lower than the face value d) All these
54) Price movement of Bond depends on:
a) Demand of the Bond which depends on liquidity in the system.
b) The yield on Bond is different from coupon rate.
c) (a) and (b) both d) None of these
55) If 10 years G. sec. at 7.37 per cent is priced at 104.80, what would be the yield'
a) 6.67% b) 5.42% c) 6.15% d) None of these
56) The interest rates in the economy depends on:
a) Rate of inflation b) GDP growth c) Other economic indicators
d) A combination of all these
57) The variety of Bonds may include: a) Step up coupons b) Coupons linked to inflation c) Floating rate coupons
d) Any of these
58) What is STRIPS:
a) Separately registered interest and principal securities
b) Under this process principal and interest are treated as separate zero coupon securities c) (a) and (b) both
d) None of these
59) What is corporate debt paper?
a) It includes medium and long term bonds and debentures issued by corporates and financial institutions
b) Yield on Bonds is higher than the govt. securities
c) They are called non-SLR securities where banks can invest d) All these
60) Which of the following statements is not correct?
a) Tier-2 capital Bonds issued by Banks fall under the category of corporate debt paper.
b) Bonds issued by corporates are not that liquid_
c) The bonds are issued in D-mat form.
d) Bank Treasury finds an attractive investment in corporate debt paper.
61) Which of the following statements is correct regarding corporate debt paper?
a) Higher the credit risk higher is the yield.
b) Global ratings are necessary if the debt paper is issued in International market.
c) Treasury can invest FCNR deposit funds and other forex surpluses in global debt paper. d) All the above
62) Which of the followings is correct?
a) Debentures are issued by private companies.
b) Bonds mainly issued by public sector companies.
c) Government does not provide guaranter on PSU Bonds d) All these
63) The material difference between debentures and bonds is:
a) Debentures are governed by relevant provisions of company law.
b) Debentures are transferable on registration
c) Bonds are negotiable instrument governed by Law of Contract. d) All these
64) The Bond can be : a) Zero Coupon Bond b) Floating Rate Bond c) Deep Discount Bond
d) Any of these
65) Which of the followings is not correct?
a) Debenture and Bonds can be issued with redemption in instruments over a period.
b) They can be issued with a premium or redemption.
c) There are no Bonds with put and call option
d) Bonds secured by stocks or other collateral are called collaterised obligations
66) Which of the followings is relevant regarding issue of Bonds and debentures?
a) The holders have prior legal claim over the equity and preference stock holders.
b) The Trustee appointed by issuing company protects the rights of debenture holders.
c) The Trustee can initiate legal action against the company in case of any default.
d) All of the above
67) Companies i s suing unsecured debentures and bonds have to compl y wi th the
provision of :
a) Companies Acceptance of Deposit Rules 1975 b) SEBI
c) (a) and (b) both d) None of these
68) What is a convertible Bond?
a) It is a mix of Debt and Equity.
b) Bond holder has an option to convert debt into equity on a fixed date.


c) The conversion price is pre-determined d) All these
69) The advantages of convertible Bonds are:
a) If the stock price is higher than prefixed conversion price, the investor would convert debt into Equity.
b) Company will have no debt repayment
c) The Equity of the company will be strengthened d) All these
70) Which of the followings are derivative products treated on stock exchange?
a) Index features b) Index options c) Stock futures and options d) All these
71) Provisions to invest in Equities are:
a) Banks can invest in Equities upto 20% of their net owned funds
b) Stock prices are highly volatile
c) Banks prefer low risk investments d) All these
72) The provision on Fll investments are:
a) Foreign currency funds are converted into rupee for portfolio investors.
b) Rupee funds with profits are converted into foreign currency for repatriation
c) Flls are allowed to invest in debt market d) All these
73) What is External Commercial Borrowings?
a) Indian companies can borrow on global market through Bank loan or issue of debt paper.
b) The debt can be repaid by reconversion of rupee funds into foreign currency
c) (a) and. (b) both d) None of these
74) The guidelines for investment of foreign currency funds of Banks are?
a) FCNR deposits can be invested in overseas market and for domestic lending :n foreign currency.
b) Banks are permitted to borrow/invest in overseas market 50% of Tier-I Capital.
c) (a) and (b) both d) None of these
75) What is Export Earners Foreign Currency Account?
a) Exporters are allowed to hold 100% export proceeds in a Current Account. wtth
b) No interest is paid on such deposits
c) (a) and (b) both d) None of these
76) What is Gilts?
a) Securities issued by government or Treasuries.
b) They do not have any credit Risk, c) (a) and (b) both d) None of these
77) SGL Account is:
a) Subsidiary General Ledger
b) It is maintained by public debt office of RBI
c) Banks maintain exclusively government Securities Accounts d) All of these
78) Which of the followings is correct?
a) Counterparty is the other party to a Transaction
b) Yield is internal rate of return where interest is also reinvested at original coupon rate.
c) Foreign currency deposits are denominated in foreign currency d) All of these
79) The features of FCNR deposit are:
a) They are denominated either in USD, GBP, JPY or EURO, Can- Dollar and Aus Dollar.
b) The deposits are maintained by non-resident Indians.
c) Interest on FCNR deposits is regulated by RBI d) All of these
80) Broad money or M3 consists of :
a) Currency in circulation b) Demand and time deposits with Banks
c) Deposits of Banks and other deposits with RBI d) All of these
81) Monetary policy of RBI aims at:
a) Controlling rate of inflation b) Ensuring stability of financial market
c) Regulating money supply d) All of these
82) The tools in the hands of RBI for direct control of money supply are:
a) CRR b) SLR c) (a)-and (b) both d) None of these
83) CRR is calculated on net Demand and Time liabilities which contain:
a) Demand deposits and Time deposits
b) Overseas Borrowings
c) Foreign outward remittances and other demand and time liabilities d) All of these
84) The Demand deposits include:
a) Current and Savings Deposits b) Margin Money for Letter of Credits
c) Overdue Fixed Deposits d) All these
85) Other Demand and Time Liabilities include:
ayAccrued Interest b) Credit Balance in Suspense Account
c) Any other liability d) All these
86) In which of the following categories only 3% minimum CRR is required to be
maintained?
a) Net Inter-Bank call borrowing/deposits where maturity does not exceed 14 days,
b) Credit Balance in ACU (Asian Currency Unit) Accounts
c) Demand and Time liabilities in respect of off shore Banking units d) None of these
87) Banks need not maintain CRR on :
a) Paid up capital, reserves, retained profits, refinance from apex institutions.
b) Excess provision for Income tax .
c) Claims received from DICGC/ECGC d) All these
88) Which of the followings is correct?
a) CRR need not be maintained on Inter-Bank term deposits of original maturity upto one year
b) RBI does not pay interest on CRR Balance
c) The Demand and Time l iabil i ties as on the report ing Friday of second previous
fortnight will be basis for CRR calculation d) All these
89) SLR can be maintained in the form of following Assets:
a) Cash Balance in excess of CRR requirements
b) ,Gold at current market price
c) Approved securities valued as per RBI norms d) All these
90) What is Liquidity Adjustment Facility?
a) It is the mechanism whereby RBI lends funds to Banking sector through repo instrument
b) This is used to monitor day to day market liquidity
c) This is exclusively applicable to repo and reverse repo transactions with RBI
d) All these
91) The features of Negotiated Dealing System are:
a) This is a system where securities clearing against assured payment is handed by Clearing Corporation of India.
b) Physical delivery of cheques are not required.
c) All Inter-Bank Money Market deals are done through Negotiated Dealing System
d) All the above
92) The feature of Real Time Gross Settlement System are:
a) All Inter-Bank payments are settled instantly.
b) Banks' Accounts with all the Branch offices of RBI are also integrated.
c) Since it is instant payment system, Banks need to maintain adequate funds
throughout the day.
d) All the above
93) Which of the following is correct?
a) Asian currency unit is a mechanism for payment to/from members of Asian clearing union.
b) Off shore Banking units render special Banking services only to overseas customers.
c) SWIFT is a secure worldwide financial messaging system exclusive to Banks.
d) All the above
94) What is DVP?
a) Delivery vesus Payment system where one account is debited and another account is credit at the same time.
b) In case of securities purchase funding account is debited and securities account is credited.
c) This facilitates prompt settlement of security transactions. d) All these


1 C 2 A 3 D 4 D 5 D 6 D 7 D 8 D 9 D 10 D
11 D 12 D 13 A 14 A 15 A 16 D 17 C 18 D 19 D 20 D
21 C 22 D 23 C 24 D 25 A 26 D 27 C 28 D 29 B 30 D
31 D 32 D 33 D 34 D 35 D 36 C 37 D 38 D 39 D 40 C
41 C 42 D 43 D 44 D 45 D 46 D 47 B 48 D 49 D 50 C
51 C 52 D 53 D 54 A 55 A 56 D 57 D 58 C 59 D 60 B
61 D 62 D 63 D 64 D 65 C 66 D 67 C 68 B 69 D 70 D
71 D 72 D 73 C 74 D 75 C 76 C 77 D 78 D 79 D 80 D
81 D 82 C 83 D 84 D 85 D 86 D 87 D 88 D 89 D 90 D
91 D 92 D 93 D 94 D

TREASURY MANAGEMENT CAIIB BFM

TREASURY MANAGEMENT ::

1. RBI pays interest on the cash balances in excess of which of the following to bank, of their
NDTL?
a) 2%
b) 3%
c) 5%
d) 6%
ans: b
2. while the exposure limits are generally left to the banks discretion. RBI has imposed
which ceiling of total business in a year with individual brokers.
a) 2%
b) 5%
c) 10%
d) 15%
ans : b
3. Ability of a business concern to borrow or build up assets on the basis of a given capital
is called.
a) debt service coverage ratio
b) good will
c) reputation
d) Leverage
ans: D
4. Protection of risk in a transaction usually through derevatives product is called.
a) insurance
b) swap
c) hedge
d) arbitrage
ans: c
5. For the organization point of view treasury is considered to be
a) Investment centre
b) Fund management department
c) service centre
d) commercial bank
e) Non of these

ans: c
6. A treasury transaction with a customer is known as…..
a) Marchant banking business
b) Trading business
c) investment business
d) commercial banking
e) Retail banking
Ans: a
7. Which act relating to foreign exchange has replace earlier one?
a) Foreign Exchange Management Act
b) Foreign Exchange Regulation Act
c) Both the above
d) none of these
ans :a
8. RBI has permitted banks to borrow and invest through their overseas correspondents
in foreign currency subject to which of the following ceilings.
a 25% of there Tier-I Capital
b 25% of there Tier-I Capital or USD 10 million
c 25% of there Tier-I Capital or USD 10 million whichever Is higher.
d 25% of there Tier-I Capital or USD 10 million whichever Is lower
ans-: c
9. The treasury is run by a few specialist staff engaged in high value transaction per trn size
generally not being below:
a Rs 10 million
b Rs 20 “
c Rs 50 “
d None of these
Ans : c
10 Treasury has open position which is also known as
a Trading position
b Open position
c Proprietary position
d) a & C both
e) a
ans : d

11. Security dealars deals with of the following market.
A primary mkt
B secondary mkt
C Open mkt
D OTC
E all of these
Ans: b
12. What is the minimum marketable investment in treasury…….
A Rs 5 crore
B Rs 10 “
C Rs 20 “
D Rs 50 “
E non of these
Ans ; A
13. which of the following is not a free currency in the foreign exchange market ?
A USD
B Rupee
C EUR
D All of these
Ans : b
14. which of following statement is not correct relating to TOD and TOM
A Rates are generally quoted at discount to the spot rate
B Rates are less favorable to the buyer of the currency
C Rates are generally quated at a premium to the spot rate
D Non of these
Ans : c
15 The interest rate differential is added to the spote rate of
A Low interest yielding currency
B high interest yielding currency
C Both
D non of these
Ans A
16. Buying of USD (with Rupees) in the market and selling same in forward market or vice
versa is called
A spot trn

B Forward tsn
C swap tsn
D convertible tsn
Ans: c
17 Call money refers to placement of fund……..
A same day
B overnight
C next day
D Two days
E Non of these
Ans: b
18. Notice money refers to placement of funds for period not exceeding……
A over night
B two days
C 7 days
D 10 days
E 14 days
Ans : e
19. Term money refers to placement of funds for period not exceeding…
A 01 yr
B 02 yr
C 03 yr
D 05 yr
 Ans ;A
20. Treasury Bills are issued by whom
A RBI
B State PSUs
C GOI
D IMF
E IRDA
Ans :C
21 treasury bill is issued for 91 days to 364 days by GOI 91 days t bill is auction on
weekly basis for amount Rs………….crore.
A 100

B 200
C 500
D 1000
Ans : c read qtn carefully total three qtns aare there..
22. 364 t bill is auction on fourthnightly basis for amt of RS ……….crore by GOI
A 500
B 1000
C 1500
D 2000
Ans : c
23. A commercial paper carried credit risk , issued for period of 14 days to 01 yr for
minimum amt of 05 lakh and face value of Rs 100 only by………………….and it
should be in D mat form. ( Read QTN care fully)
A RBI
B corporate
C commercial bank
D central govt
Ans : b
24. ECB( external commercial borrowings) indian companies can borrow ................without
approval of RBI
a. usd 500 mn up to minimum period of 5 yrs
b. usd 20 mn upto minimum period of 3 yrs
c. both a and b are correct
d. without RBI approval they cannot borrow at all
ans C
.page no 333 bfm
25individuals are now permitted to remit overseas freely without rbi approval upto
a. 100000 usd/year
b. 200000 usd/yr
c. 300000 usd/yr
d. not possible without rbi approval
 ans : b page 334 b pe
26. certificate of deposit is a negotiable debt instrument has maturity period of 07 to 1 yr
and minimum amt is Rs 01 lakh basically issued by……….
A RBI
B Banks
C Treasury
D Corporate
E None

Ans : b
27 the difference between buying and selling rate is called
a) spread
b) profit
c) a only
d) a& b
Ans:d
28 placement of funds for overnight is called
a) notice money
b) call money
c) term money
d) all the above
Ans : b
29. Treasury discount bills of exchange, of short term nature with a tenure of
A 1 to 3 month
B 3 to 6 m
C 6 to 9 m
D 9 to 12 m
Ans : b
30. govt security are issued by..
A central finance ministry
B ministry of commerce
C central govt
D RBI
Ans : d
31. The basis point value is associated with
A risk pricing
B risk measurement
C risk mitigation
D risk control
 Ans: b
32. Deventures are governed by
A Law of contract
B Company Law
C Negotiable instrument
D non of these
Ans: b
33. all exposure limit are reviewed ….
A once in a qtr
B once in half yr
C once in a yr
D no limit
Ans: c

34 interest cost of funds locked in a trading position is called
A swap
B pre-settlement
C carry
D speculation
E options
Ans:c
35. A situation where the depoiter of abank lose confidence in the bank and withdraw therir
balances immediately, is called
A liquidation of the bank
B falilue of bank
C run on the bank
D out of the money
Ans: c
36. The capacity of abank oa business organization to absorb losses on account of market
risk.
 A risk absorption capacity
B risk aversion capacity
C risk taking capacity
D risk appetite
Ans:d

Risk management CAIIB BFM

Risk management::

1. Risk is defined as uncertainties resulting in:
a) Adverse outcome, adverse in relation to planned objectives or expectations
b) Adverse variation of profitability or outright losses (financial risk)
c) Both (a) & (b) d) None of these
2. Financial Risk is defined as
a) Uncertainties in cash flow b) Variations in net cash flow
c) Uncertainties resulting in outright losses
d) Uncertainties resulting in adverse variation of profitability e) Both (c) & (d)
3. Uncertainties in cash inflows and / or outflows create uncertainties in:
a) net cash flow b) profits c) Both (a) & (b) d) none of these
4_ Which of the following is not correct?
a) Lower risk implies lower variability in net cash flow
b) Higher variability in net cash flow may result in higher profits or higher losses
c) Higher risk would imply higher upside and downside potential
d) Zero risk would imply no variation in net cash flow e) None of these
5. Return on zero risk investment would be ----as compared to other opportunities
available in the market ; a) high ,b) low c) medium d) higher or low depending upon type of investment Strategic risk is a type
of : a) exchange risk b) liquidity risk c) interest rate risk d) operational risk e) none of these
6. Investment in RBI bonds at 6.5% interest rate with a maturity of 5 years is investment.
a) zero risk b) lower risk c) medium risk d) high risk
7. The capital requirement of a business would be lower when there is :
a) lower variation in net cash flow b) lower risk
c) lower possibility of loss d) all of these e) none of these
8. The key driver in managing a business is seeking enhancement in
a) Return on investment b) Risk Management capability
c) risk adjusted return on capital d) all of these e) None of these
9. Risk adjusted return on investment is:
a) Netting risk in a business or investment against the return from this
b) Managing risk on investments
c) Managing-return on investment through risk management
d) Adjusting return on investment against the risk

11.An investment will be more preferred and higher will be the reward to investors when:
a) RAROC is higher b) RAROC is lower c) RAROC is one d) none of these
12.The banking book is generally not exposed to : a) liquidity risk b) interest rate risk c) credit risk
d) operational risk e) None of these
13.Which of the following is / are characteristics of the assets held in Trading Book?
a) They are normally not held until maturity
b) They are normally held until maturity and accrual system of accounting is applied
c) Mark to market system is followed d) Both (a) & (c) e) Both (b) & (c)
14.Trading book is mainly exposed to
a) Market Risk b) Market Liquidity Risk c) Credit Risk
d) Operational Risk e) All of these
15.The transactions relating to guarantees, letters of credit, committed or back up credit lines form part of a) Banking Book b) Trading
Book, c) Off Balance Sheet Exposures d) All of these
16.The liquidity risk of banks arises from :
a) Funding of long term assets by short term liabilities
b) Funding of short term assets by long term liabilities
c) Funding of long term liabilities by short term assets
d) None of these
17. Funding liquidity risk is defined as:
a) Excess of liabilities over assets
b) Excess of long term liabilities over long term assets
c) Excess of short term liabilities over short term assets
d) Inability to obtain funds to meet cash flow obligations
18. Liquidity risk in banks manifest in different dimensions. Which of the
a) Funding risk arises from the need to replace net outflows withdrawal / non renewal of deposits
b) Time risk arises from the need to compensate for non receipt funds e.g. NPA
c) Call risk arises due to crystallization of contingent liabilities
d) Both (a) & (b) e) None of these
19.Where an asset maturing in two years at a fixed by a liability
risk will be: a) Basis risk b) Yield curve riskc) Gap risk d) embedded option Risk
20.The risk of adverse variance of the mark to market value of change in market prices of interest rate instruments, equities, is called: a)
Price Risk b) Market Risk c) Translation Risk d) Both a & b
21.ln the financial market bond prices and yields are
a) inversely related b) directly related ,
c) inversely or directly related depending on type of bond d) none of these
22.When a bank is unable to conclude a large transaction in a particular instrument near the current market price, it is called as a)
Market risk b) Market Liquidity risk c) Default risk d) counter party risk
23.Potential of a bank borrower or counterparty to fail to meet its obligations according to agreed terms is called: a) credit risk b)
default risk c) market liquidity d) market risk e) either (a) or (b)
24.The risk related to non performance of the trading partners due to counter party's refusal
and or inability to perform is called ------risk : a) Liquidity, b) Operational , c) Counter Party , d) None
25. Country risk is an example of
a) Market risk b) Credit risk c) Operational risk d) Liquidity risk
The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events is called as
risk
a) legal b) compliance c) Fraud d) Operational
26. Which of the following is not a operational risk?
a) Compliance risk b) Transaction risk c) Legal Risk
d) Counter party risk e) System risk
27. Strategic Risk and Reputation Risk fall in the category of
a) Market risk b) credit risk c) Operational risk d) none of these
Risk arising from fraud, failed business processes and inability to maintain business continuity : a) Transaction risk b)
compliance risk c) credit risk d) none of these
28. Risk of legal or regulatory sanction, financial loss or reputation loss that a bank may suffer as a result of its failure
to comply with any or all of the applicable laws, regulations etc. is called as:
a) Transaction risk b) Compliance risk, c) legal risk d) Systems risk
Compiled by Sanjay Kumar Trivedy, ChiefManager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 52 | P a g e
31.Risk arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes is
called:
a) Reputation risk b) Strategic risk c) Operational risk d) Management risk
32. Reputation Risk which arises from negative public opinion may result in:
a) exposing an institution to litigation b) financial loss
c) decline in customer base d) all of these e) none of these
33.Risk associated with a portfolio is always less than the weighted average of risks of individual items in the portfolio due to
a) Diversification of risks
b) The fact that all accounts in a portfolio will not behave in unidirectional manner
c) The fact that risks in all the accounts in a portfolio will not materialize simultaneously,
d) Both (a) & (b) only e) All of these
34.Aggregated risk of the organizations as a whole is called:
a) Transaction risk b) Portfolio risk c) Total risk d) None of these

ANSWER ::
1 A 2 E 3 C 4 E 5 B 6 E 7 A 8 D 9 C
11 A 12 E 13 D 14 E 15 C 16 A 17 D 18 E 19 C 20 D
21 A 22 B 23 E 24 C 25 B 26 D 27 D 28 D 29 A 30 B
31 B 32 D 33 E 34 B

Off-balance sheet items

Off-balance sheet items
Off-balance sheet items have been bifurcated as follows:
(iii) Non-market related off-balance sheet items
(iv) Market related off-balance sheet items
There is two-step process for the purpose of calculating risk weighted assets in respect of
off-balance sheet items:
BI. The notional amount of the transaction is converted into a credit equivalent factor by
multiplying the amount by the specified Credit Conversion Factor (CCF)
The resulting credit equivalent amount is then multiplied by the risk weight
applicable to the counter party or to the purpose for which the bank has extended
finance or the type of asset whichever is higher. Where the off-balance sheet item is secured by eligible collateral or guarantee, the credit
risk mitigation guidelines will be applied. Non-market related off-balance sheet items:
Off balance sheet items like direct credit substitutes, trade and performance related
contingent items and commitments with certain draw downs are classified under Non- market related off-balance sheet items. The credit equivalent amount is determined by
multiplying the contracted amount of that particular transaction by the relevant CCF. Non-market related off-balance sheet items also include undrawn or partially
undrawn fund based and non-fund based facilities, which are not unconditionally
cancellable. The amount of undrawn commitment is to be included in calculating the off balance sheet items. Non-market related exposure is the maximum unused portion of the
commitment that could be drawn during the remaining period of maturity. In case of term
loan with respect to large project to be drawn in stages, undrawn portion shall be calculated
with respect of the running stage only. RBI guidelines on CCF (Credit Conversion Factor)
Direct Credit Substitutes CCF
General Guarantees (including Standby LCs), 100%
Acceptances
Transaction related contingent items (Performance 50%
bonds, Bid bonds, Warranties, Indemnities, Standby
LC relating to particular transaction
Short Term LC (Documentary) for Issuing bank as well 20%
as confirming bank

Principles for Sound Liquidity Risk Management:

 Principles for Sound Liquidity Risk Management:

After the global financial crisis, in recognition of the need for banks to improve their liquidity risk
management, the Basel Committee on Banking Supervision (BCBS) published “Principles for Sound
Liquidity Risk Management and Supervision” in September 2008. The broad principles for sound liquidity
risk management by banks as envisaged by BCBS are as under:
Fundamental principle for the management and supervision of liquidity risk
Principle 1 A bank is responsible for the sound management of liquidity risk. A bank should
establish a robust liquidity risk management framework that ensures it maintains
sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to
withstand a range of stress events, including those involving the loss or impairment of
both unsecured and secured funding sources. Supervisors should assess the
adequacy of both a bank’s liquidity risk management framework and its liquidity
position and should take prompt action if a bank is deficient in either area in order to
protect depositors and to limit potential damage to the financial system. Governance of liquidity risk management
Principle 2 A bank should clearly articulate a liquidity risk tolerance that is appropriate for its
business strategy and its role in the financial system. Principle 3 Senior management should develop a strategy, policies and practices to manage
liquidity risk in accordance with the risk tolerance and to ensure that the bank
maintains sufficient liquidity. Senior management should continuously review
information on the bank’s liquidity developments and report to the board of directors
on a regular basis. A bank’s board of directors should review and approve the
strategy, policies and practices related to the management of liquidity at least annually
and ensure that senior management manages liquidity risk effectively. Principle 4 A bank should incorporate liquidity costs, benefits and risks in the internal pricing, performance measurement and new product approval process for all significant
business activities (both on- and off-balance sheet), thereby aligning the risk-taking
incentives of individual business lines with the liquidity risk exposures their activities
create for the bank as a whole. Measurement and management of liquidity risk
Principle 5 A bank should have a sound process for identifying, measuring, monitoring and
controlling liquidity risk. This process should include a robust framework for
comprehensively projecting cash flows arising from assets, liabilities and off-balance
sheet items over an appropriate set of time horizons. Principle 6 A bank should actively monitor and control liquidity risk exposures and funding needs
within and across legal entities, business lines and currencies, taking into account
legal, regulatory and operational limitations to the transferability of liquidity. Principle 7 A bank should establish a funding strategy that provides effective diversification in the
sources and tenor of funding. It should maintain an ongoing presence in its chosen
funding markets and strong relationships with funds providers to promote effective
diversification of funding sources. A bank should regularly gauge its capacity to raise
funds quickly from each source. It should identify the main factors that affect its ability
to raise funds and monitor those factors closely to ensure that estimates of fund
raising capacity remain valid. Principle 8 A bank should actively manage its intraday liquidity positions and risks to meet
payment and settlement obligations on a timely basis under both normal and stressed
conditions and thus contribute to the smooth functioning of payment and settlement
systems. Principle 9 A bank should actively manage its collateral positions, differentiating between
encumbered and unencumbered assets. A bank should monitor the legal entity and
physical location where collateral is held and how it may be mobilised in a timely
manner. Principle 10 A bank should conduct stress tests on a regular basis for a variety of short-term and
protracted institution-specific and market-wide stress scenarios (individually and in
combination) to identify sources of potential liquidity strain and to ensure that current
exposures remain in accordance with a bank’s established liquidity risk tolerance. A
bank should use stress test outcomes to adjust its liquidity risk management

strategies, policies, and positions and to develop effective contingency plans. Principle 11 A bank should have a formal contingency funding plan (CFP) that clearly sets out the
strategies for addressing liquidity shortfalls in emergency situations. A CFP should
outline policies to manage a range of stress environments, establish clear lines of
responsibility, include clear invocation and escalation procedures and be regularly
tested and updated to ensure that it is operationally robust. Principle 12 A bank should maintain a cushion of unencumbered, high quality liquid assets to be
held as insurance against a range of liquidity stress scenarios, including those that
involve the loss or impairment of unsecured and typically available secured funding
sources. There should be no legal, regulatory or operational impediment to using
these assets to obtain funding. Public disclosure
Principle 13 A bank should publicly disclose information on a regular basis that enables market
participants to make an informed judgment about the soundness of its liquidity risk
management framework and liquidity position. Thus, a sound liquidity risk management system would envisage that:
i) A bank should establish a robust liquidity risk management framework.
ii) The Board of Directors (BoD) of a bank should be responsible for sound management of liquidity risk
and should clearly articulate a liquidity risk tolerance appropriate for its business strategy and its role in
the financial system.
iii) The BoD should develop strategy, policies and practices to manage liquidity risk in accordance with
the risk tolerance and ensure that the bank maintains sufficient liquidity. The BoD should review the
strategy, policies and practices at least annually.
iv) Top management/ALCO should continuously review information on bank’s liquidity developments and
report to the BoD on a regular basis. v) A bank should have a sound process for identifying, measuring, monitoring and controlling liquidity risk,
including a robust framework for comprehensively projecting cash flows arising from assets, liabilities and
off-balance sheet items over an appropriate time horizon. vi) A bank’s liquidity management process should be sufficient to meet its funding needs and cover both
expected and unexpected deviations from normal operations. vii) A bank should incorporate liquidity costs, benefits and risks in internal pricing, performance
measurement and new product approval process for all significant business activities. viii) A bank should actively monitor and manage liquidity risk exposure and funding needs within and
across legal entities, business lines and currencies, taking into account legal, regulatory and operational
limitations to transferability of liquidity.
ix) A bank should establish a funding strategy that provides effective diversification in the source and
tenor of funding, and maintain ongoing presence in its chosen funding markets and counterparties, and
address inhibiting factors in this regard. x) Senior management should ensure that market access is being actively managed, monitored, and
tested by the appropriate staff. xi) A bank should identify alternate sources of funding that strengthen its capacity to withstand a variety of
severe bank specific and market-wide liquidity shocks. xii) A bank should actively manage its intra-day liquidity positions and risks. xiii) A bank should actively manage its collateral positions. xiv) A bank should conduct stress tests on a regular basis for short-term and protracted institution-specific
and market-wide stress scenarios and use stress test outcomes to adjust its liquidity risk management
strategies, policies and position and develop effective contingency plans. xv) Senior management of banks should monitor for potential liquidity stress events by using early
warning indicators and event triggers. Early warning signals may include, but are not limited to, negative
publicity concerning an asset class owned by the bank, increased potential for deterioration in the bank’s
financial condition, widening debt or credit default swap spreads, and increased concerns over the
funding of off- balance sheet items. xvi) To mitigate the potential for reputation contagion, a bank should have a system of effective
communication with counterparties, credit rating agencies, and other stakeholders when liquidity
problems arise. xvii) A bank should have a formal contingency funding plan (CFP) that clearly sets out the strategies for
addressing liquidity shortfalls in emergency situations. A CFP should delineate policies to manage a
range of stress environments, establish clear lines of responsibility, and articulate clear implementation
and escalation procedures. xviii) A bank should maintain a cushion of unencumbered, high quality liquid assets to be held as
insurance against a range of liquidity stress scenarios. xix) A bank should publicly disclose its liquidity information on a regular basis that enables market
participants to make an informed judgment about the soundness of its liquidity risk management
framework and liquidity position. 5. Governance of Liquidity Risk Management:
The Reserve Bank had issued guidelines on Asset Liability Management (ALM) system, covering inter
alia liquidity risk management system, in February 1999 and October 2007. Successful implementation of
any risk management process has to emanate from the top management in the bank with the
demonstration of its strong commitment to integrate basic operations and strategic decision making with
risk management. Ideally, the organisational set up for liquidity risk management should be as under:
A. The Board of Directors (BoD):
The BoD should have the overall responsibility for management of liquidity risk. The Board should decide
the strategy, policies and procedures of the bank to manage liquidity risk in accordance with the liquidity
risk tolerance/limits as detailed in paragraph 14. The risk tolerance should be clearly understood at all
levels of management. The Board should also ensure that it understands the nature of the liquidity risk of
the bank including liquidity risk profile of all branches, subsidiaries and associates (both domestic and
overseas), periodically reviews information necessary to maintain this understanding, establishes
executive-level lines of authority and responsibility for managing the bank’s liquidity risk, enforces
management’s duties to identify, measure, monitor, and manage liquidity risk and formulates/reviews the
contingent funding plan. B. The Risk Management Committee:
The Risk Management Committee, which reports to the Board, consisting of Chief Executive Officer
(CEO)/Chairman and Managing Director (CMD) and heads of credit, market and operational risk
management committee should be responsible for evaluating the overall risks faced by the bank including
liquidity risk. The potential interaction of liquidity risk with other risks should also be included in the risks
addressed by the risk management committee. C. The Asset-Liability Management Committee (ALCO):
The Asset-Liability Management Committee (ALCO) consisting of the bank’s top management should be
responsible for ensuring adherence to the risk tolerance/limits set by the Board as well as implementing
the liquidity risk management strategy of the bank in line with bank’s decided risk management objectives
and risk tolerance. D. The Asset Liability Management (ALM) Support Group:
The ALM Support Group consisting of operating staff should be responsible for analysing, monitoring and
reporting the liquidity risk profile to the ALCO. The group should also prepare forecasts (simulations)
showing the effect of various possible changes in market conditions on the bank’s liquidity position and
recommend action needed to be taken to maintain the liquidity position/adhere to bank’s internal limits. 6. Liquidity Risk Management Policy, Strategies and Practices:
The first step towards liquidity management is to put in place an effective liquidity risk management policy, which inter alia, should spell out the liquidity risk tolerance, funding strategies, prudential limits, system for
measuring, assessing and reporting / reviewing liquidity, framework for stress testing, liquidity planning
under alternative scenarios/formal contingent funding plan, nature and frequency of management
reporting, periodical review of assumptions used in liquidity projection, etc. The policy should also
address liquidity separately for individual currencies, legal entities like subsidiaries, joint ventures and
associates, and business lines, when appropriate and material, and should place limits on transfer of
liquidity keeping in view the regulatory, legal and operational constraints. The BoD or its delegated committee of board members should oversee the establishment and approval of
policies, strategies and procedures to manage liquidity risk, and review them at least annually. 6.1 Liquidity Risk Tolerance:

Banks should have an explicit liquidity risk tolerance set by the Board of Directors. The risk tolerance
should define the level of liquidity risk that the bank is willing to assume, and should reflect the bank’s
financial condition and funding capacity. The tolerance should ensure that the bank manages its liquidity
in normal times in such a way that it is able to withstand a prolonged period of, both institution specific
and market wide stress events. The risk tolerance articulation by a bank should be explicit, comprehensive and appropriate as per its complexity, business mix, liquidity risk profile and systemic
significance. They may also be subject to sensitivity analysis. The risk tolerance could be specified by
way of fixing the tolerance levels for various maturities under flow approach depending upon the bank’s
liquidity risk profile as also for various ratios under stock approach. Risk tolerance may also be expressed
in terms of minimum survival horizons (without Central Bank or Government intervention) under a range
of severe but plausible stress scenarios, chosen to reflect the particular vulnerabilities of the bank. The
key assumptions may be subject to a periodic review by the Board. 6.2 Strategy for Managing Liquidity Risk:
The strategy for managing liquidity risk should be appropriate for the nature, scale and complexity of a
bank’s activities. In formulating the strategy, banks/banking groups should take into consideration its legal
structures, key business lines, the breadth and diversity of markets, products, jurisdictions in which they
operate and home and host country regulatory requirements, etc. Strategies should identify primary
sources of funding for meeting daily operating cash outflows, as well as expected and unexpected cash
flow fluctuations. 7. Management of Liquidity Risk:
A bank should have a sound process for identifying, measuring, monitoring and mitigating liquidity risk as
enumerated below:
8.1 Identification:
A bank should define and identify the liquidity risk to which it is exposed for each major on and off- balance sheet position, including the effect of embedded options and other contingent exposures that
may affect the bank’s sources and uses of funds and for all currencies in which a bank is active. 8.2 Measurement of Liquidity Risk:
There are two simple ways of measuring liquidity; one is the stock approach and the other, flow approach. The stock approach is the first step in evaluating liquidity. Under this method, certain ratios, like liquid
assets to short term total liabilities, purchased funds to total assets, core deposits to total assets, loan to
deposit ratio, etc. are calculated and compared to the benchmarks that a bank has set for itself. While the
stock approach helps up in looking at liquidity from one angle, it does not reveal the intrinsic liquidity
profile of a bank. The flow approach, on the other hand, forecasts liquidity at different points of time. It looks at the liquidity
requirements of today, tomorrow, the day thereafter, in the next seven to 14 days and so on. The maturity
ladder, thus, constructed helps in tracking the cash flow mismatches over a series of specified time
periods. The liquidity controls, apart from being fixed maturity-bucket wise, should also encompass
maximum cumulative mismatches across the various time bands. 8. Ratios in respect of Liquidity Risk Management:
Certain critical ratios in respect of liquidity risk management and their significance for banks are given
below. Banks may monitor these ratios by putting in place an internally defined limit approved by the
Board for these ratios. The industry averages for these ratios are given for information of banks. They
may fix their own limits, based on their liquidity risk management capabilities, experience and profile. The
stock ratios are meant for monitoring the liquidity risk at the solo bank level. Banks may also apply these
ratios for monitoring liquidity risk in major currencies, viz. US Dollar, Pound Sterling, Euro and Japanese
Yen at the solo bank level.

No. Average
(in %)
1. (Volatile liabilities – Temporary Assets)
/(Earning Assets – Temporary Assets)
Measures the extent to which volatile money supports
bank’s basic earning assets. Since the numerator
represents short-term, interest sensitive funds, a high
and positive number implies some risk of illiquidity. 40
2. Core deposits/Total Assets Measures the extent to which assets are funded
through stable deposit base. 50
3. (Loans + mandatory SLR +
mandatory CRR + Fixed
Assets)/Total Assets
Loans including mandatory cash reserves and
statutory liquidity investments are least liquid and
hence a high ratio signifies the degree of ‘illiquidity’ embedded in the balance sheet. 80
4. (Loans + mandatory SLR +
mandatory CRR + Fixed
Assets) / Core Deposits
Measure the extent to which illiquid assets are
financed out of core deposits. 150
5. Temporary Assets/Total
Assets
Measures the extent of available liquid assets. A
higher ratio could impinge on the asset utilisation of
banking system in terms of opportunity cost of holding
liquidity. 40
6. Temporary Assets/ Volatile
Liabilities
Measures the cover of liquid investments relative to
volatile liabilities. A ratio of less than 1 indicates the
possibility of a liquidity problem. 60
7. Volatile Liabilities/Total
Assets
Measures the extent to which volatile liabilities fund the
balance sheet. 60
Volatile Liabilities: (Deposits + borrowings and bills payable up to 1 year). Letters of credit – full
outstanding. Component-wise CCF of other contingent credit and commitments. Swap funds (buy/ sell)
up to one year. Current deposits (CA) and Savings deposits (SA) i.e. (CASA) deposits reported by the
banks as payable within one year (as reported in structural liquidity statement) are included under volatile
liabilities. Borrowings include from RBI, call, other institutions and refinance. Temporary assets =Cash + Excess CRR balances with RBI + Balances with banks + Bills
purchased/discounted up to 1 year + Investments up to one year + Swap funds (sell/ buy) up to one year. Earning Assets = Total assets – (Fixed assets + Balances in current accounts with other banks + Other
assets excluding leasing + Intangible assets)
Core deposits = All deposits (including CASA) above 1 year (as reported in structural liquidity
statement)+ net worth
The above stock ratios are only illustrative and banks could also use other measures / ratios. For
example to identify unstable liabilities and liquid asset coverage ratios banks may include ratios of
wholesale funding to total liabilities, potentially volatile retail (e.g. high cost or out of market) deposits to
total deposits, and other liability dependency measures, such as short term borrowings

Risk management ::

Risk management ::

Risk management is the process of identifying, assessing and controlling threats to an organization's capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters. IT security threats and data-related risks, and the risk management strategies to alleviate them, have become a top priority for digitized companies. As a result, a risk management plan increasingly includes companies' processes for identifying and controlling threats to its digital assets, including proprietary corporate data, a customer's personally identifiable information and intellectual property

Risk management standards

Since the early 2000s, several industry and government bodies have expanded regulatory compliance rules that scrutinize companies' risk management plans, policies and procedures. In an increasing number of industries, boards of directors are required to review and report on the adequacy of enterprise risk management processes. As a result, risk analysis, internal audits and other means of risk assessment have become major components of business strategy.

Risk management standards have been developed by several organizations, including the National Institute of Standards and Technology and the ISO. These standards are designed to help organizations identify specific threats, assess unique vulnerabilities to determine their risk, identify ways to reduce these risks and then implement risk reduction efforts according to organizational strategy.

The ISO 31000 principles, for example, provide frameworks for risk management process improvements that can be used by companies, regardless of the organization's size or target sector. The ISO 31000 is designed to "increase the likelihood of achieving objectives, improve the identification of opportunities and threats, and effectively allocate and use resources for risk treatment," according to the ISO website. Although ISO 31000 cannot be used for certification purposes, it can help provide guidance for internal or external risk audit, and it allows organizations to compare their risk management practices with the internationally recognized benchmarks.

The ISO recommended the following target areas, or principles, should be part of the overall risk management process:

The process should create value for the organization.

It should be an integral part of the overall organizational process.

It should factor into the company's overall decision-making process.

It must explicitly address any uncertainty.

It should be systematic and structured.

It should be based on the best available information.

It should be tailored to the project.

It must take into account human factors, including potential errors.

It should be transparent and all-inclusive.

It should be adaptable to change.

It should be continuously monitored and improved upon.

The ISO standards and others like it have been developed worldwide to help organizations systematically implement risk management best practices. The ultimate goal for these standards is to establish common frameworks and processes to effectively implement risk management strategies.

These standards are often recognized by international regulatory bodies, or by target industry groups. They are also regularly supplemented and updated to reflect rapidly changing sources of business risk. Although following these standards is usually voluntary, adherence may be required by industry regulators or through business contracts.

Risk management strategies and processes

All risk management plans follow the same steps that combine to make up the overall risk management process:

Risk identification. The company identifies and defines potential risks that may negatively influence a specific company process or project.

Risk analysis. Once specific types of risk are identified, the company then determines the odds of it occurring, as well as its consequences. The goal of the analysis is to further understand each specific instance of risk, and how it could influence the company's projects and objectives.

Risk assessment and evaluation. The risk is then further evaluated after determining the risk's overall likelihood of occurrence combined with its overall consequence. The company can then make decisions on whether the risk is acceptable and whether the company is willing to take it on based on its risk appetite.

Risk mitigation. During this step, companies assess their highest-ranked risks and develop a plan to alleviate them using specific risk controls. These plans include risk mitigation processes, risk prevention tactics and contingency plans in the event the risk comes to fruition.

Risk monitoring. Part of the mitigation plan includes following up on both the risks and the overall plan to continuously monitor and track new and existing risks. The overall risk management process should also be reviewed and updated accordingly.

Risk management approaches

After the company's specific risks are identified and the risk management process has been implemented, there are several different strategies companies can take in regard to different types of risk:

Risk avoidance. While the complete elimination of all risk is rarely possible, a risk avoidance strategy is designed to deflect as many threats as possible in order to avoid the costly and disruptive consequences of a damaging event.

Risk reduction. Companies are sometimes able to reduce the amount of effect certain risks can have on company processes. This is achieved by adjusting certain aspects of an overall project plan or company process, or by reducing its scope.

Risk sharing. Sometimes, the consequences of a risk is shared, or distributed among several of the project's participants or business departments. The risk could also be shared with a third party, such as a vendor or business partner.

Risk retaining. Sometimes, companies decide a risk is worth it from a business standpoint, and decide to retain the risk and deal with any potential fallout. Companies will often retain a certain level of risk a project's anticipated profit is greater than the costs of its potential risk.

https://iibfadda.blogspot.com/2018/09/risk-management.html?m=1

Forex Facilities for Residents (Individuals):::::

Forex Facilities for Residents
(Individuals):::::

Introduction

The legal framework for administration of exchange control in India is provided by the Foreign Exchange Management Act, 1999. Under the Act, freedom has been granted for buying and selling of foreign exchange for undertaking current account transactions. However, the Central Government has been vested with powers in consultation with Reserve Bank to impose reasonable restrictions on current account transactions. Accordingly, the Government has issued Notifications GSR.381(E) dated May 3, 2000, and S.O. 301(E) dated March 30, 2001, imposing certain restrictions on current account transactions in public interest.

These details are available on the Bank’s website besides with the authorised dealers and regional offices of the Foreign Exchange Department. Our experience so far has been that the residents like to get information on several matters relating to various current account transactions and other incidental issues. This pamphlet attempts to answer to all such questions in simple language. While preparing replies to questions, special care has been taken to ensure that the replies are drafted in simple words and reference to technical details are avoided.

 The Foreign Exchange Management Act,1999 (FEMA), has come into force with effect from June 1, 2000. With introduction of the new Act (in place of FERA), certain structural changes have been introduced and

Current Affairs on 05.12.2018

Today's Headlines from www:

*Economic Times*

📝 China keen to import more from India to bridge high trade deficit

📝 A $11 trillion opportunity set to attract investors to EMs in 2019

📝 SBI raises Rs 2,000 crore via NSE's electronic bidding platform

📝 S&P cuts Tata Motors credit rating on JLR weakness

📝 Residential real estate demand may rise in medium-term: Report

📝 Amway India to invest up to Rs 30 crore to ramp up its digital platform

📝 Government notifies dual fuel usage for agriculture, construction vehicles

*Business Standard*

📝 Soon, filing income tax returns may get easier with pre-filled forms

📝 IndiGo set to become the first Indian carrier to have 200 aircraft

📝 Kesoram, the flagship of B K Birla Group, to hive off tyre division

📝 Amazon invests fresh funds of Rs 22 billion in India marketplace

📝 I-T returns filed in April-Nov up 50% y-o-y owing to demonetisation: CBDT

📝 Apple resorts to promo deals, trade-ins to boost declining iPhone sales

📝 NREGA spend to exceed budgeted amount by Rs 50 billion this year: Jaitley

📝 Centre to move policy to promote hydro power with units of 10 Gw capacity

*Financial Express*

📝 India to allow business visa extension for up to 15 years

📝 Fusion Microfinance raises Rs 520-cr funding from Warburg Pincus, others

📝 PNB-led consortium seeks bids for Oliver Engineering

📝 RBI to inject Rs 10,000 cr through open market operations on Thursday

📝 Number of patents granted by India shot up by 50% in 2017, reports UN

📝 App-based US copter rides firm Blade to launch India service in March

📝 Telecom outlook for next year bleak: Icra

📝 Warburg Pincus forays into Indian microfinance space

*Mint*

📝 Tata Motors plans large-scale overhaul of its sales network

📝 Sebi panel bats for overseas listing of firms

📝 Xiaomi eyes India’s rural market to fuel growth

📝 I Squared Capital to set up renewable energy platform

📝 Airtel reworks broadband strategy to take on Jio GigaFiber

📝 Concerns on credit supply to small businesses a myth: SBI report

📝 Oil gives up ground as Saudis say OPEC+ cut still up in the air.

BFM Treasury Management

Points BFM / Treasury Management ★☆★

1. Swap generally used for interest arbitrage when one currency is not fully convertible.

2.TOD & TOM rates are generally quoted at discount to the rate of spot rate.

3. CBLO is a money market instrument launched by CCIL. It is generally a repo instrument.

4. The money in circulation is calculated by Broad money or M3.

5. C → 1 days

     N→ <= 14 days

     T → >14 days but < 1 yr

Here C is call money, N is Notice money & T is Term money

6. LAF is used measure to day to day liquidity in the market.

7. Treasury is proned with market risk.

8. CBLO→ Collatrised Borrowing Lending obligation

9. VaR measure can be used to assess the currency risk , interest risk and price risk.

10. Yield and price of bond move inversely.

11. The option is said to be ITM if strike price is less than the forward rate in case of a call option or if strike price is greater in a ut option.

12. Money market is measured by VaR and duration.

13. IRS( Interest rate swap ) is OTC instrument issued by banks.

14. OTC ( over the counter ) refers to the derivative products sold by banks to meet specific requirements of clients.

15. RBI has permitted banks to borrow and invest through their overseas correspondent in forigen currency subject to a ceiling of 50% of Tier I capital or USD 10 millions.

16. Spot and forward transaction are the primary product of forex market.

17. Treasury is also responsible for balance sheet management.

18. NDS(Negotiated dealing system is an electronic platform for faciliating dealing in gov. Sec.

19. LAF refers to RBI lending funds to banking thtough repo rate.

20. VaR is used to measure potential loss or wrost case scenario while holding a trading position.

21. VaR is a statistical measure indicating worst possible movement of market rate over a given period of time under normal market condition at defined confidence level.

22. Options refers to contracts where the buyer of an option has a right but no obligation to exercise the contract.

23. Options are either call option or put option.

24. Derivatives are basically of three kinds→ forward contracts, optional & swap.

25. Options are primarily used as hedge against price fluctuations , it is similar to insurance against adverse movement of price.

26. Transfer pricing refers to fixing the cost of resources and return an assets of the bank in a rational manner.

27. Transfer pricing is an integral function of ALM.

28. Futures are forward contracts traded in future exchange.

29. FRA(Forward Rate agreement) closely linked with IRS, where the interest payable for future period is commited under the agreement.

30. The difference between sources and uses of funds in specific time band is known as liquidity gap.

31. Derivaties can be used to hedge high value transactions or aggregrate risks as reflected in asset-liability mismatches.

32. For the purpose of ALM ,all assets and liabilities are placed in time buckets is measured as a gap b/w rate sensitive assets and rate sensitive liabilities.

33. CD ( Credit Derivatives) help the issuer diversify the credit risk and use the capital more efficiently.

34. Roles of Treasury → Liquidity management, propritery positions , Risk management.

35. Forwad refers to purchase or sale of currency on a future date. The exchange rate for forward sale or purchase are quoted today, hence such transaction are referred to as forward contracts b/w buyer & seller.

Current Affairs on 03.12.2018

Today's Headlines from www:

*Economic Times*

📝 EaseMyTrip eyes sales worth Rs 7,800 crore in FY20

📝 Government brings in three think tanks to strategise for RCEP talks

📝 Nexstar clinches $4.1 bn deal to acquire Tribune Media: Sources

📝 Steel cos may go for expansion through brownfield route

📝 RBI's relaxation in securitisation guideline may release Rs 60,000 crore

📝 Hero Realty forays into NCR; to invest Rs 900 crore in housing project on Dwarka Expressway

📝 Barista eyes doubling India store count to 500 in 3 years

📝 SmartE aims to raise up to $20 million to fund next round of expansion

*Business Standard*

📝 Govt confident of meeting fiscal deficit target despite GST shortfall

📝 Carmakers run out of speed in urban markets; rural demand grows

📝 Philips banks on Taiwanese partner TPV Technology to woo TV buyers in India

📝 Realty developers with rental assets to profit from boom in office space

📝 FIIs invested nearly Rs 64 billion in November, the highest since March

📝 Govt to revamp SEZ incentives policy, focus on employment over exports

📝 FPI inflows hit 10-month high of Rs 122.6 bn on softer crude, rupee gains

📝 Axis Bank staff face I-T probe for 'helping' Mumbai jewellers in benami deals

*Financial Express*

📝 China rejects India proposal for trade in local currencies

📝 RBI may cut inflation outlook yet again

📝 WPP merges JWT and Wunderman

📝 A strong balance sheet essential for independence, credibility of RBI, says Fitch Ratings

📝 National Waterways 1: Rs 5369 cr project aims to smoother navigation over river Ganges

📝 Nasscom raises concerns over US government latest proposal on H1-B visas

📝 After Samsung, Microsoft tipped to launch foldable smartphone

*Mint*

📝 US, China finally agree to halt levy of new tariffs for 90 days

📝 Bad loans: SBI to auction 3 NPA accounts to recover Rs2,111 crore dues

📝 Standard Chartered to cut Dubai, Singapore jobs

📝 WhatsApp seeks RBI nod to expand payment services to all users

📝 Theresa May threatened with vote to bring down govt over Brexit.

Different Types of LC

Different Types of LC

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

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

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

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

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

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

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

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

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

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