Module-A: Introduction of Business of Financial Institutions

What is financial institution and what are the different types of financial institution? November, 2010

Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to taking out loans and exchange currencies must be done through financial institutions. A financial institution is an institution that provides financial services for its clients or members.

Financial institutions provide service as intermediaries of financial markets. They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy. To do so, savings are brought to provide funds for loans.

Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are regulated by the government. Broadly speaking, there are four major types of financial institutions:

i. Depositary Institutions (Bank)  : Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies. Deposit-type financial institutions mainly fall under four classifications: commercial banks, savings and loan associations, credit unions, and the newer Internet banks. Commercial banks generally compete by offering the widest variety of services; however, they generally do not offer the highest interest rates on deposits or the lowest interest rates on loans. Savings and loan associations have slightly different ownership arrangements than banks, but they are similar to commercial banks. Savings and loan associations may offer slightly higher rates than commercial banks on deposits and somewhat lower rates than commercial banks on loans. Credit unions are similar to savings and loan associations, but they are not-for-profit organizations and are owned by their members. Internet banks are electronic banks that do not have traditional brick-and-mortar branches. Because they have fewer branches, employees, and capital expenditures than traditional banks, they can generally pay higher interest rates on deposits and charge less for loans than traditional banks do.

ii. Contractual Institutions : Insurance companies and pension funds; iii. Investment Institutes: [Investment Banks - Underwriting|underwriters], [Security Firms -

Broker]; iv. Credit Unions: Credit unions are another alternative to regular commercial banks. Credit unions

are almost always organized as not-for-profit cooperatives. Like banks and S&Ls, credit unions can be chartered at the federal or state level. Like S&Ls, credit unions typically offer higher rates on deposits and charge lower rates on loans in comparison to commercial banks.

v. Shadow Banks: The housing bubble and subsequent credit crisis brought attention to what is commonly called "the shadow banking system." This is a collection of investment banks, hedge funds, insurers and other non-bank financial institutions that replicate some of the activities of regulated banks, but do not operate in the same regulatory environment.and

vi. Nonbank Financial institutions: Nonbank financial institutions consist of two main kinds: mutual fund companies and brokerage firms. Mutual fund companies have broken into the banking arena. With many mutual fund companies, you can now write checks against your mutual fund account. Brokerage firms have also gotten into the act. Many brokerage firms now allow you to write checks, issue credit cards and ATM cards, and make loans. Brokerage firms offer these and many other account features that were once reserved for traditional banks.

1

What is meant by non-banking financial institutions and what are its different types? November, 2010

Non-banking financial institutions, or NBFIs, are financial institutions that provide banking services, but do not hold a banking license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still covered under banking regulations. NBFIs do offer all sorts of banking services, such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activites. A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering.

A non-banking financial institution is a company registered under the company act, 1913 and engaged in the business of loans advances, acquisition of shares/stocks/bonds/debentures/securities by government or local authority or other securities of like marketable nature, leasing, hire-purchase but does not includes any institution whose principal business is that of agriculture activity, industrial activity, sales/purchase/construction of immovable property. A NBFI which is a company and which has it principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company.

“Financial/Depository institutions offering checking accounts or commercial loans but not both is called nonbank banks” – Peter S. Rose.

Services providedNBFIs offer most sorts of banking services, such as loans and credit facilities, private education

funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs(Term Finance Certificate) and other obligations. These institutions also provide wealth management such as managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice on merger and acquisition activities. The number of non-banking financial companies has expanded greatly in the last several years as venture capital companies, retail and industrial companies have entered the lending business. Non-bank institutions also frequently support investments in property and prepare feasibility, market or industry studies for companies.

However they are typically not allowed to take deposits from the general public and have to find other means of funding their operations such as issuing debt instruments.Differences from banks:

(1) A BNFI connot accept demend deposits.(2) It is not a part of the payment and settlement system and as such connot issue cheques to its

customers.(3) Deposit insurance facilty not available for NBFI depositors unlike in case of banks.

The NBFIs that are licensed by Bangladesh Bank are as follow:(1) Equipment leasing company(2) Hire-purchase company(3) Loan company(4) Investment Company.

They do business in financing for venture capital. Merchant banking, Investment banking, Mutual association, Mutural Company, leasing company and building society would be included as NBFI.

(1) Othe Nonbank Financial Institutions are-(2) Savings and Loanscompany(3) Credit Unions(4) Shadow Banks(5) Mutual Fund Companies (6) Brokerage Firms.(7) Development finance institutions (8) Leasing companies(9) Investment companies

(10) Modaraba companies2

(11) House finance companies(12) Venture capital companies(13) Discount & guarantee houses and (14) Corporate development companies

3

What is commercial bank and what are the functions of a commercial bank? May, 2011The name bank derives from the Italian word banco "desk/bench", used during the Renaissance

era by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, traces of banking activity can be found even in ancient times.

A financial intermediary accepting deposits and granting loans: offers the widest manu of services of any financial institution. A commercial bank (or business bank) is a type of financial institution and intermediary. It is a bank that lends money and provides transactional, savings, and money market accounts and that accepts time deposits.

Commercial banking activities are different than those of investment banking, which include underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients. Some commercial banks, such as Citibank and JPMorgan Chase, also have investment banking divisions, while others, such as Ally, operate strictly on the commercial side of the business.

The activities of commercial banks are-i. accepting deposits and creation of capital,

ii. Profitable investmet,iii. giving business loans and auto loans, mortgage lending, iv. Act as the loan creates depositv. Creation of medium of exchange

vi. Equal distribution of incomevii. Implemantatin of monetary policy

viii. Development of the industriesix. Role of agricultural development.x. Reducing business risks.

xi. Expansion of trade and commerce.xii. Circulation of money and comtrolling the loans

xiii. Discuning the bill and accepting the billsxiv. Basic investment products like savings accounts and certificates of deposit. xv. Work as an agents are-

a. Purchase and sale of share and securities.b. Transaction of money.c. Consuling activitiesd. Act as a trusteee. Payment of house rentf. Payment and collect the insurance feeg. Collect the pensionh. Collect and payment the bill money.

The traditional commercial bank is a brick and mortar institution with tellers, safe deposit boxes, vaults and ATMs. However, some commercial banks do not have any physical branches and require consumers to complete all transactions by phone or Internet. In exchange, they generally pay higher interest rates on investments and deposits, and charge lower fees.

4

Whar are role of commercial banks?Commercial banks engage in the following activities:

i. processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means

ii. issuing bank drafts and bank chequesiii. accepting money on term depositiv. lending money by overdraft, installment loan, or other meansv. providing documentary and standby letter of credit, guarantees, performance bonds, securities

underwriting commitments and other forms of off balance sheet exposuresvi. safekeeping of documents and other items in safe deposit boxes

vii. sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and similar financial products as a “financial supermarket”

viii. cash management and treasuryix. merchant banking and private equity financingx. traditionally, large commercial banks also underwrite bonds, and make markets in currency,

interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.

What are the sources of funds of a commercial bank and what are the regulations imposed on commercial bank? May, 2012 & 2011.The sources of funds of commercial banks are-

(1) Funds from own sources: this are- Paid up capital Share capital Reserves funds and others reserves funds Retained earning and Statutory reserves funds

(2) Funds from the borrowing sources: These are- Depository funds Loan and advaces from other commercial banks and central bank. Loan at call money

A set of acts, laws, regulations, and guidelines have been enacted and promulgated time to to perform the commercial banks’ role particularly, to control and regulate country’s monetary and financial system. Among others, important laws and acts include:

1. Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972)2. Bank Company Act, 19913. The Negotiable Instruments Act, 18814. The Bankers’ Book Evidence Act, 18915. Foreign Exchange Regulations Act, 19476. Financial Institutions Act, 19937. Bank Deposit Insurance Act, 20008. Money Loan Court Act, 20039. Micro Credit Regulatory Authority Act, 200610. Money Laundering Prevention Act,201211. Anti-terrorism Act, 2009 and12. Anti Terrorism (Amendment) Act,2012On the other hand, regulations and guidelines broadly include Bangladesh Bank Regulations and

Foreign Exchange Regulations.

5

What types of regulations seek to enhance the net social benefits of commercial banks’ services to the economy?

Six types of regulation seek to enchance the net social benefits of commercial banks’ services to the economy. This are-

(1) Safty and soundness regulation: To protect depositors and borrowers against the risk of commercial bank failure.

(2) Monetary policy regulation: here the regulations control and implement monetary policy by requiring minimum level of cash reserves to be held agaist commercial bank deposits.

(3) Credit allocation regulation: These regulations may require a commercial bank to hold a minimum amount of assets in one particular sector of the economy or to set maximum interest rates, prices or fees to subsidise certain sectors.

(4) Consumer protection regulation: This type of regulation is imposed to prevent the commercial bank from discriminating unfairly in lending.

(5) Investor protection regulation: Here laws protect investors who directly purchase securitires and /or indirectly purchase securities by investing in mutual or pension funds managed directly or indirectly by commercial banks and

(6) Entry and chartering regulation: Entry and activity regulations limit the number of commercial banks in any given financial services sector, thus impacting the charter value of commercial banks operating in that sector.

Explain the difference types of services provided by a bank. November, 2010

(1) Currency exchange: The service offered by banks in which they trade one nation’s currecy fro that o another. A bank stood ready to trade on form of currency, such as dollars, for another, such as Frances or pesos, in return fro a service fee.

(2) Discounting commercial notes and making business loans: Banks began discounting commercial notes and making business loans, in effect making loans to local merchants who sold the debts (account receivable) they held against customers to a bank to raise cash quickly.

(3) Offering saving deposits: Thrift accouts that pay interest and encourage people t save. On of the earliest sources fo funds consisted of offering saving deposits, interest bearing funds left with the banks for a period fo weeks, months or year.

(4) Safekeeping of valuables and certificaiton of value: During the middle ages, banks began the practice of holding gold, securitirs and other valuables owned by theier customers in secure vaults.

(5) Supporting government activities with the credit: During the middle ages and the early years of the industrial revolution, the ability of banker to mobilize large amounts of funds and make loans came to the attendtion of government.

(6) Offering checking accounts (Demand deposits): the industrial revolutionin Europe and the USA ushered in new banking practices and services. An account used principally to make payments for purchases of goods and services.

(7) Trust services: Managing customers’ property and investing their fund for a free.(8) Graning commercial loans(9) Financial advising(10) Financial advisory services: Helping customers with financial planning for the future.(11) Cash management service: Managing customers’ cash account to achieve a higher rate fo

return and ensure timely funds availability.(12) Equipment leasing services: an alternative to lending in which a bank buys equipment

and rents it to its customers.(13) Insurance policies: Contracts that protect customers by covering the costs of property

damage and health care and making monetary payments in case of death.(14) Retirement plans: Pension programs that aid individuals to save money for retirement.(15) Security brokers: Executing customer orders to buy or sell securities.(16) Offering mutual funds and annuities.

6

(17) Marcent banking services(18) Cash management(19) Account reconciliation(20) Wholesale lock box(21) Automated teller machine(22) Credit card(23) Debit card(24) Point of sale service(25) Home banking(26) Telephone banking.

7

Discuss the different types of liabilities of a financial institution. May, 2012

(1) Deposits: these are-a. Noninterest bearing demand depositsb. Saving depositsc. NOW Accountd. Money market deposit accounte. Time deposit.

(2) Borrowing from nondeposit sources(3) Capital account(4) Comparative balance sheet ratio for different size banks.(5) The expansion of off-balance-sheet items in banking. These are-

a. Standby credit agreementb. Interest rate swapsc. Financial futures and option interest rate contractd. Loan commitmentse. Foreign exchange rate contracts.

Why is the financial intermediary necessary? May, 2012i. Creation of medium of exchange

ii. Collection of savings and formation of capitaliii. Supply of capitaliv. Development of home tradev. Help in foreign trade

vi. Industrial developmentvii. Agricultural development

viii. Developing fo small and cottage indudtriesix. Increase of govt. revenuex. Credit of govt.

xi. Implementation of govt. monetary policyxii. Employment

xiii. Development of standard of liningxiv. Achievement of economic grothts

What are the chalanges of financial institutions?i. Service proliferation

ii. Rising competionsiii. Degegulationiv. Raising funding costv. An increasingly interest-sensitive mix of funds

vi. Technological revolutionvii. Consolidation and geographic expantion

viii. Globalization of bankingix. Increasing risk fo failure.

8

Explain spread and burden with example. May, 2012Definition of 'Spread' is -

1. The difference between the bid and the ask price of a security or asset. 2. An options position established by purchasing one option and selling another option of the same class but of a different series.

'Spread' is -1. The spread for an asset is influenced by a number of factors:a) Supply or "float" (the total number of shares outstanding that are available to trade) b) Demand or interest in a stock c) Total trading activity of the stock2. For a stock option, the spread would be the difference between the strike price and the market value.

Burden is -1. Something that is carried.2. a. Something that is emotionally difficult to bear.

b. A source of great worry or stress; weight: The burden of economic sacrifice rests on the workers of the plant.

3. A responsibility or duty: The burden of organizing the campaign fell to me.4. Nautical

a. The amount of cargo that a vessel can carry.b. The weight of the cargo carried by a vessel at one time.

5. The amount of a disease-causing entity present in an organism.

What is financial spread sheet? What are the uses of Financial Spread sheet? Methods of determining the process of financial spread.

Financial spreadsheets aid companies when preparing and reviewing financial information. They are inexpensive options for financial analysis and are easily used by most company personnel. Spreadsheets are also used in conjunction with the company's management information system, creating a solid reporting system for management decisions.

Financial spreadsheets are simple, easy-to-use forms generated by a computer program. They have greatly aided in the processing and presenting of financial information, usually by accountants. Spreadsheets also help company management to determine how much value is to be gained in certain business decisions and what specific financial information they should look for with company investments.Uses of Fianancial spread sheet are-(1) Accounting Ratio analysis: Accountants may use spreadsheets to prepare and present the

financial statements of a company. Spreadsheets also allow accountants to quickly calculate financial ratios, which gives management a quick snapshot of specific company strengths relating to profit margins and asset use. Spreadsheets can also contain multiple periods of financial statements, creating an easy trend analysis review.

9

(2) Budgeting: Several companies engage in annual or quarterly budgeting, using financial spreadsheets to present the information for the company or each department. Spreadsheets can also be linked together, allowing multiple budgets to be totaled in one annual budget for a comparative analysis. Accountants can also link other financial spreadsheets to the budget and prepare expense reports for departments and indicate any variances between projected expenses and actual expenses.

(3) Net Present Value: When companies look into expanding current operations or acquiring competitors, the most common valuation method is the net present value (NPV) calculation. The NPV calculation takes future cash flows from the expanded or acquired operations and discounts them back to the current period dollar value. This adjusts out inflation so companies can compare the dollars spent today for expanding operations to the potential dollars earned from those new operations. Using a financial spreadsheet can quickly calculate the NPV and allow management to make informed decisions.

(4) Investment Financing: When expanding or acquiring new operations, companies must determine how much debt or equity financing should be used for major purchases. Financial spreadsheets are created using the company's current financial status and how much debt it can take on before it is over-leveraged.

(5) Stock Valuation: Investors may use financial spreadsheets to calculate the value of a company's stock. Financial information is usually taken from the company website and entered into financial spreadsheets to determine how well the company has performed in the past. Many investors have special methods they use to determine stock value and manipulate the financial information accordingly. Financial spreadsheets allow investors to create several periods of information to create a trend, strengthening their analysis of a company's stock.

(6) The Facts analysis: Computerized spreadsheets have changed the way companies handle the information of their business operations. Spreadsheets are primarily used for financial information reported from business operations, greatly improving the accuracy of the accounting department. Some businesses also create invoices from the accounting spreadsheets.

(7) Ease of Use: Most financial spreadsheet functions are relatively easy to perform. Accountants are able to process large amounts of data by using spreadsheets that perform basic calculations, saving time and creating fewer mathematical errors. Spreadsheets can also be emailed to other departments or saved on a network system for use by other workstations in a company.

(8) Accountant Functions: Almost all accounting functions can be processed by financial spreadsheets: budgets, depreciation schedules, account reviews and financial statements. Preparing this information usually requires a standard spreadsheet form to be created, and then the financial information can be input from department paperwork. The standard form is then saved each month for ease of review on a monthly or yearly basis.

(9) Business Analysis: Analyzing financial information from spreadsheets is a quick and simple process once the accounting process is complete. A standard spreadsheet of financial ratios can be created with the information filling directly from the accounting spreadsheets. This saves management countless hours of poring through information to find the numbers needed for the ratios. Financial statements can also be created by linking the financial statement spreadsheet to other spreadsheets, automatically filling in the information.

(10) MIS Exporting: Most management information systems and accounting software will export financial information into a spreadsheet for management review. This functionality helps accountants take standard reports from the company software and remove unnecessary information. Financial information can also be exported from the software and then automatically entered into the standard accounting spreadshe

(11) Other use of spreadsheet will automatically:i. Amortize and analyze property loans and leverage position

ii. Forecast net operating income (NOI) based on property income and expensesiii. Calculate cash-on-cash return, value enhancement, net present value (NPV) and internal

rate of return (IRR)iv. Create T-bars to visualize income stream

10

v. Establish market rental rates using a comparison gridvi. Determine net effective rental rates

vii. Compute time value of money variables such as present value, future value, and paymentviii. Conduct a discounted cash flow analysis

Methods of determining the process of it.(1) Asset & liabilities analysis(2) Income statement(3) Cash flow statement(4) Fund flow statement(5) Ratio analysis and (6) Credit scores.

What are the Function of central bank? Functions

(1) BB performs all the core functions of a typical monetary and financial sector regulator, and a number of other non core functions. The major functional areas include;

(2) Formulation and implementation of monetary and credit policies.(3) Regulation and supervision of banks and non-bank financial institutions, promotion and

development of domestic financial markets.(4) Management of the country's international reserves.(5) Issuance of currency notes.(6) Regulation and supervision of the payment system.(7) Acting as banker to the government.(8) Money Laundering Prevention.(9) Collection and furnishing of credit information.(10) Implementation of the Foreign exchange regulation Act.(11) Managing a Deposit Insurance Scheme .

Why financial institutions are regulated? Mention some regulations imposed by BB for banking industry. FIs provide various services to sectors of economy. Failure to provide these services, or a breakdown in their efficient provision, can be costly to both the ultimate suppliers of fund and users as well as the economy overall. For example, bank failures may destroy household saving and at the same time restrict a firm’s access to credit. Insurance company may failures may leave household members totally exposed in old age to the cost of catastrophic illnesses and to sudden drops in income on retirement. In addition, individual FI failures may create doubts in savers’ minds regarding the stability and solvency of FLs and the financial system in general and cause panics and failures and the costs they would impose on the economy and society at large. Although regulations may be socially beneficial, it also imposes private costs, or a regulatory burden on individual Fl owners and managers. Consequently, regulation is an attempt to enhance the social welfare benefits and mitigate the costs of the provision of Fl services. Regulations imposed by bb are-

i. Minimum capital requirement-TK.400 cr.ii. SLR for banks-19% , for Islami banks-11.50%

iii. CRR for banks-6%, for Islami banks-6%iv. Bank rate-5%v. Repo-7.25,

vi. Reverse Repo-5.25%vii. Interest rate cap on- Export Credit-7%, agri.credit-13% and industrial term credit-

13%viii. Single borrower exposure limit -35% for funded and non-funded credit.

ix. There are KYC, observation on abnormal transactions.x. Classification on performing and non-performing loans.

11

xi. Financial inclusion opening A/C with th-10.00 and xii. Green banking etc.

What is financial intermediary and what are the advantages enjoyed by market participants from this? Every modern economy has intermediaries, which perform key financial functions for individuals, households, corporations, small and new business, and governvent. The most important contribution of financial intermediaries is a stready and relatively inexpensive flow of funds from savers to final users or investors. Financial intermediaries includes depository institutions, such as , commercial banks, saving and loan associations, saving banks and credit unions, which acquire the bulk of their funds by offering their liabilities to the public mostly in the form of deposit. Beside this insurance companies (life, property and companies) and pension funds are also act as financial intermediaries.

Advantages enjoyed by market participants are-i. Investors can get more choices concering maturity for their investments and borrowers can get

more choices for the length of their debt obligations.ii. Borrowers can get longer term loan at a lower cost as a financial intermediary is willing to

make longer term loans at a lower cost to the borroweriii. Attaining cost-effective diversifications in order to reduce risk by purchasing the financial

assets of a financial intermediary is an important economic benefit for the market participants.iv. The lower costs acute to the benefits of the investor who benefit from a lower borrowing cost

because of investment professional employed by financial intermediaries andv. Market participants get the benefit of using cheques, credit cards, debit cards and electronic

transfer of funds through financial intermediaries

Explain the concept of mobile banking. May, 2011Mobile banking (also known as M-Banking, m-banking, SMS Banking) is a term used for

performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA). The earliest mobile banking services were offered over SMS. With the introduction of the first primitive smart phones with WAP support enabling the use of the mobile web in 1999, the first European banks started to offer mobile banking on this platform to their customers. Mobile banking has until recently (2012) most often been performed via SMS or the Mobile Web. A mobile banking conceptual model:

In one academic model, mobile banking is defined as “Mobile Banking refers to provision and an ailment of banking and financial services with the help of mobile telecommunication devices. The scope of offered services may include facilities to conduct bank and stock market transactions, to administer accounts and to access customized information”.According to this model Mobile Banking can be said to consist of three inter-related concepts:

i. Mobile Accountingii. Mobile Brokerage

iii. Mobile Financial Information Services Most services in the categories designated Accounting and Brokerage are transaction-based. We can also classify mobile banking based on the nature of the service:

Push PullFunds transfer

TransactionBill paymentShare tradeCheck orderMinimum balanceAccount balance inquiry

Inquiry12

AlertAccount statement inquiryCredit/debit alertCheck status inquiryBill payment alert

Challenges for a Mobile Banking Solution: Handset operability:Security:Application distribution:

Mobile Banking Bearer Technology OptionsServer-Side TechnologiesClient-Side Technologies

History of Mobile Banking in Bangladesh: (1) “Dutch-Bangla Bank Limited” (DBBL) has for the first time introduced its mobile

banking service on March 31, 2011 expanding the banking service from cities to remote areas. Features/Services of DBBL Mobile Banking:

(1) Customer Registration(2) Cash-in (cash deposit)(3) Cash-out (cash withdrawal)(4) Merchant Payment(5) Utility Payment(6) Salary Disbursement(7) Foreign Remittance(8) Air-time Top-up(9) Fund Transfer

(2) “BRAC Bank Limited” is set to introduce mobile banking secondly, a top official said the service will enable millions of banked and unbanked people to deposit, withdraw and transfer money through mobile phones. BKash, a joint venture between BRAC Bank and US-based Money in Motion, will provide mobile banking with a fully encrypted VISA technology platform for transactions through mobile phones.

Mobile banking can offer services such as the following:1) Account Information:

Mini-statements and checking of account historyAlerts on account activity or passing of set thresholdsMonitoring of term depositsAccess to loan statementsAccess to card statementsMutual funds / equity statementsInsurance policy managementPension plan management

2) Payment, Deposits, Withdrawals & Transfers:Domestic and international fund transfersMicro-payment handlingMobile rechargingCommercial payment processingBill payment processing

3) Investments:Portfolio management servicesReal-time stock quotesPersonalized alerts and notifications on security prices

4) Support:Status of requests for credit, including mortgage approval, and insurancecoverage

13

Check (cheque) book and card requestsExchange of data messages and email, including complaint submission andtracking

5) Content Services:General information such as weather updates, newsLoyalty-related offersLocation-based services

Disadvantages of Mobile Banking:SecurityCompatibilityCost

What do you mean by ratio analysis?A tool used by individuals to conduct a quantitative analysis of information in a company's

financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis.

There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity. Some common ratios include the price-earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital.

What do you mean by financial analysis?The term financial analysis is also known as analysis and interpretation of financial statement. “Financial analysis is the process of identifying the financial strengths and weaknesses of the firm,

by properly establishing the relationships between the items contained in balance sheet and profit and loss account”-CA.C. Rama Gopal.

Financial analysis (also referred to as financial statement analysis or accounting analysis or Analysis of finance) refers to an assessment of the viability, stability and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions.

i. Continue or discontinue its main operation or part of its business;ii. Make or purchase certain materials in the manufacture of its product;

iii. Acquire or rent/lease certain machineries and equipment in the production of its goods;iv. Issue stocks or negotiate for a bank loan to increase its working capital;v. Make decisions regarding investing or lending capital;

vi. Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.

The goals of the financial analysts often assess the following elements of a firm:(1) Profitability - its ability to earn income and sustain growth in both the short- and long-

term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;

(2) Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;

(3) Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;

(4) Stability - the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of the income statement and the balance sheet, as well as other financial and non-financial indicators.

The method of financial analysts often compares financial ratios (of solvency, profitability, growth, etc.):

14

i. Past Performance - Across historical time periods for the same firm (the last 5 years for example),

ii. Future Performance - Using historical figures and certain mathematical and statistical techniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects.

iii. Comparative Performance - Comparison between similar firms.These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet

and / or the income statement, by another, for example :Net income / equity = return on equity (ROE)Net income / total assets = return on assets (ROA)Stock price / earnings per share = P/E ratio

What are the comparison of financial and ratio analysis?Comparing financial ratios is merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:

i. They say little about the firm's prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms.

ii. One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm's performance.

iii. Seasonal factors may prevent year-end values from being representative. A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.

iv. Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values.

What is cash flow statement? In financial accounting, a cash flow statement, also known as statement of cash flows or funds

flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7) is the International Accounting Standard that deals with cash flow statements.

People and groups interested in cash flow statements include: i. Accounting personnel, who need to know whether the organization will be able to cover

payroll and other immediate expensesii. Potential lenders or creditors, who want a clear picture of a company's ability to repay

iii. Potential investors, who need to judge whether the company is financially sound iv. Potential employees or contractors, who need to know whether the company will be able

to afford compensation v. Shareholders of the business

The cash flow statement was previously known as the flow of Cash statement. The cash flow statement reflects a firm's liquidity. The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report

15

on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.The cash flow statement is intended to-

i. Provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances.

ii. Provide additional information for evaluating changes in assets, liabilities and equity. iii. Improve the comparability of different firms' operating performance by eliminating the effects

of different accounting methods. iv. Indicate the amount, timing and probability of future cash flows. The cash flow statement has been adopted as a standard financial statement because it eliminates

allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.

Cash flow activities. The cash flow statement is partitioned into three segments, namely: 1) cash flow resulting

from operating activities; 2) cash flow resulting from investing activities; and 3) cash flow resulting from financing activities.

The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.

Operating activities. Operating activities include the production, sales and delivery of the company's product as well as

collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product.

Under IAS 7, operating cash flows include:i. Receipts from the sale of goods or services.

ii. Receipts for the sale of loans, debt or equity instruments in a trading portfolio. iii. Interest received on loans. iv. Payments to suppliers for goods and services. v. Payments to employees or on behalf of employees.

vi. Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP).

vii. Buying Merchandise. Items which are added back to [or subtracted from, as appropriate] the net income figure (which is

found on the Income Statement) to arrive at cash flows from operations generally include:i. Depreciation (loss of tangible asset value over time).

ii. Deferred tax.

iii. Amortization (loss of intangible asset value over time).

iv. Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section.(unrealized gains/losses are also added back from the income statement). Investing activities

Examples of investing activities are- i. Purchase or Sale of an asset (assets can be land, building, equipment, marketable

securities, etc.) ii. Loans made to suppliers or received from customers.

iii. Payments related to mergers and acquisitions.

iv. Dividends Received.

16

Financing activities Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement. Under IAS 7-

i. Proceeds from issuing short-term or long-term debt.ii. Payments of dividends.

iii. Payments for repurchase of company shares.iv. Repayment of debt principal, including capital leases.v. For non-profit organizations, receipts of donor-restricted cash that is limited to long-

term purposes.

Items under the financing activities section include: i. Dividends paid

ii. Sale or repurchase of the company's stock

iii. Net borrowings

iv. Payment of dividend tax Disclosure of non-cash activities

Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), non-cash activities may be disclosed in a footnote or within the cash flow statement itself. Non-cash financing activities may include-

i. Leasing to purchase an asset.ii. Converting debt to equity.

iii. Exchanging non-cash assets or liabilities for other non-cash assets or liabilities. iv. Issuing shares in exchange for assets.

Preparation methods The direct method of preparing a cash flow statement results in a more easily understood report. The indirect method is almost universally used, because FAS 95 requires a supplementary report similar to the indirect method if a company chooses to use the direct method. Direct method The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities.Indirect method The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.

Complementing the balance sheet and income statement, the cash flow statement (CFS), a mandatory part of a company's financial reports since 1987, records the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. Here you will learn how the CFS is structured and how to use it as part of your analysis of a company.

17

The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit. (For background reading, see Analyze Cash Flow The Easy Way.)

Cash flow is determined by looking at three components by which cash enters and leaves a company: core operations, investing and financing.

Operations Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects how much cash is generated from a company's products or services. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations.

Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next. These adjustments are made because non-cash items are calculated into net income (income statement) and total assets and liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have to be re-evaluated when calculating cash flow from operations.

For example, depreciation is not really a cash expense; it is an amount that is deducted from the total value of an asset that has previously been accounted for. That is why it is added back into net sales for calculating cash flow. The only time income from an asset is accounted for in CFS calculations is when the asset is sold.

Changes in accounts receivable on the balance sheet from one accounting period to the next must also be reflected in cash flow. If accounts receivable decreases, this implies that more cash has entered the company from customers paying off their credit accounts - the amount by which AR has decreased is then added to net sales. If accounts receivable increase from one accounting period to the next, the amount of the increase must be deducted from net sales because, although the amounts represented in AR are revenue, they are not cash.

An increase in inventory, on the other hand, signals that a company has spent more money to purchase more raw materials. If the inventory was paid with cash, the increase in the value of inventory is deducted from net sales. A decrease in inventory would be added to net sales. If inventory was purchased on credit, an increase in accounts payable would occur on the balance sheet, and the amount of the increase from one year to the other would be added to net sales. The same logic holds true for taxes payable, salaries payable and prepaid insurance. If something has been paid off, then the difference in the value owed from one year to the next has to be subtracted from net income. If there is an amount that is still owed, then any differences will have to be added to net earnings.

Investing: Changes in equipment, assets or investments relate to cash from investing. Usually cash changes from investing are a "cash out" item, because cash is used to buy new equipment, buildings or short-term assets such as marketable securities. However, when a company divests of an asset, the transaction is considered "cash in" for calculating cash from investing.Financing Changes in debt, loans or dividends are accounted for in cash from financing. Changes in cash from financing are "cash in" when capital is raised, and they're "cash out" when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash financing; however, when interest is paid to bondholders, the company is reducing its cash.

Mention the characteristics of cash flow statement. i. It is a periodical period.

ii. It is combined the beginning and inter-balance.

18

iii. It is combined the consequences several balance sheets, profit and loss account and inner analysis statement.

iv. Cash flow statement cannot prepare in a single stage. It is prepared by the different event of the organization.

v. It shows the financial changes of the organization.

Narrate the objective of cash flow statement.i. It is prepared the financial policy for using directing, financing and investing of the

organization.ii. It ensures the necessary cash flow statement of the organization.

iii. It ensures not to break the liquidity position of the organization for shortage of cash.iv. It ensures the capacity to pay the dividend.v. Is analysis the different year’s statement and take necessary action for the betterment of

the organization.

How cash flow statement can help the bankers to forecast the liquidity position of a firm? Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been

a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the income from that asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce liquid assets as far as possible. However, a bank without sufficient liquidity to meet the demands of their depositors risks experiencing a bank run. The result is that most banks now try to forecast their liquidity requirements and maintain emergency standby credit lines at other banks. Banking regulators also view liquidity as a major concern.

(The statement of cash flows is important analytical tools for creditors, investors and other users of financial statement-explain. Or narrate the importance of cash flow statement.)

i. Getting an idea of future cash positionii. Correction of deviation

iii. Picture of liquidity positioniv. Framing long-term planningv. Searching for solution to various

vi. More important than fund flow statementvii. Useful to outside interested parties.

Mention the importance of cash flow statement for the bank officer’s. i. It helps to analysis the cash position of the organization.

ii. It helps to analysis the estimated cash flow and actual cash flow of the organization for a specific time.

iii. It helps the analysis the liquidity position of the organization.iv. Correction of deviationv. Picture of liquidity position

19

vi. Framing long-term planningvii. Searching for solution to various

viii. More important than fund flow statementix. Useful to outside interested parties.

Distinguish a cash flow statement from a fund flow statement or state the differences between the cash budget and cash flow statement. Cash flow statement is prepared from the transactions affecting cash and cash equivalents only. Taking in to account all sources and uses of cash, it starts with the opening balance of cash and cash equivalents and reaches the closing balance of cash and cash equivalents,. Cash flow statements are useful to identify the current liquidity problems which are to be corrected.

Fund flow statement analyses the sources and application of funds of long term nature and the changes in working capital. It tallies funds generated from various sources with various uses to which they are put. It is based on accrual accounting system and very useful for long range financial planning.The distinguish between the two are-

Sl Difference subjects Cash Flow Statement Fund flow statement1 foundation It works on the base of cash changing

position of a organization.It works on the base of current working capital changing position of a organization.

2 Beginning surplus It works with the beginning surplus. It does not work with the beginning surplus.3 Process of working It does not prepare the current active

capital statement.It is prepared the current active capital statement.

4 Utility It helps to determine short term the capacity of loan payment or investment.

It helps to determine the Lont term capacity of loan payment or investment.

5 Main source The main source of cash inflow is selling price of the goods

The main source of Fund inflow is net profit

Distinguish a cash flow statement from cash budget.In financial accounting, a cash flow statement, also known as statement of cash flows or funds

flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7) is the International Accounting Standard that deals with cash flow statements.

People and groups interested in cash flow statements include: i. Accounting personnel, who need to know whether the organization will be able to cover

payroll and other immediate expensesii. Potential lenders or creditors, who want a clear picture of a company's ability to repay

iii. Potential investors, who need to judge whether the company is financially sound

iv. Potential employees or contractors, who need to know whether the company will be able to afford compensation

v. Shareholders of the business

20

Definition of 'Cash Budget': An estimation of the cash inflows and outflows for a business or individual for a specific period

of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities. A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems. For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs.

A cash budget is an estimation of a person's or a company's cash inputs and outputs over a specific period of time. Cash budgets are mostly used to estimate whether or not a company has a sufficient amount of cash to fulfill regular operations. You can also use it to determine whether too much of a company’s cash is being spent in unproductive ways.

What is considered to be cash?Cash is the amount of assets that a company has available to spend immediately. These include

bank balances, bank account deposits, and more. Liquidity is another word for cash.

Why should I have a cash budget?A cash budget is very important, especially for smaller companies. It allows a company to establish the amount of credit that it can extend to customers without having problems with liquidity. A cash budget helps you avoid having a shortage of cash during periods of numerous expenses. If you cannot pay your expenses because you have a cash shortage, you must resolve this problem right away by bringing in more revenue, deferring or eliminating some of your costs or being approved for a larger loan from your bank.

What is fund flow statement? Fund flow statement is the study of the flow of funds into the business unit and the uses for

which such funds flow out during the same given time period. Fund flow statement showing changes in inflow & outflow of cash during the period.Methods of cash flow:1. Direct Method: presenting information in Statement of-

A. operating ActivitiesB. Investment Activities

C. Financial Activities2. Indirect Method: uses net income as base & make adjustments to that income (cash & non-cash) transaction.

Mention the importance or utility of fund flow statement.i. To management.

ii. To shareholders.iii. To short term creditors and bankers.iv. To investors.

Narrate the objective of fund flow statement.i. To show total inflow and outflow of fund.

ii. To show the sources of fund.iii. To show the applications or uses of funds.iv. To show increase or decrease in working capital.v. To help preparing budgets and policies.

What are the methods of preparing fund flow statement?

21

i. Statement of changes in working capital.ii. Statement of changes in non-working capital.

iii. Statement of sources and application of fund.

Narrate the statement of sources and application of fund.i. Fund from operations.

ii. Fund from other sources.

Module-B:Asset-Liability Management (ALM) Techniques

What is Asset and Liability Management? Discuss the techniques of ALM.Asset Liability Management is the most important aspect for the Financial

Institutions to manage Balance Sheet Risk, especially for managing of liquidity risk and interest rate risk. Failure to identify the risks associated with business and failure to take timely measures in giving a sense of direction threatens the very existence of the institution. It is, therefore, imperative for the Financial Institutions to form “Asset Liability Management Committee (ALCO)” with the senior management as its members to control and better manage its Balance Sheet Risk. Asset Liability Management (ALM) is an integral part of Bank Management; and so, it is essential to have a structured and systematic process for manage the Balance Sheet.

A technique companies employ in coordinating the management of assets and liabilities so that an adequate return may be earned. Also known as "surplus management."

In banking, asset and liability management (often abbreviated ALM) is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. This can also be seen in insurance. Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies and corporations.. Asset-liability management is defened by the attaining the financial policy formulation, Planning and forecasting, directing, decision making, coordinating and controlling the total works.

ALM is control of a bank’s sensitivity to changes in market interest rates to limit losses in its net income or equity.

Today, bankers have learned to look at their asset and liability portfolios as an integrated whole, considering how the bank’s total fortfolio contributes to its broad goals of adequate profitability and acceptable risk. This type of coordinated and integrated bank decision making is known as asset liability mamangement. These techniques of asset liability management provide the bank with the defensive weapons to handle business cycles and seasonal pressures on its deposits and loans and with the offensive weapons to construct portfolios of assets that promote the bank’s goals.

The techniques of ALM are –(1) Financial planning(2) Identification of sources(3) Raising of funds(4) Investment of funds(5) Protection of funds(6) Distribution of funds(7) Management of funds

22

(8) Cost control(9) Management of assets(10) Maintainging good relations(11) Protections of financial documents(12) Forecasting of cash flow

What is the main objective or goal of ALM?-Discuss it.(1) Profit maximization: Profit maximization is the process by which a firm determines

the price and output level that returns the greatest profit. Profit maximization is the process of identifying the most efficient manner of obtaining the highest rate of return from its production model. There are several different approaches to this pursuit of the highest profit margin that may be used by any corporation or business. The advantages of wealth maximization are-

a. Profit is the yardstick of efficiency.b. Proper utilization of resources.c. Social welfare.

(2) Wealth maximization: Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English weal, which is from an Indo-European word stem.  An individual, community, region or country that possesses an abundance of such possessions or resources is known as wealthy. The concept of wealth is of significance in all areas of  economics, and clearly so for growth economics and development economics . The advantages of wealth maximization are-

a. Easy and Clear concept.b. Consideration of time value of money.c. Consideration of riskd. Emphasis of price of sharee. Consideration of the interest of all parties.f. Expansion of market and business.g. Qualitative improvement of Financial decisionh. Consistent dividend policy.

What are the factors of financial decisions for investment? Discuss it and what are the influencing factors on financial decisions? The factors of financial decision for investment are-

(1) Investment decisions.(2) Financing decisions.(3) Dividend decisions.

There are two types of influencing factors are(1) Internal factors: These are-

a. Size of the businessb. Nature of businessc. Legal form of organizationsd. Business cyclee. Ecomonic life of organization

23

f. Structure of assetsg. Possibility of regular and stable income.h. Term of crediti. Philosophy of managementj. Liquidity position of business

(2) External factors: These are-a. Ecomonic condition of the countryb. Government policyc. Tax policyd. Condition of money markete. Political situation

Why profit maximization should be the goal of a firm?Profit maximization is the process by which a firm determines the price and output level that returns the

greatest profit. Profit maximization is the process of identifying the most efficient manner of obtaining the highest rate of return from its production model. There are several different approaches to this pursuit of the highest profit margin that may be used by any corporation or business. The advantages of wealth maximization are-

a. Profit is the yardstick of efficiency.b. Proper utilization of resources.c. Social welfare.

How the major financial decisions adjust between income and risk of business?The fundamental decisions of a financial manager are the investment decision, financing

decision and distrution dividend decision. Base on these decisions, a financial firm determines the financial needs; Cash flow statement, fund flow statement, time division, capital decision and earning the profit from the capital decision and distribute profit among the shareholders or owners. To take financial decision a financial manager coorditate between the financial risk and earning of the organization. To do this important task a financial manager planning and forecasting, directing, coordinating and controlling the future estimate risk and income, take necessary steps to minimize the risk and how to protect the future risk. When a financial manager can coordinate among the earning and risk and then maximize the wealth and income of the organization. Stae the the flowchart how a financial manager coordinate the risk and income of the organization is discuss below:-

Financial mamagerMaximisation of share value

Financial decisionsInvestment decisions Finacing decisions Dividend decisions

Return Trade off Risk A financial manager’s main goal or objective is to maximize the wealth by reducing the risk at a

minimum level. He takes decision that unnecessary risks are to be avoided. He has to monitor the cash inflow and outflow statement to earn maximum profit. By this one side is to secure the cash and other side is correct the uses of cash.

Discuss the structure of ideal financial management.The fundamental decisions of a financial manager are the investment decision, financing

decision and distrution dividend decision. Base on these decisions, a financial firm determines the financial needs; Cash flow statement, fund flow statement, time division, capital decision and earning the profit from the capital decision and distribute profit among the shareholders or owners. To take financial decision a financial manager coorditate between the financial risk and earning of the

24

organization. To do this important task a financial manager planning and forecasting, directing, coordinating and controlling the future estimate risk and income, take necessary steps to minimize the risk and how to protect the future risk. To establish and monitor these actions correctly a financing firm has to have a strong and efficient ideal financial structure of management. This are-

Board of directorsManaging director/ Chairman/ Chief Executive Officer

Vice president/ Director (Cash)Treasurer Controller

Capital expenditure manager-Cash Manager- Lending manager- portfolio managerTax manage- Information processing manager-Cost accounting manager-Financial manager

Who is the financial manager? Describe the qualities of financial managers.Financial managers are responsible for the financial health of an organization. They produce

financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization. Financial managers work in many places, including banks and insurance companies. Most financial managers work full time, and many work long hours.

Financial manager is the person who has the responbility to allocate funds to current and fixed assets to obtain the best mix of financing alternative and to deveop an appropriate dividend policy within the contex of the firm’s objectives.

There is no business that does not want to make a lot of money, in as little time as possible, and still have a little left over after all expenses have been paid. It is the work the finance manager in any company to put in place strategies that will ensure the business does well financially.

Qualities of Financial managers are-The term finance manager is usually a general term for all the other individuals who deal in

different financial matters. There are financial controllers, treasure, credit managers and also risk insurance managers. All these deal with matters that are still financial but different in more than one certain ways. However, the qualities to look out for are still the same. To have a good financial manager he/she has to be a people person. Since most of the time these individuals work with a team he/she will have to have good communication skills. This will help them interact well with the other managers. Furthermore, their managerial role means that they are supervisors; therefore, with good interpersonal skills they can be able to lead others.

Financial managers do also require some marketing skills. This will best tell you whether the candidate you have has some inclinations to money earning activities. He/she may not have the required education, but you could have them try to sell you a product so that you can see whether they have a money making sense or not.

With the increase in financial technical computer based instruments a financial manager must have know-how on computers. Moreover, if he/she is adaptable to changes it would be easy for them to change as technology also changes. As the world evolves, new trends come and go and this means that the person you hire to take care of your financial work should also be on the look-out for new trends so that he/she can direct the company to a more profitable position. In addition they should have knowledge of the tax laws that govern your companies industry so that they can incorporated these laws in every aspect that they undertake.

Education and experience are also key factors to look into as you go about hiring a financial manger. Good financial manager are those with enough job experience. As for education, go for those with advanced degrees in finance, economics, business administration and even risk management. Although experience and skills are paramount, it is good to choose a candidate who shows a willingness to learn. This is because such candidates are more likely to be good managers than those showing no willingness at all to learn from others.

25

Every business owner wants to make money, pay his/her expenses and still have some of it left over. The best way that they can ensure they are making profits is by hiring a finance manager. However, not just any individual can handle company's financial matters. Even though there is more than one different financial manager titles the qualities to look out for are the same. The individual you choose has to have the right education, experience, and the ability to work as a team.

Financial managers must usually have a bachelor’s degree and more than 5 years of experience in another business or financial occupation, such as loan officer, accountant, auditor, securities sales agent, or financial analyst.

What is interest rate? Why is imposing interest rate? What are the characteristics of interest rate?

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the “lease rate”.  When the borrower is a low-risk party, they will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher. 

A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal.

An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. Specifically, the interest rate (I/m) is a percent of principal (I) paid at some rate (m). Interest rates targets are also a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. Reasons for interest rate change

(1) Political short-term gain: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates.

(2) Deferred consumption: When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.

(3) Inflationary expectations: Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.

(4) Alternative investments: The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds.

(5) Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.

(6) Liquidity preference: People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time or money to realize.

(7) Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss.

26

The characteristics of interest rate are-(1) Borrower gives money at the certain percentage of orginal amount to the lender.(2) Borrower and lender fix the interest rate.(3) It is the amount of financial asset.(4) It is expressed at percentage.(5) Original loan amount is the basis of determing the interest and (6) Generally, it is calculated in a year.

What is term structure of interest rates? Discuss explanation/components of interest rates.

Interest rates are directly correlated to the performance of the world economy. Government officials craft monetary policy to manage national economies by influencing the banking system. At the micro-level, investors and private consumers should have some appreciation for the connection between interest rates and the economy before making financial decisions.A yield curve displaying the relationship between spot rates of zero-coupon securities and their term to maturity.

The resulting curve allows an interest rate pattern to be determined, which can then be used to discount cash flows appropriately. Unfortunately, most bonds carry coupons, so the term structure must be determined using the prices of these securities. Term structures are continuously changing, and though the resulting yield curve is usually normal, it can also be flat or inverted.

IdentificationInterest rates are referred to as the "cost of money." Lenders that offer capital for investment are compensated with interest payments from borrowers.Features

(1) Interest rates measure risks. (2) Lenders demand additional compensation for lending capital to riskier borrowers.(3) Investors also expect to earn a premium that is higher than the rate of inflation to make

any transaction worthwhile.(4) Treasuries, which have been described as "risk-free" investments, are a benchmark for

evaluating interest rates.

27

There are four types of term structure of interest rates theory. These are-(1) Fisher’s Classical theory.(2) Liquidity Preference theory.(3) Loanable fund theory.(4) Expectation theory.

Explanation/components of interest rates:

Explanation or components of interest rate is difficult because differences of ecomonic factors are to be analysis. Some factors that influence and changes the interest rates. This is the factor of analysis the nominal interest. This are-

(1) Real risk free interest rate(2) Expected rate of inflation(3) Corporate bond.

What is liquidity? Or define liquidity. The ability of an asset to be converted into cash quickly and without any price discount is called

liquidity. Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. Assets that generally can only be sold after a long exhaustive search for a buyer are known as illiquid. Definition of Liquidity is: 1. The degree to which an asset or security can be bought or sold in the market without affecting the

asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.

2. The ability to convert an asset to cash quickly. Also known as "marketability". There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios. In accounting, liquidity (or accounting liquidity) is a measure of the ability of a debtor to pay their

debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities

( How the liquidity position can be measured? Or how do the way of liquidity condition measured?)For a corporation with a published balance sheet there are various ratios used to calculate a measure of liquidity. These include the following:

i. The current ratio, which is the simplest measure and is calculated by dividing the total current assets by the total current liabilities. A value of over 100% is normal in a non-banking corporation. However, some current assets are more difficult to sell at full value in a hurry.

ii. The quick ratio - calculated by deducting inventories and prepayments from current assets and then dividing by current liabilities - gives a measure of the ability to meet current liabilities from assets that can be readily sold. A better way for a trading corporation to meet liabilities is from cash flows, rather than through asset sales, so;

iii. The operating cash flow ratio can be calculated by dividing the operating cash flow by current liabilities. This indicates the ability to service current debt from current income, rather than through asset sales.

What types of sources can use of liability management?- Narrate in short.i. Time certificate of deposit: In America from the 1960 the main sources of the liability

liquidity management is time certificate of deposit of commercial banks. It is salable and transferable. This certificate is 90 days or 1 year and interest rate is determined comparing the treasure bills and other instrument.

ii. Loan from other commercial bank: The second liability is the loan from other commercial banks.

28

iii. Loan from the central bank.iv. Issue shares.v. Loan from the reserve fund.

Explain the importance of liquidity of a commercial bank. May, 2011 Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been

a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the income from that asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce liquid assets as far as possible. However, a bank without sufficient liquidity to meet the demands of their depositors risks experiencing a bank run. The result is that most banks now try to forecast their liquidity requirements and maintain emergency standby credit lines at other banks. Banking regulators also view liquidity as a major concern. For most banks, the most pressing demands for liquidity typically arise from-

(1) Customer deposits withdrawals(2) Credit requists from quality loan coutomers(3) Repayment of nondeposit borrowers(4) Operating expenses and taxes incurred in producing and selling services(5) Payment of stockholder cash dividends.

Liquidity has a critical time dimension. Some bank liquidity needs are immediate or nearly so. Longterm liquidity demands arise from seasonal, cyclical and trend factors. For example, liquid funds are generally in greater demand during the fall and summer coincident with school, holidays and customer travel plans. The essence of the liquidity manabement problem for a bank may be described in two succinct statements:

(1) Rarely are the demands for bank liquidity equal to the supply of liquidity at any particular moment in timel. The bank must continually deal with either a liquidity deficit or a liquidity surplus.

(2) There is a trade-off between bank liquidity and profitability. The more bank resources are tied up in readiness to meet demands for liquidity; the lower is that bank’s expected profitability.

Thus, ensuring adequate liquidity is a never-ending problem for bank management that will always have significant implications for the bank’s profitabilitly. Liquidity managerment decisions cannot be made in isolation from all the other service areas and departments of the bank. Why are financial institutions concerned with liquidity? November, 2010

Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the income from that asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce liquid assets as far as possible. However, a bank without sufficient liquidity to meet the demands of their depositors risks experiencing a bank run. The result is that most banks now try to forecast their liquidity requirements and maintain emergency standby credit lines at other banks. Banking regulators also view liquidity as a major concern. For most banks, the most pressing demands for liquidity typically arise from-

29

(1) Customer deposits withdrawals(2) Credit requists from quality loan coutomers(3) Repayment of nondeposit borrowers(4) Operating expenses and taxes incurred in producing and selling services(5) Payment of stockholder cash dividends.Liquidity has a critical time dimension. Some bank liquidity needs are immediate or nearly so.

Longterm liquidity demands arise from seasonal, cyclical and trend factors. For example, liquid funds are generally in greater demand during the fall and summer coincident with school, holidays and customer travel plans. The essence of the liquidity manabement problem for a bank may be described in two succinct statements:

(1) Rarely are the demands for bank liquidity equal to the supply of liquidity at any particular moment in timel. The bank must continually deal with either a liquidity deficit or a liquidity surplus.

(2) There is a trade-off between bank liquidity and profitability. The more bank resources are tied up in readiness to meet demands for liquidity; the lower is that bank’s expected profitability.

Thus, ensuring adequate liquidity is a never-ending problem for bank management that will always have significant implications for the bank’s profitabilitly. Liquidity managerment decisions cannot be made in isolation from all the other service areas and departments of the bank.

What is liability management and what are its different strategies? November, 2010 Use and management of liabilities, such as customer deposits, by a bank in order to facilitate lending and allow for balanced growth. Management of money accepted from depositors as well as funds secured from other institutions constitute liability management. It also involves hedging against changes in interest rates and controlling the gap between the maturities of assets and liabilities.

In banking, asset and liability management (often abbreviated ALM) is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. This can also be seen in insurance.

Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies and corporations.

Banks manage the risks of asset liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching of the duration, by hedging and by securitization.

Modern risk management now takes place from an integrated approach to enterprise risk management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated.

Strategies of liquidity management are classified below-(1) Asset-liability Management or asset coversion strateties: The oldest approach to meeting bank

liquidity needs to known as asset liquidity management. It is the reliance on liquid assets that

can be readily sold for cash to neet a bank’s liquidity needs. Liquid asset is a readily marketable

asset with a relatively stable price that is reversible.

(2) Borrowed liquidity (liabilitly) management strategies: Liability management is reliance upon

borrowed funds to meet a bank’s liquidity needs.

(3) Balance (asset and liability) liquidity management strategies: Balanced liquidity management is

the combined use of liquid asset holdings to meet a bank’s liquidity needs.

Explain the forces of demand for and supply of liquidity. November, 2010

30

A bank’s need for liquidity-immediately spendable fund-can be viewed within a demend –supply framework. What activities give rise to the demand for liquidity inside a bank and what sources can the bank rely upon to supply liquidity when spendable funds are needed? This are-

(1) Supplies of liquid funds come from are-a) Incoming customer depositsb) Revenues from the sale of nondeposit servicesc) Customer loan repaymentd) Sales of bank assets ande) Borrowing from the money market.

(2) Demands for Bank liquidity typically arise from are-a) Customer deposits withdrawalsb) Credit requists from quality loan coutomersc) Repayment of nondeposit borrowersd) Operating expenses and taxes incurred in producing and selling services ande) Payment of stockholder cash dividends.

Liquidity has a critical time dimension. Some bank liquidity needs are immediate or nearly so. Longterm liquidity demands arise from seasonal, cyclical and trend factors. For example, liquid funds are generally in greater demand during the fall and summer coincident with school, holidays and customer travel plans. The essence of the liquidity manabement problem for a bank may be described in two succinct statements:

(1) Rarely are the demands for bank liquidity equal to the supply of liquidity at any particular moment in timel. The bank must continually deal with either a liquidity deficit or a liquidity surplus.

(2) There is a trade-off between bank liquidity and profitability. The more bank resources are tied up in readiness to meet demands for liquidity; the lower is that bank’s expected profitability.

Thus, ensuring adequate liquidity is a never-ending problem for bank management that will always have significant implications for the bank’s profitabilitly. Liquidity managerment decisions cannot be made in isolation from all the other service areas and departments of the bank.

What are the rationales of liquidity and liability management? May, 2012The rationales of liquidity and liability managent are-

(1) The liquidity must keep track of the activities of all funds using and funds-raising department within the bank.

(2) The liquidity should know in advance, wherever possible, when the bank’s biggest credit or deposit customers plan to withdraw their funds or add to their deposit.

(3) The liquidity, in cooperation with the senior management and the board of directors, must make sure the bank’s pririties and objectives for liquidity management are clear. Today, liquidity management has generally been relegated to a supporting other role compared to a bank’s number one priority-making loans and supplying other fee –generating services to all qualified customers.

(4) The bank’s liquidity needs and liquidity position. Excess liquidity that is tinuing basis to avoid both excess and deficit liquidity positions.

(5) Loan and deposits must be forecast for a given liquidity planning period(6) The estimated change in loans and deposits must be calculated for that same planning period(7) The liquidity manager must estimate the bank’s net liquid funds, surplus or feficit.

What is liquidity indicator approach? And what are these indicators?

31

Liquidity indicator approach is ratios or other measues of changes in a bank’s liquidity positions. The indicators are-

(1) Cash position indicator(2) Liquid securities indicator(3) Net bank funds position(4) Capacity ratio(5) Pledged securities ratio(6) Hot money ratio(7) Deposit brokerage index(8) Care deposit ratio(9) Deposit composition ratio.

What are the standards for assessing Liquidity management?No bank can tell fro sure if it hs sufficient liquidity until it has passed the market’s test. Specifically, management should look at these signals are-

(1) Public confidance(2) Stock price behavior(3) Risk premiuns on CDs and other borrowings(4) Loss sales of assets(5) Meeting commitment to credit customers(6) Borrowing from the central bank.

32

Module-C: Managing Sources of funds

What do you mean by bank’s fund? What are the souces of bank’s fund? What are the obstracle of giving loan in Bangaldesh? What are the regulations imposed.

Fund is a source of supply; a stock. It is a sum of money or other resources set aside for a specific purpose, available money; ready cash: short on funds. Fund may refer to:

i. Funding is the act of providing resources, usually in form of money, or other values such as effort or time, for a project, a person, a business, or any other private or public institution.

ii. The process of soliciting and gathering funds is known as fundraisingiii. A Collective investment scheme or vehicle, often referred to as a fund iv. Mutual fund, a specific type of collective investment in the United Statesv. Hedge fund, an investment vehicle open only to investors who are qualified in some way

vi. Fund Accounting, an accounting system often used by nonprofit organizations and by the public sector

The Funds of banks or bankers are the funds which is the total collection from own and outside sources for using buness purposes. Bank is the financial intermediary intstution. For such business finance or fund is prime factor of that institution. So, bank collects funds from its own and external sources. Own and external sources of fund are the fund of bank or banker.

The sources of funds of commercial banks are-(1) Funds from own sources: this are-

Paid up capital Share capital Reserves funds and others reserves funds Retained earning and Statutory reserves funds

(2) Funds from the borrowing sources: These are- Depository funds Loan and advaces from other commercial banks and central bank. Loan at call money

The obstracle of giving loan in Bangaldesh are-33

(1) Any person of the shareholder can not take loan from that bank by deposting security of those shares.

(2) Bank can not give loan without security or the loanee or any institutions or person that are stated below:

a. Director of that institutionb. Director’s family membersc. Director of that institution or his family members can not take loan from any

person, any commercial institution or private company who are the directors or owners or partners.

d. Director of that institution or his family members can not take loan from any public limited company that have the right to give vote about 20% of total or controlled by them.

(3) Except the director of the bank company act, other directors can not take loan without the majority persons approval, such as –

a. Directors of that institutionb. Director of that institution or his family members can not take loan from any

person, any commercial institution or private company who are the directors or owners or partners.

(4) Without the prior approval of the Bangladesh Bank, any bank directly or indirectly can not give loan or any other benefits to any person or any institution that value is-

a. More that 15% of that bank company act capitalb. In secured loan, easy convertible financial securities are more that 15% of that

bank company act capital.

What is deposit and non-deposit fund and describe the deposit and non-deposit funds of a bank?

A deposit fund is the money deposit by depositors.A deposit fund comprises money held for individuals or group. It is the reliable main source of fund of a bank.  Bank collect this fund by opeing various types of current and saving accounts. Deposits of public in the form of saving, current accounts, FDs, RDs, cash certificates are the main dopsit sources of a bank. Banks generally rely on such deposit sources of funds also known as public deposit.

Deposit fund of a bank are-i. Current deposit

ii. Saving depositiii. Term or fixed deposit and iv. Deposit projects: These are-

a. Monthly saving schemeb. Monthly benefit schemec. Special saving schemed. Deposit pension schemee. Education saving schemef. Hazz schemeg. Saving bond/ certificate schemeh. Advance saving schemei. Deposit linked to house loan schemej. Consumer credit linked to deposit schemek. Investment deposit scheme for entrepreneursl. Farmers investment deposit schemem. Investment facilitating depositn. Deposit with insurance benefit schemeo. One counter service scheme

34

Nondeposit funds are obtained by various kinds of borrowing. For instance, a bank may raise money by selling capital notes. Banks have frequently used nondeposit funds to meet current cash needs. As the name indicates, these are notes issued to raise capital, much in the same way that equity capital is raised by issuing bonds. The notes must be paid back within a prescribed.

Deposits of public in the form of saving, current accounts, FDs, RDs, cash certificates are the main dopsit sources of a bank. Banks generally rely on such deposit sources of funds also known as public deposit. But when bank require large amount of funds to face the problem of liquidity they borrow funds from other sources like money market this is termed as non deposit source of fund.

Non-depository financial institution: Government or private organization (such as building society, insurance company, investment trust, or mutual fund or unit trust) that serves as an intermediary between savers and borrowers, but does not accept time deposits. Such institutions fund their lending activities either by selling securities (bonds, notes, stock/shares) or insurance policies to the public. Their liabilities (depending on the liquidity of the liability) may fall under one or more money supply definitions, or may be classified as near money.

Non-deposit fund of a bank are-i. Own fund

ii. Borrowed moneyiii. Reserve fundiv. Paid up capitalv. Statutory Reserve fund

vi. General reserve fundvii. Other Reserve Fund

viii. Borrowed from central bank, ix. Money at short noticex. Call money

xi. Bank Certificatexii. Deposit Certificate

35

What are factors are to be considering taking securities? Why the valuation of security is important.

i. Acceptabilityii. Marketability

iii. Owershipiv. Adequaceyv. Non-encumbrance

vi. Transferabilityvii. Quality

viii. Price stabilityix. Determinability of pricex. Ability

xi. Honestyxii. Easy Storeability

Why Inportant:i. Loan amount is considered to approve for this security.

ii. A banker always remember the price stability or change the price..iii. By security a banker can know the actual price of this security.iv. By security a bankder set the loan amount.v. Security saves a banker if loanee becomes defaulter.

Regulations imposed:A set of acts, laws, regulations, and guidelines have been enacted and promulgated time to to

perform the commercial banks’ role particularly, to control and regulate country’s monetary and financial system. Among others, important laws and acts include:

13. Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972)14. Bank Company Act, 199115. The Negotiable Instruments Act, 188116. The Bankers’ Book Evidence Act, 189117. Foreign Exchange Regulations Act, 194718. Financial Institutions Act, 199319. Bank Deposit Insurance Act, 200020. Money Loan Court Act, 200321. Micro Credit Regulatory Authority Act, 200622. Money Laundering Prevention Act,201223. Anti-terrorism Act, 2009 and24. Anti Terrorism (Amendment) Act,2012On the other hand, regulations and guidelines broadly include Bangladesh Bank Regulations and

Foreign Exchange Regulations. 36

What is unsecured loan or credit? What is secured loan/Credit? Discuss the various types of Securited Loans or credit. Show the classification of secured Loan/credit.Unsecured loan/ credit:

Unsecured loan/ credit  refers to any type of debt or general obligation that is not collateralised  by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. In the event of the bankruptcy of the borrower, the unsecured creditors will have a general claim on the assets of the borrower after the specific pledged assets have been assigned to the secured creditors, although the unsecured creditors will usually realize a smaller proportion of their claims than the secured creditors.

In some legal systems, unsecured creditors who are also indebted to the insolvent debtor are able (and in some jurisdictions, required) to set-off the debts, which actually puts the unsecured creditor with a matured liability to the debtor in a pre-preferential position.Secured loans:

Secured loans are those loans that are protected by an asset or collateral of some sort. A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured loan/ credit owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or the entire amount originally lent to the borrower. Secured loans are not just for new purchases either. Secured loans can also be home equityloans or home equity lines of credit or even second mortgages. Such loans are based on the amount of home equity, or the value of your home minus the amount still owed. Your home is used as collateral and failure to make timely payments can result in losing your home.

There are two purposes for a loan secured. In the first purpose, by extending the loan through securing the debt, the creditor is relieved of most of the financial risks involved because it allows the creditor to take the property in the event that the debt is not properly repaid. In exchange, this permits the second purpose where the debtors may receive loans on more favorable terms than that available for unsecured debt, or to be extended credit under circumstances when credit under terms of unsecured debt would not be extended at all. The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.

Four types of secured loan or credit:(1) Mortgage loans: A mortgage loan is a secured loan in which the collateral is property,

such as a home.(2) Non-recourse loans: A nonrecourse loan is a secured loan where the collateral is the only

security or claim the creditor has against the borrower, and the creditor has no further recourse against the borrower for any deficiency remaining after foreclosure against the property.

(3) Foreclosure: A foreclosure is a legal process in which mortgaged property is sold to pay the debt of the defaulting borrower and

37

(4) Repossession: A repossession is a process in which property, such as a car, is taken back by the creditor when the borrower does not make payments due on the property. Depending on the jurisdiction, it may or may not require a court order.

If you have suffered bad credit in the past, you may still qualify for a secured loan. Every year, people apply for and accept secured loans to finance vehicles, property, vacations and property renovations.

What are the methods to determine the securities? Why determination of securities is most important? Methods of determining the securities are discuss below:

(1) Government or Bangladesh Bank security or guarantee: 100% of the value of guarantee given by Government or Bangladesh Bank .Government or Bangladesh Bank security or guarantee is considered 100% security for sanctioning loan.

(2) Government saving certificate: 100% of the value of government bond/savings certificate under lien. The nominal value and interest of any kinds of government saving certificates such as defense saving certificate, Bangladesh saving certificate, Postal saving certificate and family saving certificate is considered for sanctioning loan.

(3) ICB Unit Certificate: The nominal value and market value of ICB unit certificate which is lower is considered for sanctioning loan.

(4) Wage earner development Bond: Total nominal value and interest of wage earner development bond is considered for sanctioning loan.

(5) Share and debenture: 50% of the average market value for last 06 months or 50% of the face value, whichever is less, of the shares traded in stock exchange.

(6) Life insurance policy: 85% of life insurance policy lein against the loan.(7) Seasion produce: Control price and current market price which is lower is considered as

security against loan.(8) Manufacturing product: 50% of the market value of easily marketable commodities kept

under control of the bank(9) Vehicle: The determining price of Vehicle mimus margin is considered as security.(10) Metal or gold: 100% of the market value of gold or gold ornaments pledged with the bank.(11) Land and Building: Maximum 50% of the market value of land and building mortgaged with

the bank.(12) Submitted Bills: Subimtted bills value mimus margin is considered as security.(13) Term Deposit: 100% of deposit under lien against the loan(14) Bank Guarantee: 100% of of bank guarantee mimus administration expense occurd to collect

the bank guarantee is considered as security.(15) Personal guarantee or security: Pernonal guarantee or security is considered as security 1/3

of loan amount.Determination of securities is most important because of -

(1) Loan amont and withdrawal limit is base on the security amount.(2) Loan amount is considered to approve for this security.(3) A banker always remembers the price stability or change the price.(4) By security a banker can know the actual price of this security.(5) By security a bankder set the loan amount and(6) Security saves a banker if loanee becomes defaulter.

38

What are collateral securities?Collateral, especially within banking, traditionally refers to secured lending (also known

as asset-based lending). More recently, complex collateralization arrangements are used to secure trade transactions (also known as capital market collateralization). The former often presents unilateral obligations, secured in the form of property, surety, guarantee or other as collateral (originally denoted by the term security), whereas the latter often presents bilateral obligations secured by more liquid assets such as cash or securities, often known for margin.

Collateral security is extra security provided by a borrower to back up his/her intention to repay a loan. Collateral securities are the securities bought against funding by the third party.

In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral.

What are the principles of Finance? Please describe.(1) Principle of risk & return adjustment(2) Principle of time value of money(3) Principle of maximization of assets(4) Principle of liquidity and porofitabitly(5) Principle of perfections(6) Principle of business cyles(7) Principle of deversification

What is BASEL-2? How Banglasesh Bank uses the BASEL-2? Discuss the chat of this Framework.

The Basel Capital Accord, now familiarly known as Basel I, is widely viewed as having achieved its principal objectives of promoting financial stability and providing an equitable basis for competition among internationally active banks. At the same time, it is also seen as having outlived its usefulness, at least in relation to larger banking organizations. From the perspective of U.S. supervisors, Basel I needs to be replaced, at least for the largest, most complex banks, for three major reasons: It has serious short-comings as it applies to these large entities; the art of risk management has evolved at the largest banks; and the banking system has become increasingly concentrated.

39

The basel committeeof banking supervion, established in 1974, is made up of representatives of the central banks or other supervisory authorities of Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The committee, which meets, and has its secretariat, at the Bank for International Settlements in Basel, Switzerland, has no formal authority. Rather, it works to develop broad supervisory standards and promote best practices, in the expectation that each country will implement the standards in ways most appropriate to its circumstances. Agreements are developed by consensus, but decisions about which parts of the agreements to implement and how to implement them are left to each nation's regulatory authorities. The 1988 Basel Capital Accord and its amendments are avail-able on the web site of the Bank for International Settlements.

Over the past several years, the Basel Committee on Banking Supervision has been working on a new accord to reflect changes in the structure and prac-tices of banking and financial markets. The most recent version of the proposed New Basel Capital Accord, now known as Basel II, was released in a consultative paper in April 2003.

The focus of the reform has been on strengthening the regulatory capi-tal framework for large, internationally active bank-ing organizations through minimum capital require-ments that are more sensitive to an institution's risk profile and that reinforce incentives for strong risk management. The proposed substitute for the current capital accord is more complex than its predecessor, for several reasons. One reason is that the assessment of risk in an environment of a growing number of financial instruments and strategies having subtle dif-ferences in risk-reward characteristics is inevitably complicated. Another is that the reform effort has multiple objectives: • To improve risk measurement and management • To link, to the extent possible, the amount of required capital to the amount of risk taken • To further focus the supervisor-bank dialogue on the measurement and management of risk and the connection between risk and capital • To increase the transparency of bank risk-taking to the customers and counterparties that ultimately fund—and hence share—these risk positions.

Proposed changes to elements of the capital ratio under Basel II, diagram:Regulatory capital (Definition unchanged)=================================== = Minimum required capital ratio (8% minimum unchanged).Measure of risk exposure (Risk-weighted assets) (Measure revised)

↓Credit risk exposure + Market risk exposure + Operational risk exposure (Measure revised) (Measure unchanged) (Explicit measure added).

Bangladesh Bank works-i. Credit risk management

ii. Internal Control and complianceiii. Asset & liability managementiv. Foreign Exchange Risk managementv. Money Laundering risk management and

vi. CAMELS rating.

40

Module-D: Profitability, Productivity and Consumers

What is project? What is the process of a project? What are the steps involves in project? Discuss

A project in business and science is typically defined as a collaborative enterprise, frequently involving research or design that is carefully planned to achieve a particular aim.  Projects can be further defined as temporary rather than permanent social systems that are constituted by teams within or across organizations to accomplish particular tasks under time constraints.

Project management is the discipline of planning, organizing, securing, managing, leading, and controlling resources to achieve specific goals. A project is a temporary endeavor with a defined beginning and end (usually time-constrained, and often constrained by funding or deliverables), undertaken to meet unique goals and objectives, typically to bring about beneficial change or added value. The temporary nature of projects stands in contrast with business as usual (or operations), which are repetitive, permanent, or semi-permanent functional activities to produce products or services.

Processes of Project:The project development stages traditionally, project management includes a number of elements: four to five process groups, and a control system. Regardless of the methodology or terminology used, the same basic project management processes will be used. Major process groups generally include:

i. initiationii. planning or development

iii. production or executioniv. monitoring and controllingv. closing

41

In project environments with a significant exploratory element (e.g., research and development), these stages may be supplemented with decision points (go/no go decisions) at which the project's continuation is debated and decided. An example is the Phase–gate model.

Steps of a project:i. Identification of project ideas

ii. Evaluation of project ideasiii. Project Feasibility studyiv. Project selection.

Discuss the steps of projects fesibility study.i. Market feasibility study

ii. Technical feasibility studyiii. Commercial feasibility studyiv. Financial feasibility studyv. Contribution of national economy

vi. Political feasibility study.vii. Managerial skill study.

Discuss the technique aspect of project.i. Project size

ii. Production processiii. Raw materialiv. Skillsv. Others are-

a. Project purpose & designb. Technology & processc. Product mix & production capacityd. Safety provisione. Transportationf. Schedule of constructiong. Land and locationh. Furniture & Fixture and i. Repairs & maintenance.

What are the reasons of a weak project or how can a project be weak?Without the capacity of entrepreneurer are-

(1) Lack of infrastructure(2) Unstabe political situation(3) Natural calamities(4) Change in technology(5) Loadshading(6) Change of secila condition(7) Change in environment condition(8) Lack of proper raw materials

42

(9) Produced product or sevices value demand is very small(10) Change in government policies such as monetary policy, fiscal policy, taxation policy

etc. and (11) Interfair of labour union

With the capacity of entrepreneurer are-(1) In the stage of planning are-

a. Lack of proper technical or technology knowledgeb. Physical problemc. Historical process of production processes

(2) In the stage of financing are-a. High price of raw materialsb. High Breakeven Pointc. Lack of proper size of a projectd. Abuse of financial needse. Higher evaluation of produced product pricef. Unnecessary use of fixed property.

(3) In the stage of production are-a. Inproper production processesb. Higher production costsc. Insufficient maintenance exepense.d. More than one unstable production processese. Lack of proper standard of the productsf. Higher breakeven pointg. Lack of proper material managementh. Higher production costs

(4) In the stage of Human resource planning are-a. Higher salary or wagesb. Weak labor managementc. Additional manpowerd. Conflict of labore. Resolution of labor conflict

(5) In the stage of marketing are-a. Lack of market researchb. Production is more than its marketc. More production in unstabel marketd. Unfair pricee. Lack of working capital f. Lack of liquidity

(6) In the stage of administration are-a. Lack of skill manpowerb. Excess centralizationc. Lack of information supply to the managerd. Lack of proper controllinge. Lack of proper administration

(7) In the stage of unfair willingness of entreprenueurer are-a. Use loan amout in another projectb. Unfair managementc. Withdrawal money not using proper products or billsd. Machinery is sold in the case of unnecessary matter

What is profitability and profitability analysis?

43

Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important.

Profitability is expressed in terms of several popular numbers, that measure one of two generic types of performance: "how much they make with what they've got" and "how much they make from what they take in". Profitability is measured with income and expenses. Income is money generated from the activities of the business. Profitability is measured with an “income statement”. This is essentially a listing of income and expenses during a period of time (usually a year) for the entire business. 

Profitability Analysis is a module of the enterprise resource planning (ERP) software SAP that allows users to report sales and profit data using different customized characteristics and key. An analysis of costs and revenue is to determine whether or not a venture will make a profit, and, if so, how much. This is important information in deciding on whether to make an investment.

What are the factors considering in a loan?(1) Qualitative elements: these are-

a. Qualitative standard of securitiesb. Nature of issusing organizationc. Business conditiond. Stability of deposite. Securityf. Standard of the money and capital marketg. Opportunities of collecting money

(2) Quantitative elements: These are-a. Amount of inveted fundsb. Period of securitiesc. Eagerness of risk takingd. Anticipated profit ratioe. Extent of the liquidity reserve.

Whai is approved loan sale and what are these.(1) Sales loans in the money or monetary market are-

a. Treasury billsb. Government’s agencies bond or notec. Central bank or Bangladesh Bank’s bond or note or billd. Acceptance of bills by the bankse. Deposit certificatesf. Short term municipal bondg. Apporved short term commercial paperh. Foreign currencies

(2) Sales loans in the capital market are-a. Government bond or treasury billsb. Local government or Municipal bondc. Government’s agencies bond or noted. Corporate bonde. Share certificatesf. Mortage bond or debenture.

Considerable factors for selecting Bank deposit account.(1) Nature of client organization(2) Nature & quantity of transaction(3) Banking services

44

(4) Interest or profit(5) Credit facilities(6) Idle and surplus money(7) Secured custody

Module-E: Risk management of financial institutions

Define Risk and what are the difference between risk and uncertainity?

Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called "risks". Almost any human endeavor carries some risk, but some are much more risky than others. Risk exposure to the chance of injury or loss; a hazard ordangerous chance:  It's not worth the risk. In Insurance,

(1) The hazard or chance of loss.(2) The degree of probability of such loss.(3) The amount that the insurance company may lose.(4) A person or thing with reference to the hazard involvedin insuring him, her, or it.(5) The type of loss, as life, fire, marine disaster, orearthquake, against which an insurance policy is drawn.

“Risk is defined as the variability in the actual return emanating from a project in future over its working life in relation to the estimated return”- L.J. Gitman.

Differences are-(1) Defination:

Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). Or the hazard or chance of loss. Or the degree of probability of such loss.Uncertainty is a term used in subtly different ways in a number of fields, including physics,  philosophy,  statistics,  economics,  finance, insurance,  psychology, sociology, engineering, and information science. It applies to predictions of future events, to physical measurements already made, or to the unknown. It is the potential that a chosen action or activity will not lead to a loss.

(2) Avoidance capacity:Risk is potential hazard or chance of loss which is to be avoided by taking several action but uncertainty is potential hazard or chance of loss which is not to be avoided.

(3) Measurement:Risk is measurable but uncertainty is not.

(4) Relation with income:Risk is related with the income and has positive relation but uncertainty is not.

(5) Information:Risk is calculated based on various types of information but uncertainty is not.

(6) Count number:Risk is counted by arithmetic number and able to avoid or reduce but uncertainty is not.

(7) Insurance ;45

Risk is insured but uncertainty is not.(8) Control:(9) Risk is controllable but uncertainty is not.

What are the sources of loan risks? Discuss(1) Economic uncertainty(2) Natural uncertainty(3) Human uncertainty(4) Increase interest rate.

What are the steps to determining the loan risks?(1) Detecting the sources of risk(2) Explaining the nature of risk(3) Measuring risk(4) Inquiring remedial measures(5) Determining proper techniques(6) Takig necessary action

a. Preparing complemantary planb. Taking insurance policyc. Taking joining decisiond. Increasing own capitale. Taking preventive measuresf. Situation analysis andg. Developing cooperation.

What are the stratiges of reducing the loan risks?(1) Avoiding risk(2) Taking risk(3) Transfering risk(4) Reducing risk.

Write short notes on “securitization” Securitization is the process of pooling and repackaging loans into securities that are then sold to

investors. Although the practice of selling loans among banks is quite old—beginning in the late nineteenth century—sales to investors are more recent, dating back to 1970 when the Government offered investors a new type of bond—a mortgage pass-through.This Economic Commentary describes the mechanics of asset-backed securities. In doing so, it reviews how regulatory changes bolstered the privately issued asset-backed-security industry by allowing the creation of new securities that benefit both issuers and investors. Securitization of Assets:

i. Securitization is the transformation of an illiquid asset into a security.ii. For example, a group of consumer loans can be transformed into a publically issued debt

security.iii. A security is tradable, and therefore more liquid than the underlying loan or receivables.iv. Securitization of assets can lower risk, add liquidity, and improve economic efficiency.v. Sometimes, assets are worth more off the balance sheet than on it.

Importance of Securitization:The importance of securitization becomes more evident by observing the significant proportion

of consumer credit it has financed. In recent years, the role that securitization has assumed in providing both consumers and businesses with credit is striking:

i. Incremental Credit Creation. ii. Credit Cost Reduction.

iii. Liquidity Creation. iv. Risk Transfer.

46

v. Customized Financing and Investment Products. Principal Parties:

i. Originator: the organization which sells assets (viz. mortgage loan)ii. Trustee: to protect the interest of bondholders

iii. Special Purpose Vehicle (SPV): bankruptcy remoteiv. Servicer: to collect installments from borrowersv. Placement Agent: to sell the deal

vi. Investors: who purchases bondsvii. Credit Rating Agency: to provide rating

viii. Credit Enhancement Agencies: provide guaranteesix. Auditor: financial transparency x. Lawyer: legal integrity of the deal regulators

Securitization in Bangladesh:While there has been a lot of discussion about the potential of securitization in India, actual deal

activity has not kept pace. While some early adopters like IDLC, ULC, IPDC, BRAC were originators have been actively pursuing securitization, almost all the transactions in the market so far have been privately placed with a majority of them being bilateral fully bought out deals.To analyze the potential of securitization and we split the securitization market into the following four broad areas:

i. Asset Backed Securities (ABS)ii. Mortgage Backed Securities (MBS, RMBS, CMBS)

iii. Collateralized Debt Obligations (CDO, CLO, CBO)iv. Asset Backed Commercial Paper (ABCP)

Benefits of Securitization: i. Less Expensive, More Broadly Available Credit

ii. More Options for Investors iii. Flexibility for the Originator iv. Current Conditions of Consumer ABS and Residential MBS Marketsv. Consumer ABS

vi. Residential MBSThe Obstacles & Policy recommendations

Lack of appropriate legislation True Sale (Isolation from bankruptcy of the Originator) Tax neutral bankruptcy remote SPE Stamp Duties Taxation & Accounting Eligibility Debt market Lack of Investor Appetite Risk management failures, including the excessive or imprudent use of leverage

and mismanagement of liquidity risk. Credit ratings methodologies and assessments that proved to be overly optimistic,

and excessive reliance on credit ratings. Deteriorating underwriting standards and loan quality. Gaps in data integrity, reliability and standardization. A breakdown in checks and balances and lack of shared responsibility for the

system as a whole.

47

Define depository institution and explain its different types.Depository institution: These are the FLs, those deposits. These deposits represent the liabilities

of the deposit-accepting institution. With the funds rose through deposits and other funding soruces, depository institutions both make direct loans to various entities and invest in securities. Their income is derived from two sources: (1) the income generated the loans thay make and the securities they purchase and (2) fee income. Therea are various types of depository institutions. This are-

i. Commercial banks: Commercial banks provide numerous services in our financial system. The services can be broadly classified as follows: (a) individual banking, (b) institutional banking, (c) Global banking. Indiviadual banking encompasses consumer lending, residential mortage lending, consumer installment loan, credit card financing, automolile financing, brokerage service, student loans etc. Loans to nonfinancial corporations, financial corporations and government entities fall into the category of institutional banking. Global banking covers a broad range of activities involing corporate financing and capital market and foreign exchange products and services. Most global banking activities gererate fee income rather than interest income.

ii. Credit unions: Their unique aspect is the common bond requirement for credit union membership. In our country, they are commonly known as cooperative societies. According to the statutes, members in a credit union shall be limited to groups having a common bond of occupation or association. Or to groups within a well defined neighborhood, community or rural region. The dual purpose of credit unions is to serve their members’ saving and borrowing needs.

iii. Savings and loan association (S&Ls): S&Ls represent a fairly old institution. The basic motivation behind creation of S&ls was the providing the funds for financing the purchase of a home. The collateral for the loans would be the home being financed. It is either mutually owned or have corporate stock ownership. Mutually owned means there is no stock outstanding, so technically depositors are the owners. To increase the ability of S&ls to expand the sources of funding available to bolster their capital. While most mortgage loans are for purchase of homes, S&Ls do make contruction loans. The bulk of the liabilities of S&Ls consisted of passbook saving accounts and time deposits.

iv. Saving banks: These institutions are similar to, although much older than, S&ls. They can be mutually owned (in which case they are called mutual saving banks) or stock holder owned. The principal assets of saving banks are residential mortgages and the principal source of funds is deposits.

48

Explain the ways in which a depository institution can accommodate withdrawal and loand demand.

A depository institution must be prepared to satisfy withdrawals of funds by depositors and to provide loans to customers. There are several ways that a depository institution can accommodate withdrawal and loan demand. These are as follows-

i. Attract additional deposits.ii. Use existing securities as collateral for borrowing from the central bank or other

financial institutions. Banks are allowed to borrow at the discount window of Bangladesh bank.

iii. Raise short term funds in the money market. This alternative primarily includes sunig marketable securities owned as collateral to raise funds in the repurchase agreement market.

iv. Sell securities that a bank own. It requires that the depository institution invest a portion of its funds in securities that are both liquid and have little price risk. Price risk means the prospect that the selling price of the securities will be less than its purchase price, resulting a loss.

Short term securities entail price risk. It is therefore short term, or money market, debt obligation that a depository institution will hold as an investment to satisfy withdrawals and customer loan demand. Securities held for the purpose of satisfying net withdrawals and coutomer loan demands are sometimes referered to as secondary reserves. The percentage of a depository institution’s asset held as secondary reserves will depand both on the institution’s ability to raise funds from the other sources and on its management’s risk performance for liquidity (safety) versus yield. Depository institutions hold liquid assets not only for operational purposes, but also becauses of the regulatory requirements.

Expain the difference types of services provided by a bank.Commercial banks provide numerous services in our financial system. The serices can be

broadly classified as follows:i. Individual banking: Individual banking encompasses cousumer lending, residential

mortgage lending, consumer installment loans, credit card financing, automobile financinag, brokerage services, student loads and individual oriented financial investment services such as personal trust and investment services.

ii. Institutionsal banking: Loan to nonfinancial baning corporation, financial corporations and government entities fall into the category of institutional banking. Also included in this category are commercial real estate financing, leasing activities and factoring (purchase of accounts receivable). In the case of leasing, a bank may be involved in leasing equipment either as lessors, as lender to lessors, or as purchasers of leases. Loans and leasing gererate interest income and other services that banks offer institutional customers gererate fee income. These services include management of the assets of

49

private and public pension funds, custodial services and cash management services such as account maintenance, check clearing and electronic transfers.

iii. Global banking: Global banking covers a broad range of activities involving corporate financing and capital market and foreign exchange product and services. Most global banking activities generate fee income rather than interest income. ‘Corporate financing involves two components. First is the procuring of funds for a bank’s customers. In assisting customers in obtainging funds, banks provide bankers acceptances, letter of credit etc. The second area of corporate financing involves advice on such matters as strategies for obtaining funds, corporate restructuring, divestitures and acquisitions. Capital market and foreign exchange products and services involve transactions where the bank may act as a dealer or broker in a service. Similarly, some banks maintain foreign exchange operations, where foreign currency is bought and sold. Bank customers in need of foreign exchange can use the services of the bank.

Explain the term “off-balance sheet items”. Mention the main components of off-balance sheet items of a bank.

Off-balance sheet items are those assets or liabilities which do not appear on the balance sheet of a company and that is the reason why they are called off-balance sheet items as they are not visible in the balance sheet of a company. Off-balance sheet items are of particular significance when company is applying for loans from the banks as banks tend to see debt equity ratio before granting loans to a company and if debt equity ratio of company is not favorable the company may show real liabilities as off-balance sheet items which will make the debt equity ratio of company favorable and therefore it will help the company in taking loan from bank. It is due to this reason bank pay particular attention to off balance sheet items before giving loans to companies.

The components of off-balance sheet items are as follows:i. Contngent liabilities

a. Acceptances and endorsementsb. Letter of guaranteec. Irrevocable letters of creditd. Bills for collectione. Other contingent liabilities

ii. Other commitments:a. Documentary credits and short term trade related transactionsb. Forward assets purchased and forward deposits placedc. Undrawn note issuance and revolving endrwriting facilitiesd. Undrawn formal standby facilities, credit lines and other commitments.

Explain the importance of liquidity of a commercial bank. Why Fls or banks concerned with liquidity?

Liquidity, or the ability to fund increases in assets and meet obligations as they come due, is crucial to the ongoing viability of any banking organization. Therefore, managing liquidity is among the most important activities conducted by banks. Sound Liquidity management can reduce the probability of serious problems. Indeed, the importance of liquidity transcends the individual bank, since a liquidity shortfall at a single institution can have system-wide repercussions. For the reason, the analysis of liquidity requires bank management not only to measure the liquidity position of the bank on an ongoing basis but also to examine how funding requirements are likely to evolve under various scenarios, including adverse conditions.

So, banks are required to measure and manage their liquidity risk as many to their liabilities are payable on demand or at very short notice. Futher, they must visualize and evaluate liquidity needs (based on certain assumption) under different business scenarios. Liquidity represents the ability to deal with shortage of funds (i.e. raise cash on short notice without having to pay high cost) and surplus of funds (i.e. to deploy funds in assets). Irrespective of size of a bank, adequate liquidity is essential to meet commitments when due and to undertake new transactions when desirable. considering the

50

importance of managing liquidity risk, each bank is required to have a suitable policy in this regard which must cover objectives of liquidity management, framework for assessing and managing liquidity, funding strategies and internal norms inclusing delegation of authority etc.

What is an insurance company and what are the various types of insurance company?

Insurance company provide (sell and service) insurance policies, which are legally binding contracts for which the policyholder or owner pays insurnance premium. According to the insurance contract, insurance companies promise to pay specified sums contingent on the occurrence of future event, such as death or an automobile accident. Thus insurance company is risk takers. They accept or underwrite the risk in return for an insurnance prmium.

The major part of the insurnance company underwriting process is deciding which applications for insurance they should accept and which one they should reject, and if they accept, determing how much they should charge for the insurance. This is called the underwriting process. For example, an insurance company may not provide life insurance to someone with terminal cencer or automobile insurance to some with numerous traffic violations.

Insurance company collect insurance premiums initially and make payments later when e.g. the insured person’s death) or if (e.g. an automobile accident) an insured event occurs, insurance companies maintain the initial premiums collected in an investment portfolio, which generates a return. Thus insurance companies have tow sources of income: the initial underwriting income (the insurance premium) and the investment income. The insurance company’s profit results from the difference between their insurance premiums and investment returns on the one hand and their operating expense ad insurance payments on the other.

Types of insurance companies:i. Life insurance: For life insurance, the risk insured against is death. The life insurance

company pays the beneficiary of the life insurance policy in the event of the death of the insured.

ii. Health insurance: In the case of health insurance, the risk insured is medical treatment of the insured. The health insurance company pays the insured ( or the provider of the medical service) all or a portion of the cost of the medical treatment by doctors, hospitals or others.

iii. Property and casualty insurance: The risk insured by property and casualty insurance companies are demage to various types of property. Specifically it is insurance against financial loss caused by damage, destruction or loss of property as the result of an identifiable event that is sudden, unexpected or unusual.

iv. Liability insurance: With the liability insurance, the risk insured against is litigation or the risk of law suits against the insured due to actions by the insurd or others.

v. Disability insurance: Disability insurance insures against the inability of employed persons to earn an imcome in either their own occupation or any occupation. Typically own occupation disability insurance is written for professionals and any occupation for workers.

vi. Long term care insurance: An individual have been living longer, they have become concerned about outliving their assets and being unable to care for themselves as the age. An addition, custodial care for the aged has become very expensive. Thus, there has been an increased demand for insurance to provide custodial care for the aged who are no

51

longer able to care for themselves. This care may be provided in either the insured’s own residence or a separate custodial facility.

What is an ivestment company and what are the different types of investment companies? Explain.

Investment companies are financial intermediaries that sell shares to the public and invest the proceeds in a diversified portfolio of securities. Each share sold represents a proportional interest in the portfolio of securities managed by the investment company on behalf of its shareholders. The type of securities purchased depends on the company’s investment objective. Types of investment companies: There are three types of investment companies. This are-

i. Open-end-funds: These are commonly referred to simply as mutual funds. Open-end-funds are portfolios of securities, mainly stocks, bonds and money market instruments. These are several important aspects of mutual funds.

a. Investors in mutual funds own a pro rata share of overall portfolio.b. The investment manager of the mutual fund actively manages the portfolio, that is, buys

some securities and sells other.c. The value or price of each share of portfolio, called net asset value, equals the market

value of the portfolio minus the liabilities of the mutual funds divided by the number of shares owned by the mutual fund investors.

d. The price of the fund is determined only once each day, at the close of the day.e. All new investments into the fund or withsrawals from the fund during a day are priced

at the closing Net asset vaule.ii. Closed-end-funds: The shares of a closed end fund are very similar to the shares of common

stock of a corporation. The new shares of closed-end-funds are initially issued by an underwriter for the fund. And after the new issue, the number of shares remains constant. After the initial issue, thre are no sales or purchases of fund shares by the fund company. The shares are traded on a secondary market. As the price of the shares of a closed-end- funds are determined by the supply and demand in the market in which these fundas are traded; the price can fall below or rise above the net asset value per share. Shares selling below net asset value are said to be trading at a discount while shares trading above net asset value are trading at a premium.

iii. Unit trusts: A unit trust is similar to closed-end-funds in that the number of unit cerfiticates is fixed. Unit trusts typically invest in bonds. They differ in several ways from both mutual funds and close-end-funds that specialize in bonds.

a. There is no active trading of the bonds in the portfolio of the unit trust. Once the unit trust is assembled by the sponsor (usually a brokerage firm or bond underwriter) and turned over to a trustee, the trustee holds all the bonds until they are redeemed by the issuer.

b. Unit trusts have a fixed termination date, while mutual funds or close-end-funds do not.c. Unlike the mutual funds and close-end-funds investors, the unit trust investor knows that

the portfolio consist of a specific portfolio of bonds and has no concern that the trustee will alter the portfolio.

52

What are the ways in which an investment banking firm may be involved in the insurance of a new security?

Investment involves managing pools of assets such as closed and open-end-mutual funds (in competition with commercial banks, life insurance companies and pension funds) securities firms can manage such funds either as agents for other investors or as principals for themselves and their stockholders. The objective in funds management is to select asset portfolio to beat some return risk performance benchmark. Since this buniness generates fees that are based on the size of the pool f assets managed, it tends to produce a more stable flow of income that does either investment banking trading.

Investment banking refers to activities related to underwriting and distrusting new issues fo debt and equity securities. New issues can be either first time issues of a company’s debt or equity securities or the new issues of a firm whose debt or equity is already trading seasoned issues.

Surities under writing can be undertaken though either public or private offerings. In private offerings, an investment banker acts as a private placement agent for a fee, placing the securities with one or a few large institional investors such as life insurance companies. In a public offering, the securities may be underwriten on a best efforts or a firm commitment basis and the securities may be offered to the public at large. With best efforts underwriting, investment bankers act as agent on a fee basis related to their success in placing the issues with investors. In firm commitment underwriting, the investment banker acts a principal, purchasing the securities from the issuer at one price and seeking to place them with public investors at a slightly higer pirce. Finally, in addition to investment banking operations in the corpoarate securities markets, the investment banker may participate as an underwriter (primary dealer) in government, municipal and mortgage-based securities.

What do you mean by mutual funds? Discuss the different aspects of mutual funds.

Mutual funds are portfolios to securities, mainly stocks, bonds and money market instruments. These are also known as open-end-funds. There are three important characteristics of mutual funds. These are as fellows:

i. The numbers of shares of these funds increase or decreses as investors increases their investment or liquidate shares.

ii. The fund company facilitates these increases decreses by selling new shares to or buying existing shares from the investors and

iii. These new investments or liquidations occur via the fund company at net asset value.There are several important aspects fo mutual funds are-

i. Investors in mutual funds own a pro ratw share of overall portfolio.ii. The investment manager of the mutual fund actively manages the portfolio , that is, buys

some securities and sells others.iii. The value or price of each share of portfolio, called net asset value, equils the market of

the portfolio minus the liabilities fo the mutual funds divided by the number of shares owned by the mutual fund investors.

iv. The price of the fund is determined only once each day, at the close of the day.v. All new investments into the fund or withsrawals from the fund during a day are priced

at the closing Net asset vaule.

53

What are the components of Tier-1 and Tier-2 Capital according to Basel accord-1 and Tier-1, Tier-2 and Tier-3 capital according to Basel accord-2?Components of Tier-1 and Tier-2 capital according to Basel accord-1 are as follows:

Tier-1 capital Tier-2 capital1. Paid up capital2. Non-repayable share premium account3. Statutory reserve4. General reserve5. Retained earnings6. Minority interest in subsidiaries7. Non-cumulative irredeemable preference

shares8. Dividend equalizational account.

1. General provision (1% of unclassified loans)

2. Assets revaluation reserve3. All other preference shares4. Perpetual subordinated debt5. Exchange equalization account

Components of Tier-1, Tier-2 and Tier-3 capital according to Basel accord-1 are as follows:Tier-1 capital Tier-2 capital Tier-3 capital

1. Paid up capital2. Non-repayable share

premium account3. Statutory reserve4. General reserve5. Retained earnings6. Minority interest in

subsidiaries7. Non-cumulative

irredeemable preference shares

8. Dividend equalizational account.

1. General provision (1% of unclassified loans)

2. Assets revaluation reserve3. All other preference shares4. Perpetual subordinated

debt5. Exchange equalization

account

6. Consists of short term subordinated debt (original maturity less than or equal to five years but greater than or equal to two years) would be solely for the purpose of meeting a proportion of the capital requirements for market risks.

Explain different types of risk faced by a financial institution.1. Credit Risk: It arises because of the possibility that promised cash inflows on financial claims

held by financial institutions, such as, loans and bons, will not be paid in full. Virtually all of the Fls face this risk. However, in general, Fls that make loans or byu bonds with long maturities are more exposed than are Fls that make loans or buy bonds with short maturities. This means, for example, that banks and life insurance companies are more exposed to credit risk than are money market mutual funds and property casualty insurance companies, since banks ad life insurance companies tend to hold longer maturity assets in their portfolios than mutual funds and property casualty insurance companies.

2. Market risk: It arises when fls actively trade assets and liabilities (and derivatives) rather than holding them for long term investment, funding or hedging purposes. Market risk is closely related to interest rate and foreign exchange risk in that as these risks increase or decreases, the overall risk of the Fls is affected.

54

3. Operatinal risk: These types of risk are closely related and in recent years have caused great concern to Fls managers and regulators alike. The bank for international settlement (BIS), the principal organization of central bank in the major economies of the world, defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. That means, operational risk is the risk that existing technology or support systems may malfunctions, that fraud may occur that impacts the Fls activities, and / or external increase in liability withdrawals may require an Fl to liquidate assets in a very short period of time and low prices.

4. Liquidity risk: The risk that a sudden and unexpected increase in liability withdrawals may require an Fl to liquidate assets in a very short period of time and low prices.

5. Interest risk: The risk incurred by an Fl when the maturities of its assets and liabilities are mismatched and interest rates are volatile.

6. Off-balance-sheet risk: The risk incurred by an Fl as the result of its activities related to congingent assets and liabilities.

7. Foreign exchange risk: The risk that exchange rate changes can affect the value of an Fl’s assets and liabilities denominated in foreign currencies.

8. Country or sovereign risk: The risk that repayment by foreign borrowers may be interrupted because of interference from foreign governments or other political entities.

9. Technology risk: The risk incurred by an Fl when its technological investments do not produce anticipated cost saving.

10. Insolvency risk: The risk that an Fl may not have enough capital of offset a sudden decline in the value of its assets relative to its liabilities.

11. Strategic risk: Strategic risk means the current or prospective risk ot earnings and capital arising from nonadeaptability with the changes in the business environment, adverse business decisions, the overlooking of changes in the business environment etc.

12. Enviornment risk and climate change risk: Environment and climate change risk refers to th uncertainty or probability of losses that originates from any adverse enviormnent or climate change events (natural or manmade) and / or the non-complinace of the prevailing national environmental regulations.

13. Settlement risk: Settlement risk arises when an executed transaction is not settled as the standard settlement system, such as, evidence of bills accepted (foreign and domestic) by counterparty banks (local/foreign) but payment not realized/payment delayed, all types of receivables (except bills accepted) not settled in due time.

55

Discuss the management process for a financial institution?For each risk category, a financial institution employs a four step procedure to measure and

manage institution level exposure. These steps are:1. Standards and reports: This control process involves two different conceptual activities, i.e.

standard setting and financial reporting. They are listed together because they are the sine qua non of any risk management process. Underwriting standards, risk categorizations, and standard of review are all traditional tools of risk control. Consistent evaluation and rating of exposoure is essential for management to understand the true embedded risk in the portfolio, and the extent to which these risks must be mitigated or absorbed.The standardization of financial reporting is the next ingredient. Obviously outside ausits, regulatory reports, and rating agency evaluations are essential for investors to gauge asset quality and institution level risk. These reports have long been standardized, for better or worse. However, the need here goes beyond public reports and audited statements to the need fro management information on asset quality and risk posture. Such internal reports need similar standardization and much frequent reporting invervals, with daily or weekly reports.

2. Position limits and rules: A second step for internal control of active management is the establishment of position limits. These are imposed to cover exposures to counterparties, credits, and overall position concerntrations relative to systematic risks. In general, each person who can commit capital has a wlldefined limit. This applies to traders, lenders and portfolio managers. Summary reports to management show counterparty, credit and capital exposure by business unit on a periodic basis. Inlarge institutions with thousands of positions maintained and transactions done daily, accurate and timely reporting is quite difficult, but perhaps even more essential.

3. Investment guidelines: Investment guidelines and strategies for risk taking in the immediate future are outlined in terms of commitments to particular areas of the market, the extent of asset-liability mismatching or the need to hedge against systematic risk at a particular time. Guidelines offer institution level advice as to the appropriate level of active management-given the state of the market and the willingness of senior management to absorb the risks implied by the aggregate portfolio. Such guidelines lead to hedging and asset-liability matching. In addition, securitization and syndication are rapidly growing techiniques of position management open to participants looking to reduce their exposure to be in line with management’s guidelines. These transactions facilitie asset financing, reduce systematic risk and allow management to concentrate on customer needs that center more on origination and servicing requirements that funding positions.

4. Incentive schemes: To the extent that management can enter into incentive compatible contracts with line managers and make compensation related to the risks borne by these individuals, the need fro elaborate and costly control is lessened. However, such incentive contracts require accurate position valuation and proper cost and capital accounting systems. It involves substantial cost accounting analysis and risk wighting which may take years to put in place. Notwithstanding the difficulty, well designed compensation contracts align the goals of managers with other stakeholders in a most desirable way. In fact, most financial debacles can be traced to the absence of incentive compatibility, as the case of deposit insurance illustrates.

56

What perspectives are considered by financial institutions in their process of assessing interest rate risk?Interest rate risk is the current or potential risk to earning and capital arising from adverse

movements in interest. Interest rate risk is very important from the perpectives short term earnings and economic value consideration. Significantly reduced eraning can pose a threat to capital adequacy. So, volatility of earning is an important focal point for interest rate analysis. However, measurement of the impact on economic value (the present value of the bank’s expected net cash flow) provides a more comprehensive view of the potential long term effects on an institution’s overall exposures.So, focus will primarily be on:

1. Measuring interest rate risk in relation to economic value and 2. Considering interest rate risk in relation to earning as supplementary measures.

Institutions usually consider two different, but complementary, perpectives in their process of assessing interest rate risk, which are as follow:

a) Earning perspective: The earning perspective focuses on the sensibility of earning in the short term to interest rate movements. Institutions usually adopt this perspective due to two main reasons. (1) This is the variable through which an interest change has an immediate impact on preported earnings; and (2) the assessment of interest rate risk is difficult because it is mainly based on assumptions about the behavior of long term instruments, such as stable demand deposits or other moninterest bearing balance sheet intems and those with embedded options.

b) Ecomonic value perspective: the economic value perspective focuses on the sensitivity of the economic values of the banking book iterms to interest rate changes. To use this approach as the shorter term earning perspectives will not completely capture the impact of interest rate movement on the market value of long term positions.

Explain interest rate risk with example.All depository institutions face interest rate risk. Mangers of a depository institution who have

particular expectations about the future of interest rates will seek to benefit from these expectations. Those who expect interest rates to rise may pursue a policy to borrow funds for a long time horizon (that is, to borrow long) and lend funds for a short time horixon (to lend short). If interest rates are expected to drop, managers may elect to borrow short and lend long.

Interest rate risk can be explained best by an example. Let us suppose that a depository institution raises tk-1.00 million via deposits that have a maturity of one year and by agreeing to pay an interest rate of 7%. Ignoring for the time being the fact that the depository institution cannot invest the entire tk-1.00 million because of reserve requirement , supoose that tk-1.00 million is invested in a GBTB that mature3s in 15 years paying an interest rate of 9%. Becasuse of the funds are invested in BGTB, there is no credit risk in this case.

It would seem at first that the depository institution has locked in a spreed of 2% (9% minus 7%). This spread can be counted on only for the first year, though, because the spread in future years will depend on the interest rate this depository institution will habe to pay depositorys in order to raise tk-1.00 million after the one year time deposit matures. If interest rates decline, the spread will increase the depository institution has locked in the 9% rate. If interest rates rise, however, the spread income will decline. In fact, if this depository institution must pay more than 9% to depositors for the next 14years, the spread will be negative. That is it will cost the depository institution more to finance the government securities than it will earn on the funds invested in those securities.

In this example, the depository institution has borrowed short (borrowed for one year) and lent long (invested for 15years). This policy will benefit from a decline in interest rates but be disadvantaged if interest rates rise. Suppose, the institution could have borrowed funds for 15 years at 7% and invested in a BGTB matching in one year earning 9%-borrowed long (15 years) and lent short (1year. A rise in interest rates will benefit the depository institution because it can them reinvest the proceeds from the

57

maturing one-year government security in a new one-year government security offering a higher interest rate. In this case a decline in interest rates will reduce the spread. If interest rates fall below 7%, there will be a negative spread.

What is mean by futures contract? Discuss its role in financial markets.A future contract is a firm agreement between a buyer and a seller, in which:

i. The buyer agrees to take delivery of something at a specified price at the end of a designated period of time.

ii. The seller agrees to make delivery of something at a specified price at the end of a designated period of time.

Of course, no one buys or sells anything when entering into a futures contract. Rather, the parties to the contract agree to buy or sell a specific amount of an item at a specified turere date. The key elements of this contract are the price at which the parties agree to exchange is called the underlying. For example, there is a futures contract traded on an exchange where the underlying to be bought or sold is asset XYZ and the settlement is three months from now. Assume further that Rahim buys this futures contract and Karim sells this futures contract and the price at which they agree to transact in the future is tk-100.00 then tk-100.00 is the futures price. At the settlement date, Karim will deliver asset XYZ to Rahim and Rahim will give Karim Tk-100.00m the future price.

The role of futures contract in financial markets is as fellows:i. The futures market is an alternative market that investors can use to alter their risk

exposure to an asset when new information is acquired. For acquiring new information, futures market do this efficiently due to liquidity, transactions costs, taxes and leverages ot the futures contract.

ii. The futures market will be the price discovery market when market participants prefer to use this market rather than the cash market to change their risk exposure to an asset.

iii. The future market and the cash market for an asset are tied together by an arbitrage process. Because arbitrage is the mechanism that assures that the cash market price will reflect the information that has been collected in the futures market.

iv. The agreement that futures markets destabilize the prices of the underlying financial assets is an empirical question, but greater price volatility by itself is not an underlying attribute of a financial market.

What is meant by Reputatinal risk? What types of losses can be incuced in a bank due to peputational risk? Reputation risk is the current or prospective indirect risk to earing and capital, decline in the customer base, costly litigation arising from adverse perception of the image of the banks on the part of customers, counterparties, shareholders, investors or regulators. Reputation risk may originate from the lack of compliance with industry service standards, failure to deliver on commitments, lack of customer friendly service and fair market practices, low or inferior service quality, unreasonably high costs, a service style that does not harmonize with market benchmarks or customer expectations, inappropriate business conduct or unfavourabel authority opinion and actions.

Signs of significant and overall quality the extensive and repeated voicing of a negative opinion on the institution’s performance and overall qulity by external persons or organizations, especially if such negative opinion receives broad publicity along with poor performance by the institution which may lay the grounds for such opinions. In general, a reputational risk may potentially damage the standing or estimate of an organization in the eyes of third-parties. The harm to a frim’s reputation is intangible and may surface gradually. However, there is strong evidence that equity markets immedialtely react to the reputational consequences of some events.

There are several paths by which reputational risk can induce losses for a firm:i. Loss of current or future costumers-Typically this involves a reduction in expected future

renenues, but it could also involve an icrease in costs if , for example, increased advertising expenditures are necessary to restrain reputational damage.

ii. Losses of employees or managers within the organization , an increase in hiring costsiii. Reputaiton in current or future business partners

58

iv. Increased costs of financial funding via credit or equity marketsv. Increased costs due to government policy, suvervisory regulations, fines or other

penalties.

What is credit risk? What are the three steps in the credit risk management process?Credit risk could be defined as the possibility of losses associated with diminution in the credit quality of borrowers or counter parties. In a bank’s portfolio, losses stem from outright default due to inability or willingness of a customer or counterparty to meet commitments in relation to lending, trading, steelement and other financial transactions. The credit risk arises due to operation of a number of external and internal factors.

The external factors comprise of state of economy of the concerned country or even global economy, foreign exchange risks, trade restrictions, economic sactiona, government policies , natural calamitites etc.

The internal factors are the factors which may be internal to the borrower or internal to the financing institutions. The factors internal to the borrowing entity may be planning factors, execution factors, finance factors, marketing factors etc. The factors internal to financing banks or institutions relate to the deficiencies in loan policies/administration , abscense of prudential credit concentration limits, deficient credit appraisal standards of borrowers’ financial position exercise dependecnce on collater4als , inadequate risk pricing, absence of loan review mechanism , post sanction superfision etc.

Traditionally the credit risk is throuht of as having two components. The first is the solvency aspects of credit risk which relates to the bank that the borrower is unable to repay in full the some outstanding. The second is the liquidity aspect of credit risk that arises when the payments due from a borrower are dylayed leading to cash flow problems for the lender.

The three steps in the credit risk management process:i. Identication/ drivers of credit risk: Credit risk management is a process idenftfied/driven

by the following variable:a. Default: this is a discrete state either the debtor/counter party is in default or not.b. Exposure: It is economic value of the claim that the time of default. Exposure is

difficult to measure for derivatives. For loans and advances, it is close to its face value.

c. Loss given default: This is fractional loss due to default.ii. Meaurement of credit risk: these are-

a. Risk-weighted amountsb. External/internal credit ratingsc. Internal portfolio credit models.

iii. Monitoring or management: Majority of the banks are not using the modern portfolio management concepts t monitor or manage credit risk. This was probably due to non-availability of date and technoloty. Now technology has made available the tools required. Banks have to accumulate historical data in electronic form, data are also pooled at the industry either by a data provider or by regulator or by an industry association-all this has made it possible to apply the portfolio theory to the credit risk. This advancement can provide banks with a more complete picture of the risk and more tools to analyze and control risk proactively.

59

Discuss the purpose of market discipline in relation with accounting disclosure under revised regulatory capital framework for banks in line with basel-2.

The purpose of market discipline in the revised capital adequacy framework is to complement the minimum capital requirements and the supervisory review process. The aim fo introducing market discipline in the revised framework is t establish more transparent and moredisciplined financial market so that stakeholders can assess the position of a bank regarding holding of assets and to identity the risks relating to the assets and capital adequacy to meet probable loss of assets. For the said purpose, banks will develop a set of disclosure containing the key pieces of information on the assets, risk exposure, risk assessment processes and hence the capital adequacy to meet the risks.

Banks should have a formal disclosure framework approved by the board of directors/chief executive officer. The process of their disclosure will include validation and frequency.

Retations with accounting disclosures are-1. It is expected that the disclosure framework does not conflict with requirement under

accounting standard as set by Bangladesh Bank from time to time. Moreover, banks’ disclosures should be consistent with how senior management and the board of directors assess and manage the risks of the bank.

2. Under minimum capital requirement, banks will use specified approaches/methodologies for measuring the various risks they face and the resulting capital requirements. It is believed that providing disclosures that are based on a common framework is an effective means of informing the stakeholders about a banks’ exposure to those risks and provides a consistant and comprehensive disclosure framework of risks and its management that enhances comparability.

3. The disclosures should be subject to adequate validation. Since information in the annual financial statements would generally be audited, the additionally published with such statements must be consistent with the audited statements.

60

Define CAMELS rating and write down the composite ratings of this.

The bank companies are very different from commercial companies. As because, bulk of their liabilities and assets are comprises mainly with depsits and advances. Main risk in banking from the part is to attract and retain deposits and othe sources of fund. Depositors and other concerns prior to deposit in a bank like to analysis the bank concerned to determine the risk and to ascertain the safty of their manies. Main tools used for anlalyzing a bank are calculating different ratios i.e. profitability, liquidity, asset quality, performance and capital adequacy on the basis of balance sheet and income statement of a bank. As a regulatory body Bangladesh bank also analyze a bank through ratios and raing analysis. For regulatory purpose bankgladesh bank follows some guidelines and procedures for the uniform evaluation and rating of banks, which is known as CAMELS rating system. This system is based upon an evaluation of six crucial dimension of bank’s operation. The dimentions are as follows:

1 C Capital Adequacy2 A Asset Quality3 M Management4 E Earning5 L Liquidity6 S Sensitivity to market risk

Composition of these dimentions is to be rated on a scale of 1 though 5 &6 in ascending order of performance deficiency. Thus 1 represent the highest and 5 & 6 represent the lowest and mot critically deficient level of operating performance. Meaning of the six CAMELS numerical ratings in brief are as follows:

Rating Description1 Strong-It is the highest rating and is indicative of performance that is significantly

higher than average.2 Satisfactory- It reflects performance that is average or above average. It includes

performance that adequately provides for the safe and sound operation of the banks.3 Fair- Represent performance that is not flawless to some extent. It is neither

satisfactory nor unsatisfactory but characterized by performance of below average quality.

4 Marginal- Performance significantly below average, if not changed such performace mitht evole into weakness or condition that could thread the viability of a bank.

5&6 Undatisfactory- It is the lowest rating and indicative of performance that is critically deficient and need immediate remedial attention. Such performance by itself or in combination with other weakness, threats the viability of a bank.

Each bank is accorded a composite rating that is predicated upon the evaluation of the specific performance dimension. The composite rating is also based upon a scale of 1 through 5&6 in ascending order. The six composit ratings are defined and distinguished as: Composite rate=Rate of (C+A+M+E+L+S)/6.Scale of composite range-

Rating composite range description1 1 Through 1.4 Strong2 1.5 Through 2.4 Satisfactory3 2.5 Through 3.4 Fair4 3.5 Through 4.4 Marginal

5&6 4.5 Through 5 & 6 Unsatisfactory

61

Short note on Loan sale, Duration and yield to maturity.Loan sale: a loan sale is a commodity used term for the sale of loan pools. Loans acquired from

failed financial institutions are generally sold in pools through sealed bid sale. Typically sale contains loans that have similar characteristics. The loans are refined into pools according to specific criteria. Pooling considarations may include loan size, quality type, collateral and location.

Duration: Duration is the weithted average time to maturity on a financial security using the relative present values of the cash flows as weithts. On a time value of money basis, duration measures the period of time required to recover the initial investment in a bond. Any cash flows received prior to the period of a bond’s duration reflect the recovery of the initial investment in a bond, while cash flows received after the period of a bond’s measured duration and before its maturity are the profits or returns earned by the investor.Yield to Maturity: This means the return or yield the bond holder will earn on the bond if he or4 she buys it at its current market price, receives all coupon and principal payments as promised, and holds the bond until maturity. The yield to maturity calculation implicitly assumes that all coupon payment periodically received by the bond holder can be reinvested at the same rate that is reinvested at the calculated yield to maturity.

What are the major features of the underlying collateral and the structure fro securitization.

A securitized instrument, as compared to a direct claim on the issuer, will generally have the following features:

1. Marketability: The very purpose of securitiztion is to ensure marketability to financial claims. Hence, the instrument is structured so as to be marketable. This is one of most important feature of a securitized instrument. The concept of marketability involves two postulates;

a. The legal and systematic possibility of marketing instrument, and b. The existence of a market for the instrument.

2. Merchabntable quality: To be market acceptable, a securitized product has to have a merchantable quality. The concept of merchantable quality in case of physical goods is something which is acceptable to merchants is acceptable. For widely distributed securitized instruments, evaluation of the quality and its certification by an independent expert, viz, rating is common.

3. Wide distribution: The basic purpose of securitization is to distribute the product. The extent of distribution which the originator would like to achieve is based on a comparative analysis of the costs and the benefits achieved therby. Wider distribution leads to a cost-benefit in the sense that the issuer is able to market the product with lower return and hence lower financial cost to him.

4. Homogeneity: To serve as a marketable instrument, the instrument should be packaged as into homogeneous lots. Homogeneity is a function fo retail marketing. Most securitized instruments are broken into lots affortabel to the marginal investor and hence the minimum demonization becomes relative to the needs of the smallest investor. The need to break the whole lot to be securitized into several homogeneous lots makes securitization an exercise of integration and differentiation: integration of those several assets into one lump and them the latter’s differentialtion into uniform marketable lots.

5. Special purpose vehicle: In case the securitization involves any asset or claim which needs to be integrated and differentiated , that is, unless it is a direct and unsecurec claim on the issuer, the issuer will not need an intermediary agency to act as s repository of the asset or claim which is being securized. In securization of receivables the special purpose intermediary holds the receivabes with it and issues beneficial interest certificates to the investors.

62

What are the major features of the half yearly monetary policy (July-Dec) Published by Bangladesh bank?Major features of Half yearly Monetory Policy (July-Dec.) are-

1. Reduce private sector credit growth to 18% by the end of the fiscal year fro the exesting 25.5%.

2. Attainment of 7% real GDP growth is FY 2011-12, considering the external environment would remain benign and stable.

3. Slash the annual average CPI inflation to 7.5% in this fiscal year fro the above 8.8% clocked in 2010-2011 to help the government meet its target announced in the budget.

4. Monetary policy would be accommodative, but would remain cautious to check credit flows into unproductive and speculative used.

5. Ensuring adequate credit flows to productive pursuits in manufacturing, agricualture, trade and othe services.

Describe the functions of credit administration department of a bank. May, 2011Credit risk management is responsible for the implementation of actions that limit the lending exposure of an organization. It performs this necessary role through several functions aimed at reducing the risk associated with company financial assets. Credit policies and procedures, credit analysis and credit review help to prevent poor lending decisions and protect company investments.

(1) Credit Policies and Procedures: A major function of credit risk management is the establishment of credit policies and procedures. Credit policy defines the rules and guidelines for how an organization performs its lending functions.

(2) Credit Analysis: Credit analysis is defined as the research and investigation necessary to determine the degree of lending risk involved. This function of credit risk management is performed with the use of information pulled from credit applications, public records and credit reports.

(3) Credit Review: As important as credit analysis is to risk management and qualifying a client for a loan, the credit review process is equally important. Established clients may reveal financial difficulties through obvious actions like late payments and partial payments.

(4) Loan Documentation: (1)Facility Types, (2) Constituent Parts (3)Legal Requirements and (4) In-house and External Lawyers

(5) Perfecting Security: (1) Common Forms of Security Registration (2) Enforcement and (3) Valuation and Re-valuation

(6) Drawdowns and Rollovers: (1)Rate Fixings, (2) Payments and (3) Collection of Fees, Interest and Repayments.

(7) Record Keeping: (1) Limits, (2) Utilizations and (3) The importance of diary system.(8) Mangement Reporting: (1) Out of order account, (2) Repayment’s profiles , (3) Security

Valuation and (4) Convenant maintenance.

63

Point out the major guidelines of Bangladesh bank’s mamagement of capital of BASEL-2. May, 2011

To cope with the international best practices and to make the bank’s capital more risk sensitive as well as more shock resilient, ‘Guidelines on Risk Based Capital Adequacy (RBCA) for Banks’ (Revised regulatory capital framework in line with Basel II) have been introduced from January 01, 2009 parallel to existing BRPD Circular No. 10, dated November 25, 2002. At the end of parallel run period, Basel II regime has been started.

(1) Instructions regarding Minimum Capital Requirement (MCR), (2) Adequate Capital, and (3) Disclosure requirement as stated in these guidelines have to be followed by all scheduled

banks for the purpose of statutory compliance. Scheduled banks will follow the instructions contained in the revised ‘Guidelines on Risk Based Capital Adequacy for Banks’. These guidelines are articulated with the following areas, viz;

(1) Introduction and constituents of Capital, (2) Credit Risk, (3) Market Risk, (4) Operational Risk, (5) Supervisory Review Process, (6) Supervisory Review Evaluation Process, (7) Market Discipline, (8) Reporting Formats, and (9) Annexure.These guidelines will be able to make the regulatory requirements more appropriate and will

also assist the banks to follow the instructions more efficiently for smooth implementation of the Basel II framework in the banking sector of Bangladesh.

These guidelines are structured on following three aspects: a) Minimum capital requirements to be maintained by a bank against credit, market, and

operational risks. b) Process for assessing the overall capital adequacy aligned with risk profile of a bank as

well as capital growth plan. c) Framework of public disclosure on the position of a bank's risk profiles, capital

adequacy, and risk management system.

Scope of application : These guidelines apply to all scheduled banks on ‘Solo’ basis as well as on ‘Consolidated’ basis .

Capital base : Regulatory capital will be categorized into three tiers: Tier 1, Tier 2, and Tier 3. Tier 1 capital Tier 1 capital called ‘Core Capital’ comprises of highest quality of capital elements that consists of : a) Paid up capital :Introduction and constituents of capital Chapter1 2

b) Non-repayable share premium account c) Statutory reserve d) General reserve e) Retained earnings f) Minority interest in subsidiaries g) Non-cumulative irredeemable preference shares h) Dividend equalization account

Tier 2 capital Tier 2 capital called ‘Supplementary Capital’ represents other elements which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank and consists of: a) General provision2

b) Revaluation reserves • Revaluation reserve for fixed assets3• Revaluation reserve for securities4• Revaluation reserve for equity instrument

64

c) All other preference shares d) Subordinated debt5

Tier 3 capital Tier 3 capital called ‘Additional Supplementary Capital’, consists of short-term subordinated debt (original maturity less than or equal to five years but greater than or equal to two years) would be solely for the purpose of meeting a proportion of the capital requirements for market risk.

For foreign banks operating in Bangladesh, Tier 1 capital consists of the following items: a) Funds from head office b) Remittable profit retained as capital

other are-(1) Conditions for maintaining regulatory capital (2) Calculation of capital adequacy ratio (3) Minimum capital requirements(4) Reporting requirement and(5) Penalty for non-compliance

Circulars1. BRPD Circular No. 09 : Mapping of External Credit Assessment Institutions' (ECAIs) rating scales with Bangladesh Bank (BB) rating

Grade [Nov 16, 2011 ]2. BRPD Circular No. 35 : Amendment in Guidelines on Risk Based Capital Adequacy (RBCA) for Banks [Dec 29, 2010] 

3. BRPD Circular No. 31 : Mapping of External Credit Assessment Institutions� (ECAIs) rating scales with Bangladesh Bank (BB) rating Grade [Oct 25, 2010 ]  

4. BRPD Circular No. 24 : Risk Based Capital Adequacy (RBCA) for Banks [Aug 03, 2010 ]  

5. BRPD Circular No. 13 : Supervisory Review Evaluation Process (SREP) [Apr 21, 2010]  

6. BRPD Circular No. 12 : Consolidation for investment in subsidiaries and implication of other Capital Market Exposures for the purpose of computing eligible Regularory Capital [Mar 29, 2010]  

7. BRPD Circular No. 11: Subordinated Debt for inclusion in Regulatory Capital [Mar 21, 2010]  

8. BRPD Circular No. 10 : Risk Based Capital Adequacy (RBCA) for banks (Revised regulatory capital framework in line with Basel II) [Mar 10, 2010]  

9. BRPD Circular No. 20 : Risk Based Capital Adequacy (RBCA) for banks (Revised regulatory capital framework in line with Basel II) [Dec 29, 2009]  

10. BRPD Circular No. 13 : Subordinated Debt for inclusion in Regulatory Capital [Oct 14, 2009]  

11. BRPD Circular No. 05 : Mapping of External Credit Assessment Institutions (ECAIs) rating with Bangladesh Bank Rating Grade [Apr 29, 2009]  

12. BRPD Circular No. 09 : Risk Based Capital Adequacy for Banks (Revised regulatory capital framework in line with Basel II) [ Dec 31, 2008]   

13. BRPD Circular No. 07 : Recognition of eligible External Credit Assessment Institutions (ECAIs) [Sep 23, 2008]  

14. BRPD Circular No. 14 : Implementation of New Capital Accord (Basel II) in Bangladesh.(Road Map) [Dec 30, 2007]  

Circular Letters1. BRPD Circular Letter No. 05 : Identifying Risk Factors Relating to Islamic Mode of Investment under Risk Based Capital Adequacy

for Banks [Jul 20, 2009]   

Regulation And Guidelines1. Process Document for SRP-SREP Dialogue on ICAAP [February 2011]  

2. Risk Based Capital Adequacy for Banks (Basel II) [December 2010]  

3. Risk Based Capital Adequacy for Banks (Basel II) [December 2008]  

Name the financial statements prepared by a bank. May, 2011i. Balance sheet

65

ii. Income statementsiii. Fund flow statementsiv. Cash Flow statementv. Loan and lease statement

vi. Deposit statementvii. Investment statement

viii. Nondeposit borrowing statementix. Cash and deposits in other institution statementx. Equity capial statement

xi. Shareholder statement xii. Liquidity statement

xiii. Verious kinds of reserves statements

Define different capital requirements. May, 2012i. Paid up capital

ii. Share capital iii. Reserves funds and others reserves funds iv. Retained earning and v. Statutory reserves funds

vi. Depository fundsvii. Loan and advaces from other commercial banks and central bank.

viii. Loan at call money

Discuss the impact of government policy on financial statement of financial institutions. May, 2011

Samuel Peltzman contends that regulation shelters a firm from changes in demand and cost, lowering its risk. If true, this implies that the lifting of regulations in banking would subject individual banks to greater risk an eventually result in more bank failures.

More recently, Edward Kane has argued that regulations can increase customers confidence in banks, which, in turn, may create greater customer loyalty toward banks. He believes that regulators actually compete with each other in offering regulatory services in an attempt to broaden their ingluence among regulated firms and with the general public. Moreover, he argues that there is an ongoing struggle between regulated firms and the regulators, called the regulatory dialectic. This means that once regulations are drafted and set in place, bankers will inevitably search to find ways around the new rules through innovation to maximize the value of each banking firm. If bankers are successful in skirting existing regulations, then new rules will be created, encouraging bankers to seek futher innovations in services and methods. Thus, the struggle between regulated firms and regulations goes on indefinitely. Kane also believes that regulations provide an incentive for less-regulated businesses to try to win customers away from more regulated firms, something that appears to have happened in banking in recent years as mutual funds and other less regulated businesses have stolen away may of banking’s best customers.

Discuss the important aspects that should be considered by a banker while financing a financial an industrial project. May, 2012

66

The important aspects that should be considered by a banker while financing a financial an industrial project are-

i. Project sizeii. Production process

iii. Raw materialiv. Skillsv. Others are-

a. Project purpose & designb. Technology & processc. Product mix & production capacityd. Safety provisione. Transportationf. Schedule of constructiong. Land and locationh. Furniture & Fixture and i. Repairs & maintenance

Mention the sources of revenue and areas of expenses for a bank and an insurance company. May, 2012

Sources of revenues are-(1) Interest of loans and advances (2) Brokerages(3) Commission(4) Fees(5) Foreign exchange commission, charges and fees.(6) Bill discounting

The areas of expenses are-(1) Salaries and allowances(2) Administrative cost or overhead cost(3) Marketing expenses(4) Interest of deposits(5) Stamps(6) Bad loss loan (7) Transportations cost

What is minimum capital and liquidity requrirement for non-bank financial institutions? May, 2011

Miminum capita requirement is 100.00 crore taka and liquidity is 6%.

What are the principal money market and capital market instructions available to the banks in Bangladesh? May, 2011Principles of money market:

Well-known for its engaging, conversational style, this text makes sophisticated concepts accessible, introducing students to how markets and institutions shape the global financial system and economic policy. Principles of Money, Banking, & Financial Markets incorporates current research and

67

data while taking stock of sweeping changes in the international financial landscape produced by financial innovation, deregulation, and geopolitical considerations.

The Basics: Introducing Money, Banking, and Financial Markets; The Role of Money in the Macroeconomy; Financial Instruments, Markets, and Institutions. Financial Instruments and Markets: Interest Rate Measurement and Behavior; The Term and Risk Structure of Interest Rates; The Structure and Performance of Securities Markets; The Pricing of Risky Financial Assets; Money and Capital Markets; Demystifying Derivatives; Understanding Foreign Exchange. Banks and Other Intermediaries: The Nature of Financial Intermediation; Depository Financial Institutions; Nondepository Financial Institutions. Financial System Architecture: Understanding Financial Contrac

Principles of Capital market:(1) Capital market is one milestone in the current world economy. Many industries and

companies that use institutional capital markets as a medium to absorb the investment and the media to strengthen their financial position.

(2) Factually, capital markets have become the financial nerve-center modern economic world..

(3) As modern institutions, capital markets can not be separated from the weaknesses and mistakes.

(4) They are always watching the market change, making the analysis and calculations, and take action on the speculation in the purchase or sale of shares.

(5) Principle of Capital Market Efficiency states that differences between financial assets are measured primarily in terms of risk and return. Investors choose the highest return for a given risk level.

(6) The Principle of Comparative Advantage states that people apply the Principles of Self-Interested Behavior, Two-Sided Transactions, and Signaling to an environment characterized by similar financial assets, low transaction costs, and intense competition leads to capital market efficiency.

(7) The Principle of Valuable Ideas states that new ideas can provide value when first introduced, even in an efficient capital market.

Explain liability structure. May, 2012

(1) Capital: Capital are-a. Approved Capitalb. Issued Capitalc. Distributed Capital

68

d. Demanded Capitale. Collected capial

(2) Reserve Funds and other reverses(3) Deposti and other accounts:

a. Current depositb. Saving depositc. Other deposit

(4) Loans from other institutions are-a. Central bank and b. Other banks

(5) Acceptabel bills (6) Bill receivable according to the contra.(7) Other liabilities(8) Surplus of profit(9) Off-balance sheet items(10) Interest of deposits are-

a. Current deposit interestb. Saving deposit interest and c. Fixed or term deposit interest.

(11) Interest of Central banks loan (12) Interst of Other banks loan(13) Legal expenses(14) Legal advisor fees(15) Trainging fees of employees.

69