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Vidya Foundation Cochin

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Banking

Banking Related Quiz

1.         Call Money funds are lent with a maturity of:

a.      One day to three days                      b.      One day to two days

c.      One day to a fortnight                     d.      One day to seven days

 

2.         Under Notice Money Market funds are transacted for a period of :___

a.      One day to three days                      b.      One day to fifteen days

c.      Two days to fourteen days              d.      One day to seven days

 

3.         Maximum interest rate which can be allowed in call money market is:

a.      5%                                                    b.      7.5%

c.      10%                                                  d.      no ceiling

 

4.         In Call Money market, borrowings by a scheduled commercial bank should not exceed: ____________.

  1. 100% of owned funds
  2. 2% of aggregate deposits as at end of previous financial year
  3. higher of  ‘a or b’
  4. ‘a or b’ whichever is less.

 

5.         In Call Money market, lending of scheduled commercial banks should not     exceed _______ % of their owned funds on a fortnightly average basis.

a.      20                                                     b.      25

c.      30                                                     d.      40

 

6.         What is the minimum amount of net owned funds of a non-bank finance company to be eligible to carry its business?

a.      Rs. 10 lac                                         b.      Rs. 15 lac

c.      Rs. 20 lac                                         d.      Rs. 25 lac

 

7.        Foreign banks operating in India are required to achieve a target of _____ % of their net bank credit (NBC) for the priority sector.

a.       25                                                     b.      30

c.       32                                                     d.      36

 

8.        Foreign banks operating in India are required to achieve a target of _____ % of their net bank credit (NBC) for small-scale industries.

a.       5                                                        b.      10

c.       12                                                      d.      15

 

9.        Foreign banks operating in India are required to achieve a target of _____ % of their net bank credit (NBC) for exports.

a.      5                                                         b.      10

c.      12                                                      d.      15

 

10.       Which foreign bank has highest number of branches in India?

a.      Citi Bank

b.      American Express

c.      Hongkong & Shangai Bkg. Corp.

d.      Standard Chartered Bank

 

11.       One of the eligibility criteria for declaration of dividend by a bank is that it should maintain CRAR of at least _______ % for preceding two completed years and the accounting year for which it proposes to declare the dividend.

a.      8                                                       b.      9

c.      10                                                     d.      11

 

12.       Provision relating to Bank Rate is contained in:

  1. Sec 42 of RBI Act
  2. Sec 49 of RBI Act
  3. Sec 42 of Banking Regulation Act
  4. None of the above

13.       Cash Reserve Ratio is maintained under the provisions of :____________.

a.      Section 49 of RBI Act                     b.      Section 24 of Banking Reg. Act

c.      Section 42(1) of RBI Act                d.      Section 24(2) of Banking Reg.Act

 

14.       SLR is maintained by scheduled commercial banks under Section _________ .

a.      42(1) of RBI Act.                             b.      42 of Banking Reg. Act

c.      49 of RBI Act.                                 d.      24(2A) of Banking Reg. Act

 

15.       What is the minimum and maximum CRR as prescribed under RBI Act?

a.      3%,  15%                                         b.      3%,  20%

c.      3%,  25%                                         d.      4%,  20%

 

16.       CRR balance is maintained by banks with RBI daily on the  basis of:______.

  1. Average balance on a fortnightly basis
  2. Daily minimum Balance
  3. Monthly average balance
  4. Average weekly balance

17.       What is the minimum percentage of prescribed fortnightly average balance of CRR that is required to be maintained by banks on a daily basis?

a.      100%                                                b.      80%

c.      70%                                                  d.      50%

 

18.       At what rate interest is payable on Cash Reserve Ratio balances maintained by banks with RBI?

  1. No interest is payable on such balances
  2. No interest is payable on balance above 3%.
  3. Interest rate is payable at bank rate on eligible balances.
  4. Interest @ 3.5% p.a. payable on eligible balances

19.       The index on residential property prices launched by National Housing Bank is known as:

a.      NHB-RESIDEX                               b.      NHB-RINDEX

c.      NHB-HOUSING INDEX                d.      NHB-INDEX

 Answer Key

 

Q. 1 2 3 4 5 6 7 8 9 10
Ans. c c d c b d c b c d
Q. 11 12 13 14 15 16 17 18 19  
Ans b b c d b a c a a  

Banking Terminology – Technical Questions for Bank Interviews and Finance Interviews

Capital Funds

Equity contribution of owners. The basic approach of capital adequacy framework is that a bank should have sufficient capital to provide a stable resource to absorb any losses arising from the risks in its business. For supervisory purposes capital is split into two categories: Tier I and Tier II.

Tier I Capital

It consists mainly of share capital and disclosed reserves (minus goodwill, if any). Tier I items are deemed to be of the highest quality because they are fully available to cover losses Hence it is also termed as core capital.

Tier II Capital

Also known as supplementary capital, it consists of certain reserves and certain types of subordinated debt. Tier II’s capital loss absorption capacity is lower than that of Tier I capital.

Revaluation reserves

Revaluation reserves are a part of Tier-II capital. These reserves arise from revaluation of assets that are undervalued on the bank’s books, typically bank premises and marketable securities.

Leverage

Ratio of assets to capital.

Capital reserves

That portion of a company’s profits not paid out as dividends to shareholders. They are also known as undistributable reserves and are ploughed back into the business.

 Subordinated debt

Refers to the status of the debt. In the event of the bankruptcy or liquidation of the debtor, subordinated debt only has a secondary claim on repayments, after other debt has been repaid.

 Hybrid debt capital instruments

In this category, fall a number of capital instruments, which combine certain characteristics of equity and certain characteristics of debt.

BASEL Committee on Banking Supervision

The BASEL Committee is a committee of Central Bankers of different countries who are members of Bank for International Settlements. Basel is a town of Swiss where the Bank (BIS) is situated. Its committee on Banking supervision meets regularly and is a forum for discussion on the handling of specific supervisory problems. It coordinates the roles of Regulators ( like RBI in India) to ensure effective supervision in the member countries. They lay down policies on minimum capital requirements, management of risk, disclosure norms, market discipline etc which are accepted by the member countries for compliance. There are three recommendations, Basel 1, Basel 2, and Basel 3 .

 Market Discipline

Market Discipline seeks to achieve increased transparency through expanded disclosure requirements for banks.

Mortgage Backed Security

A bond-type security in which the collateral is provided by a pool of mortgages. Income from the underlying mortgages is used to meet interest and principal repayments.

Derivative

A derivative instrument derives its value from an underlying product. There are basically three derivatives

Forward Contract- A forward contract is an agreement between two parties to buy or sell an agreed amount of a commodity or financial instrument at an agreed price, for delivery on an agreed future date.

Futures Contract- Is a standardized exchange tradable forward contract executed at an exchange. In contrast to a futures contract, a forward contract is not transferable or exchange tradable, its terms are not standardized and no margin is exchanged.

Long and Short: The buyer of the forward contract is said to be long on the contract and the seller is said to be short on the contract.

Options- An option is a contract which grants the buyer the right, but not the obligation, to buy (call option) or sell (put option) an asset, commodity, currency or financial instrument at an agreed rate (exercise price) on or before an agreed date (expiry or settlement date). The buyer pays the seller an amount called the premium in exchange for this right. This premium is the price of the option.

 Swaps- Is an agreement to exchange future cash flow at pre-specified Intervals. Typically one cash flow is based on a variable price and other on affixed one.

Non Performing Assets (NPA)

An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.

Net NPA

Gross NPA – Total provisions already provided periodically so far.

Sub-standard Assets

A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months

Doubtful Asset

An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

Loss Asset

A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Off Balance Sheet Exposure

Off-Balance Sheet exposures refer to the business activities of a bank that generally do not involve booking assets (loans) and taking deposits. Off-balance sheet activities normally generate fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on the institution’s balance sheet until and unless they become actual assets or liabilities.

Net Interest Income ( NII)

The NII is the difference between the interest income and the interest expenses.

Net Interest Margin

Net interest margin is the net interest income divided by average interest earning assets.

Return on Asset (ROA)- After Tax

Return on Assets (ROA) is a profitability ratio which indicates the net profit (net income) generated on total assets. It is computed by dividing net income by average total assets. Formula- (Profit after tax/Av. Total assets)*100

Return on equity (ROE)- After Tax

Return on Equity (ROE) is a ratio relating net profit (net income) to shareholders’ equity. Here the equity refers to share capital reserves and surplus of the bank. Formula- Profit after tax/(Total equity + Total equity at the end of previous year)/2}*100

CASA Deposit

Deposit in bank in Current and Savings account.

Liquid Assets

Liquid assets consists of: cash, balances with RBI, balances in current accounts with banks, money at call and short notice, inter-bank placements due within 30 days and securities under “held for trading” and “available for sale” categories excluding securities that do not have ready market.

ALM

Asset Liability Management (ALM) is concerned with strategic Balance Sheet management involving all market risks. It also deals with liquidity management, funds management, trading and capital planning.

ALCO

Asset-Liability Management Committee (ALCO) is a strategic decision making body, formulating and overseeing the function of asset liability management (ALM) of a bank.

Venture Capital Fund

A fund set up for the purpose of investing in startup businesses that is perceived to have excellent growth prospects but does not have access to capital markets.

Held Till Maturity(HTM)

The securities ( Bonds /debentures) acquired by the banks with the intention to hold them up to maturity.

Held for Trading(HFT)

Securities( Bonds /debentures) where the intention is to trade by taking advantage of short-term price / interest rate movements.

Available for Sale(AFS)

The securities( Bonds /debentures) available for sale are those securities where the intention of the bank is neither to trade nor to hold till maturity. These securities are valued at the fair value which is determined by reference to the best available source of current market quotations or other data relative to current value.

Yield to maturity (YTM) or Yield

The Yield to maturity (YTM) is the yield promised to the bondholder on the assumption that the bond will be held to maturity and coupon payments will be reinvested at the YTM. It is a measure of the return of the bond.

CRR

Cash reserve ratio is the cash parked by the banks in their specified current account maintained with RBI as part of regulatory requirements

SLR

Statutory liquidity ratio is in the form of gold (current market value) and balances in unencumbered approved securities.

LIBOR

London Inter Bank Offered Rate. The interest rate at which banks offer to lend funds in the interbank market.

Basis Point

Is one hundredth of one percent. 1 basis point means 0.01%. Used for measuring change in interest rate/yield.

Fraud

Frauds have been classified as under, based mainly on the provisions of the Indian Penal Code

(a) Misappropriation and criminal breach of trust.

(b) Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property.

(c) Unauthorised credit facilities extended for reward or for illegal gratification.

(d) Negligence and cash shortages.

(e) Cheating and forgery.

(f) Irregularities in foreign exchange transactions.

(g) Any other type of fraud not coming under the specific heads as above.

Securitization

A process by which a single asset or a pool of assets are transferred from the balance sheet of the originator (bank) to a bankruptcy remote SPV (trust) in return for an immediate cash payment.

Special Purpose Vehicle (SPV)

An entity which may be a trust, company or other entity constituted or established by a ‘Deed’ or ‘Agreement’ for a specific purpose.

Bankruptcy remote

The legal position with reference to the creation of the SPV should be such that the SPV and its assets would not be touched in case the originator of the securitization goes bankrupt and its assets are liquidated.

Commercial real estate

Commercial real estate is defined as “fund based and non-fund based exposures secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction etc.)”

 Miscellaneous Facts- Banking

Highlights of new Banking Law amendment :

 

vidya foundation banking

rbi

The Banking regulation bill, 2011 was passed in the Winter session of parliament in Dec.2012.

The salient features of the Banking regulation bill are (list not exhaustive)

1.              RBI can inspect books of associate business arms of a bank.

2.              RBI can supercede entire board of directors of a bank.

3.              RBI can conduct special audits of cooperative banks.

4.              Cooperative societies cannot carryout banking activities without license from RBI.

5.              A “Depositor Education and Awareness Fund to receive money from deposit accounts not operated for more than 10 years.

6.              Increased the penalties and fines for violating Banking Regulation Act.

7.              Public Banks can obtain more capital via bonus shares and rights issue.

8.              Increases the voting rights of shareholders in Public and Private sector banks.

9.              Prior approval of RBI necessary if a person wants to purchase more than 5% shares   of a bank.

10.            Banking Mergers and acquisition will fall under purview of CCI.

11.            Bank will have to pay penalty interest rate, if it doesn’t maintain CRR on daily basis.

12.            Foreign banks exempted from stampduty payment for certain cases

What is CRR?

• CRR means Cash Reserve Ratio.

• Banks in India are required to hold a certain proportion of their total deposits with RBI in cash form.

• Right now, CRR is about 4.00% that means if people deposit total Rs.100 in SBI, then SBI would have to deposit Rs.4.00 in RBI.

• CRR rule does not apply to Regional Rural Banks, Non Banking Financial Companies (NBFC), Mutual funds or insurance companies.

What is Scheduled Commercial Bank?

• Scheduled banks are those banks which have been included in the second schedule of the Reserve bank of India act of 1934.

• The banks included in this schedule list should fulfill two conditions.

The paid capital and collected funds of bank should not be less than Rs. 5 lakhs.

Any activity of the bank will not adversely affect the interests of depositors

 Bank Rate

• Bank rate is the interest rate which RBI charges from its clients* for their LONG-term loans.

• Recall that Repo Rate  = RBI charge that much interest from its clients on SHORT term loans.

What is the need of all these CRR,SLR,Repo rates?

• RBI’s main job = control inflation by controlling money supply in the market.

• Too much money in the market =easy to get loans= not good. Because It’ll create inflation. [Demand Pull]

• Too less money in the market= again not good, because businessmen find it hard to get loans, thus input cost of production increases= not good for economy either and it’ll create inflation. [Cost push]

• Therefore, RBI will increase/decrease these CRR, SLR and Repo Rates according to the situation in order to adjust the money supply in market and thus control inflation. [Monetary policy]

• Nowadays RBI doesn’t touch Bank rate much and mostly relies on Repo rate to control the money supply.

• CRR and SLR are also not  changed as frequently as Repo rate.

• And Reverse repo rate is automatically kept 1% less than Repo rate, so that makes Repo rate the “most frequently used tool” in RBI’s monetary policy, in last two years.

 

Last year SBI Chairman Pratip Chaudhari said that:

• CRR does not help anyone and it is unfair to apply it only on banks.

• Even if CRR is required why should it be on banks alone? There are a number of institutions that raise funds from the public – insurance companies, mutual funds and NBFCs so CRR should be applicable to all.

• Because of CRR, every year we lose Rs. 3,500 crore.

• In India, Businessmen get loan @11 per cent while that for a Chinese equipment manufacturer gets loan in his country for only 4 per cent. So CRR= less money in market= higher interest rate= increases the input cost of Indian products.

What is NPA? ( in simple  non- banking terms)

• Bank gives loan to a borrower.

• Person fails to make regular payments.

• Bank gives him notice to correct his behavior. But he doesn’t.

• Bank declares that loan as Non-Performing Asset (NPA) (=Bad Loan)

What is Qualified Institutional Buyer (QIB)?

These people have the expertise and the financial muscle to evaluate and invest in the capital markets.

Examples: (click on each to read previous articles on them)

1.              Scheduled Commericial Banks

2.              Foreign Institutional Investor

3.              Mutual Funds

4.              Venture Capital Investors

5.              Insurance Companies

6.              Pension/ Provident Funds

Central Registry ( new introduction)

• Previously, borrowers used to forged property documents and get loans from multiple banks by giving them duplicate property documents as security.

• So when borrower refuses to pay up loan, many banks would make claim for the same property!

• To fix this problem, Reserve Bank of India (RBI) setup Central Registry in 2011, under SARFAESI.

• This central registry has details of all properties against which loans have been taken.

• Any person or bank can inspect records of this registry to make sure the mortgaged property is genuine.

• Official name: Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI)