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Please provide me question paper for Icfai university mba central banking and commercial banking (mb3g2b) examination?

Here I am giving you question paper for Icfai university mba central banking and commercial banking (mb3g2b) examination in PDF file attached with it/..

1. Under which act, the definition of the person —resident in India“ has been aligned with the
Income Tax Act 1961?
(a) FEMA (Foreign Exchange Management Act)
(b) FERA (Foreign Exchange Regulation Act)
(c) BR Act (Banking Regulation Act)
(d) RBI Act (Reserve Bank of India Act)
(e) SCRA (Securities Contract Regulation Act).

2. A bank‘s loan policy and deposit costs are inter-dependent .Which of the following
statement is false with regard to compensating deposit balances offered by the borrowers?
(a) Such deposits are inexpensive
(b) Promotional expenditure on such deposits is nil
(c) The transaction costs incurred are minimum
(d) It provides greater access to credit
(e) The deposits are relatively stable.

Which act defines the regulatory jurisdiction of the RBI over various activities in the
government securities market, money market and derivatives market?
(a) The Reserve Bank of India Act (RBI Act)
(b) Banking Regulation Act (BR Act)
(c) Securities Contract Regulations Act (SCRA)
(d) Foreign Exchange Regulation Act (FERA)
(e) Foreign Exchange Management Act (FEMA).

4. Project financing some times operates through a special purpose vehicle (SPV). From the
options given below identify the characteristic(s) of a SPV business entity.
I. It has no assets of its own beyond those of the project.
II. The assets are jointly owned by project participants.
III. SPV insulates the other participants from the financial obligations and risks assumed
by the project.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.

5. With regard to the most important business implications of NPAs, which of the following
is not a quantifiable implication?
(a) It leads to credit risk management
(b) It assumes priority over the other aspects of bank‘s functioning
(c) Disinclination to take decisions
(d) Bank‘s whole machinery is engaged with recovery procedures
(e) Bank‘s are forced to incur carrying costs on non income yielding assets.
6. Lending is the principal business activity and is also the predominant source of revenue
for banks. Which is/are the source(s) of risk(s) involved to a bank‘s safety and
I. Lax credit standards.
II. Poor portfolio risk management.
III. Weakness in the economy.
(a) Only (I) above
(b) Only (II) above
(c) Only(III) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
7. Which of the following factors is not related to the payment history of credit scoring?
(a) Payment information on many types of accounts
(b) Public record and collection items
(c) Details on late or missed payments
(d) Isolates various characteristics on delinquencies
(e) How many accounts show no late payments.
8. Which type of deposit account(s) generally display low amount of activity in terms of
deposit withdrawals?
I. Time deposits.
II. Certificate of deposits.
III. Savings accounts.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) All (I), (II) and (III) above.
9. Which of the following statements is/are not considered as primary in charting a
monetary policy in the new cyber world?
I. The IT induced changes affect the structure of the real economy.
II. The IT induced changes with regard to payment and settlement system will have
major influence on the monetary policy.
III. It becomes easy to select economic indicators and interpret them.
IV. IT would affect the day to day market operations of a central bank.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
10. Which act(s) provide(s) the legal frame work for the prudential regulation and supervision
of banks, NBFcs and FIs?
I. RBI Act.
II. Banking Regulation Act.
III. Companies Act.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) All (I), (II) and (III) above.
11. The pricing policy of a bank is based on many variables. Which of the following variables
is false?
(a) Customer relationship pricing
(b) Promotional pricing of new products
(c) Intense competition raises the deposit interest costs
(d) Product differentiation as marketing element
(e) Deposit costs and volumes.
12. Under consumer credit analysis banks rely on the subjective appraisal of the borrower.
Which of the following statement is false with regard to such appraisal?
(a) Obtain personal references
(b) Verification of employment status
(b) Verification of employment status
(c) Check the accuracy of the loan application
(d) Reference to comprehensive analytical format
(e) Consideration to collateral is secondary.
13. Which of the following is not a liability of the banking department?
(a) Notes (transferred from the issue department)
(b) Rupee coins
(c) Foreign securities
(d) Small coins
(e) Bills purchased and discounted (Including Government T-Bills).
14. Which of the following functions of Credit Information Bureau of India Limited (CIBIL)
is false?
(a) Collects and collates credit and financial information on borrowers
(b) Undertakes research projects
(c) Undertakes any other business with the prior approval of RBI
(d) Rates the borrowers
(e) Provides credit information to the specified users.
15. As per Section 26 of the Banking Regulation Act, all accounts in India, which could not
be operated for a period of _______ after the close of each calendar year are considered as
unclaimed deposits.
(a) 5 years
(b) 10 years
(c) 12 years
(d) 15 years
(e) 20 years.
16. Which factor(s) has/have contributed for the banking sector monopoly over the payment
and settlement services offered by them?
I. Free use of infrastructure.
II. Network externality.
III. New providers for payment and settlement services.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.
17. Which city has the dual benefit of trading with Japan in the morning and USA in the
(a) Ottawa
(b) London
(c) Boston
(d) Berlin
(e) Chicago.
18. Banks offer two types of Portfolio Management Services viz. discretionary and non
discretionary. Which of the following is/are not a discretionary service?
I. The portfolio manager to take investment decisions on behalf of his/her client.
II. Unbiased investment advice customized to meet the client‘s needs.
III. Transactions both in the primary and secondary markets facilitated through brokers.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
19. Out of the two emerging strategies in the banking scenario, customer relationship
management is used by many retail bankers. Identify the strategy that is not focused by
retail bankers.
(a) Maximize customer acquisition
(b) Cross selling
(c) About interaction between the bank and the customer
(d) Retain customers
(e) Increase profitability.
20. In relation to which of the following account(s), the banker cannot exercise his right of
I. A Savings Account and an Overdraft Account.
II. A Loan Account and a Current Account.
III. A Loan Account and a Savings Account.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
21. Statistical Credit Scoring is not used for which of the following purposes?
(a) To reduce defaults
(b) To provide predefined rules and standards for loan approvals
(c) To operate at a chosen level of risk
(d) To calculate expected loss and profit
(e) To guide the decision on the rate of interest.
22. Through out the credit cycle, which of the following decisions does not have bad risk
(a) Marketing
(b) Application processing
(c) Repayment behavior of the borrower
(d) Accounts management
(e) Collection.
23. Which of the following is/are not the characteristics of a participation advance?
I. It is a joint finance by more than one bank.
II. The security should not be common.
III. The advance should be to the same party/company.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) All (I), (II) and (III) above.
24. Which of the following statements is/are false with regard to the draw down facility
sanctioned to a borrower under syndicated loan?
I. The borrower can draw the loan amount over a period of time.
II. The commitment of the lenders is not terminated at the end of the draw down period.
III. The undrawn amounts are cancelled if not availed during the period.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
25. The department of supervision was split into Department of Banking Supervision (DBS)
and Department of Non-Banking Supervision (DNBS) .Which of the following is not a
function performed by DNBS?
(a) Attending to complaints relating to NBFCs
(b) On-site inspection and follow up
(c) Deals with financial sector frauds
(d) Initiates deterrent action against the errant companies
(e) Identification and classification of NBFCs.
26. Which of the following is not true with regard to globalization of financial services?
(a) Provides better technology
(b) Less vulnerable to economic shocks
(c) Greater access to international commodity markets
(d) Bank failures and capital flight
(e) Lead to financial crisis in Mexico.
27. The borrower enjoys which kind of freedom under syndicated loan versus consortium?
I. Competitive pricing.
II. The convenient mode of raising long term credit.
III. Fixed repayment period.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
28. Who took over the function of debt management subsequent to the nationalization of
Bank of England?
(a) Bank of England
(b) H.M. Treasury
(c) Financial services authority
(d) Audit Committee
(e) Banks Court.
29. Which of the following statements is not true with regard to market penetration deposit
pricing strategy?
(a) It emphasizes on profits and cost recovery in the short run
(b) It is used to know the added cost of bringing new deposits
(c) Average cost of funds on each source of funds is taken into account
(d) It enables to know any change in deposit prices
(e) Charging the customer for the total cost of deposit related services.
30. The sound credit scoring model does not predict which of the following?
(a) The future performance of an individual loan
(b) Credit worthiness of a borrower
(c) Predicting potential bankruptcy
(d) Profitability attrition
(e) Frauds.

1. Credit administration is a critical element in maintaining the safety and soundness of a
bank. Which of the following is not included in the credit administration process?
(a) Keeping the credit file up to date
(b) Obtaining current financial information
(c) Establishing a sound credit granting process
(d) Sending out renewal notices
(e) Preparation of various documents.

2. RBI faces very challenging task in managing the Government’s public debt. Which of the
following institution(s) incur/s the public debt?
I. Local Bodies.
II. Central Government.
III. State Government.
(a) Only (I) above
(b) Only (II)above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.

3. When the economy is hit by supply shocks, in which of the following ways the Central Bank
I. Allows temporary rise in inflation.
II. Monetary policy will be restrictive.
III. Provides stability of output.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above.

4. Towards providing greater operational transparency, which central bank regularly
publishes future interest rate paths?
(a) The Bank of Norway
(b) Bank of Japan
(c) Swiss National Bank
(d) Australian Central Bank
(e) Bank of Canada.

5. As per RBI guidelines on the loan system for delivery of bank credit borrowal accounts are
classified as
I. ‘Standard’.
II. ‘Sub-standard’.
III. ‘Doubtful’.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.

6. Which of the following arrangements has a very strong commitment to the exchange rate
(a) Currency boards
(b) Gold reserve system
(c) Minimum reserve system
(d) Free banking system
(e) Gold standard system.

7. Which loan facility gives the borrower money on the same day under various types of
syndicated loan facilities?
(a) Swingline facility
(b) Short-Term Commercial loan
(c) Revolving credit
(d) Evergreen facility
(e) Term loan.

8. In any syndicated loan agreement, the borrower has to pay various types of fees to the
banks. The fee a borrower has to pay when the drawn portion exceeds 50% is called
(a) Commitment fee
(b) Arrangement fee
(c) Utilization fee
(d) Agency fee
(e) Underwriting fee.

9. Which one of the following committees was set up in 1991 to examine the structure,
organization, functions and procedures of the Indian financial system?
(a) Padmanabhan committee
(b) Narasimham committee
(c) Kumaramangalam Birla committee
(d) Malhotra committee
(e) L.C.Gupta committee.

10. To protect the health of banks RBI came out with certain important measures in the form of
Prudential Norms. Which of the following is/are not a/the guideline(s) on prudential norms?
I. Income Recognition.
II. Asset –Liability management.
III. Provisioning for Bad and Doubtful Debts.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above.

11. Which of the following statements is true with regard to supervision of banks in UK?
(a) Bank of England does the supervision of banks in UK
(b) Off-site work is done by reporting accountants
(c) The supervision of banks in UK is mostly on-site
(d) Supervision of financial system is done by the Financial Services Authority(FSA)
(e) HM treasury does the supervision of banks in UK.

12. Loan approval process is the first step towards quality portfolio. The loan approval process
should be compatible with
I. The bank’s credit culture.
II. Its risk profile.
III. The capabilities of its lenders.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.

13. In which country the Prime Rate pricing based on the risk level is charged by banks from its
(a) Russia
(b) USA
(c) Canada
(d) Japan
(e) Germany.

14. A global market dynamics underline the need to have a right payment and settlement
mechanism. In which of the following area(s) such need is/are keenly felt?
I. Currency exchanges.
II. Trade in goods and services.
III. Currency trade by itself.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) All (I), (II) and (III) above.

15. BIS as an international organization, governed by international law was setup by
(a) The Hague agreement
(b) EU Treaty
(c) Maastricht criteria
(d) League of Nations
(e) European Monetary institute.

16. During the late nineties, to improve Customer Relationship Management, which of the
following service(s) was/were introduced by banks
I. Online banking.
II. Voice Response Unit (VRU).
III. Consultation services.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.

17. Which of the following is not the characteristics of a good collateral?
(a) Durability
(b) Marketability
(c) Mobility
(d) Identification
(e) Stability of value.

18. Which of the following institution(s) can use the information provided by the CIBIL?
II. Housing Finance Companies.
III. Credit card companies.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.

19. Loans are generally classified into secured and unsecured loans. Which of the following
advance given by a bank is not classified as unsecured advance?
I. An advance with the personal security of any individual.
II. An advance covered by bank/government guarantee.
III. An advance to a borrower with or without a guarantor.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above.

20. Under Non-Installment loans, individual borrowing needs are temporary. Which of the
following is the characteristic of a non-installment loan?
(a) Periodic payment of principal
(b) A single principal payment/and interest
(c) Periodic payment of interest
(d) Borrowed to cover extraordinary expenses
(e) Maturity ranges from two to five years.

21. In which of the following countries, as a key component of accountability, the Governor is
required to appear before a parliamentary committee after the semi-annual Monetary
Policy Report is released?
(a) United States
(b) Australia
(c) Canada
(d) U.K.
(e) Japan.

22. Which of the following institutions has the power to regulate the overseas activities of the
member banks?
(a) Board of Governors
(b) Advisory Committee
(c) Federal Reserve Board
(d) Federal Advisory Council
(e) Federal Open Market Committee.

23. Mahila bank Limited has accepted a deposit of Rs.3,00,000 for a period of 2 years at the
interest rate of 11% under quarterly compounding scheme? What is the maturity value of
the deposit?
(a) Rs.3,72,690
(b) Rs.3,71,640
(c) Rs.3,73,800
(d) Rs.3,69,630
(e) Rs.3,70,730.

24. What was the original structure of the RBI when it was first setup?
(a) Government company
(b) Public limited bank
(c) Statutory company
(d) Private shareholders bank
(e) Chartered company under royal charter.

25. What is the instrument that is issued for automatic monetization of debt?
(a) 182 days Treasury Bill
(b) Corporate deposit
(c) Ways and Means Advance
(d) Commercial paper
(e) Adhoc Treasury bill.

26. In loan syndication, the bank that heads the pact is known as
(a) Lead Manager
(b) Participating bank
(c) The arranger
(d) The Agent
(e) Facility manager.

27. Which of the following terms provides the best description of the central bank’s function
to lend to the commercial banks during exigencies?
(a) Financial guarantor
(b) Lender in due course
(c) Principal lender
(d) Lender of Last Resort
(e) Banker to the bank.

28. One of the alternatives given below does not represent a part of Financial Market
Operations of the Bank of England. Identify.
(a) Capital markets
(b) Banking services
(c) Foreign Exchange
(d) Gilt-edged and Money Markets
(e) Risk Analysis and Monitoring.

29. Which one of the following functions is not performed by the RBI in its role as the banker
to the government?
(a) Management of new issues of government loans
(b) Management of public debt
(c) Setting up of new financial institutions
(d) Advice on the timing of the issue of instruments
(e) Advise on the quantum of issue of the instruments.

30. Identify the income item which is accounted by RBI on receipt basis?
(a) Dividend
(b) Exchange
(c) Discount
(d) The interest earnings
(e) Commission.

Central Banking and Commercial Banking (MB3G2B): January 2009
Section B : Caselets/Problem (50 Marks)

• This section consists of questions with serial number 1 – 8.
• Answer all questions.
• Marks are indicated against each question.
• Detailed explanations/working should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.

Caselet 1
Read the caselet carefully and answer the following questions:
1. Why are banks special? ( 6 marks)
2. Can regulations take care of all risks? ( 6 marks)
There has been significant debate on whether banks are special and should be treated
as such. The rapid development of capital markets, increasing importance of nonbank
sources of financial intermediation and the emergence of universal banking
have led to the erosion of importance as well as uniqueness of banks as financial
institutions. Banks particularly those with access to payments system are generally
treated as a separate class in a regulatory framework, particularly in developing
countries. In India, all banks are subject to the RBJ's regulation but the framework is
not uniform in the sense that public sector banks, cooperative banks, and private
banks are governed by significant differences and not all of them have access to the
payments system. The Reserve Bank is a regulator of banks but is also the dominant
owner of the largest commercial bank. Such close links were considered essential
for effective coordination in financial sector as part of the early endeavors of
planned development and the channelization of credit.
Regulation is often perceived to be a free good, available at no cost, but it is not so.
There are costs of administering regulation; of compliance; and there are also
structural costs. Excessive or inappropriate regulation can stifle efficiency, and
invite problems of what are known as moral hazard and adverse selection. It may
even provide incentives for the over-regulated business overtly or covertly,
depending on the nature of the business, to move to entities that are not so regulated.
Moreover, there are savers who are willing to have a portfolio with different degrees
of risk and return and correspondingly there are investment avenues. An efficient
regulatory policy providing avenues for a spectrum of risks and rewards makes it
clear that regulation by itself does not guarantee risk-free transaction and ensures
that overall benefits to the system are commensurate with the overall costs incurred.
All failures of a regulated unit do not represent failure of regulation and a regulator
cannot guarantee compensation for those affected by failures other than those
covered by deposit insurance. But, a regulator has to maintain the credibility in
terms of assurance of systemic stability and consumer protection, especially in terms
of information availability in a timely and transparent manner particularly to retail
customers. Public policy arrangements should never eliminate the incentive for
consumers of financial services to exercise due care.

Caselet 2
Read the caselet carefully and answer the following questions:
3. Why are Central Banks vital for any economy? ( 6 marks)
4. What can Central Banks do to achieve growth by keeping inflation stable through
macro policies? ( 6 marks)

In recent years, in New Zealand as in many other countries, the public have come to
believe that Central Banks can achieve much more than they can; in fact, they can
really deliver. There is a serious risk that, when the realization dawns that the power
of Central Banks is not in fact unlimited, or when economies which have been

performing extremely well in recent years go through a period of slower growth,
Central Banks will receive far more than their fair share of blame. Indeed, there are
already signs of this blame and anger emerging in the United States for much of the
last decade, Alan Greenspan was widely assumed to be able to walk on water. Now
there are angry accusations from many quarters that imply that he should have been
able to keep the US economy growing above its trend potential indefinitely, and
prices in the US share-market growing with it.
Today, focus is on the responsibility the Central Banks have for keeping the value of
money stable, for keeping inflation low, rather than on their responsibility for the
financial system. The question now is to what extent the Central Banks make a
contribution to economic growth and social justice by keeping the value of money
Nobody seriously doubts that both hyperinflation and significant deflation can do
real damage to economic growth, and that by avoiding both, Central Banks can
make a considerable contribution. But what about the contribution to growth from
keeping inflation in low single figures, as compared to the double-digit inflation
which endured during much of the '70s and '80s.
Perhaps inevitably, this is still a matter of ongoing debate among economists.
Some claim that the contribution is negligible because beyond avoiding the
catastrophies of hyperinflation and significant deflation, the contribution which
inflation control makes to economic growth is very small. Others see a rather larger
contribution, through the fact that the pricing system works more efficiently to
allocate resources when prices are on an average stable; for example, through the
avoidance of the distortions caused by the interaction of inflation and a tax system
based on the assumption that prices are stable.
To see this latter point vividly the distortions caused by the interaction of even quite
modest levels of inflation with a tax system designed on the assumption that prices
are stable as being particularly relevant to the way in which keeping inflation under
tight control can assist economic growth. It is hard to escape the conclusion that one
of the reasons for New Zealanders' relatively heavy investment in property assets,
and relatively low investment in financial assets in recent decades is related to the
fact that, under the present tax regime, inflation results in an “under-taxation” of
property investment and an “over-taxation” of financial assets. And if, as many
believe, an increase in the government's share of GDP is associated with lower
economic growth, this is another way in which inflation damages growth.
In many ways, keeping the value of money broadly stable makes a bigger
contribution to social justice than it does to economic growth. When money is not
stable, in other words, there is inflation or deflation, the value of financial assets and
liabilities changes in potentially major and unexpected ways.
Therefore. Central Banks can probably make some modest contribution to trend
growth through keeping inflation low and stable, and can help avoid the social
injustices often caused by unstable money.
In seeking to keep inflation low and stable. Central Banks may also have a tendency
to smoothen the economic cycle. It is now well understood that one of the more
important determinants of changes in the inflation rate is the extent to which actual
output diverges from potential output. When actual output falls short of what the
economy could produce without difficulty where, in other words, resources of
capital and labor are underutilized there is a tendency for inflation to fall.
Conversely, when the economy is straining to produce more than it can on a
sustainable basis, when capital is being used round-the-clock and the labor market is
tight, there is a tendency for inflation to rise. For this reason, all Central Banks, even
those with no formal mandate to be concerned about output or employment, have to
watch carefully about what is happening to keep inflation under control. Indeed,
once inflation has been brought down to a low-level, it is not much of an
exaggeration to say that keeping inflation low and stable is mainly about trying to
keep actual output tracking close to potential. Reducing economic and social
dislocation caused by booms and busts is a useful contribution which Central Banks
can make.

Caselet 3
Read the caselet carefully and answer the following questions:
5. How do the banks, seeking to reduce their exposure to corporate credits, view credit
derivatives as compared to the traditional securitization? ( 3 marks)

6. What are the motivations for banks the world over to use credit derivatives as a
synthetic investment tool? ( 4 marks)

7. What according to you does the future hold for credit derivatives? ( 8 marks)
It was the new international rules of Basel Accord, 1988 that brought credit
derivatives into existence. The Basel norms required banks to set aside some part of
their capital against their loans. Banks seeking to reduce their exposure and related
risk-based capital requirements to corporate credits have found credit derivatives to
be more efficient than traditional securitizations. A credit derivative is a financial
instrument used to mitigate or to assume specific forms of credit risk by hedgers and
speculators. They are particularly useful for institutions with widespread credit
exposures. It has the potential to herald a new form of international banking in
which banks resemble portfolios of globally diversified credit risk more than purely
domestic lenders. Today credit derivatives represent one of the fastest growing
businesses in banking.
In any financial transaction the two primary types of risks faced by firms are market
risk and credit risk. When the changes of interest rates, exchange rates, stock prices
or commodity prices affect the firm's value it is market risk. However, when the firm
fails to meet obligated payments of counter parties on time it is credit risk. The
degree of risk is reflected in the borrower's credit rating, which defines the premium
over the riskless borrowing rate it pays for funds and ultimately the market price of
its debt.
Credit risk has two variables; market risk and firm-specific risk. Credit derivatives
allow users to isolate, price and trade firm-specific credit risk unbundling a debt
instrument or a basket of instrument into its component parts and transferring each
risk to those best suited or most interested in managing it. Generally, firms enter into
offsetting or hedging transactions to manage market risk. However, managing firmspecific
risk is not that easy. Though banks and other financial institutions have dealt
with credit risk for decades, the methodology used in the past was neither very
sophisticated nor well suited to meet the needs of the present changed world. Today
the financial markets deal with highly leveraged derivative transactions, often
involving a multiplicity of parties determined by a large number of market variables.
It was only when the over-the-counter derivatives activity accelerated theimportance
of efficient management of credit risk was realized.
But how does the institutions measure credit exposure? There is no particular
method to measure credit exposure. Different institutions measure credit exposure
differently. However, a typical way to incorporate a short-dated total return swap on
a long-dated note or bond into computation of credit exposure is to add it to the
portfolio of deals with the relevant counterpart or credit name. Afterwards the credit
VaR model, or any other relevant model may be run to verify the change in
Once the measurement part is complete, methods need to be designed to control it.
Typical methods of controlling credit risk include, limiting the amount of business a
party does with another party, requiring minimum counter party credit ratings, such
as a triple-A from both Moody and S&P, periodically marking contracts to market,
using collaterals and for some dealer firms the establishment of separately
capitalized derivatives subsidiaries. There are also various traditional mechanisms to
reduce credit risk including refusal to make a loan, insurance products, guarantees
and letter of credit. However, these instruments are less effective during periods of
economic downturn when risks that normally offset each other simultaneously

default and financial institutions suffer substantial losses on their loans.
In recent years, credit derivatives have evolved as major risk management tools.
Though the market was once confined only to banks, market participants have
expanded to include insurance companies, hedge funds, mutual funds, pension
funds, corporate treasuries and other investors looking for yield enhancement or
credit risk transference.
This new innovation in the credit risk management appeared on the scene in the
early 1990s. It was the launch of a new instrument to segregate market risk from
credit risk and to allow the separate trading of credit risk called credit derivatives.
There are four primary types of credit derivatives each addressing in some manner
though not perfectly, the problem of segregating market risk from credit risk. The
ultimate beneficiaries are those who borrow and lend and interact in the credit
market and those who transact in derivatives that are subject to default.
The traditional methods of assessing credit risk have been more judgmental. They
used to focus more on qualitative aspects with a modest degree of analysis. This is
probably the first wave of credit risk analysis. The second wave made a
distinguished analysis of financial statements and utilized credit-scoring models.
These procedures incorporate quantitative measures of a borrower's financial
position into a statistical model that assigned a score, called a z-score, to the
borrower. Based on historical statistics, a z-score beyond a certain threshold was
considered indicative of a high probability of default. The third wave of analysis is
based on option pricing theory. It reflects the fact that default is an option. When a
party repays a debt, the option expires in the money. However, when it defaults, the
option expires out-of-the-money. All said and done, it is very difficult to go from
theory to practice in the matter of credit risk.

8. Coastal Financial Institution Ltd., has been offering banking and investment
services for the past 3 decades. It has a branch network of over 300. The working
funds of CFI at the end of 2007-2008 are Rs. 1,400 crore. The average cash
balances are maintained at 0.5% of the total working funds. Further, the
management has decided that to ensure proper liquidity, the acceptance range for
variance can be up to 6%.
With this data compute the following:

a. The average cash balance to be maintained and the acceptance range;

( 2 marks)
b. The average cash balance and the acceptance range, if the working funds
have increased to Rs.2,200 crore.

( 4 marks)
c. If the average working funds register a decline to Rs.2,000 crore from Rs.2,200
crore due to circumstances beyond their control.
( 5 marks)

Section C : Applied Theory (20 Marks)
• This section consists of questions with serial number 9 - 10.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 -30 minutes on Section C.

9. Advances cover all types of lending and must satisfy the bank's need for
security and its wish to have the money repaid on the due date. What are the
different types of advances offered by banks?
( 10 marks)

10. The Reserve Bank of India performs the role of setting up new institutions
from time to time to attain the objective of equitable growth. The setting up of
IDBI, NABARD, etc., are some examples in this regard. Explain the
promotional role of the RBI in this regard.
( 10 marks)


Suggested Answers
Central Banking and Commercial Banking (MB3G2B): January 2009
Section A : Basic Concepts
Answer Reason
1. C Credit administration includes all except option (c).Credit risk models are developed
to help in measuring credit risk.

2. E RBI faces a very challenging task in managing the government’s public debt. Public
debt is the sum of the debt incurred by the Central government, State government
and local bodies such as municipalities.

3. A When the economy is hit by supply shock, central banks respond by allowing a
temporary rise in inflation to off set the decline in out put. If the economy is looking
up the ideal monetary policy will be restrictive.

4. A The Bank Of Norway Regularly Publishes Future Interest Rate Paths.

5. C The loan system would be applicable only to borrowal accounts classified as
Standard and Sub-standard Assets.

6. A The currency board arrangement is the example of fixed rate regime, wherein there is
a very strong commitment to the exchange rate peg. The system of currency boards
had succeeded well in small countries.

7. A Under swingline facility the borrower gets the money the same day.
8. C Utilization fee should be paid by the borrower when the drawn portion exceeds
50%.This is a compensation (fees) in a typical syndication.

9. B . The government had set up a high level committee in August 1991, under the
chairmanship of shri M.Narasimham to examine all aspects relating to structure,
organization, functions and procedures of the Indian financial system .L.C.Gupta
committee on derivatives and Birla committee on corporate governance.

10. B .Asset liability management is related to liquidity management .Income recognition
and provisioning for bad and doubtful debts relate to prudential norms.

11. D The Financial Services Authority carries out integrated supervision of financial
system. The FSA system of bank supervision is essentially off-site with most of the
on-site work being done by staff.

12. E The loan approval process is the first step towards good portfolio quality. The
process should be compatible with the bank’s credit culture, its risk profile and the
capabilities of its lenders.

13. B Prime rate can be defined as a bench mark rate that a bank charges from its
borrowers based on the risk level .LIBOR used in the UK markets and the prime rate
in the USA markets are the examples of prime rate based pricing.

14. E In a global market, the dynamics of currency exchanges, trade in goods and services
and currency trade by itself underline the need to have a right payment and
settlement mechanism.

15. A Hague Agreement established BIS as an international organization governed by
international law. The BIS was given the legal structure of a limited company.

16. E To add both value to their services and to satisfy their customers banks started
selling on line services. Most banks focused upon reengineering the existing and
introduced newer customer services like VRU and consultation services.

17. C Mobility is not a good characteristic of a good collateral. All others are good
characteristic of a collateral.

18. E The main users of CIBIL are banks , Financial Institutions, NBFCs, Housing Finance
Companies and credit card companies etc.

19. B If an advance given by the bank has personal security of any individual or the
borrower with or with out guarantor it will be classified as unsecured advance.
However advances with bank/government will be classified as secured advances.

20. B Non installment loan requires a single principal and interest payment. All others relate
to installment credit loans.

21. C It has simply become a defacto standard, like in Canada, where the Governor is
required to appear before a parliamentary committee after the Monetary policy
Report is released.

22. C The Federal Reserve Board has broad discretionary powers to regulate the overseas
activities of member banks and bank holding companies so that ,in financing US
trade and investments overseas, US banks can be highly competitive against

23. A
Maturity Value = PV ×
m n r

Maturity Value = PV ×
8 0.11

Maturity Value = 300000 ×1.2423 = Rs.3,72,690.

24. D It was initially set up as a private share holders bank. RBI was nationalized on Jan 1,

25. E The process of automatic monetization of debt is in vogue through adhoc treasury
bill system.

26. A The bank that heads the pact in loan syndication is called the Lead banker.
27. D During the times of financial crunch banks turn to the RBI for help. RBI sets aside
certain amount of reserves for this purpose. It plays the role of LOR (Lender of Last

28. A Financial Market Operations area includes all except capital markets.
29. C Setting up of new financial institutions is the promotional role of RBI. As a banker to
government it RBI manages all other functions.

30. A Dividend is the only item that is accounted by RBI on receipt basis.

Central Banking and Commercial Banking (MB3G2B): January 2009
Section B : Caselets/Problem
1. Banks are special, first, they are participants in the payments system and hence are the
backbone of the financial system. The-systemic risks of any one bank being affected either on
account of its banking operations or on account of non-banking operations are high. Second,
the banks contract for liquid deposits to acquire illiquid assets and hence are vulnerable to
liquidity crisis. This would underline the need for a lender of last resort. Third, the banks are
the major service providers for retail customers and are, therefore, on a separate footing in
terms of consumer protection, especially since the customers of a bank are typically riskaverse.
In other words, while retaining incentive for banks to be always solvent, there is
constructive ambiguity in extending liquidity by lender of last resort.

2. Regulation policy should recognize and admit that the fact of regulation does not guarantee
that there will be no risk of failure or insolvency of a regulated unit. In fact, a zero failure
system is likely to be sub optimal. There is always a danger that people perceive that mere act
of an entity being regulated provides a guarantee from the regulator that it is risk-free to
transact business with the unit. The risks arise due to several problems, mainly related to lack
of information. First, it is difficult to precisely assess even for the regulator that how
good the internal controls in a regulated entity are on an ongoing basis. Frauds that occur in
connivance with the management of the bank are even more difficult to detect if they occur
between two inspections, as the off-site surveillance may not throw up this information.
Second, there is no way of perfect and continuous assessment of adherence to the external
rules imposed by the regulator. Third, even under most prudent circumstances, there is a
residual risk.

3. In all developed countries and most developing countries, the Central Bank is charged with
promoting stable money and a stable financial system. And these are extremely important
goals. To see just how important, it is worth reflecting on the economic and human cost
incurred by many countries when Central Banks got policy wrong and contributed to the
strong deflation of the thirties, or reflecting on the economic and human cost incurred by
those countries which experienced hyperinflation at some stage during the last century or
reflecting on the economic and human cost incurred by those countries, including many in our
own region, which experienced severe banking sector crises in recent years. When Central
Banks get it wrong, when they allow the value of the money which they issue to fluctuate
substantially, as in the case of serious deflation or high inflation, or when they allow banking
systems to become unstable, the damage which can be done is enormous. Savings can be
destroyed as also businesses and jobs.
So, not to understate the importance of the role which Central Banks can play. When central
banking is done well, it not only avoids those catastrophic results which have been seen
around the globe from time to time, but also makes some positive contribution to economic
growth, to social justice, and perhaps even to the integrity of society itself.

4. There is nothing fair, just, or even honest in a monetary system which steals people's savings,
or rewards those lucky enough to go heavily into debt at the right time. There can be little
doubt that some of those who today are wealthy became wealthy as much through having the
real value of their borrowings evaporate before their eyes as through their own efforts and
initiative. And this sends absolutely the wrong message to everyone making saving, spending
and investment decisions.
Because in most societies interest rates are used as a way to try to compensate savers for the
erosion of the principal value of their savings through inflation, there is an additional problem
which often makes it particularly difficult for those with low incomes or few other assets to
borrow at a time of high inflation. The problem arises from the fact that, when inflation is
high and nominal interest rates are similarly high, the cash-flow problem of servicing a loan is
quite difficult in the first few years of the loan, but very easy in the last few years of the loan.
Putting it in another way, using interest rates to compensate savers for the effects of inflation
on their savings has the effect of front-loading the real burden of debt service. This may
effectively deny those on low incomes any access to borrowing facilities in times of high
inflation, even though the real interest rate on the loan is at a moderate level.

5. The latest trend among banks in Europe is to look at securitization and credit derivates not as
alternatives but as complementary. An increasing number of European bank Collateral Loan

Obligation/Co I lateral Bond Obligation transactions are now coming by way of synthetic
securitizations, which is a combination of securitization and credit derivatives. As a matter of
fact, credit derivatives have helped securitization to get into its new avtar: a device of risk
transfer and not merely a device of funding. Synthetic securitizations were developed only in
1997, but in a short period of time, they have become extremely popular. In some markets, for
example - Germany, the growth in synthetic securitization is far faster than that in traditional
6. From the point of view of the investing bank, there are two clear motives. One, there is an
issue of risk diversification. A banker selling protection under a default swap or a total return
swap is indirectly exposing oneself in the portfolio created by someone else, and benefiting
from the returns thereof.
Two, many investors also look at credit linked notes as a yield kicker. Credit linked notes have
carried impressive spreads. They enable banks to convert a 100% risk weighted asset into a
lower risk asset, thereby giving a substantial boost to capital adequacy.

7. The future of credit derivatives seems to be very rosy. Everybody in the business is busy
predicting how credit derivatives will change the face of finance in the coming years. Global
credit markets still display discrepancies in the pricing of the same credit risk across different
asset classes, maturities, rating cohorts, time zones, currencies and so on. These discrepancies
persist because arbitrageurs have traditionally been unable to purchase cheap obligations
against expensive ones in order to extract arbitrage profits.
Over the years, as credit derivative liquidity position improves, players in the credit
derivatives market will definitely exploit such opportunities, just as the evolution of interest
rate derivatives prompted arbitrage activity in the 1980s. This will lead to the gradual
disappearance of the credit pricing discrepancies thereby making the market more mature and
efficient. Though the credit derivatives market is still at a nascent stage, it will continue to
grow exponentially for the foreseeable future, driven by a knowledgeable user base, an
accommodating regulatory environment and, most important a compelling cache of
investment, corporate finance and risk management applications. With the improvement in
technology, brilliant research works in various financial institutions and the accumulation of
significant body of knowledge on credit experience and analysis, credit derivatives are at the
threshold of becoming an inevitable tool of risk management.

8. a.
Average cash balance = 1400 × 0.005 = 7 crore
Acceptance range = 7 ± (7 ×0.04)
Acceptance range = 7 ± (0.28) = Rs.6.72 crore to Rs.7.28 crore
Thus, the cash balances of MMFI can lie between Rs.6.72 crore to Rs.7.28 crore.
b. Average cash balance with increased working funds = 2200 × 0.005 = 11 crore
Acceptance range = 11± (11× 0.04) = Rs.10.56 crore to Rs.11.44 crore
Thus, if the working funds of bank are increased to Rs.2,200 the range for maintaining
cash balances will be Rs.10.56 crore to Rs.11.44 crore.
c. If the working funds decline to Rs.2,000 crore from Rs.2,200 crore,
Average cash balance with decreased working funds = 2000 × 0.005 = Rs.10 crore
Acceptance range = 10 ± (10 × 0.04) = Rs.9.60 crore to Rs.10.40 crore
Thus, if the working funds of bank decrease to Rs.2,000 crore the range for maintaining
cash balances will be Rs.9.60 crore to Rs.10.40 crore.

Section C: Applied Theory
9. Types of Advances
Loans are generally classified into secured or unsecured loans. Their features are discussed
Unsecured Advances: When the advance given by the bank has a personal security of any
individual or the borrower with or without a guarantor, it will be classified as an unsecured
advance. In the absence of any tangible security, though personal security is given by an
individual by way of an obligation for repayment, the loans are treated as unsecured.

However, all those loans that have the guarantee of a bank/government are categorized as
"Advances covered by Bank/Government Guarantees" and hence are not reported under
unsecured loans category. An unsecured loan is also a loan without any collateral being
offered as security. Two examples of unsecured loans are, a Letter of Credit (LOC) and
Signature Loans. If the borrower defaults on an unsecured loan, the creditor has no priority
claim against any particular property of the borrower. The creditor can try to obtain just a
money judgment against the borrower. Until a small business has an established credit history,
it cannot usually get unsecured loans because of the business's risk.
Secured Advances: Secured advances on the other hand, have impersonal security, i.e., the
security has to be a tangible asset against which the loan is to be granted. Primary security is
an asset against which the loan is given and collateral security is a security, which is given in
addition to the existing primary security. These primary and collateral securities can be
movable or immovable assets and depending on the same the charge created on the security
may vary. Because the value of pledged collateral is critical to a secured lender, loan
conditions and covenants, such as insurance coverage, are always required of a borrower.
Charge on the movable properties can be created in the following five different ways:
Banker's Lien
10. A Central Bank in any developing economy will have a major role to play in the development
of the country's financial market place. The need for such promotional role for the Central
Bank arises because:
In a developing economy, it has to be ensured that there is a proper credit allocation -
among the various sectors of the economy.
The imperfections present in the various financial markets will have to be removed,
which in turn requires the development of the market place and the market players.
Likewise, the Reserve Bank of India also has a major role to play in the development of the
Indian Financial System. It acts as the promoter of financial institutions in the country and
expects its policies to be effective in promoting economic growth as per the guidelines and
policies formulated by the government. When the RBI was incorporated, India lacked a well
developed Commercial Banking System and a money market. After its nationalization, the
RBI took steps to promote and develop financial institutions in line with its objective of
pursuing appropriate credit and monetary policies for economic growth and development. Its
efforts culminated in the emergence of an impressive network of financial institutions both in
the public and cooperative sectors. With the help of branch networking, banking could reach
out to hitherto unbanked areas, thereby mobilizing the untapped savings. The RBI played a
key role in the establishment of various financial institutions like the IDBI, NABARD, NHB,
EXIM Bank, UTI etc., set-up to serve different sectors. Incidentally, development could also
be witnessed in the other financial markets viz., the capital market, the foreign exchange
market and the money market. This promotional role of the RBI is a continuous process. It
serves to encourage and conduct various research activities, which aid to enhance the
operational efficiency of the economy.

Last edited by Aakashd; July 1st, 2019 at 01:35 PM.
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Old October 31st, 2015, 02:19 PM
Default Re: ICFAI MBA Central Banking And Commercial Banking (mb3g2b) Paper

Hey buddy I’m preparing for ICFAI MBA Central Banking And Commercial Banking for that can you please also get the exam paper so that I can have idea about it?
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Old October 31st, 2015, 02:27 PM
Super Moderator
Join Date: Dec 2011
Default Re: ICFAI MBA Central Banking And Commercial Banking (mb3g2b) Paper

As you are preparing for ICFAI MBA Central Banking And Commercial Banking exam I will help you here to get the exam paper which help you also to prepare well and score well in the exam.

Here is the exam paper of ICFAI MBA Central Banking And Commercial Banking

1.Credit administration is a critical element in maintaining the safety and soundness of a bank. Which of the following is not included in the credit administration process?
(a)Keeping the credit file up to date
(b)Obtaining current financial information
(c)Establishing a sound credit granting process
(d)Sending out renewal notices
(e)Preparation of various documents.

2.RBI faces very challenging task in managing the Government’s public debt. Which of the following institution(s) incur/s the public debt?

I.Local Bodies.
II. Central Government.
III. State Government.

(a)Only (I) above
(b)Only (II)above
(c)Both (I) and (II) above
(d)Both (II) and (III) above
(e)All (I), (II) and (III) above.

When the economy is hit by supply shocks, in which of the following ways the Central Bank
I.Allows temporary rise in inflation.
II. Monetary policy will be restrictive.
III. Provides stability of output.

(a)Only (I) above
(b)Only (II) above
(c)Both (I) and (II) above
(d)Both (I) and (III) above
(e)All (I), (II) and (III) above.

4.Towards providing greater operational transparency, which central bank regularly publishes future interest rate paths?
(a)The Bank of Norway
(b)Bank of Japan
(c)Swiss National Bank
(d)Australian Central Bank
(e)Bank of Canada.


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Last edited by Aakashd; August 13th, 2018 at 09:39 AM.
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