Dear Friend, I had on October 27, 2010 sent you a PDF file listing out 101 interview questions for bank promotions. I am sure by this time, you must have answered most of the questions. I too have tried to answer those questions. I am attaching a new file with answers to those 101 questions.
With regards, Rama Krishna V Hyderabad November 8, 2010
Note: The answers are not in the order in which questions were set on October 27, 2010 in the file named “101 interview questions for bank promotions.” Please read the disclaimer at the end of the answers.
Compiled by: Rama Krishna Vadlamudi, Hyderabad
November 8, 2010
Answers to 101 interview questions for bank promotions: 81. What is ‘paripassu’ charge? A ‘paripassu’ charge gives lenders a right to the property on which a charge is created in proportion to the amount lent to the debtor. Let us assume two banks ‘X’ and ‘Y’ have lent to a company with the outstanding at Rs 70 lakh and Rs 30 lakh respectively and have ‘paripassu’ charge over the assets hypothecated. In case of liquidation of that company, the lenders ‘X’ and ‘Y’ will share the proceeds from liquidation in proportion to the outstanding loan amount, that is, 70:30. 71. What are SEZs? SEZ is an acronym for a Special Economic Zone. SEZs are a big success in China. Based on the Chinese model, India too has set up several SEZs with a view to increasing economic activity, attracting foreign and domestic investment, creating employment opportunities and developing infrastructure in the country. As of now, there are 122 operational SEZs in India, out of a total 155 which received ‘in-principle’ approval from the Government. The advantage with SEZs is that they can be set up with single-window clearance and simple rules. Some of the well-known SEZs are SEEPZ SEZ, Kandla SEZ, Madras SEZ and Visakhapatnam SEZ in the Government Sector; Mahindra City SEZ, Chennai, Surat SEZ, Mundra Port & SEZ and Infosys Technologies SEZ, Managaore in the private sector. 61. Do commercial banks have freedom to raise/lower interest rate on Savings Bank account? Commercial banks in India do not have freedom to set interest rate on Savings Bank deposits. Reserve Bank of India decides rates on SB account. However, RBI is preparing a discussion paper to assess the pros and cons of deregulating interest rates on Savings Banks account. If RBI decides to deregulate and give freedom to banks to set rates on SB deposits ultimately, then savers can expect better interest rate on their SB accounts. As of now, Savings Bank accounts carry interest rate of 3.5 per cent per annum with effect from March 1, 2003. From April 1, 2010, banks are giving interest rates on SB account based on daily product.
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Compiled by: Rama Krishna Vadlamudi, Hyderabad
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41. What is a no-frill account? As per the guidelines given by Reserve Bank of India and in line with the intentions of the Government of India, commercial banks have been opening nofrills accounts to large sections of underprivileged sections of the society. The nofrills accounts are an innovative concept to introduce banking to the masses. This concept is part of ‘financial inclusion’ drive started by the Government of India some time back. Customers can open no-frills accounts with either a ‘zero’ balance or with bare minimum balance. Even collateral-free loans of up to Rs 50,000 can be obtained by the nofrills accountholder. Students from minority communities can open such accounts to receive Government Scholarships Banks can provide credit cards against no-frills accounts in rural and semi-urban areas 101. Why are gold prices rising? This is a most difficult question to answer. However, let me try. Gold is a precious commodity. From time immemorial, gold has fascinated man (man includes woman also). It is a malleable material and can be converted easily into any form. It has no economic value meaning it does not offer any regular return (like a dividend from a stock or interest from a bond) except capital gains. International gold price is hovering around USD 1,390 per ounce and in India around Rs 19,700 per 10 gm. The reasons for gold price rise can be attributed to: Investors around the world are worried about the growth of the world economy They consider gold as better compared to the depreciating currencies, like, US dollar Due to the global financial crisis of 2007/2008, investors have lost faith in Governments who have been printing currency notes in thousands of crores devaluing their currencies As a result, purchasing power of currencies has come down The sovereign debt crisis in Dubai and Greece have convinced investors that Governments are broke; so gold is a safe haven Even central banks of several countries, including, India and China, have bought tonnes of gold from the IMF and international market Rising prices bring in more investors to gold Gold exchange-traded funds (ETFs) have made it easier for investors to put their money in gold The price of any good or service depends on the principle of demand and supply. However, sentiments matter a lot in markets rather than fundamentals.
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Compiled by: Rama Krishna Vadlamudi, Hyderabad
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11. Base Rate was recommended by a working group set up by RBI. Who headed the working group? Reserve Bank of India set up a working group to introduce Base Rate. The group was headed by Deepak Mohanty. As per the recommendations of the working group, Base Rate was introduced in India from July 1, 2010. 1. RBI has set up a committee to free interest rate on savings bank deposits. Why has it decided to do so? Since the 1990s, Reserve Bank of India had been deregulating interest rates on deposits and advances. As part of the financial sector reforms and with a view to giving more freedom to banks, Reserve Bank of India is now considering deregulating interest rates on Savings Bank deposits. 21. Can you tell us something about Agricultural Debt Relief scheme? Under the Agricultural Debt Waiver & Debt Relief scheme (2008), farmers having more than two hectares of land were given time up to 31st December, 2009 to pay 75% of their overdues. In view of the recent drought in some States and the severe floods in some other parts of the country, it was proposed to extend this period by six month up to 30th June, 2010';. In the light of the above said announcement, Government has now decided to extend the period of payment of 75% of overdue portion by the 'other farmer' under the 'One Time Settlement' Scheme under ADWDRS, 2008 for another six months i.e., from 01.01.2010 to 30.06.2010. The banks/lending institutions are allowed to receive even less than 75% of the eligible amount under OTS provided the banks/lending institutions bear the difference themselves and do not claim the same either from the Government or from the farmer. The government will pay only 25% of the actual eligible amount under debt relief as has already been intimated The eligible 'other farmers' may be allowed to deposit this amount in one or more instalments prior to 30th June, 2010.
31. If you are appointed as Branch Manager of a worst performing branch, what steps would you initiate to turn around the Branch? To increase profitability, the Branch Manager shall adopt strategies depending on the specific problems pertaining to that Branch and the environment. However, some general strategies could be: Bank’s profitability basically depends on the spread between cost of deposits and yield on advances CASA deposits should be improved to reduce cost of deposits To increase high-value advances and improve yield on advances To improve non-interest income through cross selling and others To plug income leakage Reducing overhead costs that can be cut To concentrate on NPA/AUC recovery and collect un-debited interest and amounts from interest not collected account To speed up legal actions under SARFAESI Act and other means
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Compiled by: Rama Krishna Vadlamudi, Hyderabad
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51. What is the rate of interest paid by RBI for cash reserves, in the form of CRR, maintained by Banks with it? With effect from March 31, 2007, RBI does not pay any interest on Cash Reserve Ratio maintained by banks with RBI. With effect from April 1, 2007, RBI prescribes CRR, depending on monetary policy considerations for banks without any floor or ceiling rate. With effect from April 24, 2010, CRR is six per cent of net demand and time liabilities (NDTL). 91. What is G-20? G-20 is a Group of 20 countries. G-20 consists of most influential countries financially and economically. G-20 was established in 1999 with a view to bringing together industrialized nations and developing countries to discuss key issues in globally economy. The important members of G-20 include: the USA, Australia, the UK, Germany, China, India, Brazil, Mexico, the European Union, and Russia. G-20 Summit will be held on November 11 and 12, 2010 in Seoul, South Korea. 100. What is GST? Goods and Services Tax (GST) is a unified tax on goods and services aimed at replacing the multiple tax system currently being followed by the Central Government and State Governments. GST will subsume multiple taxes, like, central excise, service tax, surchages, cesses, VAT, sales tax, entertainment tax, entry tax, etc. GST is a multi-stage consumption tax imposed on a broad range of goods and services. It is a tax on transactions and end customers who consume the goods or services bear the final cost of the tax. It was originally proposed to introduce GST with effect from 1.4.2010. However, the date of implementation is postponed due to differences between the Centre and States. The Centre and States are yet to come into an agreement on the framework of GST. 10. What is the rationale behind introducing Base Rate and shifting from BPLR to Base Rate? There was a public perception that banks had been offering lower lending rates to big corporate customers, while charging higher rates from small borrowers in the retail, small business and agriculture segments. This amounts to crosssubsidization. RBI had received several complaints to this effect from various industry bodies and associations. RBI had taken this view into consideration. For several years especially since the early 2000s, RBI had tried to bring in a transparent system of lending rates in the banking system. After trying very hard, RBI has genuinely felt that banks’ BPLRs are not transparent and there is a largescale sub-BPLR lending. So, with effect from July 1, 2010, RBI introduced Base Rate System for loan pricing.
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Compiled by: Rama Krishna Vadlamudi, Hyderabad
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90. Why is the US putting pressure on China to allow its currency, the Yuan, to appreciate? America criticizes China for keeping its currency, the Yuan, undervalued. China is basically an exporting country. It has huge trade surplus running into billions of dollars. Exports are crucial to jobs in China. China wants to protect the interests of its exporters and citizens. Chinese manufactured products are sold everywhere in the world. To protect its exports, China’s keeps its currency undervalued against major currencies, like, the US dollar. America has a big trade deficit with China. If China allows Yuan to appreciate, it will benefit American exports to some extent. As such, America has been putting pressure on Chine since the early 2000s to allow the Yuan to appreciate. In 1995, China had pegged its currency to the dollar at 8.27 and it had remained there at that level till July 2005. Between July 2005 and September 2008, China had allowed the Yuan to appreciate to 6.85 to the US dollar. Between September 2008 (post Lehman Brothers collapse) and June 2010, China kept the exchange rate stable at around 6.85. However, from June 2010, the Yuan has started appreciating again with one dollar fetching 6.65 Yuan as on November 6, 2010. 80. What is cross selling? Cross-selling is a popular concept in banks. Banks sell insurance and mutual products to their own customers. By cross-selling, banks earn commission from insurance companies and mutual funds. Banks enter into agreements with insurance companies and asset management companies for cross-selling. Within their own products, banks can cross-sell by the following ways: 1. selling loan products to depositors, 2. offering SB/current accounts to borrowers, etc. 70. What is CIBIL? CIBIL stands for Credit Information Bureau (India) Limited. CIBIL was incorporated in 2000. Its original promoters were State Bank of India, HDFC, Dun & Bradstreet and TransUnion. Now, the shareholding is more diversified with several more stakeholders, like ICICI Bank, BOB, IOB, UBI, PNB, Hong Kong Bank etc, included. CIBIL provides credit information on commercial and individual borrowers to lenders, like, banks, NBFCs and others. The information is provided for a fee. In credit markets, data sharing is very important between lenders and borrowers.
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Compiled by: Rama Krishna Vadlamudi, Hyderabad
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20. What do you know about ASBA? ASBA means “Application Supported by Blocked Amount”. It is a term used in capital markets. ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue – an initial public offer or follow-on-offer. If an investor is applying through ASBA, his/her application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized. All investors can apply through ASBA in all public issues. 30. What is India’s GDP for 2009-10? According to the Central Statistical Organisation (CSO), India’s Gross Domestic Product at factor cost at constant (2004-05) prices for 2009-10 was estimated at Rs 44.64 lakh crore, growing at a rate of 7.4 per cent over 2008-09. In the first quarter of 2010-11, that is, during April-June 2010, India’s GDP grew by a spectacular 8.8 per cent over April-June 2009 quarter. 50. Does RBI have any powers to set interest rates (either for deposits or advances)? RBI has progressively deregulated interest rates during the last two decades. However, RBI still sets interest rates on Savings Bank deposits and current accounts. Savings Bank deposits fetch 3.5 per cent per annum while current accountholders do not get any interest. Banks do not have any freedom with regard to interest rates on DRI loans. DRI loans are lent at four per cent per annum. Till recently, loans up to Rs 2 lakh to small borrowers, under priority sector, were administered. With the introduction of Base Rate System on July 1, 2010, banks have the freedom to charge their own rates for such loans. 60. How many public sector banks (PSBs) are there in India? There are 26 public sectors banks in India. Nationalised Banks are 20 including IDBI Bank. State Bank Group companies are six after the merger of State Bank of Indore and State Bank of Saurashtra with State Bank of India. 40. Why are yields on Government bonds going up recently? The yields on Government bonds had gone up recently. The yield on benchmark 10-year Government bond had gone up to a high of 8.14 per cent on October 20, 2010 before cooling down. The RBI had started raising policy interest rates in February 2010. Since then, bond yields have gone up. When interest rates go up, bond yields also go up while bond prices come down. Bond prices and bond yields have an inverse relationship.
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In its second quarter review of Monetary Policy announced on November 2, 2010, RBI indicated that it might not raise interest rates further for the next three months. After the RBI announcement, bond prices have rallied with the yield on benchmark 10-year paper coming down to 7.99 per cent on November 5, 2010. 19. Is there is any change in market hours of stock trading on BSE and NSE? Before January 4, 2010, stock market trading timings were between 9.55 am and 3.30 pm. But with effect from January 4, 2010, BSE and NSE changed the market timings to between 9.00 am and 3.30 pm. With effect from October 18, 2010, BSE and NSE introduced pre-open session for call auction. The pre-open session shall be for duration of 15 minutes i.e. from 9:00 am to 9:15 am and is applicable for Nifty and Sensex stocks initially. The pre-open session is comprised of Order collection period and order matching period. After completion of order matching there shall be silent period to facilitate the transition from pre-open session to the normal market. So, normal market will open for trading after closure of pre-open session, that is, 9.15 am. 99. What are tax-saving infrastructure bonds? Government of India allowed certain companies to issue long-term infrastructure bonds which enjoy tax benefits. Resident Individuals and HUFs (Hindu Undivided Families) are eligible for a deduction of Rs 20,000/from one’s total income in a financial year under Section 80CCF of the Income Tax Act. This new section was introduced this year only and is effective from April 1, 2010. This deduction of Rs 20,000/- from total income is in addition to Rs 1.00 lakh deduction provided under Section 80C. Companies like, IFCI Limited, IDFC Limited and L&T Infrastructure Finance Company Limited, issued such bonds recently. 79. What is the minimum maturity period of a Commercial Paper? The minimum maturity period of a commercial paper is seven days. 89. Who will benefit the most when rupee is rising? When rupee is appreciating against major currencies, like, US dollar, Euro and Pound, importers in India will benefit because importers need to pay lesser rupees for goods and services. 29. What are the present rates of CRR, SLR, Repo and Reverse Repo?
Cash Reserve Ratio is six per cent wef Apr 24, 2010 Statutory Liquidity Ratio is 25 per cent wef Nov 7, 2009 LAF-Repo rate is 6.25 per cent wef Nov 2, 2010 LAF-Reverse repo rate is 5.25 per cent wef Nov 2, 2010
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Compiled by: Rama Krishna Vadlamudi, Hyderabad
November 8, 2010
39. RBI had recently fined two private sector banks for violation of KYC norms. Which are these banks? In July 2010, RBI imposed a penalty of Rs 5 lakh each on Standard Chartered Bank and ICICI Bank for violation of know-your-customer (KYC/AML) norms. 49. Who decides interest rates of Banks? Banks themselves decide interest rates in India. Banks have Asset-Liability Committees (ALCOs) to set interest rates on deposits and advances. However, in a few cases, like, SB deposits and current accounts, the rate is decided by RBI. 69. When will Indian Banks start issuing their financial statements (balance sheet, profit and loss account, etc) as per IFRS? As per the available information, banks in India will converge their accounts with IFRS (International Financial Reporting Standards) with effect from April 1, 2013. 59. What is an EEFC account? EEFC is short for Exchange Earners’ Foreign Currency account. Its salient features are: As the name suggests, an EEFC account is an account maintained by an exchange earner (typically an exporter) It is maintained in foreign currency It is maintained with an Authorized Dealer, that is, a bank dealing in foreign exchange It does not earn any interest and is in current account form 9. What is Base Rate? Base Rate is the minimum lending rate below which a bank can not lend to borrowers except in a few cases. Base Rate was implemented in India with effect from July 1, 2010. From that date, the existing Benchmark Prime Lending Rate (BPLR) was replaced by the new Base Rate System. Base Rate differs from bank to bank depending on individual bank’s cost of deposits/funds and other criteria. 8. A new exchange in India has started operations in currency futures market. What is the name of the exchange? A new exchange has started operations in India. Its name is United Stock Exchange of India Limited (USE). USE started its operations on September 20, 2010 with the launch of currency futures on its exchange. USE is promoted by 26 domestic banks, BSE, Jaypee Capital, Riddhi Siddhi Bullion, MMTC and India Potash, among other. The CMD of USE is T.S. Narayanaswami.
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98. What is India’s current account deficit? India’s current account deficit is USD 13.7 billion during the April-June 2010 quarter. Imports have been growing at a greater pace compared to export growth. As a result, current account deficit has been going up of late. 88. How do you define priority sector advances? Priority Sector advances have been in existence for the past four decades. As per RBI guidelines, commercial banks have to lend 40 per cent of their advances to priority sector – like agriculture, small industries and tiny sector. Categories in the priority sector: Agriculture – direct and indirect finance Micro and Small Enterprises – direct and indirect finance: they include small and water transport operators, small business, professional and selfemployed persons, retail trade and all other service enterprises Micro credit – provision of credit of small amounts not exceeding Rs 50,000 per borrower Educational loans – to individuals up to Rs 10 lakh for studies in India and up to Rs 20 lakh for studies abroad Housing loans up to Rs 20 lakh to individuals Targets/sub-targets for domestic commercial banks: Total priority sector advances – 40 per cent of ANBC* Total agricultural loans – 18 per cent of ANBC Micro and Small Enterprises advances (MSE sector) – will be reckoned under the overall priority sector target Export credit – no target Advances to weaker sectors – 10 per cent of ANBC DRI (Differential Rate of Interest Scheme) loans – one per cent of the total advances outstanding as at the end of the previous year * The targets/sub-targets are linked to Adjusted Net Bank Credit (ANBC) (net bank credit plus investments made by banks in non-SLR bonds in HTM category) or Credit Equivalent amount of Off-Balance sheet Exposure, whichever is higher, as on March 31st of previous year
78. What is the minimum tenor of Domestic Term Deposits? The Minimum tenor of a domestic term deposits is seven days.
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68. What is IFRS? IFRS stands for International Financial Reporting Standards. IFRS standards are set by an international body known as IASB. The objectives of IFRS are to establish a single set of high quality global accounting standards that can be adopted by several companies across countries and continents. More than 120 countries have already adopted or are at an advanced stage of implementing the IFRS at their national level. Countries, like, Australia, the UK, countries in the European Union and several countries in Africa have already moved toward IFRS. Countries, like, Brazil, Canada and India are shifting their national standards to IFRS in the next one year. The US has been making a slow progress from its USGAAP standards to IFRS and it may take several more years for complete convergence. India is adopting IFRS in stages. Companies in Nifty and Sensex indices will shift to IFRS with effect from April 1, 2011. Banks will shift to IFRS with effect from April 1, 2013. 18. What is a Letter of Credit and what steps shall bankers take before negotiating LCs? Letter of Credit: A letter of credit is a document issued by a bank which provides an irrevocable undertaking to a beneficiary against complying documents as stated in the LC. It is also known as documentary credit (DC). Precautions to be taken for LCs: Banks should not extend any non-fund based facilities to parties who are not their regular customers Banks should not discount any bill drawn under LCs for beneficiaries who are not their regular clients In the case of LCs for import of goods, banks should be very vigilant while making payment to the overseas suppliers on the basis of shipping documents Payments should be released to the foreign parties only after ensuring that the document are strictly in conformity with the terms of the LCs Branch officials should not exceed their discretionary powers while sanctioning facilities Banks shall always honour their commitments under LCs and make payment promptly
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28. Who regulates MFIs in India? Reserve Bank of India regulates only those Micro Finance Institutions (MFIs) that are set up as Non-Banking Financial Companies, like, SKS Microfinance Limited. There is no formal regulator for other MFIs in India. Now, there is a proposal to bring all MFIs under one central legislation. 38. How much entry load shall investors pay while investing in mutual funds in India? With effect from August 1, 2009, the capital market regulator SEBI banned entry load on mutual funds. As such, investors need not pay any entry load for investing in mutual funds. However, some equity mutual funds usually impose exit loads after one year from the date of purchase. 48. What is the maximum amount up to which RBI can penalize Banks? The maximum penalty that be imposed by RBI on banks is Rs 5 lakh in one instance. 58. As per RBI, what percentage of NPAs shall banks maintain as compulsory loan provisioning? RBI has stipulated that banks shall make compulsorily make a loan provision of 70 per cent of their bad assets, known as Non-Performing Assets (NPA). This is known as PCR, provisioning coverage ratio. 3. Why have been stock market indices rising continuously for more than a year in India? Reasons for the strong rally in Indian stock markets: Foreign Institutional Investors (FIIs) have put in a total of USD 25 billion in Indian stock market so far in calendar year 2010 India’s GDP is growing at more than eight per cent. Even in 2010-11, India’s GDP is expected to grow by 8.5 per cent Companies are recording strong sales and net profit growth Indian companies’ fundamentals are strong Compare to the economies of the US, Europe and other developed world, Indian economy is not much affected by the global financial crisis. As such, international investors have been more optimistic about India’s growth. 53. Whether bank deposits attract any income tax concessions? Under Section 80 C of the Income Tax Act, bank deposits of five-year tenure enjoy tax concession up to a maximum of Rs one lakh in a financial year.
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63. Are there any restrictions on banks opening new ATMs? As of now, there are no restrictions on banks opening new Automated Teller Machines. Recently, RBI has removed all restrictions on opening ATMs. 13. What is Reverse Mortgage and how does it work? A reverse mortgage is a loan extended to senior citizens against the security of a house property owned by them. The loan is given in lump sum or in installments and it provides important cash flow to the senior citizens who require money during their old age. They continue to be the owners of the house and occupy it. The loan obligation is deferred till the death of the homeowner. The legal heirs of senior citizens can repay the loan amount after the death of the borrower and the bank will release the security on the house property. 23. Who are Business Correspondents (BCs)? With a view to ensuring greater financial inclusion and increasing the penetration of banking services to vast sections of the underprivileged sections of the society, RBI a few years back allowed banks to use the services of well-established NGOs, SHGs, MFIs, Post Offices, and others as intermediaries. With the help of the intermediaries, banks can extend their services through the use of Banking Correspondent model. In September 2010, RBI allowed banks to appoint companies as Business Correspondents who can sell banking products to vast sections of rural and semiurban population. With this measure, companies like, HUL, ITC and Bharti Airtel, can be appointed as BCs by banks an in turn these companies will provide banking services to the people. 73. What is the audit rating of your branch? The answer differs from branch to branch. 93. Can investors do trading in stocks using their mobiles? SEBI in August 2010 allowed share trading through mobiles or laptops. Some brokerage houses have already introduced share trading through mobiles. BSE launched mobile trading on September 22, 2010, using its proprietary Fastrade mobile application. 83. What is an ECB? An ECB is short for External Commercial Borrowing. An External Commercial Borrowing (ECB) is a commercial loan availed by domestic companies from nonresident lenders abroad for a minimum maturity of three years. Many Indian companies and financial institutions raise ECBs as interest rates abroad are much cheaper compared to India. RBI allows companies to borrow through ECBs in two routes – one is Automatic Route and the other is Approval Route. Indian firms can borrow up to USD 40 billion in 2010-11 as compared to a limit of USD 35 billion in 2009-10.
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33. What is CDS? A CDS is short for Credit Default Swap. Its features are:
It is a financial instrument used for hedging It is an OTC derivative product Internationally, majority of CDS are cash-settled It provides insurance to the creditor (or investor in a bond) against credit default by an issuer/debtor It is like a guarantee against a default of a loan/bond As an insurance, it serves a genuine economic purpose Now, RBI has released a draft for introduction of CDS in India In 2003 and 2007, RBI proposed introducing CDS but later withdrew the draft guidelines Naked CDS transactions may create problems for credit markets as had happened during the global financial crisis of 2007/2008
43. What is the capital adequacy ratio of our Bank? As at the end of September 30, 2010, the capital adequacy ratio of State Bank of Mysore is 11.72 per cent. 94. What is SBI’s BPLR? In October 2010, State Bank of India raised its benchmark PLR by 25 basis points to 12.50 per cent. 84. What is an FCCB? FCCB is an acronym for Foreign Currency Convertible Bond. Its features are: It is a financial instrument through which companies raise money It is a hybrid instrument – it has features of both a bond and a stock It is a bond that can be converted at the option of the bondholder in to an equity share at a predetermined price and after a specific period. During the period it provides regular yield to the bondholder. As the name suggests, it is denominated in a foreign currency 74. What is the minimum maturity period of a Certificate of Deposit (CDs)? The minimum maturity period of a Certificate of Deposit is seven days.
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4. What are Basel III norms?
Basel III norms are an improvement over Basel II norms They will coming after Basel I and Basel II norms and are third set They are set by Basel Committee on Banking Supervision (BCSB) As per Basel III norms, banks have to raise their Tier I capital from the present two per cent to 4.5 per cent by 2015. In addition, they will have to set aside another 2.5 per cent as contingency capital, with which the total capital adequacy ratio would go up to seven per cent. According to RBI Governor, Indian Banks are not likely to be impacted by the new Basel III norms These norms are still evolving and it may take some more time for RBI to come out with its guidelines on Basel III norms
54. What is meant by the term ‘crystallization?’ When an import bill is not paid within 10 days from the due date, banks will convert it into rupee liability to honour their commitment and make payment. Such process of conversion is called crystallization. 64. What is the importance of DSCR? DSCR means debt-service coverage ratio. It indicates whether income generated out of the business is sufficient to meet term loan installment along with interest. This ratio is very important for assessing whether a borrower has got the financial ability to repay the debt obligations. 24. Why is Government increasing thrust on developing MSME Sector in India? The MSME sector provides employment to a large number of people in the lower strata of society It is a nursery of entrepreneurship for several new ideas The sector contributes eight per cent of India’s GDP It contributes 40 per cent of India’s exports It contributes 45 per cent of manufactured output They provide a lot of value-added products to big industries 34. Banks lend money to long-term projects. But, most of their liabilities are short-term to medium-term. How do banks balance their assets and liabilities, that is, Asset- Liability Management (ALM)? Take-out financing is one of the solutions for setting the banks’ mismatch in Asset-Liability Management. Another is to issue to long-term bonds to insurance companies, pension funds, etc.
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44. What is our Bank’s quarterly profit in September 2010 quarter and why our net profit has come down? The net profit of State Bank of Mysore for the September 2010 quarter is Rs 93.36 crore as compared to Rs 98.64 crore in the same quarter last year. The decline in net profit is due to higher provisioning which has gone up by 150 per cent as compared to the corresponding quarter last year. 14. Why is Reverse Mortgage product yet to take off in India? Indians typically tend to pass on their assets to the heirs. They do not like the idea that they will not be able to pass on their house property to their children. As such, Reverse Mortgage has not yet taken off here. 55. What is the definition of a sick unit? "Sick industrial company" means an industrial company which has (i) the accumulated losses in any financial year equal to fifty per cent, or more of its average net worth during four years immediately preceding such financial year; or (ii) failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company; Any one of above two criteria is sufficient to consider such company as a sick industrial company. 65. What is financial inclusion? Financial inclusion is a process whereby easy access to banking services is provided by banks to weaker sections and low-income groups. As part of financial inclusion, commercial banks have to offer, at affordable cost and in a fair manner, financial products and services to these underprivileged sections. As per RBI guidelines, banks have to provide banking services through a banking outlet in every village having a population of over 2,000. The banking services could be provided through any of the various forms of models, such as, Business Correspondents and not necessarily through a brick-and-mortar branch. 75. What is technology risk? Technology has become an integral part of our day-to-day life. It has penetrated deeper and deeper into our conscience. For a variety of activities, we depend on technology. Organizations too depend on technology for variety of functions, be it providing services to customers, collecting data from clients, studying internal processes, offering client-based solution or searching for data from around the world. As we depend more and more on information technology, we need to PAGE 16 OF 26
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understand risks posed by technology. This awareness will enable us to get prepared for facing technology risks – like disruption of computer systems, natural disasters affecting computer hardware, virus attacks, threats to data security, hacking of networks, and others. Organizations need to identify such risks so that management of such risks will become easier and allows smooth functioning of business functions. If the employees are not skilled enough to face such risks, it will be chaotic for organizations. 95. What is SBI’s Base Rate? State Bank of India has recently increased its Base Rate from 7.50 per cent to 7.60 per cent per annum. 85. Why do banks lend money to Micro Finance Institutions (MFIs)? Banks’ lending to Micro Finance Institutions is reckoned as priority sector advances by RBI. As such, it is attractive for banks to lend money to MFIs. More over, several MFIs are making decent profits on their operations. To that extent, lending to MFIs is less riskier for banks. Some MFIs boast of a recovery rate of 99 per cent on their loans. 25. What is Nuclear Liability Bill and what are the important provisions? The Bill was passed a few months back by Indian Parliament The Civil Liability for Nuclear Damage Bill, 2010 fixes liability for nuclear damage and specifies procedures for compensating victims. It caps the liability of the operator at Rs 1,500 crore. For damage exceeding this amount, and up to 300 million SDR, the central government will be liable. All operators (except the central government) need to take insurance or provide financial security to cover their liability. 15. Why is Indian Rupee appreciating against US dollar and other major currencies? The reasons for Indian Rupee appreciating against the US dollar: The dollar-rupee exchange rate depends on the supply and demand Foreign Institutional Investors (FIIs) have been investing billions of dollars in Indian stock markets. During this calendar year, they have so far brought in USD 25 billion. Dollar supply has increased which resulted in rupee appreciation.
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As India’s is showing good economic growth compared to the developed markets, FIIs have been thronging to our markets for better yields The US Fed Funds rate is between zero and 0.25 per cent. Such ultra lowinterest rates in the US tempt investors to borrow in dollars and invest in India. Even foreigners are allowed to invest in India’s debt markets, including Government bonds. Now, more foreign money is coming to debt markets also. 5. What is the rationale behind introduction of Basel III norms? During the global financial crisis, many banks in the US and Europe have been severely affected due to severe losses made by them in derivative transactions. Keeping this experience in mind, the Basel Committee wants to improve the capital adequacy, liquidity levels and solvency levels of banks around the world. So, to strengthen banks, Basel III norms are being introduced. Basel III norms are an improvement over Basel II norms. 35. What is take-out financing? Take-out financing is a method by which commercial banks will be able to provide long-term loans to infrastructure projects which typically have duration of 15 years or more. Let us see how it works with a hypothetical example: Punjab National Bank will sanction a loan to an infrastructure company, say, LNT, for a period of seven years during November 2010. While sanctioning the loan itself, PNB will enter into an agreement with IDFC (it can be another financial institution like IIFCL that caters to the needs of infrastructure finance) – whereby IDFC will take out the loan from the books of PNB after seven years, that is, in November 2017. In November 2017, IDFC will become second lender to LNT and the second lending may be for a period of five to seven years or more. From this example it can be observed dthat take-out financing is a three-way arrangement between a bank, a longterm infrastructure financing company and a borrower like an infrastructure company. Important features of take-out financing: Take-out financing helps commercial banks in providing long-term loans to infrastructure projects without any asset-liability mismatch for banks Take-out financing will encourage commercial banks to lend more to infrastructure projects Take-out financing is available only for infrastructure projects like, roads and bridges, railways, airports, ports, inland waterways, power sector, urban transport, water supply and transport, gas pipelines, infrastructure projects in SEZs and others Take-out financing is a widely-used international practice for financing long-gestation infrastructure projects
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Has take-out financing taken off in India? Government-owned India Infrastructure Finance Company Limited (IIFCL) launched its first-ever take-out financing scheme on October 12, 2010 by issuing sanction letters to Union Bank of India. As per the sanction letters, IIFCL will take out over Rs 1,500 crore of UBI’s loans in seven different projects. Out of the committed Rs 1,500 crore with UBI, IIFCL had done a take-out financing deal involving Rs 450 crore on October 12, 2010. 45. What is our Bank’s net NPA% as at the end of September 2010? The gross NPA of State Bank of Mysore as on September 30, 2010 is Rs 970 crore. In percentage terms it is 3.12 per cent. The net NPA is Rs 451 crore and in percentage terms it is 1.48 per cent. 76. What is doorstep banking? Doorstep banking is provision of banking services at the premises of customers by banks. In 2005, RBI had issued guidelines to banks for providing doorstep banking. Such banking services include, pick-up of cash, delivery of cash, pick-up of instruments, delivery of demand drafts and others. Doorstep banking can be provided through banks’ own employees or through agents. 66. What is fuller capital account convertibility? Capital account convertibility (CAC) refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world. Reserve Bank of India appointed two committees – one in 1997 and the other in 2006 – to suggest a roadmap for capital account convertibility. Both committees were headed by SS Tarapore, former governor of RBI. Since the 1990s, India has progressively liberalized capital account transactions through various measures. However, there exist still a plethora of controls on capital account. Against this backdrop, we can say fuller capital account convertibility means additional measures that can be taken to move forward on capital account convertibility. Fuller capital account convertibility would not necessarily mean zero capital regulation. 56. What is a gold exchange-traded fund (gold ETF)? Before we define what a gold ETF is, let us see the Exchange-Traded Fund definition. An ETF is basically an index mutual fund scheme with a difference. An ETF is always listed and traded on an exchange. An ETF is linked to a benchmark index. An ETF can be bought and sold through an exchange like any share.
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A gold ETF is an ETF where the underlying is gold. The net asset value of a gold ETF moves in line with the price of gold, the underlying. As on November 8, 2010 gold price is quoting around Rs 1,970 per gram. As such, the price of one unit of gold ETF will be Rs 1,970. One gram is usually the unit for gold ETFs in India. Like shares, investors can buy/sell one or more units of gold ETF through a stock exchange and units will be credited/debited to investor’s demat account. 6. What is mobile banking? Why is it important now? Mobile banking is offering banking services to customers through a mobile set. It is also known as M-banking. With the help of M-banking, customers can check their account balances, make payments, verify transactions and others. It brings down transaction costs for customers as well as banks. It is an alternative delivery channel for banks. Banks need to encourage customers to use M-banking; otherwise, there is a threat of telecommunication companies taking away banking business from banks. Bharti Airtel has become the first mobile operator in the country to get a licence from the Reserve Bank of India to start mobile payment services. The service will allow Airtel customers to exchange physical cash to virtual money which can be stored on mobile phones to pay for goods ands services for transaction value of less than Rs 5,000. So, Bharti Airtel is now emerged as a big competitor for banks! 16. Why are Foreign Institutional Investors (FIIs) pouring money into Indian stock market and debt market? Foreign Institutional Investors (FIIs) have been investing billions of dollars in Indian stock markets. During this calendar year, they have so far brought in USD 25 billion. As India’s is showing good economic growth compared to the developed markets, FIIs have been thronging to our markets for better yields The US Fed Funds rate is between zero and 0.25 per cent. Such ultra lowinterest rates in the US tempt investors to borrow in dollars and invest in India. Even foreigners are allowed to invest in India’s debt markets, including Government bonds. Now, more foreign money is coming to debt markets also. 26. Why have Micro Finance Institutions (MFIs) attracted so much media attention recently, especially, in Andhra Pradesh? Micro Finance Institutions have faced lot of criticism from the media, especially in Andhra Pradesh. Several allegations were leveled against MFIs last month. The allegations range from high interest rates, harsh measures of recovery and multiple lending. It is reported in the media that some microfinance borrowers in Andhra Pradesh committed suicide due to debt trap.
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36. What role does IIFCL play? India Infrastructure Finance Company Limited (IIFCL) is owned by Government of India. It was set up in 2006 to provide long-term financing to infrastructure projects in India. IIFCL has surplus funds of Rs 20,000 crore. In October 2010, it started a take-out financing scheme. 96. What is a ‘Maharatna’ company? ONGC, SAIL, NTPC and IOC have been accorded ‘maharatna’ status by the Government of India. The new status empowers the boards of these companies to make investments up to Rs 5,000 crore with the government’s approval. The new status is higher than ‘navaratna’ status. 86. What factors affect interest rates? Government borrowings Supply of money Inflation rate 46. Our Bank raised capital recently. What route Bank has chosen to raise it? SBM has chosen the equity route to raise capital. State Bank of Mysore raised Rs 583 crore in October 2010 through a rights issue to the existing equity shareholders in the ratio of three rights equity shares for every 10 equity shares held. The issue price was Rs 540 per share (including share premium of Rs 530). 77. What is a Cash Management Bill? A Cash Management Bill is a Government Security through which Government of India raises money in order to meet its temporary cash shortages. It is issued for a maturity of less than 91 days. It is a new type of government debt paper. Reserve Bank of India (RBI) acts as a money manager and issues these Cash Management Bills on behalf of Government of India. Government of India (GOI) had, along with RBI, issued guidelines in August 2009 itself for the Cash Management Bills. 57. When does an agricultural loan become NPA? Two crop seasons not exceeding two half-years in case of short-term loan and one crop season not exceeding one year in case of long duration crop from the due date of installment or interest. In case of miscellaneous agricultural activity where income is going to be generated daily/monthly like dairy the NPA classification is once again as similar to P-segment/SBF advances.
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67. Why is India’s GDP growing while all over the world growth is weak, especially, in the US, Europe, etc? India’s growth is driven by internal consumption Consumers are buying more cars, mortorcycles, consumer durables, etc India was not very much affected by the global financial crisis of 2007/2008 Indian companies’ fundamentals are strong 7. RBI has introduced a new system of loan pricing for Indian Banks. What is that system called? With effect from July 1, 2010, RBI introduced a new system of loan pricing called Base Rate System. All commercial banks have adopted the new system. 27. Why has the Government of Andhra Pradesh issued ordinance for clipping the wings of MFIs? Micro Finance Institutions have faced lot of criticism from the media, especially in Andhra Pradesh. Several allegations were leveled against MFIs last month. The allegations range from high interest rates, harsh measures of recovery and multiple lending. It is reported in the media that some microfinance borrowers in Andhra Pradesh committed suicide due to debt trap. To solve the problems being faced by micro finance borrowers, Government of Andhra Pradesh had issued an ordinance to control the activities of MFIs and to protect the interests of small borrowers. 17. What is ULP (universal life plan)? Salient features of a universal life plan (ULP): Universal life plans are a combination of investment and insurance similar to ULIPs The premium for an ULP consists of two components – one component goes to insurance and the other to investment The investment portion gets invested either in stocks or bonds Policy holders have the flexibility to change the premium, sum assured and the term of the policy during the policy tenure The risk here is that policy may lapse if the cash values are no longer sufficient to cover the cost of insurance and other expenses
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37. How is RBI controlling inflation in India? To control inflation, RBI has been raising CRR, repo and reverse repo rates gradually since February 2010. With such measures, money supply will be restricted and money will become costlier. In a rising interest rate scenario, companies will be reluctant to start new projects which may impact overall growth. As a result, RBI always tries to maintain a balance between growth and price stability. 87. What is a quick ratio? Quick ratio simply means current assets excluding inventories divided by current liabilities. It denotes the ability of a company/firm to meet short-term liabilities from the available liquid assets. 97. What is an IDR? Indian Depository Receipts allow foreign companies to raise capital in India. These are issued by a local depository against the shares of a foreign company’s publicly-traded securities. The salient features of IDRs are: IDRs are derivative instruments similar to GDRs or ADSs (Global Depository Receipts and American Depository Receipts are used by Indian companies to raise capital on foreign shores) They are negotiable instruments Foreign Institutional Investors and Mutual Funds are allowed to invest in them Standard Chartered Bank was the first such company to raise capital through an IDR issue. 47. What is a Rights Issue? In a rights issue, an existing shareholder will have a right to subscribe to shares as decided by a company. Let us assume a shareholder is holding 100 shares of company ‘X.’ If that company proposes to raise capital with a rights issue in the ratio of one share for every two shares held, the shareholder will have an option to subscribe to 50 new shares at a price predetermined by the company. 22. Who has created Rupee Symbol? The new symbol for Indian Rupee was designed by Dr Dharmalingam Udaya Kumar, a graduate from IIT, Bombay. He is working as a faculty in IIT, Guwahati.
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12. How is Base Rate Calculated? Banks are given freedom to decide their own Base Rates based on cost of deposits, adjustment for CRR/SLR maintenance, unallocatable overhead costs and average return on net worth. Base rate is calculated as follows:
BASE RATE = Cost of deposits/funds
+ Negative carry on CRR/SLR
+ Unallocatable overhead cost
+ Average return on net worth 2. Why are interest rates going up in India in the last eight to 10 months? Inflation has been very high in India for a very long time. As such, RBI has been raising policy interest rates since February 2010. As such, interest rates have been on upward trend in the last eight to 10 months. 92. What is money laundering? Money laundering is a process whereby criminals use banking/financial system to legitimize their ill-gotten money. Many terrorists and drug traffickers have been using banking channels as a conduit to transfer money for their terrorist/illegal activities. 82. What is the definition of a wilful defaulter? If any one of the following criteria is satisfied, such an occurrence can be termed as ‘wilful default’: 1) The borrower has defaulted even though he/she has the capacity to honour the payments 2) The borrower has defaulted on the payments and has not utilized the funds for the purpose they were sanctioned and diverted the funds 3) The borrower has defaulted on the payments and has siphoned off the funds and the funds are not available in any other asset form
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62. Why do banks require introduction while opening SB/CA accounts? Banks insist on ‘introduction’ while opening SB/CA accounts in order to avoid money laundering, opening of ‘benami’ accounts, to meet requirement as per KYC norms and to get protection under Section 131 of the Negotiable Instruments Act. 52. What is investment fluctuation reserve? Changes in interest rates affect bond prices. Banks hold huge amounts of their assets in Government Securities and other bonds. When interest rates fall, banks make huge profits due to rise in bond prices that are held by banks. Likewise, when interest rates go up, bond prices fall affecting the banks adversely. In the early 2000s, Indian economy experienced downward trend in interest rates. During that period, banks made huge profits due to rising bond prices. With a view to building up adequate reserves to guard against any possible reversal of interest rates (that is in the event of a rising interest rate scenario), RBI had in January 2002 advised banks to build up an investment fluctuation reserve (IFR) of a minimum of five per cent of investment portfolio consisting of HFT and AFS categories, within a period of five years. Such a reserve is called investment fluctuation reserve. However, in October 2005, RBI allowed to transfer the balance in IFR account to Statutory Reserve, General Reserve or balance in Profit and Loss account.
72. Recently, a private bank was merged with ICICI Bank. Name the Bank. In August 2010, Bank of Rajasthan merged with another private sector bank ICICI Bank after its approval by Reserve Bank of India. 32. Which sectors come under Infrastructure in India? Different agencies give different definitions for Infrastructure in India. Broadly speaking, the following can be considered as Infrastructure sectors:
Electricity including generation, transmission and distribution Non-Conventional Energy including wind energy and solar energy Water supply and sanitation; and street lighting Telecommunications Roads & bridges Ports Inland waterways Airports Railways Irrigation including watershed development Oil and gas pipelines
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42. What are India’s foreign exchange (forex) reserves? As on October 29, 2010, India’s foreign exchange reserves are USD 297.96 billion or Rs 13.27 lakh crore. These reserves include USD 21. 67 billion or Rs 0.97 lakh crore of gold bullion.
Sources: various websites, like, RBI, SEBI, newspapers, etc. Disclaimer: The above is for information purpose. Though every care has been taken to provide authentic information on the above questions, readers have to do their own diligence and the author is not responsible for any mistakes. However, if you find any mistakes, please bring it to my notice.
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