Management of Financial Institutions-2

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Assignment – A

Question 1. Define money market. What are its broad objectives and functions? How is money market different from capital markets?

Question 2. What is a derivative contract? Explain forward, future and options contracts.

Question 3. In every lending decision, credit officers refer to a principle of lending known as the 5 Cs of credit.
(a) What is the relevance of this principle in a loan evaluation process?
(b) Explain with details, the 5 Cs of credit.

Question 4. Outline the main elements of the prudential norms relating to the credit and investment portfolios of banks. Discuss briefly the capital adequacy norms applicable to banks.

Question 5. Write short notes on any three of the following:-
Commercial Banks
NBFC
Universal Banking
Securitizations.
NASDAQ

Assignment – B

Question 1. Explain briefly the main elements of the Asset Liability Management Framework prescribed by the RBI, for the banks in India.

Question 2. Explain briefly the major types of risks to which banks are exposed.

Question 3. Describe the role of developmental financial institutions in industrial financing. Give examples of some of the developmental financial institutions in India.

Case Study

Dilemma of Asian Bags

Asia Paper Bag has since 1990 operated as a manufacturer of plastic carrier bags supplying them on a contract-manufacturing basis to well-known supermarket chains, fast-food outlets, pharmacies and department stores. Lately, Asia Paper Bag exports customized plastic carrier bags to Marks n Spencer and Boots Pharmacy in the United Kingdom.

During the Asian financial crisis, Asia Paper Bag had difficulties in meeting its term loan repayment, and had to restructure the term loan last year. The term loan was restructured by way of a debt moratorium of 24 months on the principal and an extension of the maturity period from five years to eight years.

Currently, Asia Paper Bag’s turnover is about Rs 3million per month with an average net profit margin of 7%. Lately, with the increase in world oil prices, raw materials for plastic bag production have increased by over 5% to USD1,200 per ton. Asia Paper Bag’s capacity utilization is still low at only 40%, after it expanded rapidly pre-crisis. Asia Paper Bag Sdn Bhd ‘s production capacity increased from 200,000tonnes per annum to 350,000tonnes per annum during the pre-crisis period. This was when the company borrowed a term loan of Rs. 10 million to finance the machinery. The raw materials, PE resins, are purchased mainly from Singapore and Thailand, whilst only 15% is sourced domestically.

Questions:
a. List the qualitative risks of Asia Paper Bag relation to bank lending.
b. List and explain the appropriate financial ratios to analyze the financial performance (profitability) of Asia Paper Bag Sdn Bhd (Malay equivalent of incorporated).
c. State the motives for using ratio analysis as a credit evaluation tool.

Assignment – C

1. The role of Financial Markets and institutions–
(a) Involves the movement of huge quantities of money.
(b) Affects the profits of businesses.
(c) Affects the types of goods and services produced in an economy.
(d) Does all of the above.

2. Which of the following is a money market instrument?
(a) T-bill
(b) IPO
(c) Share
(d) Option

3. Which of the following is a derivatives instrument ?
(a) Commercial Paper
(b) Certificate of Deposit
(c) Forward Contract
(d) Reliance Shares

4. Which of the following is a capital market instrument ?
(a) Debenture
(b) T-bill
(c) Commercial Paper
(d) Certificate of Deposit

5. Which Interest rates are important to financial institutions since an interest rate increase ?
(a) Decreases the cost of acquiring funds.
(b) Increases the cost of acquiring funds.
(c) Raises the income from assets.
(d) (B) and (C) of the above.
(e) (A) and (C) of the above.

6. Bank Assurance refers to which of the following?
(a) A tie up between insurance and bank whereby the insurance company can use the sales channel of the bank
(b) An assurance of safety by banks
(c) An investment banking service provided by banks
(d) Funding of insurance companies by banks

7. What is an NBFC?
(a) Nationalised banking and financing company
(b) Non Bond Finance Coupon
(c) Non Banking Financial Corporation
(d) New-market Bond and Finance Corporation

8. Which of the following is an example of a commercial bank?
(a) EXIM Bank
(b) Citibank
(c) SEBI
(d) Reserve Bank of India

9. Which of the following is an example of a development bank?
(a) EXIM Bank
(b) Citibank
(c) SEBI
(d) Reserve Bank of India

10. Capital Adequacy refers to which of the following ?
(a) It is the minimum amount of loan which has to be given by a bank
(b) It is the ratio of the asset to liabilities of a bank.
(c) It is the minimum capital which banks have to keep with the RBI to ensure sufficient funds in case of default.
(d) It is the total capital of the bank.

11. Which of the following is an Over the counter (OTC ) Derivative instrument ?
(a) Future
(b) Option
(c) Swap
(d) Bonds

12. Which of the following is an exchange traded derivative instrument?
(a) Future
(b) Forward
(c) Swap
(d) Bonds

13. Primary Market refers to —
(a) A subset of money market, where the government issues new T-bills
(b) A subset of the money market, where the government issues new Bonds
(c) A subset of the capital market, where the equities are traded
(d) A subset of the capital market, where the company issues new equity

14. Secondary Market refers to–
(a) A subset of money market, where the government issues new T-bills
(b) A subset of the money market, where the government issues new Bonds
(c) A subset of the capital market, where the equities are traded
(d) A subset of the capital market, where the company issues new equity

15. For a project to be viable , the Net present value of the project should be–
(a) Positive
(b) Negative
(c) Zero
(d) NPV doesn’t have any impact on project viability.

16. Asset Liability Management for the banks involves —
(a) Managing the assets and liabilities of companies who have taken credit from the bank
(b) Consulting the companies who have taken credit on asset liability mismatch
(c) It is a kind of risk management technique adopted by banks
(d) It is a kind of profit enhancement technique adopted by banks.

17. Credit Risk refers to the risk of —
(a) Risk of non payment of dues by the bank to its lenders.
(b) Risk if non payment of dues to the bank by its borrowers.
(c) Risk of non payment from credit card holders
(d) Risk of non payment from the tax credits to RBI.

18. Which of the following is not a factor considered as a part of asset liability management by the banks ?
(a) Currency rates
(b) Interest rates
(c) Liquidity
(d) Employee Turnover

19. The price of one country’s currency in terms of another’s is called–
(a) The exchange rate.
(b) The interest rate.
(c) The Dow Jones industrial average.
(d) None of the above.

20. Prudential norms relate to which of the following?
(a) Norms related to Management of bank funds in a systematic manner.
(b) Norms related to new equity investment as given by SEBI.
(c) Norms by which Public Sector Companies have to comply.
(d) Norms to be followed by RBI while making policy decisions.

21. Insurance companies are regulated by which institution?
(a) SEBI
(b) IRDA
(c) RBI
(d) State Governments

22. (I) Debt markets are often referred to generically as the bond market. (II) A bond is a security that is a claim on the earnings and assets of a corporation.
(a) (I) is true, (II) false.
(b) (I) is false, (II) true.
(c) Both are true.
(d) Both are false.

23. (I) A bond is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that is a claim on the earnings and assets of a corporation.
(a) (I) is true, (II) false.
(b) (I) is false, (II) true.
(c) Both are true.
(d) Both are false.

24. Reinsurance refers to which of the following–
(a) A client who is taking insurance for the second time.
(b) A company which is getting its assets insured by more than two companies.
(c) Insurance taken by an insurance company itself
(d) Insurance taken on something which is already insured.

25. Narsimhan Committee recommendations were in relation to which of the following institutions–
(a) Banks
(b) RBI
(c) SEBI
(d) Capital Markets

26. Typically, increasing interest rates–
(a) Discourage corporate investments.
(b) Discourage individuals from saving.
(c) Encourage corporate expansion.
(d) Encourage corporate borrowing.
(e) None of the above.

27. Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuates _____ and are _____ on average.
(a) more; lower
(b) less; lower
(c) more; higher
(d) less; higher

28. Banks, savings and loan associations, mutual savings banks, and credit unions—
(a) Are no longer important players in financial intermediation?
(b) Have been providing services only to small depositors since deregulation.
(c) Have been adept at innovating in response to changes in the regulatory environment.
(d) All of the above.
(e) Only (A) and (C) of the above.

29. Banks are important to the study of money and the economy because they–
(a) Provide a channel for linking those who want to save with those who want to invest.
(b) Have been a source of rapid financial innovation that is expanding the
alternatives available to those wanting to invest their money.
(c) Are the only financial institutions to play a role in determining the quantity of money in the economy?
(d) Do all of the above.
(e) Do only (a) and (b) of the above.

30. Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries–
(a) Act as middlemen, borrowing funds from those who have saved and lending these funds to others.
(b) Play an important role in determining the quantity of money in the economy.
(c) Help promote a more efficient and dynamic economy.
(d) Do all of the above.
(e) Do only (A) and (C) of the above.

31. (I) Banks are financial intermediaries that accept deposits and make loans.
(II) Included under the term ‘banks’ are firms such as commercial banks, savings and loan associations, mutual savings banks, credit unions, and insurance companies.
(a) (I) is true, (II) false.
(b) (I) is false, (II) true.
(c) Both are true.
(d) Both are false.

32. The organization responsible for the conduct of monetary policy in India is the–
(a) Comptroller of the Currency.
(b) SEBI
(c) Reserve Bank of India
(d) Bureau of Monetary Affairs.

33. The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of Rs 100 per year) is commonly referred to as the–
(a) Inflation rate.
(b) Exchange rate.
(c) Interest rate.
(d) Aggregate price level.

34. The bond markets are important because–
(a) They are easily the most widely followed financial markets in India and the United States.
(b) They are the markets where foreign exchange rates are determined.
(c) They are the markets where interest rates are determined.
(d) Of all of the above.
(e) Of only (A) and (B) of the above.

35. The stock market is important because–
(a) It is where interest rates are determined.
(b) It is the most widely followed financial market in the United States.
(c) It is where foreign exchange rates are determined.
(d) All of the above.

36. Typically , stock prices in India and other world markets have been–
(a) Relatively stable, trending upward at a steady pace.
(b) Relatively stable, trending downward at a moderate rate.
(c) Extremely volatile.
(d) Unstable, trending downward at a moderate rate.

37. A rising stock market index due to higher share prices–
(a) Increases people’s wealth and as a result may increase their willingness to spend.
(b) Increases the amount of funds that business firms can raise by selling newly issued stock.
(c) Decreases the amount of funds that business firms can raise by selling newly issued stock.
(d) Both (A) and (B) of the above.

38. A declining stock market index due to lower share prices–
(a) Reduces people’s wealth and as a result may reduce their willingness to spend.
(b) Increases people’s wealth and as a result may increase their willingness to spend.
(c) Decreases the amount of funds that business firms can raise by selling newly issued stock.
(d) Both (A) and (C) of the above.
(e) Both (B) and (C) of the above.

39. Changes in stock prices–
(a) Affect people’s wealth and their willingness to spend.
(b) Affect firm’s decisions to sell stock to finance investment spending.
(c) Are characterized by considerable fluctuations.
(d) All of the above.
(e) Only (A) and (B) of the above.

40. Money is defined as–
(a) Anything that is generally accepted in payment for goods and services or in the repayment of debt.
(b) Bills of exchange.
(c) A risk less repository of spending power.
(d) All of the above.
(e) Only (A) and (B) of the above.