Examination Paper: Banking and Financial Services Management

IIBM Institute of Business Management

Examination Paper MM.100

Principles and Practices of Banking

Section A: Objective Type (30 marks)

This section consists of Multiple Choice questions & Short Answer type questions.
Answer all the questions.
Part One questions carries 1 mark each & Part Two questions carries 4 marks each.

Part One:

Multiple Choices:

1. Frequency of First Tranche Returns is:

a. Weekly
b. Monthly
c. Monthly/quarterly
d. Monthly/quarterly/half-yearly

2. An order for winding up a banking company can be issued by:

a. The High Court
b. The RBI
c. The Central Government
d. The Supreme court

3. Who shall be natural guardian in case of married minor girl?

a. Father
b. Brother in law
c. Father-in-law
d. Husband

4. X a partner in the firm XYZ Co. wants to open a Bank account in the firms name. It will require
signatures of:
a. All partners
b. Any one of the partner
c. Managing partner only
d. Sleeping partner not required

5. Public limited companies should have minimum shareholders, before Opening Bank account.
a. 11
b. 7
c. 5
d. 15

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Examination Paper: Banking and Financial Services Management

6. If the beneficiary is government then the Expiry of guarantee is governed by the law of
limitation ranging from 3 years to:
a. 15 years
b. 30 years
c. 20 years
d. 10 years

7. Charge created on LIC Policy is:

a. Lien
b. Hypothecation
c. Pledge
d. Assignment

8. The device that combines the parallel input data into single serial output data is known as:
a. Switcher
b. Multiplexer
c. Encoder
d. Front end processor

9. In market skimming pricing strategy:

a. Initially price is lower and then it is increased
b. Initial price is high and is maintained high
c. Initial price is low and is maintained low
d. Initially price is higher and then it is reduced

10. The marketing personnel need information intervals.

a. At yearly
b. At quarterly
c. At monthly
d. On a continuous basis and regular

Part Two:

1. Explain Cryptography and the need of keys. Convince.

2. Define the term obscenity used in E-commerce.

3. What do you understand by Real time accessement?

4. What Marketing mix conveys in modern marketing theory? Explain in short.

5. Write a note on Labeling in product development.

END OF SECTION A

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IIBM Institute of Business Management
Examination Paper: Banking and Financial Services Management

Section B: Caselets (40 marks)

This section consists of Caselets.

Answer all the questions.
Each Caselet carries 20 marks.
Detailed information should form the part of your answer (Word limit 150 to 200 words).

Caselet 1

There is a lacuna in the present T-Bill auction system of RBI. The dealers (investors) are subject to
what is called the Winners Curse. The value of a T-Bill to a dealer is the price it can fetch in the
secondary market. This is an unobserved random value, which is likely to be common to all dealers.
It is quite unlike the works of art which the Sothebys would place at an auction. The price of Mona
Lisa, say, to an avid collector of Da Vincis paintings, would be more than what a Picasso collector
would value it. In sharp contrast, market participants are likely to agree on the price of a T-Bill in the
secondary market. Now winning an auction in a discriminatory price method may not be profitable.
For, it would mean that the winner has overestimated the T-Bill value.

Questions:

1. How does the winner in such an auction become the loser due to the winner curse?

2. Explain the role of primary dealers in the money market.

Caselet 2

In a bid to familiarize banks, exporters and other financial bodies with Forfeiting, the State Bank of
India (SBI) will soon be setting up a three-man cell at its international division in Mumbai for
advisory purposes. According to Mr. D. Ian Guild, Senior Advisor, Forfeiting & Syndications
Group, Standard Bank, the cell was being set up after a series of meetings with the bank, and is
essentially aimed at spreading the message of Forfeiting as an effective trade financing mechanism
to increase exports. Suggesting that forfeiting was the ideal springboard for effecting a quantum
jump in exports in the medium-term, Mr. Guild said he was confident of aggregating forfeiting
business of $100 millions in 1998 and $250 millions in 1999 in the country. Since its introduction in
1992, Exim Bank had facilitated 69 forfeiting transactions valued at around $75 millions, with credit
periods ranging between 90 days and seven years, and covering the export of goods ranging from
textiles to plant and machinery. The RBI has now permitted all commercial banks to act as
facilitators for forfeiting transactions. Mr. Guild pointed out that forfeiting has not really taken off in
India because exporters and commercial banks lacked the knowledge of the mechanics of the
scheme. In India, the real challenge would be to motivate small and medium exporters to use the
forfeiting route for exports to countries which may not be able to buy on cash terms. Mr. S.
Bhattacharya, deputy general manager, Exim Bank, Calcutta, said: Payment defaults by overseas
buyers were an integral part of cross-border business and export credit insurance has not been a
comprehensive answer to this problem. Forfeiting offered an alternative solution, especially to
exporters wishing to penetrate difficult markets for the first time, he pointed out. Some of the top
international forfeiters in the world have stopped accepting forfeiting documents involving Pakistan
and Russia, according to Mr. Amitabh Mehta, Trader and Originator, Forfeiting and Syndications

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IIBM Institute of Business Management
Examination Paper: Banking and Financial Services Management

group, Standard Bank London Ltd. (SBLL). According to Mr. Mehta, forfeiting transactions
involving Pakistan could not be carried out due to poor performance of the banks there. In addition,
the financial status of Pakistan following the nuclear blasts has made it impossible to carry out the
transactions. Similarly, transactions with Russia are being totally rejected by forfeiting due to the
current economic turmoil. Joining the list with Pakistan and Russia are Iraq, Sudan and Nigeria, he
added. Commenting on the Indian situation, Mr. Mehta said, With its sound banking system, the
country is well placed in the international scene. In fact, there is tremendous potential for forfeiting
in the years to come, he said. According to him, even after the nuclear tests conducted by India, the
top forfeiters were not worried and continued to accept forfeiting papers to be transacted with India.

Questions:

1. Discuss the mechanism of forfeiting and the role played by banks in forfeiting transactions.

2. How does forfeiting differ from factoring?

END OF SECTION B

Section C: Applied Theory (30 marks)

This section consists of Applied Theory Questions.

Answer all the questions.
Each question carries 15 marks.
Detailed information should form the part of your answer (Word limit 200 to 250 words).

1. Government securities are referred to as gift-edged securities, as they are absolutely secured.
RBI, being the banker to the Government, issues different types of paper on behalf of the latter, to
cater various requirements. Discuss the various types of Government securities that are issued by
the RBI.

2. A sound regularly framework in regulating capital markets is expected to provide transparency,

maintain market integrity, fairness and ensure investor protection. However, lack of adequate
regulations can lead to manipulations which endanger the integrity of the market and damage the
confidence of investors and market participants in India?

END OF SECTION C

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IIBM Institute of Business Management
Examination Paper: Banking and Financial Services Management

IIBM Institute of Business Management

Examination Paper MM.100

Financial Services

Section A: Objective Type (30 marks)

This section consists of Multiple Choices/Fill in the blanks/True-False & Short Answer type
questions.
Answer all the questions.
Part One questions carries 1 mark each & Part Two questions carries 5 marks each.

Part One:

Multiple Choices:

1. NBFS stands for

2. ALCO is a decision making unit responsible for balance sheet planning from risk return
perspective. (T/F)

3. A contract of Indemnity is one whereby:

a. A person tries to use the others property
b. A person promises to save the others property from loss caused.
c. A person tries to trick the property of other for some other person.
d. None of the above

4. The transaction between the lessor and the lessee being a demand sale is called:
a. First sale
b. Second sale
c. Third sale
d. Fourth sale

5. If the net present value of leasing be a and net advantage of leasing be b then decision
criterion is given by:
a. a/b
b. a+b
c. b/a
d. a-b

6. Break even lease rental BERL has NAL value equal to:
a. 1
b. 2
c. 0
d. 0.5

7. The right under which an unpaid seller who is in possession of the goods is entitled to retain them
until payment of the price is done is termed as

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IIBM Institute of Business Management
Examination Paper: Banking and Financial Services Management

8. If the no of level investments be t, total no of level installments be n and total charge for
credit be c then the interest rebate is given by

9. The practice of discounting accommodation bills is known as ..

10. HUDCO stands for

Part Two:
1. What do you understand by Lock-in period.

2. Write a short note Hybrid Debt Capital Instruments.

3. What do you understand by Bipartite Lease?

4. What is Suit for Quantum Meruit?

END OF SECTION A

Section B: Caselets (40 marks)

This section consists of Caselets.

Answer all the questions.
Each Caselet carries 20 marks.
Detailed information should form the part of your answer (Word limit 150 to 200 words).

Caselet 1

Sunlight Industries Ltd manages its accounts receivables internally by its sales and credit
department. The cost of sales ledger administration stands at Rs 9 crores annually. It supplies
chemicals to heavy industries. These chemicals are used as raw material for further use of is directly
sold to industrial units for consumption. There is good demand for both the types of uses. For the
direct consumers, the company has a credit policy of 2/10, net 30. Past experience of the company
has been that on average 40 per cent of the customers avail of the discount while the balance of the
receivables are collected on average 75 days after the invoice date. Sunlight Industries also has small
dealer networks that sell the chemicals. Bad debts of the company are currently 1.5 per cent of total
sales.
Sunlight Industries finances its investment in debtors through a mix of bank credit and own long-
term funds in the ratio of 60:40. The current cost of bank credit and long-term funds are 12 per cent
and 15 per cent respectively.
There has been a consistent rise in the sales of the company due to its proactive measures in cost
reduction and maintaining good relations with dealers and customers. The projected sales for the
next year are Rs 800 crore, up 15 per cent from last year. Gross profiles have been maintained at a
healthy 22 per cent over the years and are expected to continue in future.
With escalating cost associated with the in-house management of debtors coupled with the need
to unburden the management with the task so as to focus on sales promotion, the CEO of Sunlight
Industries is examining the possibility of outsourcing its factoring service for managing its

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IIBM Institute of Business Management
Examination Paper: Banking and Financial Services Management

receivables. He assigns the responsibility of Anita Guha, the CFO of Sunlight. Two proposals, the
details of which are given below, are available for Anitas consideration.
Proposal from Canbank Factors Ltd: The main elements of the proposal are: (i) Guaranteed
payment within 30 days (i) Advance, 88 per cent and 84 per cent for the resource and non-recourse
arrangements respectively (iii) discount charge in advance, 21 per cent for with resource and 22 per
cent without resource (iv) Commission, 4.5 per cent without resources 2.5 per cent and with
resource.
Proposal from Indbank Factors: (i) Guaranteed payment within 30 days (ii) Advance, 84 per cent
with resource and 80 per cent without resource (iii) Discount charge upfront, without resource 21 per
cent and with resource, 20 per cent and (iv) Commission upfront, without resource 3.6 per cent and
with resource 1.8 per cent.
The opinion of the Chief Marketing Manager is that in the context of the factoring arrangement,
his staff would be able to exclusively focus on sales promotion which would result in additional
sales of Rs 75 crores.

Question:

1. The CFO of Sunlight Industries seeks your advice as a financial consultant on the alternative
proposals. What advice would you give? Why? Calculations can be up to one digit only.

Caselet 2

Following are the financial statements for A Ltd and T Ltd for the current financial year. Both firms
operate in the same industry.

BALANCE SHEETS

Particulars Firm A Firm B

Total current assets Rs 14,00,000 Rs 10,00,000
Total fixed assets (net) 10,00,000 5,00,000

Total assets 24,00,000 15,00,000

Equity capital (of Rs 10 each) 10,00,000 8,00,000

Retained earnings 2,00,000 _
14% Long-term debt 5,00,000 3,00,000
Total current liabilities 7,00,000 4,00,000

24,00,000 15,00,000

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IIBM Institute of Business Management
Examination Paper: Banking and Financial Services Management

INCOME STATEMENTS

Net sales Rs 34,50,000 Rs 17,00,000

Cost of goods sold 27,60,000 13,60,000

Gross profit 6,90,000 3,40,000

Operating expenses 2,96,923 1,45,692
Interest 70,000 42,000

Earnings before taxes (EBT) 3,23,077 1,52,308

Taxes (0.35) 1,13,077 53,308
Earnings after taxes (EAT) 2,10,000 99,000

Additional information:

Number of equity shares 1,00,000 80,000

Dividend payment (D/P) ratio 0.40 0.60
Market price per share (MPS) Rs 40 Rs 15

Assume that the two firms are in the process of negotiating a merger through an exchange of equity
shares. You have been asked to assist in establishing equitable exchange terms, and are required to:
(i) Decompose the share prices of both the companies into EPS and P/E components, and also segregate
their EPS figures into return on equity (ROE) and book value of intrinsic value per share (BVPS)
components.
(ii) Estimate future EPS growth rates for each firm.
(iii) Based on expected operating synergies, A Ltd estimates that the intrinsic value of Ts equity share
would be Rs 20 per share on its acquisition. You are required to develop a range of justifiable equity
share exchange ratios that can be offered by A Ltds shareholders. Based on your analysis in parts (i)
and (ii), would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio
limits? Why?
(iv) Calculate the post-merger EPS based on an exchange ratio of 0.4 : 1 being offered by A Ltd. Indicate
the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders.
(v) Based on a 0.4 :1 exchange ratio, and assuming that As pre-merger P/E ratio will continue after the
merger, estimate the post-merger market price. Show the resulting accretion or dilution in pre-merger
market prices.

END OF SECTION B

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IIBM Institute of Business Management
Examination Paper: Banking and Financial Services Management

Section C: Applied Theory (30 marks)

This section consists of Applied Theory Questions.

Answer all the questions.
Each question carries 15 marks.
Detailed information should form the part of your answer (Word limit 200 to 250 words).

1. The Hypothetical Finance Ltd has structured a hire-purchase deal. The required to make a down
payment of 20 per cent of the investment cost. The hire-term is four years with quarterly payment
in advance. The flat rate of interest is 13 per cent. The finance company would charge a front-
ended documentation and service fee and allow rebate for prompt payment @ 0.5 per cent and 1
per cent of investment outlay respectively.
Assuming after paying 24th installment, a hirer wishes the purchase option, what is the interest
rebate according to (i) actuarial method, (ii) rule of 78 method and, (iii) SLM?

2. The Hypothetical Finance Ltd (HFL) has structured a hire-purchase deal for the Hypothetical
Industries Ltd (HIL) at a (flat) rate of interest of 13 per cent. The payment would be made in 36
equal monthly installments in arrears. The HIL is required to make a cash down payment of 20
per cent.
Assume that after paying the 24th installment, the HIL wishes to repay the outstanding amount
and purchase the equipment. What is the interest rebate per Rs 1,000 of investment cost,
according to the ERI/IRR method?

END OF SECTION C

S-2-210311

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IIBM Institute of Business Management