101 Questions and Answers
for Bank Interview
Rama Krishna Vadlamudi,
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Dear Friend,
The 2010 Edition of
‘101 Questions & Answers for Bank Promotion’ prepared by me for bank
interviews proved to be very popular and received good response from several
quarters. Now, the time has come for the 2011 Edition of 101 Q & A.
I’d already sent
the ‘101 Questions-2011 Edition’ to you on 03 October 2011. Now, the answers
are ready. You can access them at:
I wholeheartedly
wish you all the best in your interview.
With regards,
Rama Krishna Vadlamudi
101 Questions and Answers
1.
What is the interest rate on savings bank deposit account?
Interest
rate on savings bank deposits was raised from 3.5 per cent to 4.0 per cent by
Reserve Bank of India
2. Gold price has gone up several times recently. But
why is it coming down now?
Due to concerns about paper currencies across the
world, investors are flocking to assets, like, gold, silver and other
commodities. The US dollar’s weakness has helped the commodities’ prices to
rise faster. However, in the last few months, the US dollar is gaining strength
against other major currencies, like, euro, pound sterling and others.
With dollar strengthening, global investors have
started moving money to dollar assets and started selling other currencies,
gold other commodities. After touching a peak of $ 1,930 per ounce, the world
gold price has come down by 15 per cent to the current $ 1,640 per ounce.
Accordingly, gold prices in India
too should have come down from a peak
of Rs India
Gold price in India
Gold price had gone up very fast in the last one year.
As such, some investors may be booking profits on their investments by selling
gold.
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3.
What are the reasons behind Indian rupee’s recent fall against the US dollar?
Ø
The
dollar-rupee exchange rate depends on the supply and demand
Ø
There
is shortage of US dollars after the dollar has strengthened against other major
currencies, like, euro and pound sterling in the past one or two months. The dollar
shortage has spread to India
Ø
Foreign
Institutional Investors (FIIs) have been selling in the Indian stock markets
pushing up the demand for dollars
Ø
Sudden
rupee depreciation has forced corporates to go for covering their imports and
this has pushed up the demand for dollars to some extent. Typically, exporters
try to postpone bringing their dollars to India
Ø
However,
theoretically speaking, rupee should be gaining strength against dollar as
Indian economy is expected to do much better compared to the US India
than those in the US
4.
Why is the US dollar gaining strength against other major currencies of late?
Credit
rating agency, Standard & Poor’s, downgraded US
However,
let me try to make some sense out of this counter-intuitive behaviour of
investors. The US dollar is still regarded as a global reserve currency and its
usage is very widespread across the globe for trade and other purposes.
Immediately after the S&P downgraded the US
During
the first week of September 2011, Swiss National Bank (SNB) announced it had
pegged its currency Swiss franc (CHF) to euro (EUR) shocking the currency
markets. Concerned that the massive overvaluation of its franc would hurt Swiss
exporters & may jeopardize their economy, the SNB said that it would not
tolerate a EUR-CHF exchange rate below
the minimum rate of
CHF 1.20.
At around
this time, sovereign debt crisis in the eurozone has deepened. Global financial
markets have started worrying about the prospect of Greece
So,
investors have no choice but to rush to the relative safety of US dollars. They
started moving away from euro and Swiss franc to dollar. Even Japanese
government too intervened to stop the yen appreciating against the dollar. Japan
During the
first half of this calendar year, the US dollar had weakened against major
currencies. The US dollar index (the indexed value of the US dollar against six
major currencies, like, euro, pound sterling, Japanese yen and so on) went down
to a level of 72.5 in July 2011. But, after two months, the dollar gained
substantially and the US dollar index is now hovering around 79.5 showing the
dollar has appreciated by nearly 10 per cent in the last two months.
Currencies
in the emerging markets too have lost by about five to 15 per cent against the
US dollar in the last one month. The Indian rupee has lost around 10 per cent
against the dollar in the last two months.
5.
How may credit information companies are allowed to operate in India
RBI has permitted four credit information companies to
distribute credit information of bank borrowers. They are:
1. CIBIL – Credit Information Bureau (India
2. Experian Credit Information Company of India Pvt
Ltd.
3. Equifax Credit Information Services Pvt Ltd.
4. High Mark Credit Information Services Pvt Ltd.
Credit information companies disseminate credit
history of borrowers covering data supplied by banks and other financial
institutions through their websites.
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6.
What is India
According
to the Central Statistics Office (CSO), India’s Gross Domestic Product at factor cost at constant
(2004-05) prices for 2010-11 was estimated at Rs 48.78 lakh crore, growing at a
rate of 8.5 per cent over 2009-10. In the first quarter of 2011-12 (April-June
2011), India
7.
What are the present rates of CRR, SLR, Repo, Reverse Repo and others?
Ø
Cash
Reserve Ratio is six per cent wef Apr 24, 2010
Ø
Statutory
Liquidity Ratio is 24 per cent wef 18 December 2010
Ø
LAF-Repo
rate is 8.25 per cent wef 16 September 2011
Ø
LAF-Reverse
repo rate is 7.25 per cent wef 16 September 2011
Ø
Marginal
Standing Facility (MSF) interest rate is 9.25% wef 16Sep2011
Ø
Bank
Rate has been kept unchanged at six per cent since 30 April 2003
8.
RBI had recently fined several banks for violation of foreign exchange
derivatives norms. Which are the major banks?
In
April 2011, RBI penalized 19 banks for violation of derivatives norms that
occurred in 2007. The penalty ranges from Rs 15 lakh to Rs 5 lakh. The major
banks that suffered penalty, among others, are: Axis Bank, HDFC Bank, ICICI
Bank, Yes Bank, Citibank, DCB, ING Vysya Bank, SBI and HSBC Ltd.
9.
What is India
Current
account deficit (CAD) for 2010-11 stood at $ 44.3 billion representing 2.6 per cent
of India
CAD
denotes the excess of imports (merchandise imports and services imports) over
exports (merchandise exports and services exports).
10.
What are the reasons for weakness in Indian stock markets since November 2010?
Reasons for the recent weakness in Indian stock markets:
Ø
India
Ø
The
sovereign debt crisis in eurozone and the US
are making investors nervous about India
Ø
The
recent rupee depreciation against US dollar is also stoking fears that some
Indian companies may record losses due to foreign exchange losses in their
profit and loss accounts
Ø
Foreign
Institutional Investors (FIIs) are net sellers this year
Ø
Bank
deposits are giving assured annual returns of 9 per cent to 11 per cent. As
such, investors find deposits more attractive compared to stocks.
Ø
Several
stocks in the real estate, construction and infrastructure are hit by scandals
and bribery charges
Ø
Banking
stocks too are losing heavily due to rising interest rates and concerns about
quality of assets and compounded by Moody’s downgrade of State Bank of India
Ø
Market
participants believe that policymakers are not doing enough to push for
economic reforms
Ø
Investment
cycle is down and project clearances are affected due to environmental factors
and land acquisition problems
11.
What are the strengths and weakness of Indian Economy as of now?
The Strengths are:
ü
Indian
economy is driven by domestic consumption of late and is less dependent on
exports as compared to other Asian nations
ü
Savings
rate is very high at around 35 per cent (of course, the high savings rate is
mainly due to the fact that common people have no social security)
ü
India
ü
The
level of entrepreneurship has gone up substantially after liberalization
ü
Indian
banking system is very strong providing financial stability despite concerns
about quality of assets of late
ü
India
ü
India
ü
India
ü
Indian
companies, in general, are in good health carrying huge cash balances and lower
debt levels on their balance sheets
ü
If
implemented properly, Goods and Services Tax will boost tax revenues
The weaknesses are:
Ø
Inflation
remains persistent at around 8 to 10 per cent for about four years
Ø
Large
price rise in food articles is affecting the poor people very adversely
Ø
Corruption
is entrenched in the entire social fabric
Ø
India
Ø
Fiscal
deficit is getting out of control as the government is unable to control
expenditure and resorting to higher market borrowings
Ø
Current
account deficit is manageable now, but it may go out of hand in future if not
handled properly
Ø
New
project clearances are delayed due to environmental concerns and problems related
with land acquisition leading to social unrest stemming from improper
resettlement and rehabilitation
Ø
Despite
huge population, there is massive skills deficit across industries
Ø
There
is a perception that the government is unable to push economic reforms due to a
spate of corruption scandals that surfaced recently
Ø
The
micro challenges for India
Ø
Hard
infrastructure (roads, ports, power, broadband, etc) is very weak and energy
security is poor
Ø
Low
agricultural productivity – we need a second green revolution
12.
What are CDS?
A CDS is short for Credit Default Swap. Its features are:
Ø
It
is a financial instrument used for hedging
Ø
It
is an over-the-counter (OTC) derivative product
Ø
It
provides insurance to the creditor (investor in a bond) against default by an
issuer/debtor
Ø
It
is like a guarantee against default of a loan/bond
Ø
As
an insurance, it serves a genuine economic purpose
Ø
RBI
is introducing CDS for corporate bonds effective from 24Oct2011
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13.
What is the capital adequacy ratio of our Bank?
As
at the end of June 2011, the capital adequacy ratio of State Bank of Mysore
14.
What is SBI’s BPLR?
State
Bank of India
15.
What is our Bank’s quarterly profit in June 2011 quarter and why our net profit
has come down?
The net profit of
State Bank of Mysore
16.
What is SBI’s Base Rate?
State
Bank of India
17.
What is the Land Acquisition Bill and what are the important provisions?
Government
of India
Ø
Government
will not acquire land for private companies
Ø
In
urban areas, land owners will get a minimum compensation of twice the market
value
Ø
In
rural areas, land owners will get a minimum compensation of four times the
market value
Ø
A
comprehensive rehabilitation package for land owners and the landless people
affected by the project
Ø
The
Bill will enjoy primacy over specialized legislations
18.
What is our Bank’s net NPA percentage as at the end of June 2011?
The
gross NPA
of State Bank of Mysore
As
on 30 June 2011, the provisioning coverage ratio (PCR) is 66.12 per cent with
reference to gross NPAs position as on 30 September 2010.
19.
What are the reasons for the economic and financial crises in the US
Ø
The
Governments in the eurozone, like, Greece ,
Italy and Spain
Ø
These
governments are unable to meet their debt obligations
Ø
Some
analysts are afraid that some countries (Greece ,
Portugal or Spain
Ø
Several
European banks require massive capital funds
Ø
Growth
in the eurozone is very low fuelling fears of recession
Ø
Unemployment
is generally very high in the eurozone
Ø
There
are fears of a break-up of eurozone
Ø
The US
Ø
The
unemployment rate in the US
Ø
The
US
Ø
These
countries have been living well above their means for decades, through
borrowings and now are in big trouble
20.
What is eurozone?
Those European Union (EU) member states that have
adopted the euro as their single currency are part of the euro area. A single
monetary policy for the euro area is conducted by the European Central Bank (ECB)
under the responsibility of the Governing Council of the ECB. Euro area is
informally known as eurozone. The euro was launched on 01 January 1999 on
foreign exchange markets, and euro currencies replaced national currencies on 01
January 2002.
There are now 17 European countries in the eurozone,
with a common currency, the euro, and a single interest rate set by the ECB. Estonia
The full list of eurozone
countries is as follows: Austria ,
Belgium , Cyprus , Estonia ,
Finland , France , Germany ,
Greece , Ireland , Italy ,
Luxembourg , Malta , the Netherlands ,
Portugal , Slovakia , Slovenia
and Spain
The European Union (EU) was established on 01 November
1993 after the ratification of the Maastricht Treaty by the member states. It
was previously known as the European Economic Community (EEC). It is a
political and economic union of the member states, mainly consisting of European
nations. It aims to provide a single market for the member states. Its
important institutions include the European Commission, the European
Parliament, the European Court of Justice and the European Central Bank.
The EU is an amalgam of 27 Member States. It consists
of:
Ø
17 eurozone nations (given above); and
Ø
10 other nations – Bulgaria, the Czech Republic, Denmark, Hungary,
Latvia, Lithuania, Poland, Romania, Sweden and the United Kingdom – which have
not adopted euro and continue to use their own national currencies.
21.
How is RBI controlling inflation in India
To control inflation, RBI has been raising CRR, repo and reverse repo rates
gradually since February 2010. With such measures, money supply will be
restricted and money will become costlier. In a rising interest rate scenario,
companies will be reluctant to start new projects which may impact overall growth.
As a result, RBI always tries to maintain a balance between growth and price
stability.
But,
the inflation rate is not coming down mainly due to supply bottlenecks and
rising demand for products as household incomes have gone up in the past four
to five years in urban as well as rural areas.
22.
Why are interest rates going up in India
Inflation has been very high in India
23.
What are India
As
on 23 September 2011, India
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24.
What are the concerns being faced by banking industry in India
Ø
Managing
rising interest rate scenario
Ø
Making
the bond portfolio immune to interest rate risk to a large extent
Ø
Growing
threat of non-performing assets exaggerated by slowdown in GDP growth
Ø
Fall
in net interest margins which may adversely affect banks’ profits
Ø
Interest
rate on savings bank deposit was increased from 3.5 per cent to 4 per cent
which is having the potential to reduce banks’ margins (Moreover, from 01 April 2010, banks
have been giving interest rates on SB account based on daily product)
Ø
Need
for more capital in future when Basel III norms will be implemented
25.
What is an infrastructure debt fund (IDF)?
The Union
Finance Minister in his budget speech for 2011-12 had announced setting up of
IDFs in order to accelerate and enhance the flow of long term debt in
infrastructure projects for funding the Government’s ambitious programme of
infrastructure development.
According
the RBI guidelines issued on 23 September 2011, banks and non-banking finance
companies (NBFCs) can float IDFs which will help them in achieving the
objectives of asset-liability management (ALM). Funds raised through IDFs are
to be used for financing infrastructure projects in sectors, like, power,
roads, telecom, ports and airports.
26.
Which bank has been awarded the Best Bank award by ‘Business India’ magazine
for 2011?
Punjab
National Bank has been awarded the Best Bank.
27.
What are the provisions of the proposed National Food Security Bill?
Ø
It
offers food security to all ensuring the Right to Food
Ø
The
bill proposes to give 35 kg of rice or wheat per month at Rs 3 per kg to each
Below Poverty Line (BPL) family
Ø
The
bill is likely to cover 40 per cent of India
Ø
If
implemented, the government will incur thousands of crores of money
28.
What are currency options?
In
July 2010, Reserve Bank of India India
At present, currency options are allowed in US
dollar-Indian rupee currency pair.
A currency option is a contract where the purchaser of
the option has the right but not the obligation to either purchase or sell an
agreed amount of a specified currency at a price agreed in advance and
denominated in another currency during a specified period of time. This
financial derivative is used as a hedging instrument.
29.
What are interest rate futures (IRFs)?
An IRF is a contract between two parties – a borrower
and a lender – who agree to fix the rate at which they will borrow/lend on a
future date. To put simply:
Ø
It is a hedging mechanism used by economic agents affected by interest
rate movements and was introduced in August 2009 by RBI
Ø
Alternatively put, it is a tool to manage interest rate risk
Ø
It is a derivative contract – providing standardization and
transparency
Ø
It may be used by banks, insurers, primary dealers, provident funds,
etc.
Ø
Even FIIs and NRIs are allowed to take trading positions subject to
norms
Ø
It is traded on a stock exchange
Ø
An IRF is permitted on 10-year government bond 91-day treasury bill
30.
Whether nomination facility can be extended to deposits held by a bank in
the name of a sole proprietary concern?
Yes.
Nomination facility can be extended to deposits held by a sole proprietary concern
as per RBI’s norms.
31. What is Marginal Standing Facility (MSF)?
The Marginal Standing Facility was started by the
Reserve Bank of India
This is an additional window and the interest rate is
more expensive compared to repo rate under liquidity adjustment facility (LAF).
The rate of interest on amounts
accessed from this facility will be 100 basis points (or one per cent) above
the repo rate. At present, the MSF rate is 9.25 per cent.
Banks
will look for the MSF window to borrow money from RBI once they exhausted all
other avenues (like, call money market, LAF-repo window, CBLO, market repo,
etc.) for overnight money. Under exceptional circumstances, banks will borrow
money through MSF window.
32. What is the single operating monetary policy rate of the RBI?
It is repo rate under Liquidity Adjustment Facility of
the Reserve Bank of India
33. Why is the Government of India borrowing an extra Rs 53,000 crore
from the market during the second half of 2011-12?
The Central Government is facing a shortage of Rs 18,000 crore due to
lower government cash balances and net outflow of small savings during 2011-12.
34. The Standard & Poor’s has downgraded the credit rating of the US
The US US economy is facing the prospect of a recession
and the lawmakers in the US
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35. What is a credit rating agency?
A
credit rating is a formal opinion given by a specialized company about the
credit risk of a firm that is issuing bonds or debt securities. Such a
specialized company that offers credit ratings is known as a credit rating
agency. Credit rating is usually done for specific issue of a bond. Credit
rating is also performed on government bonds around the world.
Standard
& Poor’s, Moody’s and Fitch Ratings are some of the well known credit
rating agencies in the world.
36. Why has the demand for unit-linked insurance policies (ULIPs) come
down of late?
Insurance
companies are struggling to sell ULIPs as investors are doubtful of the returns
from ULIPs. ULIPs fetched good returns for investors during 2006 and 2007 when
the stock markets did well. But the collapse of stock markets in 2008 has left
many ULIP investors suffer heavy losses. Moreover, regulators have tightened
the norms and drastically changed the product design, namely, five-year lock-in
period, capping of surrender charges and distribution of commission through the
term of the product.
37. Are insurance companies permitted to sell policies online?
Insurance
companies are allowed to sell term insurance policies online. Various insurers
are offering term policies and they can be bought online. Even LIC of India is
thinking of introducing its term insurance online.
38. Who is India
Vinod
Rai is India
39. Who is India
Sunil
Mitra is India
40. How much can be invested by a resident Indian abroad?
All resident individuals are allowed to
freely remit up to $ 200,000 per financial year (April – March) for any
permissible current or capital account transaction or a combination of both.
This is as per Reserve Bank of India
Under the Scheme, resident individuals
can acquire and hold immovable property or shares or mutual funds or debt
instruments or any other assets outside India India
The facility under the Scheme is in
addition to those already available for private travel, business travel,
studies, medical treatment, etc. The Scheme can also be used for these
purposes.
41. Can banks charge pre-payment penalty charges for housing loans?
During the Banking Ombudsman Conference in September
2011, RBI suggested that banks must not recover pre-payment charges in floating
rate loans. The banks, however, are free to recover/charge appropriate
pre-payment penalties in the case of fixed rate loans.
42. What is the share of agriculture in India
The
share of agriculture sector in India
43. Since the beginning of this upward interest rate cycle that started
in March 2010, how many times RBI has increased its Repo rate under LAF?
Since
March 2010, RBI has raised Repo rate by twelve times beginning from 4.75 per
cent to the current 8.25 per cent.
44. What are the salient
features of the RBI’s draft guidelines issued on 29 August 2011 for issue of
new bank licenses in India
Ø
Initial Capital: The
minimum initial capital shall be Rs 500 crore
Ø
Eligible Promoters:
Promoters should be resident Indians with a minimum successful track record of
10 years.
Ø
NBFCs: Existing Non-Banking
Finance Companies can convert themselves into banks or apply for a new banking
license
Ø
Corporate Structure:
Promoters have to set up a wholly-owned non-operative holding company (NOHC).
Ø
Foreign holding: Total
foreign holding from FDI, FIIs and NRIs cannot exceed 49 per cent of the total
stake for the first five years.
Ø
The new bank shall get
itself listed on a stock exchange within two years
Ø
Minimum capital adequacy is
12 per cent for a minimum period of three years
Ø
The bank shall open at
least 25 per cent branches in unbanked rural centres
45. How much can banks invest in liquid schemes of
mutual funds?
As per RBI norms, investment by banks in liquid
schemes of debt oriented mutual funds is subject to a prudential cap of 10 per
cent of their net worth as on March 31 of the previous year, with effect from
May 2011.
46. Swiss National Bank has recently pegged its currency the Swiss franc
to a major currency. Which is the major currency?
Swiss
franc is pegged to euro and the franc would not be allowed to go below 1.20
against euro.
47.
Who is the managing director of International Monetary Fund?
Ms
Christine Lagarde of France
48.
What is the name of the associate which was merged with State Bank of India
State Bank
of India Commercial and International (SBICI) Limited was merged with State
Bank of India
49.
What are the highlights of the draft Mining Bill?
Ø
As
per the proposed draft Mining Bill, coal companies will have to share 26 per
cent of their net profits with the project-affected people
Ø
Mining
companies of iron ore and other minerals have to set aside an amount equal to
the royalty paid to the states
Ø
An
amount of Rs 10,000 crore may accrue annually from the above
Ø
This
money will be spent for the welfare of tribal people in project areas
Ø
The
proposed bill has adversely impacted the share prices of mining companies,
like, Coal India
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50. Why did RBI penalize Citibank recently?
Reserve
Bank of India
51. With which country India
In December 2010, RBI decided to allow oil importers
to make payments to Iranian oil companies outside the ACU (Asian Clearing
Union) mechanism. Before the US US sanctions,
importers are facing problems and as such RBI allowed oil payments to Iran
52. What is a self-help group (SHG)?
A self-help group is a small voluntary association of poor
people; preferably from the same socio-economic background. An SHG allows poor
people to come together and avail bank finance for their livelihoods. SHGs
promote small savings among its members and the savings are kept with a bank.
The savings are used as leverage in order to get bank loans for its members.
53. What is National Financial Switch?
National Financial Switch is an arrangement that
facilitates electronic connectivity between banks, automated teller machines
(ATMs) and inter-bank payment gateways. NFS allows banks to settle their net
payments/receipts for inter-bank transactions. Bank customers are able to draw
money from other banks’ ATMs due to this NFS arrangement. The NFS was set up in
2004.
54. How do you define a high net worth individual
(HNI)?
High net worth individuals are persons who are
extremely wealthy and have large cash surpluses for investment. Several banks
try to attract HNIs for increasing their business. Globally, high net worth
individuals are defined as persons with liquid assets of $ one million or more.
In India India
55. What is solvency margin?
Solvency margin can be defined as the excess of assets
an insurance company is needed to keep aside over its liabilities. It is
similar to capital adequacy ratio in banks and is mandatory. It is part of the
prudential norms for insurers and they have to maintain it to protect the
interests of the policyholders. Solvency margin acts as a cushion for insurers
to meet their long term obligations.
56. What is a warehouse receipt?
A warehouse receipt is a document issued by a
warehouse to depositors against the goods/commodities deposited in the
warehouse. Warehouse receipts can be either negotiable or non-negotiable. It is
a document of title to goods. A warehouse receipt can be negotiable or
non-negotiable and it can be in writing or in electronic form.
A negotiable warehouse receipt means a
warehouse receipt under which the goods represented therein are deliverable to
the depositor and the depositor holds a good title and he/she can transfer the
goods by endorsement.
A typical warehouse receipt contains
the following details:
Ø
Receipt number and date
Ø
Warehouse address, registration number and date up to which
it is valid
Ø
Person who deposited the goods
Ø
Description of goods and their market value
Ø
Storage and handling charges
Ø
Whether it is negotiable or non-negotiable
Ø
Others
The Warehousing Development and Regulatory Authority
(WDRA) was set up by the Central Government in October 2010 as per the
Warehousing Development and Regulation Act. WDRA works for the development and
regulation of warehouses. As per the Act, all warehouses in the country have to
be registered with the WDRA.
Around 150 warehouses have already been registered
under WDRA. Warehousing
business involves maintaining storage of goods and issuing negotiable warehouse
receipts.
NCMSL became the first private sector company to issue a
Negotiable Warehouse Receipt (NWR) in the country on 02 October 2011. The first
NWR has been issued at Kaithal, Haryana, for Paddy. NWR can be issued only by
the warehouses that are registered with WDRA.
NWR is very useful to farmers as
they can store their produce in the registered warehouses, avail bank finance
against the NWR and wait for a better price. With this NWR, banks in India
57. Why is it important to monitor end of funds after
loan disbursals?
Monitoring end use of funds by banks is an important
area in credit risk management to safeguard banks’ interests. However, there
are some cases where term loans are credited to current or cash credit accounts
and funds are diverted. This is due to lack of proper due diligence at the
branches.
Concerned about such misuse of funds, RBI has recently
advised banks:
Ø
to scrutinize the financial statements of borrowers properly
Ø
to regularly inspect the units financed
Ø
to scrutinize the borrowers’ books of accounts
Ø
to introduce stock audits wherever necessary
58. What is shadow banking?
Traditional banks seek deposits from savers and lend
money to borrowers. Deposits in traditional banks up to a certain limit are
protected by the government (like deposit insurance provided by DICGC in India
In the US, Federal Deposit
Insurance Insurance Corporation or FDIC provides deposit insurance of up
to $ 250,000 per depositor, per insured bank. Traditional banks are regulated
and they get funding from central banks if a need arises.
On the other hand, shadow banks are financial
intermediaries who take a lot of risk and are not regulated. Shadow banking
system includes investment banks, hedge funds, structured investments, real
estate investment trusts, money market mutual funds, collateralized debit
obligations (CDOs) and others.
Shadow banks get their funding mainly from reverse
repo and asset-backed commercial paper. Deposit insurance and central bank
funding are not available to them.
Shadow banking system played a major role before the
global financial crisis of 2007/2008. Due to the collapse of a few shadow banks,
like, Bear Stearns and Lehman Brothers in 2008, shadow banking system suffered
a major blow.
59. What is an inflation-indexed bond?
Inflation-indexed bonds are bonds issued by the government and their
returns are based on inflation. If the inflation rate goes up, the bonds offer
higher returns and vice versa. They offer a hedge against inflation risk. They
are real safe assets for long-term investors.
Inflation-indexed bonds were first issued by the UK Government in the
early 1980s and the US Government issued them in 1997. In the US Canada , New
Zealand and South Africa
International experience suggests that inflation-indexed bond prices
have tended to move opposite stock prices indicating negative relationship
between them. As such, these bonds are used by investors as a hedge against
equity risk for diversification.
On behalf of the Central Government, Reserve Bank of India
A few days back, RBI Governor, D.Subbarao, said that the central bank
was planning to reintroduce inflation-indexed bonds. This is an interesting
development for investors when the price rise is becoming unbearable.
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60. Why did IRDA impose a
penalty on SBI Life?
The
regulator of insurance sector, Insurance Regulatory and Development Authority (IRDA),
has imposed a penalty of Rs 70 lakh on SBI Life Insurance Company for violation
of guidelines on group insurance policies.
61.
What are currency futures?
Currency futures means a standardized foreign exchange derivative
contract traded on a recognized stock exchange to buy or sell one currency
against another on a specified future date, at a price determined on the date
of contract, but does not include a forward contract. They were introduced in India
Four currency pairs are allowed to be traded by the RBI. They are US
dollar-Indian rupee, Euro-Rupee, Pound Sterling-Rupee and Japanese Yen-Rupee. They
are traded on NSE, MCX-SX and USE.
62.
What is the minimum limit for sending remittance through RTGS facility?
The minimum limit
for remittances through Real Time Gross Settlement is Rs two
lakh per transaction.
63.
What is FDI?
Foreign Direct Investment is foreign investment made by a non-resident
entity in the capital of an Indian company. FDI is different from the portfolio
inflows brought in by foreign institutional investors (FIIs). FDI flows are
considered more stable compared to FII flows. FIIs can take out their money
very easily from Indian stock markets.
64.
What is the objective of KYC guidelines?
The objective of know-your-customer guidelines issued by RBI is to
prevent banks from being used by criminal elements for money laundering and
terrorist financing activities. With the
help of KYC norms, banks will be in a better position to know their customers
and their financial dealings well – ultimately for management of risks
prudently.
65.
What are semi-closed prepaid instruments?
Non-bank entities were permitted by the Reserve Bank
to issue mobile-based semi-closed prepaid instruments in August 2009. Now, mobile-based
semi-closed prepaid instruments issued by non-banks are treated on a par with
other semi-closed payment instruments and raise the limit from Rs 5,000 to Rs 50,000,
subject to certain conditions.
In ‘semi-closed’ mobile prepaid instruments, one can
load money into the mobile phone from a telecom company and make payments with
it. But one can not withdraw cash from it and that’s why it is called
semi-closed.
66. Why is the Government of India increasing fuel
prices?
67. What is CERSAI?
Ø Central Registry of
Securitisation Asset Reconstruction and Security Interest of India is a
Government company
Ø It maintains and operates a
registration system for the purpose of registration of securitization
transactions as per SARFAESI Act
Ø Properties mortgaged to banks and
other financial institutions will have
to be compulsorily registered on CERSAI platform
Ø Such registration system prevents
frauds and double financing
Ø Any one can also see and inspect
the records on CERSAI platform
Ø It was started in March 2011
68. What is NIM?
Net Interest Margin is calculated as the difference between interest
income generated by banks or other financial institutions by their lending and
interest paid on borrowings (for example, deposits). It is a profitability
indicator of a bank. In general, net interest margin is expressed as a
percentage of net interest income (interest income from assets minus interest paid
on liabilities) in terms of income-generating assets.
NIM = (interest received on
assets – interest paid on liabilities) / average earning assets
69. Why did RBI raise interest rate on SB deposits
in May 2011?
Reserve Bank of India
Ø Term deposit rates have gone up
substantially in recent years. But, SB interest rate was frozen at 3.5 per cent
for more than eight years. To bridge the gap between SB interest rates and
interest rates on term deposits, RBI raised the SB interest rates.
Ø To compensate the SB deposit
holders for the rising inflation
70. Which Chinese bank has opened its first branch in India
Industrial and Commercial Bank of China (ICBC), the
world’s largest bank in terms of market capitalization, launched its first
branch in Mumbai in September 2011 after getting license from RBI.
71. How much money can resident Indian transfer money
as a gift out of India
In September 2011, the RBI doubled the amount a
resident Indian can transfer to a person resident outside India
72. What is a green channel counter?
State Bank of India
73. What is the loan to value (LTV) ratio for housing
loans?
LTV
ratio is a new concept introduced by RBI. In order to prevent excessive leveraging,
RBI had in November 2010 stipulated that the loan to value (LTV) ratio in respect
of housing loans should not exceed 80 per cent. For housing loans up to Rs. 20
lakh (which get categorised as priority sector advances), however, the LTV
ratio should not exceed 90 per cent. LTV ratio is calculated by dividing amount
of loan with total value of the property.
RBI
revised the risk weights and provisioning norms for housing loans.
74.
How do you define a ‘small account’?
According
to RBI, a ‘small account’ means a savings bank account in a bank where:
Ø 1. the total of all credits in a
financial year does not exceed Rs 1,00,000;
Ø 2. the aggregate of all withdrawals and
transfers in a month does not exceed Rs 10,000; and,
Ø 3. the balance at any point of time
does not exceed Rs 50,000.
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75.
Does RBI collect any service charges from banks for RTGS transactions?
Since
the introduction of RTGS in 2004, RBI never collected any service charges from
banks for RTGS transactions. However, with effect from 01 October 2011, RBI has
introduced service charges for banks and other members for RTGS outward
transactions. The RBI is charging three types of charges from banks –
membership fees, transaction fee and time varying tariff. For inward
transactions, there are no service charges.
76.
What is credit risk?
The credit risk of a bond consists of three
components:
1.
Default risk – the risk that the issuer will default on making a timely
payment of interest and/or principal
2.
Credit spread risk – the risk that the credit spread will increase
3.
Downgrade risk – the risk that the issue will be downgraded
77.
What is a payment in due course?
According
to the Negotiable Instrument Act: "Payment in due course" means
payment in accordance with the apparent tenor of the instrument in good faith
and without negligence to any person in possession thereof under circumstances
which do not afford a reasonable ground for believing that he is not entitled
to receive payment of the amount therein mentioned.
78. What
is the maximum percentage of voting rights in a private sector bank?
According to the Banking Regulation Act, no person can
exercise voting rights more than 10 per cent of the total voting rights of all
the shares of a private bank. For example, a person holds 25 per cent of shares
in a private bank and that person’s total voting rights will be restricted to
10 per cent of the total voting rights. Efforts are now being made to give full
voting rights.
79. What are ‘Gilt-edged’ securities?
The term ‘government securities’ includes all bonds and treasury
bills issued by the Central Government and state governments. These securities
are normally referred to as "gilt-edged," as repayments of principal
as well as interest are totally secured by sovereign guarantee.
80. What factors determine interest rates?
The macroeconomic factors that influence interest
rates are:
Ø
Demand for money
Ø
Government
borrowings
Ø
Supply of money
Ø
Inflation
rate
The Reserve Bank of India
81. What do you mean by ‘buffer stocks’?
Buffer
Stocks are the amount of stocks that are maintained with the public sector
agencies to meet the food security needs of the country. The buffer stocks are
maintained in accordance with the buffer stock norms: those quantities of food
grains, which are deemed to be sufficient to meet the food security
requirement.
82.
What is a Floating-rate Bond?
It is a
bond whose interest rate varies with changes in a pre-specified market interest
rate.
83.
What is LAF?
Liquidity
Adjustment Facility (LAF) is a facility by which the RBI adjusts the daily
liquidity in the domestic markets (India
84.
What is Secondary Market?
Secondary
market is the market in which outstanding securities are traded. This term
differentiates from the primary or initial market when securities are sold for
the first time. Secondary market refers to the buying and selling that goes on
after the initial public sale of the security.
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85.
What is Yield to maturity (YTM)?
Yield
to maturity is the total return one would except to receive if the security is
being held until maturity.
86.
What is Mezzanine Finance?
Mezzanine financing is a hybrid of debt and equity
financing and is generally provided to finance expansion projects. It is
basically provision of short-term financing and involves high risk, and
therefore, has high yield.
87. What is a dear money policy?
Dear money policy is a monetary policy which aims to
contract the economy by making money expensive to the public. This is done
usually by increasing interest rates in the banking system. India
88. What is working capital?
Working capital is the amount of funds that are readily available
to operate a business. Working capital is needed to meet the daily needs of a
firm. It is expressed as the current assets minus current liabilities.
Current assets are cash, stocks, debtors and others that
can be converted to cash within one year or normal operating cycle. Current
liabilities are monies owed to creditors, taxes payable and others that are due
within one year.
89. What is a capital account?
A capital account
is a record of foreign investment made in a country minus its investments
abroad.
On the contrary, a current account is a record of receipts from exports of goods and
services, payments for imports of goods and services, net income and net
transfers received from the rest of the world.
90. Can an NRI be a joint accountholder in a resident’s SB
account?
As per RBI norms issued in September 2011, individual
residents in India
91. Can banks issue prepaid instruments to corporates?
The Reserve Bank of India
92. What is time limit set by RBI for resolution of failed
ATM transactions?
The Reserve Bank of India
93. What is the limit for housing loan under priority sector?
The RBI
in May 2011 increased the limit of housing loans for being eligible for priority
sector from Rs.20 lakh to Rs.25 lakh. The increased limit will be applicable to
housing loans sanctioned on or after 01 April 2011 to individuals for
purchase/construction of house, excluding housing loans to their own staff.
94.
What is the revised provision for sub-standard assets?
According
to RBI norms issued in May 2011, sub-standard assets attract a provision of 15
per cent as against the earlier 10 per cent. The “unsecured exposures”
classified as sub-standard assets will attract an additional provision of 10
per cent, that is, a total of 25 per cent as against the earlier provision of
20%.
95.
What is provisioning
coverage ratio
(PCR)?
In December 2009, RBI advised banks to achieve a provisioning coverage
ratio (PCR) of 70 per cent. Prior to that, different banks were having
different coverage ratios. The 70-per cent PCR was introduced by RBI to have
some sort of uniformity across banks. The coverage ratio was intended to
achieve a counter-cyclical objective by ensuring that banks build up a good
cushion of provisions to protect them from any adverse shocks if the economy
goes in to a downturn.
As RBI norms, banks were supposed
to achieve PCR of 70 per cent by
30 September 2010. But, some banks
are yet to achieve this ratio even as lately as of 30 June 2011. RBI allowed
them more time on a case-by-case basis.
PCR is calculated as a ratio of total provisions to gross
non-performing assets of a bank and is indicative of the extent of funds a bank
keeps aside to cover loan losses. The higher the PCR, the stronger the bank’s
balance sheet.
In April 2011, RBI advised banks to segregate the
surplus of provisions under the PCR vis-a-vis
as required as per prudential norms as on 30 September 2010, into an
account styled as “counter-cyclical provisioning buffer.”
As per RBI norms (May 2011), the provisioning coverage
ratio of 70 per cent is with reference to the gross NPA position in banks as on
30 September 2010; the surplus of the provision under PCR vis-a-vis
as required as
per prudential norms, should be segregated into an account styled as “countercyclical
provisioning buffer”; and banks will be allowed to use this buffer for making specific provisions
for NPAs during periods of system wide downturn, with the RBI’s prior approval.
96. Is it necessary that all nominations and
cancellation/variation of nominations are required to be witnessed?
As per
a clarification given by Reserve Bank of India
97. Can an exporter liquidate the post-shipment rupee export credit
from rupee resources?
In
general, post-shipment credit is to be liquidated by proceeds of export bills
received from abroad for goods exported/services rendered. However, in April
2011, RBI permitted exporters with overdue export bills to extinguish their
overdue post-shipment rupee export credit from their rupee resources with a
view to reducing the cost to exporters, i.e., interest cost on overdue export
bills.
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98.
What is CAFRAL?
The
Centre for Advanced Financial Research and Learning (CAFRAL) was set up by the
RBI to develop it into a global resource for research and capacity building in
banking and finance for central bankers, regulators and senior management of
banks, government and industry. Mrs Usha Thorat, former Deputy Governor of RBI,
is Director of CAFRAL.
99.
What are the mobile banking services offered by banks?
The
services which are being offered by banks under their mobile banking are:
Ø alert services
Ø service requests (cheque book,
statement request)
Ø account enquiry
Ø intra-bank funds transfer
Ø inter-bank funds transfer - inter-bank
mobile payment service by the National Payments Corporation of India (NPCI)
Ø value added services, such as, bill
pay, ticketing, etc.
100.
What is Swavalamban Scheme?
Swavalamban
Scheme was announced by the Government in the Union Budget 2010-11. The
objective of the scheme is to provide some sort of social security to poorer
sections of the society who have the risk of living too long. Under the Scheme,
the Government of India shall contribute a sum of Rs 1,000 during the current
year and the next three years, to each account in the New Pension System of
such subscribers who contribute any amount between Rs. 1,000 and Rs 12,000 per
annum provided, they are not part of any statutory pension scheme.
101.
Whether ‘Aadhaar’ letter issued by the UIDAI is valid under KYC Norms?
In
December 2010, RBI recognised the letter issued by the Unique Identification
Authority of India (UIDAI) containing details of name, address and ‘Aadhaar’
number as a valid document under KYC norms for opening of small accounts only.
Now, it
is decided to extend the above to all types of accounts. As per RBI norms
issued in September 2011, the letter issued by the UIDAI containing details of
name, address and ‘Aadhaar’ number is a valid document for identification under
KYC norms to all types of accounts.
- - -
References: RBI, SEBI, GOI, newspapers, etc.
Note: Wherever $ symbol is used, it means US dollar.
Disclaimer: The above is for information purpose.
Though every care has been taken to provide authentic information on the above
questions, readers have to do their own diligence and the author is not
responsible for any mistakes. However, if you find any mistakes, please bring
it to my notice.
Copyright:
Rama Krishna Vadlamudi, Hyderabad
Note on author: The author in an
investment analyst and writes copiously on financial markets – equities, bonds,
currencies, taxes, Indian economy, etc. He has written more than 135 articles
running into 825 pages of original content – mostly pertaining to financial
markets. You can read these articles on:
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