**T T BUYING RATE & BILL BUYING RATE AND**

**PROBLEMS Based on that asked in CAIIB BFM EXAM**T T BUYING RATE : THE BANKS QUOTE A VARIETY OF EXCHANGE RATES. ONE OF THEM IS THE T T BUYING RATE (T T STANDS FOR TELEGRAPHIC TRANSFER).

T T RATES ARE APPLICABLE FOR CLEAN INWARD OR OUTWARD REMITTANCES WHERE THE BANKS UNDERTAKE ONLY THE JOB OF MONEY TRANSFER AND DO NOT HAVE TO PERFORM ANY OTHER FUNCTION , SUCH AS HANDLING DOCUMENTS.

BILL BUYING RATE : EXPORTERS FREQUENTLY DRAW BILLS OF EXCHANGE ON THEIR FOREIGN CUSTOMERS.

THEN THEY SELL THESE BILLS TO AN AUTHORISED DEALER IN FOREIGN CURRENCY.

THE AUTHORISED DEALER BUYS THE BILL AND THEN COLLECTS THE PAYMENT FROM THE IMPORTER.

SINCE, THERE IS DELAY BETWEEN THE AD PAYING THE EXPORTER AND ITSELF GETTING PAID, VARIOUS MARGINS ARE SUBSTRACTED FROM THE BASE RATE TO COMPUTE THE BILL BUYING RATE.

SO,

__Remember the Formula__

**BILL BUYING RATE = THE TT BASE RATE minus EXCHANGE MARGIN minus FORWARD DISCOUNT.**

**Type I Problem:**Buying Rates without marginTT buying rates for GBP 50,000 /- inward payment, if USD/INR is 48.50/52 and GBP/USD is 1.6050 / 60. Ignore margins. Calculate the amount to be credited to the customers account?

**Solution:-****As it is mentioned, TT Buying Rate which means Banks will Buy**.

Apply Cross currency concept as we need 1 GBP is how much INR

Take both the buying rates. Buying Rates are always the first one and Selling rate is are given after the symbol " / " that means 48.50 is buying rate and 48.52 is selling rate.

USD/INR = 48.50 and GBP/USD = 1.6050. We require GBP/INR.

So use maths, GBP/INR = GBP/USD x USD/INR = 1.6050 x 48.50 = 77.8425.

Amount credited to the customer = 77.8425 x 50000 =

**Rs 3,892,125**

**Type II Problem:**Buying rates with marginTT buying rate for inward payment of USD 250,000.00 , if the interbank rate is 49.00/02 and margin to be charged is 0.08%. What is the amount to be credited?

**Solution:****As it is mentioned, TT Buying Rate which means Banks will Buy**.

Apply buying rate 49.00.

**Keep in Mind : Banks will always Subtract margin while buying and Add margin while selling which simply means buy low and sell high to make profit.**

So For buying, we need to substract margin.

So 49.00 x 0.08%= 0.0392. So, rate = 49.00 – 0.0392 = 48.9608.

Amount to be credited to the customer = 48.9608 x 250000 =

**Rs. 12,240,200.00**We have already dealt with problems on buying rates. Now, let us consider some problems on selling rates.

**Kindly note: It is not the number of problems you do which matter in exam, it is the number of concepts you are thorough , which finally matters. Thus, focus more on understanding -- Competz Team**

**Type III Problem: Selling Rates without margin**TT selling rate for issue of draft for JPY 100,000, if USD/INR is 47.940/9450 and USD/JPY is 99.50/55 . No margins. Give rupee amount to be charged.

**Solution:**

TT selling rate so it simply means Banks are selling.

Take the Selling rate which is always more than the buying rate.

Apply Cross currency concept as we need 1 JPY is how much INR

Selling rates are USD/INR = 47.9450 and USD/JPY = 99.55.

JPY/USD = 1 / 99.55 = 0.01004. Now, JPY/ USD x USD/INR = 0.01004 x 47.9450 JPY/INR = 0.4816.

No margins.

Thus, the Amount to be debited from customers acount = 0.4816 x 100000 =

**Rs. 48161.72**

**Type IV Problem: Selling rates with margin**Bill selling rate for import bill USD 100000.00 if the interbank rate is 48.5600/5700 and margin to be charged is 0.20%

**Solution:**

Bill selling rate so it simply means Banks are selling.

So take the selling rate of 48.57.

Apply Margin = 48.57 x 0.20% = 0.09714 .

**Keep in Mind : Banks will always Subtract margin while buying and Add margin while selling which simply means buy low and sell high to make profit.**Sale, so add margin. Rate = 48.57+0.09714 = 48.66714.

Amount debited to customer = 48.66714 x 100000 =

**4866714.**

**Type V Problem: Forward Purchase contract cancelled on spot date**What rate would a forward purchase contract of USD 100000.00 due on spot date be cancelled if interbank spot is 48.5125/5175 and exchange margin on TT purchase is 0.08% and TT selling is 0.15% .

**Solution:**

**Kindly Remember : Forward Purchase contracts are always booked using TT Buying Rate. Now, when forward Purchase contract is cancelled, we need to apply TT Selling rate.**

So apply TT selling rate.

Selling Rate = 48.5175.

Margin = 0.15% x 48.5175 = 0.0727.

**Keep in Mind : Banks will always Subtract margin while buying and Add margin while selling which simply means buy low and sell high to make profit.**Apply Margin, Rate = 48.8175 + 0.0727 = 48.8902.

As we are selling dollars, we would receive rupees. Thus, we need to debit the customer account by

48.8902 x 100000 = Rs. 4,889,020

**Additional problem linked to above :**

Calculate the difference to be charged/paid to the customer, in the above question, if the original contract was booked at Rs 49.7500 per USD

**Solution:**

Original purchase contract was booked at 49.75 – margin. Margin = 0.08% x 49.75 = 0.0398 .

Rate = 49.75 – 0.0398 = 49.7102.

As we are buying dollars, we have to credit customers account.

Hence, amount which was credited = 49.7102 x 100000 = Rs. 4,971,020.

Here the customer gains by the difference. Rs. 4,971,020 – Rs. 4,889,020 = Rs.82,000/-

**Type VI Problem:**Rate for forward purchase booking of USD 100,000 delivery 3rd month (full month) if USD/INR spot is 48.7850/7950 and premium is 1m 0.08/0.09, 2m 0.16/0.17, 3 month 2500/2550. Ignore margins

**Solution:**

Buy low, sell high maxim: Buy at lowest and sell at the highest rate of the 2 rates before and after the given date.

We want for 3rd full month. So take 2nd month and 3rd month rate. You are buying.

Find the rates now: Currency is at premium. Why? Bcoz right side of the rates is higher than left side. So add the forward points to spot rate. 2 month: 48.7850+0.16 = 48.945,

3 month: 48.785+0.2500 = 49.035. Buy at lowest of the 2 rates. So take, 48.945. No margins. Amount paid to the customer = 48.945 x 100000 = Rs. 4,894,500

**HOW BANKS MAKE PROFIT AND AFFECT ON INTEREST RATES ON BANKING SECTOR**The banking sector's profitability increases with interest rate hikes. Institutions in the banking sector such as retail banks, commercial banks, investment banks, insurance companies and brokerages have massive cash holdings due to customer balances and business activities.

Increases in the Federal funds rate directly increase the yield on this cash, and the proceeds go directly to earnings. An analogous situation is when the price of oil rises for oil drillers. The benefit of higher interest rates is most notable for brokerages, commercial banks and regional banks.

Banking is a spread business. Banks profit from the gap between the interest rate they receive on their assets (mostly loans and securities) and the rate that they pay on liabilities (mostly deposits). Because banks engage in maturity transformation – with assets having a longer maturity than deposits – this lending spread will generally fall when the yield curve flattens.

Since banks hold fixed-income instruments (bonds and loans), higher interest rates across the yield curve reduce the present discounted value of their assets. And, the longer the duration of their assets (relative to their liabilities), the bigger those losses will be. Similarly, banks face greater risk when the volatility of their portfolios (and the correlations among their assets) rise.

Rising interest rates are often a signal of stronger economic growth. An improved growth outlook benefits banks in several ways. It reduces the risk that borrowers will default, increasing the value of bank assets. It increases credit demand at any given interest rate, potentially raising the volume of their lending business.

**Tier 1 Capital**

Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations. Under Basel III, the minimum tier 1 capital ratio is 6%, which is calculated by dividing the bank's tier 1 capital by its total risk-based assets.

For example, bank ABC has $600,000 in equity and retained earnings and has $10 million in risk-weighted assets. Its tier 1 capital ratio is 6% ($600000/$10 million), which meets the minimum Basel III requirement.

**Tier 2 Capital**Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves. Tier 2 capital is supplementary capital because it is less reliable than tier 1 capital. In 2015, under Basel III, the minimum total capital ratio is 8%, which indicates the minimum tier 2 capital ratio is 2%, as opposed to 6% for the tier 1 capital ratio.

For example, bank ABC has tier 2 capital of $100,000 and risk-weighted assets of $10 million. Therefore, the tier 2 capital ratio is 1% ($100000/$10 million). Thus, bank ABC's total capital ratio is 7% (6%+1%). Under Basel III, bank ABC would not meet the minimum total capital ratio of 8%.

__Capital Adequacy Ratio (CAR)__

Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio (CRAR) is the ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.

It is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures.

This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

**Risk-weighted asset ( also referred to as RWA)**Risk-weighted asset ( also referred to as RWA) is a bank's assets or off-balance-sheet exposures, weighted according to risk. This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio (CAR) for a financial institution.

__Pre-Shipment and Post-Shipment__

Pre-shipment / Packing Credit also known as ‘Packing credit’ is a loan/ advance granted to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment. Packing credit can also be extended as working capital assistance to meet expenses such as wages, utility payments, travel expenses etc; to companies engaged in export or services. Packing credit is sanctioned/granted on the basis of letter of credit or a confirmed and irrevocable order for the export of goods / services from India or any other evidence of an order for export from India.

'Post-shipment Credit' means any loan or advance granted or any other credit provided by a bank to an exporter of goods / services from India from the date of extending credit after shipment of goods / rendering of services to the date of realisation of export proceeds as per the period of realization prescribed by Reserve Bank of India (RBI) and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the Government from time to time. As per extant guidelines of RBI, the period prescribed for realisation of export proceeds is 12 months from the date of shipment.

Nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions.

Rules for any mode of transport

EXW – Ex Works (named place of delivery)

FCA – Free Carrier (named place of delivery)

CPT – Carriage Paid To (named place of destination)

CIP – Carriage and Insurance Paid to (named place of destination)

DAT – Delivered At Terminal (named terminal at port or place of destination)

DAP – Delivered At Place (named place of destination)

DDP – Delivered Duty Paid (named place of destination)

Rules for sea and inland waterway transport

FOB – Free on Board (named port of shipment)

CFR – Cost and Freight (named port of destination)

CIF – Cost, Insurance & Freight (named port of destination)

__Shipment Based Questions__

An exporter approaches the ABC Bank for pre-shipment and post-shipment loan with estimated sales of

Rs. 500 lakh. The bank sanctions a limit of Rs. 200 lakh, with 30 % margin for pre-shipment loan on FOB

value and margins on bills of 15 % on foreign demand bills and 20 % on foreign usance bills.

The firm gets an order for USD 60,000 (CIF) to Australia. On 1.1.2015 when the USD/INR rate was

Rs.65.50 per USD, the firm approached the Bank for releasing pre-shipment loan (PCL), which is

released.On 31.5.2015, the firm submitted export documents,

drawn on sight basis for USD 30,000 as full and final shipment.

The bank purchased the documents at Rs.65.85, adjusted the PCL outstanding and credited the balance

amount to the firm's account, after recovering interest for Normal Transit Period (NTP).The documents

were realized on 30.6.2015 after deduction of foreign bank charges of USD 350. The bank adjusted the

outstanding post shipment advance against the bill.

Bank charged interest for pre-shipment loan @ 6 % up to 90 days and, @ 7 % over 90 days up to 180

days. For Post shipment credit the Bank charged interest @ 8 % for demand bills and @ 8.5 % for usance

(D/A) documents up to 90 days and @ 9.50 % thereafter and on all overdues interest @ 12%.

01. What is the amount that the Bank can allow as PCL to the exporter against the given export order,

considering the profit margin of 5% and insurance and freight cost of 10% ?

a. 2352105

b. 3360150

c. 3537000

d. 3930000

Ans - a

Explanation :

FOB value = 60000 x 65.50 = 3930000 — 393000 (10 % of 3930000 (insurance and freight cost))

= 3537000 — 176850 (5 % profit margin)

= 3360150 - 1008045 (30% margin)

= 2352105

So, the Bank can allow Rs. 2352105 as PCL to the exporter against the given export order.

02. What is the amount of post shipment advance that can be allowed by the Bank under foreign bills

purchased, for the bill submitted by the exporter?

a. 3360150

b. 2352105

c. 1975500

d. 1750500

Ans - c

Explanation :

30000 x 65.85 = 1975500

So, the Bank can allow Rs. 1975500 as post shipment advance under foreign bills purchased, for the bill

submitted by the exporter.

03. In the above case, when should the bill be crystallized (latest date), if the bill remains unrealised for

over two months, from the date of purchase (ignore holidays)?

a. 24.06.2015

b. 25.06.2015

c. 24.07.2015

d. 25.07.2015

Ans - c

Explanation :

Crystallisation will be done when the bill becomes overdue after 25 days of normal transit period. Date

of overdue will be 25.6.2015. If bill remains overdue, it will be crystallised within 30 days i.e. up to

24.7.2015.

04. What rate of interest will be applicable for charging interest on the export bill at the time of

realisation, for the days beyond Normal Due Date (NDD)?

a. 8.50%

b. 9.5 %

c. 10 %

d. 12 %

Ans - c

Explanation :

Rate of interest will be 12% as the overdue interest is stated as 12%

.............................................

**100**

Pre-shipment and post-shipment Loan

ABC and Co., approaches the XYZ Bank for pre-shipment and post-shipment loan with estimated sales of

Rs. 100 lakh. The bank sanctions a limit of Rs. 50 lakh, with 25 % margin for pre-shipment loan on FOB

value and margins on bills of 10 % on foreign demand bills and 20 % on foreign usance bills.

The firm gets an order for USD 50,000 (CIF) to Australia. On 1.1.2016 when the USD/INR rate was

Rs.66.50 per USD, the firm approached the Bank for releasing pre-shipment loan (PCL), which is released

on 31.3.2016, the firm submitted export documents, drawn on sight basis for USD 45,000 as full and

final shipment.

The bank purchased the documents at Rs.66.75, adjusted the PCL outstanding and credited the balance

amount to the firm's account, after recovering interest for Normal Transit Period (NTP).The documents

were realized on 30.4.2016 after deduction of foreign bank charges of USD 450. The bank adjusted the

outstanding post shipment advance against the bill.

Bank charged interest for pre-shipment loan @ 7 % up to 90 days and, @ 8% over 90 days up to 180

days. For Post shipment credit the Bank charged interest @ 7 % for demand bills and @ 7.5 % for usance

(D/A) documents up to 90 days and @ 8.50 % thereafter and on all overdues, interest @ 11%.

01. What is the amount that the Bank can allow as PCL to the exporter against the given export order,

considering the profit margin of 10% and insurance and freight cost of 10% ?

a. 2992500

b. 2693250

c. 2102620

d. 2019938

Ans - d

Explanation

FOB value = 50000 x 66.50 = 3325000 — 332500 (10% of 3325000 (insurance and freight cost))

= 2992500 — 299250 (10% profit margin)

= 2693250 - 673312 (25% margin)

= 2019938

So, the Bank can allow Rs. 2019938 as PCL to the exporter against the given export order.

02. What is the amount of post shipment advance that can be allowed by the Bank under foreign bills

purchased, for the bill submitted by the exporter?

a. 2992500

b. 3003750

c. 3325000

d. 3337500

Ans - b

Explanation

45000 x 66.75 = 3003750

So, the Bank can allow Rs. 3003750 as post shipment advance under foreign bills purchased, for the bill

submitted by the exporter.

03. What will be the period for which the Bank charges concessional interest on DP bills, from date of

purchase of the bill?

a. 20 Days

b. 25 Days

c. 30 Days

d. 1 Month

Ans - b

Explanation :

Concessional rate will be charged for normal transit period of 25 days and there after overdue interest

will be charged.

04. In the above case, when should the bill be crystallized (latest date), if the bill remains unrealised for

over two months, from the date of purchase (ignore holidays)?

a. 24.04.2016

b. 25.04.2016

c. 24.05.2016

d. 25.05.2016

Ans - c

Explanation :

Crystallisation will be done when the bill becomes overdue after 25 days of normal transit period. Date

of overdue will be 25.4.2016. If bill remains overdue, it will be crystallised within 30 days i.e. up to

24.5.2016.

05. What rate of interest will be applicable for charging interest on the export bill at the time of

realisation, for the days beyond Normal Due Date (NDD)?

a. 7.5 %

b. 8 %

c. 8.5 %

d. 11 %

Explanation :

Rate of interest will be 11% as the overdue interest is stated as 11%

Ques: A textile exporter, with estimated export sales of Rs. 300 lacs during the last year and projected sales of

Rs.500 lacs for the current year, approaches the bank for granting credit facilities. The bank sanctions

following facilities in the account:

PCL/FBP/FUBD/FBN Rs. 100.00 lacs

Sub limits:

PCL (25 % margin on fob value) Rs. 50.00 lacs FBP (10 % margin on bill amount) Rs. 50.00 lacs FUBD (15

% margin on bill amount) Rs. 50.00 lacs FBN (nil margin) Rs. 100.00 lacs. He gets an order for USD

50,000.00 CF, for exports of textiles- dyed/hand printed, to UK, with shipment to be made by 15.9.2014.

On 2.6.2014 he approaches the bank for releasing PCL against this order of USD 50,000.00. The bank

releases the PCL as per terms of sanction.

On 31.8.2014, the exporter submits export documents for USD 48,000.00, against the order for USD

50,000.00. The documents are drawn on 30 days usance (D/A) as per terms of the order The bank

discounts the documents at the days applicable rate, adjusts the PCL outstanding and credits the

balance to the exporter's account, after recovering interest up to notional due date. Interest on PCL

recovered separately.

The documents are realized on 29.10.2014, value date 27.10.2014, after deduction of foreign bank

charges of USD 250.00. The bank adjusts the outstanding post shipment advance allowed against the bill

on 31.8.2014.

Bank charges interest at - PCL- 8.50 % upto 180 days, and post shipment at 8.50 % upto 90 days and

10.50 % thereafter. Overdue interest is charged at 14.50%.

The USD/INR rates were as under:

— 2.6.2014: Bill Buying 48.20, bill Selling 48.40.

— 31.08.2014: TT buying 47.92, Bill buying 47.85, TT selling 48.08, Bill selling 48.15., premium for

30 days was quoted as 04/06 paise.

Now answer the following:

1. What is the amount that the bank allows as PCL to the exporter against the given export order,

considering insurance and freight costs of 12%.

(i) Rs. 15,90,600

(ii) Rs. 24,10,000

(iii) Rs. 21,20,800

(iv) Rs. 18,15,000

2. What exchange rate will the bank apply for purchase of the export bill for USD 48,000.00 tendered by

the exporter:

(i) 47.89

(ii) 47.85

(iii) 47.91

(iv) 47.96

3. What is the amount of post shipment advance allowed by the bank under FUBD. for the bill

submitted by the exporter:

(i) Rs. 19,54,728

(ii) Rs. 19,52,280

(iii) Rs. 19,53,912

(iv) Rs. 22,98,720

4. What will be the notional due date of the bill submitted by the exporter:

(i) 30.10.2014

(ii) 30.9.2014

(iii) 25.10.2014

(iv) 27.10.2014

5. Total interest on the export bill discounted, will be charged up to;

(i) notional due date 25.10.2014

(ii) value date of credit 27.10.2014

(iii) date of realisation 30.10.2014

(iv) date of credit to nostro account 29.10.2014

Ans. 1: USD 50,000.00 @ 48.20 = Rs.. 2410000.00 - less 12% for insurance and freight cost i.e Rs.

289,200 = Rs.21,20,800.00 (for value of the order. Less margin 25% i.e. Rs.530,200.00 balance Rs

15,90,600.00)

Ans. 2: 47.89 - Bill buying rate on 31.8.2008 - 47.85 plus 4 paise premium for 30 days, this being a DA

bill.

Ans 3: USD 48,000.00 @ 47.96 =Rs. 23,02,080.00, less 15% margin on DA bill, i.e. Rs. 345312.00 = Rs

19,56,768.00

Ans 4: Bill submitted on 31.8.2014- drawn on 30 days DA plus normal transit period of 25 days -

31.8.2014 plus 30 days plus 25 days, i.e. total 55 days from 31.3.2014 i.e. 25.10.2014

Ans 5: Interest is charged up to the date the funds have been credited to the banks nostro account, the

effective date of credit is the value date of credit, i.e. 27.10.2014.

__Notes on Estimate__

In statistics, estimation refers to the process by which one makes inferences about a population, based on information obtained from a sample.

Point Estimate vs. Interval Estimate

Statisticians use sample statistics to estimate population parameters. For example, sample means are used to estimate population means; sample proportions, to estimate population proportions.

An estimate of a population parameter may be expressed in two ways:

Point estimate. A point estimate of a population parameter is a single value of a statistic. For example, the sample mean x is a point estimate of the population mean μ. Similarly, the sample proportion p is a point estimate of the population proportion P.

Interval estimate. An interval estimate is defined by two numbers, between which a population parameter is said to lie.

Confidence Intervals

Statisticians use a confidence interval to express the precision and uncertainty associated with a particular sampling method. A confidence interval consists of three parts.

A confidence level.

A statistic.

A margin of error.

The confidence level describes the uncertainty of a sampling method. The statistic and the margin of error define an interval estimate that describes the precision of the method. The interval estimate of a confidence interval is defined by the sample statistic + margin of error.

Confidence intervals are preferred to point estimates, because confidence intervals indicate a the precision of the estimate and b the uncertainty of the estimate.

Confidence Level

The probability part of a confidence interval is called a confidence level. The confidence level describes the likelihood that a particular sampling method will produce a confidence interval that includes the true population parameter.

Margin of Error

In a confidence interval, the range of values above and below the sample statistic is called the margin of error.

Balance of payments is the overall record of all economic transactions of a country with the rest of the world. Balance of trade is the difference in the value of exports and imports of only visible items. Balance of trade includes imports and exports of goods alone i.e., visible items.

Face Value:The par value (i.e., principal, or maturity, value) of a security appearing on the face of the instrument.

Coupon: This is the amount of interest due and the date on which payment is to be made. Where the coupon is blank, it can indicate that the bond can be a “ zero-coupon,” a new issue, or that it is a variable-rate bond. In the case of registered coupons (see "Registered Bond"), the interest payment is mailed directly to the registered holder. Bearer coupons are presented to the issuer's designated paying agent or deposited in a commerical bank for collection. Coupons are generally payable semiannually.

Period: Period remaining of the bond

Market Rate: Rate of other bonds in the market of similar nature

Market Price: Price which general public is ready to pay to purchase the bond at a given periood

A sensitivity analysis is a technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price.

A concept that refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and portfolios.

The payback period is the time required for the amount invested in an asset to be repaid by the net cash outflow generated by the asset. It is a simple way to evaluate the risk associated with a proposed project.

The payback period is expressed in years and fractions of years. For example, if a company invests $300,000 in a new production line, and the production line then produces cash flow of $100,000 per year, then the payback period is 3.0 years ($300,000 initial investment / $100,000 annual payback). An investment with a shorter payback period is considered to be better, since the investor's initial outlay is at risk for a shorter period of time. The calculation used to derive the payback period is called the payback method.

Capital rationing refers to a situation where the firm is constrained for external, or self imposed, reasons to obtain necessary funds to invest in all investment projects with positive net present value (NPV). Under capital rationing, the management has not simply to determine the profitable investment opportunities, but it has also to decide to obtain that combination of the profitable projects which yields highest net present value (NPV) within the available funds.

Expected net present value is a capital budgeting technique which adjusts for uncertainty by calculating NPVs under different scenarios and probability-weighting them to get the most likely NPV.

For example, instead of relying on a single NPV, companies calculate NPVs under a range of scenarios; say base case, worst case and best case. They then estimates probability of occurrence of each scenario and then weight the NPVs calculated according to their relative probabilities to find the expected NPV.

Expected NPV is a more reliable estimate than the traditional NPV because it considers the uncertainty inherent in projecting future scenarios.

Case Study question:.Forward sale contract USD 500000 delivery 2nd month (full month). ) if USD/INR spot is 48.7850/7950 and premium is 1m 0.08000/0.09000, 2m 0.16/0.17, 3 month 2500/2550. Margin 0.15%. Find rate

Buy low, sell high maxim: Buy at lowest and sell at the highest rate of the 2 rates before and after the given date.

We want for 2nd full month. So take 1st month and 2nd month rate. You are selling. Find the rates now: Currency is at premium. Why? Bcoz right side of the rates is higher than left side. So add the forward points to spot rate. 1 month: 48.7950+0.09 = 48.885,

2 month: 48.795+0.17 = 48.965. Sell at highest of the 2 rates. So take, 48.965. Margin = 0.15% x 48.965 = 0.0734.We are selling, so add margin. Rate = 48.965 + 0.0734 = 49.0384 Amount paid to the customer = 49.0384 x 500000 = Rs. 24,519,200

Forward sale contract USD 500000 delivery 2nd month (full month). ) if USD/INR spot is 48.7850/7950 and premium is 1m 0.08000/0.09000, 2m 0.16/0.17, 3 month 2500/2550. Margin 0.15%. Find rate

Buy low, sell high maxim: Buy at lowest and sell at the highest rate of the 2 rates before and after the given date.

We want for 2nd full month. So take 1st month and 2nd month rate. You are selling. Find the rates now: Currency is at premium. Why? Bcoz right side of the rates is higher than left side. So add the forward points to spot rate. 1 month: 48.7950+0.09 = 48.885,

2 month: 48.795+0.17 = 48.965. Sell at highest of the 2 rates. So take, 48.965. Margin = 0.15% x 48.965 = 0.0734.We are selling, so add margin. Rate = 48.965 + 0.0734 = 49.0384 Amount paid to the customer = 49.0384 x 500000 = Rs. 24,519,200

Rate for forward purchase booking of USD 100,000 delivery 3rd month (full month) if USD/INR spot is 48.7850/7950 and premium is 1m 0.08/0.09, 2m 0.16/0.17, 3 month 2500/2550. Ignore margins

Buy low, sell high maxim: Buy at lowest and sell at the highest rate of the 2 rates before and after the given date.

We want for 3rd full month. So take 2nd month and 3rd month rate. You are buying. Find the rates now: Currency is at premium. Why? Bcoz right side of the rates is higher than left side. So add the forward points to spot rate. 2 month: 48.7850+0.16 = 48.945,

3 month: 48.785+0.2500 = 49.035. Buy at lowest of the 2 rates. So take, 48.945. No margins. Amount paid to the customer = 48.945 x 100000 = Rs. 4,894,500

Payment of import can be made to NR account of the exporter. Import Payment: within 6 months from the date of shipment. Settlement of import delays allowed due to disputes, financial difficulties, etc. Interest to be paid as below: Supplier’s and Buyer’s Credits beyond 6 months upto 3years to be treated as trade credits. Beyond 3 yrs not allowed. Remittance for import of books : No time limit of 6 months. No person to import or bring into India any foreign currency, without permission of RBI. Import of Indian Currency: Indian resident gone out can bring max Rs. 25000 while returning from his visit. From Nepal or Bhutan, one can bring any amount upto Rs 100 denomination. A person may:

a Send any amount to India in any form other than currency notes and traveller’s cheque

b Less than 10K USD( Currency notes + TCs) or less than 5K ( Currency notes), no CDF required

Form A -1is not necessary for any import payment now as per Master Circular on imprt of Goods and Services Dated July 01, 2014. Exchange control copy of copy of Bill of Entry to be obtained by bank. Banks and AD can freely open LCs and allow remittances for import. Foreign exchange acquired to be used for the same purpose in declaration or for other purpose for which foreign exchange is permitted. When foreign exchange is remitted for import of goods or services, bank to ensure that importer furnishes exchange control copy of Bill of Exchange and satisfy remittance equivalent amount of goods are imported.

1 Trade Credits can be extended directly by the overseas supplier, Bank or Financial Institution with a maturity 5 years. – Supplier or Buyer credit.

2 Supplier’s Credit: Credit for Imports into India by overseas supplier.

3 Buyer’s Credit: Loans for payment of Imports into India arranged by the importer from a Bank or financial institution outside India for maturity of less than 5 years.

4 Trade Credits greater than 5 years are under ECB guidelines.

5 TC maximum can be allowed up t $ 20 M per import trxn for 1 year, for Capital goods up to 5 yrs maturity. No rollover permitted beyond permissible above period.

6 all-in-one cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses

Up to 5 years : 6 month libor + 350 bps

7 Guarantee for purpose of imports by ad banks:

A up to $ 20 M for 1 yr non-capex except gold and 3 yrs for capex goods

B period should match with the import lc period.

8 reporting: details of approvals, drawal, utilization and repayment of trade credits by all it’s branches every month in form tc report so as to reach not later than 10th of every month to rbi.

Advance remittance allowed subject to:

greater than 2 L USD, LC/ guarantee required. Guarantee by Indian bank, counter guarantee from foreign bank required.

Upto 5 Crore USD without LC or guarantee, good track record and bonafides of customer.Policy to be framed by Board of Directors of Bank

PSU greater than1L USD , without guarantee, waiver from FinMin reqd

Payment directly to manufacturer's account

Import to be done within 6 months from date of adv remittance. For capex goods in 3 yrs.

If ‘e’ not possible, then repatiriate the funds or use for other foreign exchange required purpose.

Interest on Import Bills

Imports made, but payment not made

6 months LIBOR + 350 bps max rate

Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements. A ratio is a statistical yardstick that provides a measure of the relationship between two variables or figures.

Fixed assets to net worth is a ratio measuring the solvency of a company. This ratio indicates the extent to which the owners' cash is frozen in the form of fixed assets, such as property, plant, and equipment, and the extent to which funds are available for the company's operations (i.e. for working capital).

Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated by dividing a company's total liabilities by its stockholders' equity. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders' equity.

The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the total assets of a company (both liquid and illiquid) relative to that company's total liabilities.

The Acid-test or quick ratio or liquidity ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.

__Case Studies Based on Basel Norms__

As per Basel III, the value of revaluation reserve is to be taken at ...... % discount to include in Tier 2

capital

a. 60%

b. 55%

c. 50%

d. 45%

Ans - b

As per Basel III, adjustments / deductions are required to be made from Tier I and Tier 2 capital, relating

to which of the following (i) goodwill and other intangible assets (ii) deferred tax assets (iii) Investment

in own shares (treasury stock)

a. Only (i) and (ii)

b. Only (i) and (iii)

c. Only (ii) and (iii)

d. (i), (ii) and (iii)

Ans - d

Basel - II accord prescribes that housing loan portfolio be given risk weight of ......

a) 100%

b) 75%

c) 35%

d) 150%

Ans - c

As per Basel III, general provisions and loss reserves are included in Tier-2 capital maximum to the

extent of:

a. 1.25% of total risk weighted assets under standardized approach and 0.6% of total risk weighted

assets under IRB approach

b. 0.6% of total risk weighted assets under standardized approach and 0.6% of total risk weighted assets

under IRB approach

c. 0.6% of total risk weighted assets under standardized approach and 1.25% of total risk weighted

assets under IRB approach

d. 1.25% of total risk weighted assets under standardized approach and 1.25% of total risk weighted

assets under IRB approach

Ans - a

Under Simplified Standardised Approach (SSA), risk weight for corporates is prescribed as ......

a) 150%

b) 100%

c) 50%

d) 20%

Ans - b

For Substandard Secured Assets, the provision required is ...... of the outstanding amount.

a) 15%

b) 20%

c) 10% of the realizable value of security (RVS)

d) None of these

Ans - a

As per Basel II, Risk weighted assets for Operational risk are worked out as :

a) Capital for operational risk x 9

b) Capital for operational risk x 12.5

c) Capital for operation risk x 8.33

d) Capital for operational risk x 8

Ans - b

Under Basel III the risk weight for capital charge for credit risk on the basis of standardized approach,

match for claims on foreign governments (based on rating of international rating agencies such as S & P,

Fitch, Moody's Rating), in respect of which of the following: (i) AAA to AA rating—0%, (ii) BBB rating--

20% (iii) Below B rating—150%

a. Only (i) and (ii)

b. Only (i) and (iii)

c. Only (ii) and (iii)

d. (i), (ii) and (iii)

Ans - b

**Case Studies Based on Provisions and Risk Wieghted Assets**Balance sheet of a bank provides the following information:

Fixed Assets - 1000cr

Investment in central Govt Securities - Rs 10000cr

In standard loan accounts

Housing Loans - RS 6000cr (Secured, below Rs 10 lac)

the Retail loan - Rs 4000cr

Other loans - Rs 8000cr

sub-standard secured loans - Rs 1000cr

sub-standard unsecured loans - Rs 500cr

Doubtful loans (D-1, secured) - Rs 800cr

Doubtful loans (D-1, unsecured) - Rs 600cr

Doubtful loans (D-2, secured) - Rs 500cr

Doubtful loans (D-2, unsecured) - Rs 1000cr

Doubtful loans (D-3, secured) - Rs 1000cr

Doubtful loans (D-3, unsecured) - Rs 600cr

Loss Assets - 50cr and

other assets - Rs 500cr.

Answer the following questions, based on this information, by using standard Approach for credit risk.

1. What is the amount of RWAs for investment in govt securities?

a. Rs 5000cr

b. Rs 3500cr

c. Rs 2500cr

d. Nil

2. What is the amount of RWAs for sub-standard secured accounts?

a. Rs 500cr

b. Rs 7500cr

c. Rs 1000cr

d. Rs 1500cr

3. What is the amount of RWAs for sub-standard unsecured accounts?

a. Rs 500cr

b. Rs 7500cr

c. Rs 1000cr

d. Rs 1500cr

4. What is the amount of RWAs for doubtful (D-1, Secured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

5. What is the amount of RWAs for doubtful (D-1, unSecured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

6. What is the amount of RWAs for doubtful (D-2, Secured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

7. What is the amount of RWAs for doubtful (D-2, unSecured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

8. What is the amount of RWAs for doubtful (D-3, Secured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

9. What is the amount of RWAs for doubtful (D-3, Secured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

10. What is the amount of RWAs for retail loans?

a. 3000cr

b. 4000cr

c. 5000cr

d. 6000cr

11. What is the amount of RWAs for housing loans?

a. 3000cr

b. 4000cr

c. 5000cr

d. 6000cr

Solution :

1. d

RW against Govt Securities = 0 %

So, RWA

= 10000 x 0%

= 0 Cr

2. d

If the provision is less than 20 %, then RW is 150%

If the provision is 20-50 %, then RW is 100%

If the provision is more than 50 %, then RW is 50%

Provision in Sub-Standard Secured - 15 %, and so, RW = 150 %

So, RWA

= 1000 x 150 %

= 1500 Cr

3. a

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in Sub-Standard Un-Secured - 25 %, and so, RW = 100 %

So, RWA

= 500 x 100 %

= 500 Cr

4. c

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-1, Secured) - 25 %, and so, RW = 100 %

So, RWA

= 800 x 100 %

= 800 Cr

5. a

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-1, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 600 x 50 %

= 300 Cr

6. b

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-2, Secured) - 40 %, and so, RW = 100 %

So, RWA

= 500 x 100 %

= 500 Cr

7. b

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-2, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 1000 x 50 %

= 500 Cr

8. b

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-3, Secured) - 100 %, and so, RW = 50 %

So, RWA

= 1000 x 50 %

= 500 Cr

9. a

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-3, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 600 x 50 %

= 300 Cr

10. a

RW on retail loans = 75 %

So, RWA

= 4000 x 75%

= 3000 Cr

11. a

RW on housing loans = 50 %

So, RWA

= 6000 x 50%

= 3000 Cr

In a loan a/c, the balance outstanding is Rs. 5 lacs and a cover of 75% is available from CGTMSE. The a/c

has been doubtful since 01.10.2011 and the value of security held is Rs. 2 lacs. What will be the total

provision to be made for this account as on 31.03.2015?

a. Rs. 500000

b. Rs. 275000

c. Rs. 225000

d. Rs. 75000

Ans - b

Friends, actually in case the advance covered by CGTMSE guarantee becomes nonperforming,

no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for nonperforming

advances.

Fund Trust For Micro And Small Enterprises (CGTMSE) guarantee.

So,

Explanation :

Outstanding balance = Rs. 5 lacs, Security available = Rs. 2 lacs

NET WORTH RS. 1500 CRS

T1 + T2 CAPITAL RS 3500 CRS

RSA RS 22500 CRS

RSL RS 21000 CRS

DA WT MODIFY DURATION OF ASSETS 1.80

DL WT MODIFY DURATION OF LIABILITY 1.10

DURATION OF GAP FOR BANK IS ESTAMATED AT

a. 0.77

b. 0.73

c. 0.62

d. NONE

Ans - a

DWAP = DA-W*DL

= FIRST CALCULATE W=RSL/RSA=21000/22500=.933

= 1.80-.933*1.10

= 0.77

LEVERAGE RATIO IS

a. 6.43

b. 15

c. 14.33

d. 6.14

Ans - a

LEVERAGE RATIO = RSA/(TIER1+TIERII)

= 22500/3500

= 6.428

.............................................

MODIFY DURATION OF EQUITY IS

a. 4.97

b. 5.99

c. 3.68

d. 9.56

Ans - b

Modified duration = DGAP*leverage ratio

= 0.933*6.43

= 5.99

The assets side of balance sheet of International Bank provides the following information:

Fixed Assets — 500 cr, Investment in Central govt. securities — Rs.5000 cr. In standard loan accounts,

the Retail loans — Rs.3000 cr, House Loans- Rs.2000 cr (all individual loans below Rs.30 lac and fully secured by mortgage), Other loans — Rs.10000 cr. Sub-standard secured

loans — Rs.500 cr, sub-standard unsecured loans Rs.150 cr, Doubtful loans Rs.800 cr (all DF-1 category

and fully secured) and other assets-Rs.200 cr. Based on this information, by using Standard Approach for

credit risk, answer the following questions.

1. What is the amount of risk weighted assets for retail loans?

a) Rs.3000 cr

b) Rs.2500 cr

c) Rs.2250 cr

d) Zero, as retail loans are risk free

Ans - c

2. What is the amount of risk weighted assets for housing loans?

a) Rs.2000 cr

b) Rs.1800 cr

c) Rs.1500 cr

d) Rs.1000 cr

Ans - d

3. What is the amount of risk weighted assets for investment in govt. securities?

a) Rs.5000 cr

b) Rs.2500 cr

c) Rs.1000 cr

d) nil

Ans - d

4. What is the amount of risk weighted assets for sub-standard secured accounts?

a) Rs.250 cr

b) Rs.500 cr

c) Rs.750 cr

d) Rs.1000 cr

Ans - c

5. What is the amount of risk weighted assets for sub-standard unsecured accounts?

a) Rs.75cr

b) Rs.112.50 cr

c) Rs.150 cr

d) Rs.225 cr

Ans - c

6. What is the amount of risk weighted assets for doubtful accounts?

a) Rs.400 cr

b) Rs.600 cr

c) Rs.800 cr

d) Rs.1600 cr

Ans - c

Explanations :

1: RW is 75% on retail loans. RW value = 3000 x 75% = 2250

2: RW is 50% on housing loans for individual loan up to Rs.30 lac. RW value = 2000 x 50% = 1000

3: On claims against Central govt., the risk weight is zero. 5000 x 0% = 0

4: RW is 150%, if the provision is less than 20% and 100%, if the provisions is 20% and 50%, where the

provision is 50% of the outstanding balance. In sub-standard secured account, the provision being 15%,

RW is 150%. Hence RWA = 500 x 150% = 750 cr

5: RW is 150%, if the provision is less than 20%, nd 100%, if the provisions is 20% and 50%, where the

provision is 50% of the outstanding balance. In sub-standard unsecured account, the provision being

25%, RW is 100%. Hence RWA = 150 x 100% = 150 cr

6: RW is 150%, if the provision is less than 20% and 100%, if the provisions is 20% and 50%, where the

provision is 50% of the outstanding balance. In doubtful up to one year category (DF1) account, the

provision being 25%, RW is 100%. Hence RWA = 800 x 100% = 800 cr

CGTMSE cover of 75% available on the remaining amount

= (500000 – 200000) x 75/100

= 300000 x 75/100 = 225000

We will take the uncovered amount for taking provision, which will be,

300000 - 225000 = 75000

Since loan is in doubtful category for more than 3 years, we will take 100 % Provision for security value.

=200000

So total provision will be,

75000+200000

= 275000

Asset in doubtful category for 2 years – Rs. 500000/-

Realization value of security – Rs. 300000/-

What will be the provision requirement?

a. Rs. 500000/-

b. Rs. 320000/-

c. Rs. 200000/-

d. Rs. 175000/-

Ans - b

Explanation

Provision for secured portion of Doubtful Cat for 2 years = 40%

Provision for unsecured portion of Doubtful Cat for 2 years = 100%

Here,

Secured portion = Rs. 300000

Unsecured portion = Rs. 200000

Provision

= (300000 * 40/100) + 200000

= 120000 + 200000

= 320000

Balance sheet of a bank provides the following information:

sub-standard secured loans - Rs 1200cr

sub-standard unsecured loans - Rs 600cr

Doubtful loans (D-1, secured) - Rs 1000cr

Doubtful loans (D-1, unsecured) - Rs 500cr

Doubtful loans (D-2, secured) - Rs 800cr

Doubtful loans (D-2, unsecured) - Rs 1000cr

Doubtful loans (D-3, secured) - Rs 600cr

Doubtful loans (D-3, unsecured) - Rs 1000cr

Loss Assets - 100cr and

other assets - Rs 400cr

Fixed Assets - 1500cr

Investment in central Govt Securities - Rs 20000cr

In standard loan accounts

Housing Loans - RS 10000cr (Secured, below Rs 10 lac)

the Retail loan - Rs 8000cr

Other loans - Rs 12000cr

Answer the following questions, based on this information, by using standard Approach for credit risk.

1. What is the amount of RWAs for investment in govt securities?

a. Rs 5000cr

b. Rs 10000cr

c. Rs 15000cr

d. Nil

2. What is the amount of RWAs for sub-standard secured accounts?

a. Rs 600cr

b. Rs 1200cr

c. Rs 1800cr

d. Rs 2400cr

3. What is the amount of RWAs for sub-standard unsecured accounts?

a. Rs 600cr

b. Rs 1200cr

c. Rs 1800cr

d. Rs 2400cr

4. What is the amount of RWAs for doubtful (D-1, Secured) accounts?

a. Rs 500cr

b. Rs 1000cr

c. Rs 1500cr

d. Rs 2000cr

5. What is the amount of RWAs for doubtful (D-1, unSecured) accounts?

a. Rs 250cr

b. Rs 500cr

c. Rs 750cr

d. Rs 1000cr

6. What is the amount of RWAs for doubtful (D-2, Secured) accounts?

a. Rs 400cr

b. Rs 800cr

c. Rs 1000cr

d. Rs 1200cr

7. What is the amount of RWAs for doubtful (D-2, unSecured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

8. What is the amount of RWAs for doubtful (D-3, Secured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

9. What is the amount of RWAs for doubtful (D-3, Secured) accounts?

a. Rs 300cr

b. Rs 500cr

c. Rs 800cr

d. Rs 900cr

10. What is the amount of RWAs for retail loans?

a. 3000cr

b. 4000cr

c. 5000cr

d. 6000cr

11. What is the amount of RWAs for housing loans?

a. 3000cr

b. 4000cr

c. 5000cr

d. 6000cr

Solution :

1. d

RW against Govt Securities = 0 %

So, RWA

= 10000 x 0%

= 0 Cr

2. c

If the provision is less than 20 %, then RW is 150%

If the provision is 20-50 %, then RW is 100%

If the provision is more than 50 %, then RW is 50%

Provision in Sub-Standard Secured - 15 %, and so, RW = 150 %

So, RWA

= 1200 x 150 %

= 1800 Cr

3. a

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in Sub-Standard Un-Secured - 25 %, and so, RW = 100 %

So, RWA

= 600 x 100 %

= 600 Cr

4. b

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-1, Secured) - 25 %, and so, RW = 100 %

So, RWA

= 1000 x 100 %

= 1000 Cr

5. a

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-1, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 500 x 50 %

= 250 Cr

6. b

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-2, Secured) - 40 %, and so, RW = 100 %

So, RWA

= 800 x 100 %

= 800 Cr

7. b

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-2, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 1000 x 50 %

= 500 Cr

8. a

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-3, Secured) - 100 %, and so, RW = 50 %

So, RWA

= 600 x 50 %

= 300 Cr

9. b

If the provision is less than 20 %, then RW is 150%

If the provision is 20-49 %, then RW is 100%

If the provision is 50% or more, then RW is 50%

Provision in doubtful (D-3, unsecured) - 100 %, and so, RW = 50 %

So, RWA

= 1000 x 50 %

= 500 Cr

10. d

RW on retail loans = 75 %

So, RWA

= 8000 x 75%

= 6000 Cr

11. c

RW on housing loans = 50 %

So, RWA

= 10000 x 50%

= 5000 Cr

An advance of Rs. 400000/- has been declared sub standard on 31/05/2015. It is covered by securities

with realizable value of Rs. 250000/-.

What will be the total provision in the account as on 31/03/2015?

a. 150000

b. 75000

c. 55000

d. 50000

Ans - b

Explanation :

Sub standard assets will attract provision of 15 % for secured portion and 25 % for unsecured portion.

So,

= 15% of 250000 + 25% of of 150000

= 37500 + 37500

= 75000

International Bank has provided the following information relating to its advance portfolio as on Mar 31,

2015:

Total advances Rs.40000 cr. Gross NPA 9% and Net NPA 2%. Based on this information, answer the

following questions?

01. Considering that all the standard loan accounts represent general advances, what is the amount of

provision for standard loan accounts:

a) Rs.160 cr

b) Rs.151.90 cr

c) Rs.145.60 cr

d) Rs.141.50 cr

02. What is the provision on NPA accounts?

a) Rs.3600 cr

b) Rs.3200 cr

c) Rs.2800 cr

d) Incomplete information. Cannot be calculated.

03. What is the total amount of provisions on total advances,including the standard accounts?

a) Rs:3612.30 cr

b) Rs.2945.60 cr

c) Rs.2840.20 cr

d) Incomplete information. Cannot be calculated.

04. What is the amount of gross NPA ?

a) Rs.4000 cr

b) Rs.3600 cr

c) Rs.3200 cr

d) Rs.2800 cr

05. What is the amount of net NPA?

a) Rs.800 cr

b) Rs.1000 cr

c) Rs.1200 cr

d) Incomplete information.

06. What is the provision coverage ratio for NPA?

a) 70%

b) 74.3%

c) 75.2%

d) 77.8%

07. What is the minimum amount of provisions to be maintained by the bank to meet the provisioning

coverage ratio of 70%?

a) Rs.3600 cr

b) Rs.3200 cr

c) Rs.2880 cr

d) Rs.2520 cr

Answers: 1-c 2-c 3-b 4-b 5-a 6-d 7-d

Explanations:

Que-1: Standard account Total = 40000 cr — 9% NPA = 3600 cr. = 40000 — 3600 = 36400 cr. Provision at

0.4% = 36400 x 0.4% = 145.60 cr

Que-2: Provision on NPA = Gross NPA 9% - net NPA 2% = 7% i.e. 40000 x 7% = 2800 cr.

Que-3: Provision on NPA = Gross NPA 9% - net NPA 2% = 7% i.e. 0000 x 7% = 2800 cr. Provision on

standard accounts Rs.145.60 cr. Hence total

provision = 2945.60 cr.

Que - 4 : 40000 x 9% = 3600 cr

Que - 5 : 40000 X 2% = 800 cr

Que - 6 : Total provision on NPA / Gross NPA = 2800/3600 = 77.8%

Que - 7 : Gross NPA x 70% = 3600 x 70% = 2520 cr

You have given the following information, in summary about the profit & loss a/c of the c bank

Interest earning Rs 120000 cr

Other income Rs 1800 cr

Profit on sale of fixed assets Rs 120 cr

Income from sale of third party products Rs 80 cr

On expenses side

Interest expenses are Rs 8200 cr

Operating expences Rs 3400 cr

Provisions of Rs 1600cr

Answer following

Operating profit for the bank ......

a. Rs 800cr

b. 4400 cr

c. 2400 cr

d. 2800 cr

Ans - c

Gross income for the purpose of working out capital charge for operational risk under Basel II would be

......

a. 6000 cr

b. 4400 cr

c. 4000cr

d. 2600cr

Ans - a

Under basic indicator approach the bank would be required to allocate capital for operational risk under

Basel-ii based on operations for one

year as.

a. 900 cr

b. 600 cr

c. 300 cr

d 1200 cr

Ans - a

The risk weighted assets for operational risk under basel-II in the above case would be:

a. 11250 cr

b. 90000 cr

c. 5000 cr

d. 6000 cr

Ans - a

The allocation of capital for market risk under basel-II would be ......

a. 296 cr

b. 592 cr

c. 444 cr

d. Insufficient data to calculate the capital required

Ans -d

A company enjoys cash credit account with a bank. It also has a term loan account with o/s balance of

Rs. 15 Crores as on 31-03-2015. The bank has also subscribed to the bonds issued by the borrower

company amounting to Rs. 3 Crores. As on 31-03-2015, the CC account with o/s balance of Rs 1.20 Crs is

required to be classified as NPA. There is no default in payment of interest and installment in the term

loan and bonds. What will be the amount that will become NPA on account of this company?

a. Rs. 1.20 Crores

b. Rs. 4.20 Crores

c. Rs. 16.20 Crores

d. Rs. 19.20 Crores

Ans - d

= 15+3+1.20 = 19.20

A bank has compiled following data for computing its CRAR as on 30 Sep 2014

Tier I capital 2500

Tier ii capital 2000

RWA for credit risk other than retail assets

(include 2000 crores of commercial real estate - 35,500

Exposure on retail assets - 8,700

Total eligible financial collaterals available for retail assets - 1200

Capital charge for general market risk net position - 450

Capital charge for specific risk - 190

Capital charge for equity - 150

Vertical adjustment - 15

Horizontal adjustment - 10

Total capital charge for options - 70

Gross income for the previous year - 495

Gross income for the year before previous year - 450

Gross income for 2nd year before previous year - 390

Based on the data given above, answer the following questions.

The capital required for credit risk at minimum required rate as per RBI is ......

a. Rs. 4585 Crores

b. Rs. 4383 Crores

c. Rs. 3701 Crores

d. Rs. 3508 Crores

Ans - c

= 8700-1200=7500

@ 75% =5625

35500+5625=41125

9%= 3701 Crs

Total Risk weighted assets for market risk is ......

a. Rs. 9833 Crores

b. Rs. 9553 Crores

c. Rs. 8952 Crores

d. Rs. 7156 Crores

Ans - a

Total Risk weighted assets for market risk

= 450+190+15+10+150+70

= 885/.09

= 9833 Crores

.......

Total weighted assets for operational risk is ……

a. Rs. 4944 Crores

b. Rs. 4323 Crores

c. Rs. 9553 Crores

d. Rs. 7156 Crores

Ans - a

1335/3

=885/.09

=4944

The CRAR of the bank as on 30th Sept 2013 is ……

a. 7.35 %

b. 8.05 %

c. 9.22 %

d. 10.23 %

Ans - b

41125+9833+4944 = 55902

4500/55902

= 8.049

.............................................

The bank compares its tier I CRAR with minimum require tier I CRAR and finds

a. Its tier I CRAR is more and exceeds requirement by 675 Crs

b. Its tier I CRAR is more and exceeds requirement by 355 Crs

c. Its tier I CRAR falls short by Rs 854 Crs

d. None of these

Ans - c

(As per RBI, Tier I capital adequacy ratio should be atleast 6 %)

RWA is 55902

6 % of 55902 = 55902 x 6/100 = 3354.

Tier I capital is 2500.

So, 3354-2500=854

Tier I capital will be short fall by Rs. 854 Crores.

**Random Question for Practice**A claim of Rs. 60 lacs has been settled by ECGC in favour of a bank against default of Rs. 80 lacs.

Subsequently the bank realizes Rs. 20 lacs with the collaterals available to the loan. What is the loss

suffered by the bank on this loan?

a. Rs. 25 lacs

b. Rs. 20 lacs

c. Rs. 15 lacs

d. Rs. 10 lacs

Ans – c

Explanation :

ECGC had settled Rs. 60 lacs on default of 80 Lacs (That is 75% of the default amount)

But Subsequent to that settlement, Rs. 20 lacs was realised through the security held. So, the claim

amount from ECGC should be, 60 Lacs only from ECGC.

And the ECGC had settled only 75 % of the claim amount. So, the settlement amount will be,

75% of Rs. 60 lacs = 6000000 x 75/100 = 45 lacs

So, total realised value = 4500000 + 2000000 = 6500000 (out of 80 lacs)

So, the bank had suffered loss Rs. 15 lacs on this loan.

Modified duration is McCauley's duration discounted by one period yield to maturity

Here we are talking McCauley's duration is 8 years.

Modified duration =McCauley's duration / ( 1 + yield )

= 8 /(1 + 10%)

= 8/(1 +0.1)

= 8/(1.1)

= 7.2727

**133**

% change in price =- modified duration × yield change

= - 7.2727× (0.60%)

= (-)4.3636 %

= (-) 4.36%

( - )means decrease in price

- % decrease in price. .

Data relating to balance sheet as on 14 Mar 2015 banks reveals its capital at Rs 1110 cr, reserve 2150 cr,

demand deposit 6500cr,SB deposit 20500 cr, term deposits from banks 1300 cr, term deposit from

public 30800 cr, borrowing from RBI nil, borrowing from other institutions 200 cr, refinance from

NABARD 150 cr, bills payable 50 Cr, accrued 20 cr, subordinated debt 200 cr and credit balance in

suspense a/c 30 cr (Total Being 63000)

Answer the following based on the data given above.

Total amt of liabilities not to be included in computing DTLs in Rs

a. 3250 cr

b. 3300 cr

c. 4600 cr

d. 4700 cr

Ans - d

In time liabilities capital and reserve + refinance from NABARD + term deposit of banks not to be

included

1100+2150+150+1300

=4700

Total amount of DTL on which CRR is to be maintained

a. Rs. 58100 cr

b. Rs. 63000 cr

c. Rs. 58300 cr

d. Rs. 67100 cr

Ans – c

6500+20500+30800+200+50+20+200+30=58300

other than those not included while calculating DTL

Bank would required to maintain average CRR amounting to, if the rate of CRR is 5%

a. 2915

b. 2905

c. 1749

d. 3150

Ans – c

= 5% of 58300

= 2915

What are the risk weighted assets for market risk?

a. Rs. 1000 crores

b. Rs. 1500 crores

c. Rs. 2000 crores

d. Rs. 2500 crores

Ans –d

200/.08

=2500

What are the risk weighted assets for operational risk?

a. Rs 1000 Cr

b. Rs 2000 Cr

c. Rs 1250 Cr

d. Rs 2500 Cr

Ans – c

100/.08

= 1250 Ans

.............................................

What is the Tier-I CRAR?

a. 10.29 %

b. 11.42 %

c. 5.71%

d. 14.85 %

Ans - c

TIER-I CRAR=Eligible tier-1 capital/(Total RWAs)

= 500/8750

= 5.71%

.............................................

What is the total capital adequacy ratio?

0.1486

0.1111

**127**

0.1143

0.1282

Ans – c

Total CRAR = Eligible Total capital/(Total RWAs)

= 1000/8750

= 11.42 %

(Remember here tier-II capital does not exceed 100 % of tier-I capital. So, Tier-II of Rs. 500Crore is taken

for calculation (500+500=1000).

.............................................

If there is an assets of Rs. 120 in the doubtful-I cat and the realization value of security is Rs. 100 only,

what will be the provision requirement?

a. Rs. 40

b. Rs. 45

c. Rs. 50

d. Rs. 60

Ans – b

Since it a doubtful-I cat asset, so 25% of realization value Rs.100 i.e Rs. 25 and 100% of short Fall that is

120-100=20 so ans will be

20+25=45

.............................................

Balance sheet of a company indicated that its Current Ratio is 1.5:1. Company’s net working capital is Rs.

1 crore. The current assets would amount to ......

a. Rs. 2 crores

b. Rs. 2.5 crores

c. Rs. 3 crores

d. Rs. 3.5 crores

Ans – c

One year T-bill rate is 10% and the rate on one year zero coupon debenture issued by ABC Ltd is 11%.

What is the probability of default?

a. 1%

b. 2%

c. 3%

d. 4%

Ans - a

Explanation :

Formula for probability of default is :

1-P = 1 – [(1+i)/(1+k)]

= 1 - (1.1/1.11)

= 1 - 0.990

=0.01

= 1%

How capital charge is calculated under basic indicator approach for operational risk?

a. capital charge equals internally generated measure based on internal and external loss data

b. 15% of average gross income over 3 years

c. sum of capital charges across business lines

d. none of these

Ans – b

Mr. Raj purchases a call option for 500 shares of A with strike price of Rs. 140 having maturity after 03

months at a premium of Rs. 40. On maturity, shares of A were priced at Rs. 180. Taking interest cost @

12% p.a. What is the profit/lost for the individual on the transaction?

a. Profit of Rs. 20000

b. Profit of Rs. 600

c. Loss of Rs. 20600

d. Loss of Rs. 600

Ans - d

Explanation.

This is call option, so it is assumed that,

He will purchase 500 shares of A at a price of 140

Total value of shares is = 70000

Then he will sell the total shares in the market at a price of 180.

500 × 180 = 90000

So profit of 20000 in the transaction. .

But he has to pay the premium for call options.

Which is 40 × 500 = 20000

And the fund interest cost will be, 12% p.a. So for 03 months 12/4=3%)

= 20000 × 3/100 = 600

Total premium + premium cost

= 20000 + 600

= 20600

In total,

= 20000 - 20600

= - 600

Basel II defines capital requirement as ......

a. Capital = Min capital ratio (8%) * (Credit Risk + Market Risk + Operational Risk)

b. Capital = Min capital ratio (8%) * (Credit Risk + Market Risk)

c. Capital = Min capital ratio (8%) * Credit Risk + Market Risk * Operational Risk

d. Capital = Min capital ratio (18%) * (Credit Risk + Market Risk + Operational Risk)

Ans – a

A bond with a coupon rate of 9% maturing in 2015 and trading at Rs 180 will have yield of …...

a. 4%

b. 5%

c. 6%

d. 7%

Ans - b

Explanation :

Current yield = Coupon rate/Prevailing market value

= 9/180= 5%

A bank borrows US $ for 03 months @ 3.0% and swaps the same in to INR for 03 months for deployment

in CPs @ 5%. The 3 months premium on US $ is 0.5%.

What is the margin(gain/loss) generated by the bank in the transaction?

a. 2%

b. 3%

c. 1.5%

d. 2.5%

Ans - c

Explanation :

Bank borrows US $ for 3 months @ 3%

Same it will invest in CP for 3 months @ 5%

So, it gains 2% by interest rate margin here.

But when bank repay its borrowing in $, it has pay 0.5% extra because US $ will be costly by 0.5% as US $

is at premium.

So it will reduce bank gain by 0.5%.

2.0% - 0.5 %

= 1.5%

XYZ Bank’s foreign correspondent maintaining a Nostro Rupee account with XYZ bank, wants to fund his

account by purchase of Rs. 10.00 million, against US dollars. Assuming that the USD/INR interbank

market is at 56.2380/2420, what rate would be quoted to the correspondent, ignoring exchange

margin? Calculate amount of USD XYZ Bank would receive in its USD Nostro account, if the deal is struck.

a. 175438.60

b. 177803.07

c. 177815.71

d. 178571.43

Ans - c

Explanation :

The transaction is to sell Rs 10.00 million, against US dollars.

Hence the XYZ Bank would quote the lower of the two rates, i.e. 56.2380.

If the deal is struck, the foreign bank would pay Rs. 10000000/56.2380 = USD 177815.71 to XYZ Bank

USD Nostro account.

Given the following, Probability of occurrence = 4, Potential financial impact = 4, Impact of internal

controls = 0%. What is the estimated level of operational risk?

a. 3

b. 2

c. 0

d. 4

Ans – d

Estimate level

= √*probability of occurrence*potential financial impact ( 1-% of impact of internal controls )]

= 4*4(1-0)^0.5 = 4

Volatility over a time horizon 'T' is calculated as follows:

a. Volatility over a time horizon T = Daily Volatility * vT

If the volatility per annum is 25% and the number of trading days per annum is 252, find the volatility

per day.

a. 1.58%

b. 15.8%

c. 158%

d. 0.10%

Ans - a

Daily volatility of a stock is 0.5%. What is its 10-day volatility?

a. 5%

b. 0.25%

c. 1.58%

d. None of these

Ans – c

Given the following

Probability of occurrence = 4

Potential financial impact = 4

Impact of internal controls =5 0%

What is the estimated level of operational risk?

a. 3

b. 2

c. 0

d. 4

Ans – b

Book value of shares of the company as on 31-03-2015

a. Rs. 10 cr

b. Rs. 30 cr

c. Rs. 40 cr

d. Rs. 80 cr

Ans – c

Book value of shares = (paid up capital + reserve)/no of shares

= (20+60)/2

= 40

The earning per share would be ......

a. Rs. 40 cr

a. Rs. 30 cr

a. Rs. 20 cr

a. Rs. 10 cr

Ans – d

EPS=NPAT/paid up capital* face value

= 20/20*10

= 10

Market price of the share of the co......

a. Rs. 50 cr

a. Rs. 100 cr

a. Rs. 200 cr

a. Rs. 300 cr

Ans – b

Market price = PER * EPS

= 10*10

= 100

bond having a McCauley’s duration of 8 Yr is yielding 10% at present. What will be the modified

duration?

a) 8.8181

b) 8.2323

c) 7.5353

d) 7.2727

Ans - d

Modified duration is McCauley's duration discounted by one period yield to maturity

Here we are talking McCauley's duration is 8 years.

Modified duration =McCauley's duration / ( 1 + yield )

= 8 /(1 + 10%)

= 8/(1 +0.1)

= 8/(1.1)

= 7.2727

Calculation of capital for market risk

International Bank has paid up capital of Rs.100 cr, free reserves of Rs.300 cr, provisions and

contingencies reserves reserve of Rs.300 cr, Perpetual non-cumulative preference shares of Rs.400 cr,

and subordinated debt of Rs.300 cr. The risks for credit and operational risk are Rs.10000 cr and for

market risk Rs.4000 cr. Based on the above information, answer the following questions?:

1. What is the amount of Tier-1 capital?

a) 900 cr

b) 800 cr

c) 750 cr

d) 610 cr

Ans - b

2. Calculate the amount of Tier-2 capital?

a) 900 cr

b) 800 cr

c) 750 cr

d) 610 cr

Ans - d

3. Calculate the amount of capital fund.

a) 800 cr

b) 1200 cr

c) 1410 cr

d) 1620 cr

Ans - c

4. What is the capital adequacy ratio of the bank?

a) 9%

b) 9.65%

c) 10.05%

d) 10.07%

Ans - d

5. What is amount of minimum capital to support credit and operational risk?

a) 900 cr

b) 950 cr

c) 1000 cr

d) 1250 cr

Ans - a

6. What is the amount of minimum Tier 1 and Tier 2 to support the credit and operational risk?

a) 900 cr, 900 cr

b) 600 cr, 900 cr

c) 450 cr, 450 cr

d) 300 cr, 450 cr

Ans - c

7. What is the amount of Tier-1 capital fund, to support market risk?

a) 450 cr

b) 350 cr

c) 250 cr

d) 185 cr

Ans - b

8. What is the amount of Tier-2 capital fund, to support market risk?

a) 450 cr

b) 350 cr

c) 250 cr

d) 160 cr

Ans - d

01.What is the amount of Tier-1 capital?

solution :

Paid up capital + free reserves + perpetual non cumulative preferences shares ( pncp)

= 100+300+400

= 800

02. Calculate the amount of Tier-2 capital?

solution :

Tier 2 capital

= subordinate debt + 45% of revaluation reserve (discount of 55%) + 1.25 % of rwa ( for contingency

reserve & provision whichever is lower)

= 300 + 45% of 300 + 1.25% of 14000

= 300 + 135 + 175

= 610

3. Calculate the amount of capital fund.

solution :

Total capital. .

= tier 1 + tier 2

= 800+610

= 1410

4. What is the capital adequacy ratio of the bank?

solution :

Capital adequacy ratio= (tier 1 + tier 2)/rwa

=800+610/14000

= 1410 / 14000

= 0.10071

= 10.07 %

5. What is amount of minimum capital to support credit and operational risk?

solution :

Minimum capital required for credit & operation risk together is..

= 9% of 10000

=10000X9/100

900

A bank’s G sec portfolio has 100 day VaR at 95% confidence level of 4% based on yield.

What is the worst case scenario over 25 days?

a. Increase in yield by 0.4%

b. Decrease in yield by 0.4%

c. Increase in yield by 2%

d. Decrease in yield by 2%

Ans - c

Solution :

100 day VaR is 4 %. So one day Var is,

4 = one day VaR × square root of 100

4 = one day VaR × 10

One day VaR = 0.4 %

25 day VaR = 0.4 × suare root of 25

= 0.4 × 5

= 2 %

In worst case scenario yield will always increase. .

Because this will decrease the market price or value. .

Answer is increase in yield by 2 %

.

Calculation of Economic Value of Equity

Net Worth = 1350.00

RSA =18251.00 RSL = 18590.00

Modified duration GAP

DA = 1.96 DL = 1.25

01. What is Weight (W) ?

a. 1

b. 1.02

c. 1.33

d. 1.66

Ans - b

Solution:

Calculate weight (W) = RSL/RSA

=18590/18251

=1.018

=1.02

02. What is DGAP ?

a. 0.33

b. 0.48

c. 0.69

d. 0.81

Ans - c

Solution

DGAP (modified duration gap) = DA - (W*DL)

= 1.96 - (1.02*1.25)

= 1.96 - 1.1275

= 0.685

= 0.69

03. What is Leverage Ratio?

a. 12.33

b. 13.22

c. 13.52

d. 13.66

Ans - c

Solution

Leverage ratio= RSA/ Networth

= 18251/1350

= 13.52

04. What is Modified Duration of Equity?

a. 6.33

b. 7.33

c. 8.33

d. 9.33

Ans - d

Solution:

Modified duration of equity (MD) = DGAP * leverage ratio

= 0.69 * 13.52

= 9.3288

= 9.33 years

05. If there is 200 bp change in Rate what is drop in Equity Value?

a. 18.66

b. 20.33

c. 22.66

d. 24.33

Ans - a

Solution

Equity value=Change in rate (BP)*MD

=200*9.33/100

=18.6576

=18.66%

Please go through the RBI circular for BASEL III as most of the questions come from them.