FIN623 MOFI (A) / 0205

Term – V End - Term Examinations

FIN623 – Management of Financial Institutions
Part – A

Q. Permanent component under the investment portfolio in Government and other approved
securities by bank should not exceed:
a. 10% of total investment
b. 15% of total investment
c. 20% of total investment
d. 25 % of total investment
e. 40 % of total investment

Q. The maximum amount of brokerage that can be paid by non banking finance companies for
obtaining public deposit is:
a. 2% of deposit
b. 3% of deposit
c. 4% of deposit
d. 1% of deposit
e. 1.5% of deposit.

Q. Transfer of funds from profits before any dividend is declared to statutory reserves by a banking
company shall be done every year at a rate not less than
a. 10% of profit
b. 15% of profit
c. 20% of profit
d. 25% of profit
e. 30% of profit

Q. The yield curve gives

a. The movement of interest rates over time
b. The structure of interest rates at a given point of time
c. The relationship between short run and long run interest rates
d. The bench mark rate
e. None of the above

Q. In the CRAMELS rating (by RBI) of banks A and E stand for:

a. Asset quality and efficiency
b. Asset management and Earnings
c. Asset liability management and Establishment expenses
d. Asset quality and Earnings
e. Audit report and employee productivity

1
FIN623 MOFI (A) / 0205

Q. If the rates of interest in India are greater than those of the USA, then
a. Dollars will flow in causing inflation
b. Anti inflationary measures will cause rates of interest to rise further
c. Appreciation of the indian rupee
d. Capital account convertibility should be allowed
e. Forward rates will rise

Q. Lowering of the CRR

a. Need not lead to increased availability of funds in the hands of the banks
b. Leads to an increase in funds in the hands of the banks
c. Can lead to industrial growth
d. Leads to efficient deployment of funds
e. All of the above

Q. Which of the following perils are covered by fire insurance policy

a. Subterranean fire
b. Loss to any electrical machine due to short circuiting
c. Loss due to nuclear risk
d. Lightning
e. None of the above

Q. In which of the following contracts the insurable interest need not be proved?
a. Parent and child
b. Employer and employee
c. Creditor and debtor
d. Partners of the firm
e. Both (a) and (b) above.

Q. What are the powers of RBI conferred under the BANKING REGULATION ACT 1949?
a. Stipulation of cash reserve ratio to be maintained by commercial banks.
b. Provision relating to NBFC deposits
c. Licensing of banking companies
d. Both (a) and ( c ) above
e. Both ( b ) and ( c ) above.

2
 FIN623 MOFI (A) / 0205

Q. Which of the following statement is TRUE in respect of priority sector advances of banks?
a. Advances to priority sector should be at least 33% of total advances
b. Advances to agriculture should be at least 18 % of total advances
c. Direct advances to agriculture should be not less than 10 % of total advances
d. Credit deposit ratio in rural areas should be minimum 60 % for a branch in rural area
e. Both (a) and (c) above.

Q. Non performing assets (NPAs) are assets

a. Which have been written off in the books
b. Which are loans to companies which have closed down operations
c. Which have stopped generating surplus
d. Which have stopped paying principal and interest within the stipulated period
e. Whose principal payments have been rescheduled

Q. Commercial banks invest in GOI securities

a. To maximize returns on liquid funds
b. As they provide both liquidity and safety
c. As there are no risks associated with them
d. As they do not have alternative investment opportunities
e. As they have longer maturity periods

Q. A bank issued a subordinated debt instrument on 1.1.2000 with a maturity of six years. The
applicable discount rate for computation of capital adequacy ratio while finalizing the balance
sheet for the year ending 31st march 2005 is:
a. 20%
b. 40%
c. 60%
d. 80%
e. 100%

Q. The marketing strategy of a bank should include

a. Clear identification of target customers
b. Understanding the pattern of demand and specifying the product mix
c. Portfolio management services
d. Man power deployment
e. All of the above

3
FIN623 MOFI (A) / 0205

Q. Currency notes are

a. Liabilities of the Reserve Bank of India
b. Liabilities of the banking system as a whole
c. Liabilities of Government of India
d. Both (a) and (b) above
e. None of the above

Q. (Total capital – Net NPA)/(RWAs – Net NPAs) is known as

a. Core CRAR
b. Adjusted CRAR
c. Incremental CRAR
d. Average CRAR
e. None of the above

Q. The issue price of a cash certificate with a face value of Rs.1000 and carrying an interest of 9.5%
for one year is
a. Rs.889
b. Rs.913
c. Rs.920
d. Rs.899
e. Rs.1,000

Q. Hypothecation means
a. Creating mortgage on all fixed assets
b. Creating charge on plant & machinery
c. Creating charge on land, building and equipment
d. Creating floating charge on working capital
e. All of the above

Q. Which of the following gives the hurdle rate for loan pricing?
a. Average cost of funds
b. Marginal cost of funds
c. Cost of funds + Costs of servicing + Margin
d. Cost of funds + Costs of servicing + Spread
e. Cost of pooled funds

4
 FIN623 MOFI (A) / 0205

Q. Data on a bank shows

Total loans advanced Rs.5000 crore
Lending rate 15%
Debt funds Rs.3000 crore
Cost of debt 12%
Servicing cost 1%
If the equity of the bank is Rs.500 crore, the returns to equity is
a. 59%
b. 72%
c. 81%
d. 79%
e. 66%

Q. At the time of sanction of a loan, the important factors are

a. Security of the loan
b. Cash flow from the loan
c. The rate of interest
d. Cost of funds
e. All of the above

Q. If net worth is Rs.300 crore, provisions are 25% of Gross Assets, and capital adequacy is 11%,
then Gross Assets are
a. 4536
b. 3636
c. 3000
d. 4300
e. 5000

Q. The policy that covers fire insurance of all the stocks and goods at more than one location is
known as:
a. Floating policy
b. Reinstatement policy
c. Transit policy
d. Declaration policy
e. None of the above

5
FIN623 MOFI (A) / 0205

Q. Which of the financial intermediaries are naturally placed for financial resources?
a. IDBI
b. ICICI Bank
c. HDFC
d. LIC
e. (b), & (d) above

Q. A letter of credit whereby the credit available to the beneficiary gets reinstated after being utilized
is called a
a. Revocable letter of credit
b. Revolving letter of credit
c. Unconfirmed letter of credit
d. Back to back letter of credit
e. Forward letter of credit

Q. If liabilities to banks and others is Rs.190 crore and Rs.120 crore respectively and the assets to
the banking system are Rs.65 crore, then which of the following is the amount to be maintained
at 4.5% CRR?
a. Rs.10 crore
b. Rs.11.025 crore
c. Rs.11.10 crore
d. Rs.15.45 crore
e. Rs.13.11 crore

Q. A risk based management system implies a structure where

a. All functions are aimed at minimization of some form of risk
b. A hierarchical structure is replaced by a flat organizational structure
c. Risk based pricing is present
d. Project appraisal is of a high order
e. All of the above

Q. In a falling interest rate regime, it is desirable to have

a. RSAs > RSLs
b. RSAs < RSLs
c. RSAs = RSLs
d. RSAs ≥ RSLs
e. All of the above

6
 FIN623 MOFI (A) / 0205

Q. If the capital of a bank is Rs.300 crore, total assets are Rs.4,500 crore and the capital adequacy
ratio is 10%, then the average risk weight is
a. 50%
b. 55.55%
c. 60%
d. 66.67%
e. 61.50%

Part B
Problems, Conceptual Understanding, Analytical Ability and Situational Analysis

1. The following data relates to the financial position of a commercial bank as on 31.3.2004.
Rs. Crore
Equity capital 150
Free reserve 45
Capital reserve 60
Undisclosed reserve 15
Equity investment in subsidiaries 16
Revaluation reserve 65
General provision & loss reserve 48
Subordinated debt with maturity
- upto 1 year 5
-1 to 2 years 15
- 2 to 3 years 10
- 3 to 4 years 16
- above 5 years 20
CRR investment 120
SLR investment 375
Investment in other securities 55
Loans & advances guaranteed by Govt. of India 165
Loans granted to PSUs of Central Govt. 140
Loans & advances to other parties 530
Certificate of Deposit 30
Claims on FIs 35
Fixture, furniture & premises 160
Standby letter of credit 20
Collateralised credit based on underlying shipment 25

7
FIN623 MOFI (A) / 0205

NIF issued to a blue chip company 20

Aggregate outstanding foreign exchange
contracts with maturity
- upto 1 year 20
- upto 2 years 15
Other risk weighted assets 2500
Compute the capital adequacy ratio of the bank.
(10 marks)
Suggested Answer:
The correct weight age has to be chosen.

2. The following is the balance sheet of Phantom commercial Bank Ltd as on 31.3.2004.
Duration Amount Interest Duration Amount Rate of
Liabilities Assets
In years In crores rate in years in crores interest

Equity - 150 - Cash - 75 -

Demand 0.5 1450 4 Balance - 385 -
deposits with RBI
Term 1.0 1150 8 Short term 1.0 1240 11
deposits investment
Term 2.0 2100 9 Long term 3.0 400 12
deposits investment
Term 3.0 1900 10 Demand 1.0 1850 13
deposits loans
Term 3.0 2800 14
loans
TOTAL 6750 TOTAL 6750

The bank forecasts a 2 % increase in the interest rate.

With the above information/ data please:
a. Compute the duration of assets and liabilities
b. Compute the duration of surplus for the bank
c. Assess the impact of change in the interest rate on the market value of assets, liabilities
and equity
d. Immunize the market value of the firm using the immunizing asset duration method.
(3 + 3 + 8 + 4 = 18 marks)
Suggested Answer:
a. Duration of assets
Duration of Assets (D a) = 0 {460/6750} +1{1240/6750} + 1{400/6750}+3{2800/6750) = 1.88

8
 FIN623 MOFI (A) / 0205

Duration of liabilities
Duration of liabilities: 0.5{1450/6600}=1{1150/6600}+2100/6600} +3{1900/6600} = 1.78

b. DURRATION OF SURPLUS= DL+ A/S{ Da-Dl) = 1.78+{6750/150} X 1.87-1.78 == 6.28

The duration of surplus is 5.83, which is positive. This indicates that there will be a definite
impact on the value of equity with any change in interest rates.
Computation of the change in the market value of assets, liabilities and equity value, due to
an increase in rte of interest by 2 %:
c. Change in value of asset/ liability: -D X change in the interest rate X current market value/
(1+ r)
Change in the value of the firm = change in market value of assets – change in market
value of liabilities
New market value = current value market + change in the market value
Cost of deposits {1450 X0.04 + 1150X0.08 +2100X0.09+1900X0.1}/6600 = 8.015%
Yield on assets: {1240X0.11+400X0.12+0.14) / 6750 = 12.10 %
Change in asset value = { -1.88X0.22X6750/ (1+1.1210) }= -226.40
New value of assets = 6750 + (226.40) = 6523.60
Change in liabilities = (-1.78X0.02X6600)/ 1+0.08015 = - 217.53
New value of liabilities = 6600+ (- 217.53) = 6382.47
New value of the firm -= New value of assets- new value of liabilities
= 6523.60 – 6382.47 = 141.13
Therefore: Change in value of rim = 141.13 –150 = -8.87
d. Immunization of asset duration:
To immunize the value of the firm the duration of assets can be changed, in order to get the
immunizing asset duration ( DAZ)
DLX L/a = 1.78 X 6600/6750 = 1.74 is immunizing asset duration:
Change ion asset value = -1.74 X0.02 X6750 / 1+0.1210 = - 209.55
New value of asset = 6750+(-209.55)= 6540.45
New value of the liabilities = 6382.47
New value of the firm = New value of assets – New value of liabilities
6540-45 – 6382.47 = 157.98
Excess immunization of 7.98 has been due to different interest rates on deposit and assets.

3. The following data relates to a commercial bank as of Friday the 7th January 2005.
Liabilities Amount( crores) Assets Amount( crores)
Capital 12 Cash on hand 24
Reserve& surplus 180 Balance with RBI 316
Deposits from bank 260 Balance with banks 314

9
FIN623 MOFI (A) / 0205

Deposits – others 2240 Investments 950

Borrowings from RBI 2 Advances 1280
Other liabilities
External 118 Fixed assets 200
Internal 80
Other assets 56
TOTAL 3140 TOTAL 3140

You are required to:

a. Arrive at the net demand and time liabilities
b. Calculate the CRR to be maintained
c. Calculate the SLR to be maintained
d. Determine the maintenance period for CRR and SLR.
(12 marks)
Suggested Answer:
Liabilities to the banking system: deposits from bank: 260.
Liabilities to others: deposits 2240 + other liabilities 118 = total 2358
Asset with banking system: balances with other banks 314
Net inter bank liabilities = 0 (260- 314) **
CRR: 4.75 % of RL or 3 % of NDTL.
RL = NDTL + NIBL
= 2358 + 0 = 2358 only
NDTL for; the fortnight 2358
CRR 4.75% of 2358 = 111.29 crores
SLR 25 % of NDTL = 25 % of 2358 = 638 crores.
Maintenance period 2 weeks after reporting Friday which is 7th jan 2005.
Beginning from third Saturday from reporting Friday.
Maintenance period = 22nd January 2005 to 4th February 2005.
** Here the student should be able to explain; why it is zero and how thw CRR to be calculated
on NDTL.

Part C
Problems, Conceptual Understanding, Analytical Ability and Situational Analysis

4. Following are the cash forecasts of a private sector bank for the first and second quarters of
2005.

10
 FIN623 MOFI (A) / 0205

(Rs. Mn)
Month Inflows Outflows
1 720 740
2 800 820
3 860 840
4 920 830
5 880 870
6 900 950
Required: Advise the bank in managing its cash position.
(10 marks)
Suggested Answer:
Net Cummu -
Month Inflows Outflows Suggestions
flows lative Flows

Borrow Rs. 20 mn at the

1 720 740 -20 -20
beginning of the month
Borrow additional Rs. 20mn
2 800 820 -20 -40 at beginning of the second
month
Repay Rs. 20 mn at the end
3 860 840 +20 -20
of the third month
Repay remaining Rs. 20 mn
4 920 830 +90 +70 and Invest Rs. 70 mn at the
end of 4th month
Liquidate the investment for
5 880 870 +10 +80 Rs. 40 mn at the end of 5th
month.
Decide for the Investment of
6 900 950 -50 +30 Rs. 30 mn depending upon
the next months forecast.

Case Analysis / Applied Theory

5. Insurance is an uberrimae fides contract. What is uberrimae fides? Explain its significance to an
insurance contract. Briefly explain the essential elements / principles on which the insurance
contract is built upon?
(10 marks)
Suggested Answer:
Insurance is a uberrimae fides contract where one party agrees to compensate the other in
consideration of a certain smaller sum. This type of compensation is contingent upon happening
or non-happening of a certain event. UF relates to one of the 8 elements of insurance- utmost
good faith. UF contracts require utmost good faith on both the parties of an insurance contract
that ask for voluntary disclosure of all material facts relevant to the subject matter of the

11
FIN623 MOFI (A) / 0205

contract. Thus in an insurance contract both (party and insurance Co) should disclose all
material facts at the time of entering into the contract. Any material facts that are not disclosed to
the other party having direct relation to the contract will make it null and void.
The assured must disclose material facts; which he knows and it is his duty to make disclosure.
It also means that he person who is buying insurance should disclosed facts to insurance
company. The insurance company is also obliged to explain the implication of the clauses in the
agreement and further to explain each of the questions of which the answers a re sought in the
personal statement.
Apart from utmost good faith there are seven essential elements of insurance contract.
i. A valid contract of insurance should have an insurable interest by the person who is buying
insurance in the existence of the subject matter that is being insured. Any loss of subject
matter should directly lead to monetary loss to the holder and all insurance contracts
should have an insurable interest.
ii. Indemnity: this refers to the assurance given by one to put the person who obtained
assurance, in the event of loss the same position that he occupied immediately before the;
happening of the event for which indemnity is sought for.
iii. Subrogation is the right of the insurer to stand in the place of the insured after settlement of
a claim in so far as the insured’s right of recovery from an alternative source is involved.
iv. Proximate cause refers to the immediate cause that resulted in the loss. EG: when there is
loss of property due to fire caused by short circuit the proximate cause will be the short
circuit) even if the short circuit is due to any other cause). It is the cause without which the
loss would not have occurred. Insurer is liable for any loss proximately caused by a peril
INSURED AGAINST.
v. Assignment: assignment refers the situation in which one party transfers its right and duties
under a contract to another party.
vi. Nomination refers to the procedure which enables the; nominee to get the policy proceeds
without the necessity of producing any legal representation to the estate of the deceased
life assured. There need; not be any reason for nomination of a policy.

6. The role played by a Central Bank of a country is very important for the efficient functioning of a
country’s financial system and economy. Discuss the role played by Reserve Bank of India in
the Indian economy
(10 marks)
Suggested Answer:
The role of Reserve bank of India in the economy of the country are :
a. Role as a Central banker
b. Role as a promoter
c. Role as a regulator.
Central Banking: As Central bank RBI will have to transact Govt business, issue currency and
act as lender of last resort.
Banker to Government: RBI acts as a banker to the GOI as well as to other state government.
The RBI looks after the current financial transactions of the government by accepting money on
its behalf and making payment. RBI also manages public debt of Govt of India.

12
 FIN623 MOFI (A) / 0205

Banker to issue: RBI issues currency notes and manages money supply. RBI issues GOI
securities and other bills which are eligible for buying by the RBI.
Lender of last resort: RBI also lends to government and meet all the demands for financial
accommodation from commercial banks, discount house and other credit institutions subject to
certain terms and conditions.
PROMOTER:
The RBI acts as a promoter in a economy to ensure that there is proper credit allocation to
various sectors of the economy. RBI also has a major role in the development of the financial
system of the country to ensure that the policies could be effective in promoting growth as per
the Government policies.
REGULATOR:
RBI supervises all the financial institutions in the country and acts as regulator for all these
institutions. The policies governing the financial institutions, banks, NBFCs are decided by the
RBI and functioning of these institutions are being looked after . As regulator RBI does the
following functions:
Licensing for banks and NBFCs
Reserve requirements
Regulating interest rates on transactions involving RBI, which has bearing on the general rate of
interest in the country.
Norms for lending by banks/ ceiling and benchmarks for various sectors to ensure that there is
uniform credit delivery system for all the sectors.
Monitoring the performance of the banks/ Fis/NBFC to protect the interest of users of these
institutions.
Regulating the money market, security market in so far as financial institutions are concerned.
Investment by banks, Reserve requirements, disclosure in financial statements and recovery of
advances are all monitored/ regulated by RBI through its policy guidelines.

13