Easy2Siksha.com
GNDU Question Paper-2021
Bachelor of Business Administration
BBA 5
th
Semester
MANAGEMENT OF BANKING OPERATIONS
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Discuss the tools of monetary policy. What are the implications of monetary policy?
2. Explain major provisions of Negotiable Instruments Act 1881.
SECTION-B
3. Explain different types of loans. Highlight their features.
4. Discuss various types of risks in banking business. How can these be managed ?
SECTION-C
5. What is meant by Asset-Liability management? What are reasons for asset-liability
mismanagement? Explain its methods.
6. What is meant by asset classification? Discuss prudential norms for asset classification.
Explain provisioning and income recognition.
Easy2Siksha.com
SECTION-D
7. What is meant by corporate governance? How is it followed in banks ?
8. Explain different innovations in banking with respect to fee based services.
GNDU Answer Paper-2021
Bachelor of Business Administration
BBA 5
th
Semester
MANAGEMENT OF BANKING OPERATIONS
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Discuss the tools of monetary policy. What are the implications of monetary policy?
Ans: It was just past dawn in the riverside town of Navapur, and the marketplace was
already alive with vendors hawking fresh produce, weavers bargaining over cotton, and
shopkeepers tallying yesterday’s sales. Yet behind the scenes, deep in the vaulted halls of
the Navapur Reserve Bank, Governor Meera Rao sat at her desk, scanning the latest
indicators: credit growth was surging, inflation was nudging 6 percent, and the rupee
wobbled against the dollar.
She closed her eyes and thought of her toolbox—sleek levers she could pull to steer the
entire town’s economy. Those levers were the tools of monetary policy, and she knew that
choosing wisely today would determine whether Navapur thrived in prosperity or stumbled
into trouble.
Tools of Monetary Policy
Easy2Siksha.com
Monetary policy tools are the instruments a central bank uses to regulate the supply of
money, influence interest rates, and guide economic activity. In Navapur Reserve Bank
(NRB), Meera Rao’s primary toolkit included:
1. Policy (Repo) Rate The rate at which the NRB lends funds to commercial banks.
2. Reverse Repo Rate The rate at which the NRB absorbs surplus liquidity from banks.
3. Cash Reserve Ratio (CRR) The percentage of a bank’s deposits that must be held
with the central bank.
4. Statutory Liquidity Ratio (SLR) The share of deposits banks must maintain in liquid
assets like government bonds.
5. Open Market Operations (OMOs) Buying or selling government securities to adjust
banking system liquidity.
6. Marginal Standing Facility (MSF) and Bank Rate Emergency funding at a higher
penalty rate to ensure overnight liquidity.
Each tool affects banks’ cost of funds, which in turn influences lending rates for businesses
and consumers, ultimately shaping spending, investment, and inflation.
How They Work—A Day in Governor Rao’s Office
Meera Rao leaned back and pictured Navapur’s banks as spigots controlling the flow of
credit:
• When the repo rate rises, banks borrow at a higher cost. They pass on that cost to
borrowers—higher loan rates cool down demand for mortgages and business loans.
• When she lowered the reverse repo, banks found it less attractive to park funds with
the NRB. They instead lent more to customers, boosting economic activity.
• A hike in CRR meant banks had less money to lend, tightening credit and tamping
down inflationary pressure.
• Selling government bonds through OMOs soaked up excess liquidity, helping rein in
price rises during harvest season when grain prices threatened to spike.
Comparison of Key Tools
Tool
Action by Central Bank
Immediate Effect on
Banks
End Impact on
Economy
Repo Rate
Increase or decrease
Changes cost of
borrowing for banks
Affects loan
interest rates
Reverse Repo
Rate
Adjust up or down
Alters returns on
excess bank funds
Influences banks’
lending urge
Cash Reserve
Ratio
Raise or lower
percentage
Directly changes
banks’ lendable funds
Tightens or
loosens credit
Statutory
Liquidity Ratio
Adjust required holding
of liquid assets
Modifies banks’
investment flexibility
Influences bond
yields
Open Market
Operations
Buy/sell government
securities
Injects or absorbs
liquidity
Stabilizes short-
term rates
Easy2Siksha.com
Marginal
Standing Facility
Change penalty lending
rate
Safety valve for
liquidity shortages
Caps overnight
rates
Implications of Monetary Policy
Once Meera Rao selected the right combination of tools, their ripple effects spread through
Navapur’s economy. Let’s explore the major implications:
1. Controlling Inflation and Price Stability
By tightening credit (raising repo or CRR), the NRB absorbs excess money chasing goods.
Inflation slows, preserving purchasing power for the town’s families. Conversely, easing
policy can ward off deflation during a downturn.
2. Steering Economic Growth
In lean seasons—when mills close for maintenance or crop yields dip—Meera might cut
rates to stimulate borrowing. Cheap loans fuel investment in machines or farm inputs,
kickstarting production and employment.
3. Influencing Employment
Lower borrowing costs often boost business expansion, leading to higher hiring. However,
over-expansion can lead to overheating, creating labor shortages and wage-push inflation.
4. Managing Exchange Rates
Higher domestic rates attract foreign portfolio investors seeking better yields. Capital
inflows strengthen the rupee but can hurt exporters. Lower rates can ease export
competitiveness but risk currency depreciation.
5. Shaping Credit Availability
By adjusting CRR and OMOs, the NRB controls how much banks can lend. Ample credit
encourages entrepreneurial ventures and home loans; scarce credit forces banks to tighten
lending criteria.
6. Financial Market Sentiment
Central bank signals—changes in policy rates or public forward guidance—influence market
expectations. Businesses plan expansions, and consumers decide on big-ticket purchases
(homes, cars) based on where rates are headed.
A Real-Life Example—The Festival Rush
As Diwali approached, gold and appliance sales in Navapur typically surged. Last year,
runaway money supply led to double-digit inflation and skyrocketing prices. This year,
Easy2Siksha.com
Governor Rao preemptively raised the repo rate by 50 basis points and conducted OMOs to
absorb ₹5,000 crore of excess liquidity.
• Merchants noticed loan rates inch upward three weeks before the festival.
• Some consumers postponed purchases, which eased demand-induced price spikes.
• Gold prices rose only 3 percent instead of last year’s 12 percent.
This measured approach allowed Navapur’s households to celebrate without straining their
budgets, and businesses to plan inventory without fear of wild price swings.
Balancing Act and Limitations
Despite its power, monetary policy has caveats:
• Time Lags: Adjustments take months before fully affecting the real economy.
• Liquidity Trap: When rates are near zero, further cuts do little to boost demand.
• Global Shocks: Oil price spikes or geopolitical crises can overwhelm domestic policy.
• Transmission Gaps: If banks don’t pass on rate cuts to consumers, intended benefits
stall.
That’s why Meera Rao combined monetary policy with close dialogue with the
government’s fiscal team, ensuring spending and taxation complemented central bank
efforts.
A Town in Balance
By year-end, inflation in Navapur settled at 4 percent—right within the NRB’s comfort
zone—and GDP growth picked up to 6 percent. Farmers expanded acreage, weavers
ordered new looms, and shopkeepers stocked festive goods without fear of runaway prices.
In the heart of the Reserve Bank, Meera Rao reviewed her ledger. Each tool had been a
deliberate stroke on the vast canvas of Navapur’s economy. She knew tomorrow would
bring new data—and perhaps new challenges—but for today, her toolbox had delivered the
balance every community deserves: steady growth, stable prices, and shared prosperity.
2. Explain major provisions of Negotiable Instruments Act 1881.
Ans: The Tale of Merchant Arjun and the Magic of Negotiable Instruments Act, 1881
Imagine a bustling fair in old Delhi, where Arjun the merchant traveled from city to city
trading silks and spices. Instead of carrying sacks of coins, he relied on pieces of paper that
acted like money—promissory notes, bills of exchange, and cheques. One day, a bill of
exchange was dishonoured, and Arjun faced ruin. It was then that his shrewd banker
introduced him to the Negotiable Instruments Act, 1881—the rulebook that turned these
papers into trustworthy instruments across the land.
Easy2Siksha.com
1. Defining What’s Negotiable (Section 4)
Before Arjun could understand his rights, he needed to know what made a paper
“negotiable.”
• A Negotiable Instrument is an unconditional written order or promise
• It ensures payment of a certain sum of money
• It can be transferred from one person to another, giving the new holder a clean title
For Arjun, it meant he could accept a bill in Agra, endorse it to a spice trader in Jaipur, and
know each transfer carried clear legal protection.
2. The Three Stars of the Show (Sections 5–7)
The Act recognizes three main instruments:
1. Promissory Note (Section 4 & 5)
o A written promise by the maker to pay a specified sum to the payee
o Example: Arjun promised his supplier in Calcutta to pay ₹10,000 on a future
date
2. Bill of Exchange (Section 4 & 6)
o A written order by the drawer to the drawee to pay a certain amount
o Arjun drew a bill on his banker: “Bank, please pay ₹15,000 to Rashid & Co.”
3. Cheque (Section 6 & 6A)
o A bill of exchange drawn on a banker and payable on demand
o “Pay ₹2,000 to Meena” scrawled across an Arjun’s deposit slip became a
cheque
These three stars each have slightly different roles, but all share the magic of transferability.
3. Who Holds It and Why It Matters (Sections 8–10)
Arjun discovered that not just anyone could claim the money on these papers. The Act
distinguishes:
• Holder (Section 8): The person in possession of the instrument, transferred legally,
who is entitled to receive payment.
• Holder in Due Course (Section 9): A holder who acquires the instrument for value, in
good faith, and without notice of any defect. This person enjoys a privileged position:
o Takes the instrument free of most defects
o Can demand payment even if earlier parties had disputes
For Arjun, selling a bill to a banker made the banker a Holder in Due Course, ensuring
Arjun’s customer paid without delay.
4. Endorsement and Negotiation (Sections 14–17, 48–50)
Easy2Siksha.com
Passing an instrument is more than handing over paper; it’s a legal dance called
endorsement and negotiation.
• Endorsement (Section 14): A signature on the back, accompanied by any direction,
transferring rights.
• Negotiation (Section 48): Delivery of the instrument, with necessary endorsement,
to vest full rights in the transferee.
Arjun’s apprentice would write, “Pay to the order of Mr. Gupta,” sign below, and the
negotiation was complete. Each new endorsement became a chain of title, proving the
holder’s right to demand payment.
5. Parties and Their Liabilities (Sections 30–35)
Arjun quickly learned that each instrument named parties with specific duties:
• Maker of a Promissory Note → unconditionally promises payment
• Drawer of a Bill/Cheque → orders payment
• Drawee (usually a banker) → ordered to pay
• Endorser → guarantees payment if earlier parties default
When Arjun’s cheque bounced, his banker realized Arjun, as the drawer, bore the primary
liability. Anyone endorsing that cheque would also become liable if Arjun failed to honour it.
6. Presentment, Dishonour, and Notice (Sections 91–100)
To enforce rights, Arjun had to follow a strict ritual:
1. Presentment for Payment (Section 92): Submit the instrument to the drawee on
time.
2. Dishonour (Section 92–99): If payment is refused, the instrument is dishonoured—
Arjun’s cheque was marked “Insufficient Funds.”
3. Notice of Dishonour (Section 93–94): Promptly inform prior parties (drawer,
endorsers) so they know to settle the claim.
Missing any step could cost Arjun his right to recover funds, just as a misstep in the
marketplace dance cost a merchant his reputation.
7. Stale and Maturity—Timing Is Everything (Sections 18–19)
Arjun discovered his bills had an expiry date:
• Promissory Note & Bill of Exchange: Become stale after three months if payable on
demand, or six months if payable at a fixed period.
• Cheque: Becomes stale after three months from the date.
Presenting a stale instrument is like showing up at an empty market—no one will pay.
Easy2Siksha.com
8. Material Alteration—Keeping Paper Pure (Section 87)
If someone changed the date or amount on Arjun’s bill of exchange without his consent, it
became materially altered. Such an instrument lost all negotiability, protecting Arjun from
impostors but also warning him to guard his papers jealously.
9. Penalty for Dishonour of Cheques (Section 138)
Years after the Act’s birth, Section 138 was added, giving teeth to cheque payments:
• Dishonour due to insufficient funds → criminal liability
• Drawer faces fines or imprisonment if payment isn’t made within 15 days of the
bank’s notice
When Arjun’s customer defaulted on a cheque, the threat of Section 138 nudged him to
clear the debt, restoring Arjun’s capital and peace of mind.
10. Privileges of a Holder in Due Course (Section 131)
Arjun’s banker friend, as a holder in due course, could enforce a bill in a lawsuit without
worrying about earlier defects. This privilege turned bankers into reliable pillars of trade and
encouraged Arjun to discount bills for quick cash, fueling his expansion across the empire.
Harmony Restored
With every dishonour, notice, or negotiation, Arjun grew wiser in the ways of paper money.
The Negotiable Instruments Act, 1881 became his trusted guide—ensuring each promissory
note or bill of exchange he accepted carried clear rights, duties, and remedies.
From the crowded lanes of the old bazaar to the high walls of colonial courtrooms, this Act
wove a network of trust, transforming humble pieces of paper into instruments of
commerce that merchants like Arjun could rely on without fear.
SECTION-B
3. Explain different types of loans. Highlight their features.
Ans: 1. Personal Loan – The All-Rounder Friend
First stop is the Personal Loan Pavilion. Here stands Riya, a schoolteacher who’s planning
her sister’s wedding.
• What it is: An unsecured loan—meaning no collateral is needed. It’s granted based
on your income, credit score, and repayment capacity.
Easy2Siksha.com
• Purpose: Flexible—weddings, travel, medical bills, home renovation, even debt
consolidation.
• Features:
o Tenure: Usually 1–5 years.
o Interest Rate: Higher than secured loans (since no collateral).
o Documentation: Proof of income, ID, address.
o Repayment: Fixed monthly instalments (EMIs).
Story Angle: Riya applied online, got approval within 48 hours, and used the funds for décor,
catering, and music. She’ll repay in 36 EMIs. No asset was pledged—just her signature and
her salary slip.
2. Home Loan – The Dream Builder
Under a large model of a house, we find Anil and Meena, newlyweds eyeing a cozy 2BHK
flat.
• What it is: A secured loan given to buy, build, or renovate a home—property itself
acts as collateral.
• Purpose: Purchase of a new home, construction, or extension.
• Features:
o Long Tenure: Often up to 20–30 years.
o Lower Interest Rates: Because it’s secured.
o Tax Benefits: On both principal and interest under the Income Tax Act.
o EMI Flexibility: Some banks offer step-up EMIs (lower initially, then
increasing as income grows).
Story Angle: Anil and Meena are thrilled—they lock in a 25-year loan, comfortable EMIs,
and know their home is both their dream and the bank’s security.
3. Education Loan – The Future Maker
At the Education Loan Corner, banners read “Invest in Your Dreams.” Here, Samar, a bright
engineering student, is clutching his admission letter from a Canadian university.
• What it is: Loan to cover tuition fees, living costs, and related expenses for higher
education.
• Features:
o Moratorium Period: Repayment starts after course completion (plus 6–12
months grace).
o Collateral: Loans up to a certain amount (say ₹7.5 lakh in India) often don’t
require collateral; above that may need security.
o Interest Subsidy: For eligible students under government schemes.
o Tax Deduction: On interest paid under Section 80E of IT Act.
Story Angle: Samar’s parents sigh in relief—the bank will fund ₹20 lakh. He’ll repay over 7
years after he begins earning.
Easy2Siksha.com
4. Vehicle Loan – The Mobility Booster
Next to a shiny red sedan and a row of motorbikes, we meet Harpreet, who’s eyeing his first
car.
• What it is: Loan to purchase a two-wheeler or four-wheeler; vehicle itself is
collateral.
• Features:
o Tenure: Typically 1–7 years.
o Down Payment: Often required, with the rest financed.
o Quick Processing: Minimal documentation.
o Ownership: Hypothecation in bank’s name until repayment.
Story Angle: Harpreet drives home the same day—his car papers note the bank’s name,
which will be removed once he’s paid in full.
5. Gold Loan – The Quick Rescuer
At a small but busy stall, Seema hands over her gold bangles.
• What it is: Loan against pledged gold ornaments or coins.
• Features:
o Short-Term: Usually up to 1–3 years.
o Lower Interest than Personal Loan: Because gold is collateral.
o Fast Disbursal: Sometimes within hours.
o Loan-to-Value (LTV): Regulated—currently up to 75% of gold’s value in India.
Story Angle: Seema uses a gold loan to fund urgent medical expenses—redeeming her
jewellery when the crisis passes.
6. Business Loan – The Enterprise Engine
The largest stall showcases “From Startup to Expansion.” Farhan, who runs a bakery, wants
a second outlet.
• What it is: Funding for new businesses, working capital, or expansion.
• Features:
o Secured or Unsecured: Depending on size, nature of business, and
creditworthiness.
o Variety: Term loans, working capital loans, overdrafts, equipment financing.
o Tenure: Few months to several years.
o Interest: Depends on business risk profile.
Story Angle: Farhan opts for a term loan with monthly repayments, plus an overdraft facility
for seasonal cash flow gaps.
7. Payday/Short-Term Loan – The Emergency Plug
Easy2Siksha.com
In a discreet corner is the “Quick Cash” counter. Arif is here to cover rent until his salary
arrives.
• What it is: Very short-term borrowing, often until next payday.
• Features:
o Minimal Eligibility: Often just proof of income.
o High Interest: Significantly more expensive than other loans.
o Tenure: Weeks, not months.
o Instant Disbursal: Usually same day.
Story Angle: Arif gets ₹20,000 within hours, repaying when his salary credits—paying a
higher fee for speed.
8. Mortgage Loan / Loan Against Property – The Big Leverage
Beside a miniature of a commercial building, we find Mrs. Nanda, who owns a shop.
• What it is: Loan using owned property (residential/commercial) as collateral.
• Features:
o Large Amounts: Linked to property’s market value.
o Lower Interest than Personal Loan: Because secured.
o Flexible Use: Business expansion, education, medical, etc.
o Tenure: Up to 15 years.
Story Angle: Mrs. Nanda mortgages her shop to raise ₹50 lakh for her son’s hotel business.
9. Agricultural Loan – The Farmer’s Lifeline
Under a green tent, Baldev Singh, a wheat farmer, sits with a rural bank officer.
• What it is: Credit for seeds, fertilisers, equipment, irrigation, and crop maintenance.
• Features:
o Seasonal Repayment: Timed with harvest cycles.
o Subsidised Interest Rates: Under government schemes.
o Collateral: May vary with loan size.
o Short & Long-Term: Crop loans vs. farm development loans.
Story Angle: Baldev uses the loan to buy better-quality seeds—his yield improves, and
repayment is made post-harvest.
Key Takeaways Table
Loan Type
Secured/Unsecured
Tenure
Key Collateral
Typical Use
Personal
Unsecured
1–5 years
None
General
Home
Secured
20–30 years
House property
Housing
Education
Both
Up to 15 years
Course-dependent
Studies
Vehicle
Secured
1–7 years
Vehicle
Purchase
Easy2Siksha.com
Gold
Secured
1–3 years
Gold
Urgent need
Business
Both
Months–Years
Varies
Enterprise
Payday
Unsecured
Days–Weeks
None
Emergencies
Mortgage/LAP
Secured
Up to 15 years
Property
Big funding
Agricultural
Both
Season–Years
Varies
Farming
Closing Thoughts
That day at the Bank Fair, each stall told a human story—of dreams built, emergencies
tackled, futures secured, and opportunities expanded. Loans aren’t just financial products;
they’re partnerships between ambition and resources. When chosen wisely and repaid
responsibly, they can turn a goal scribbled on paper into a life well-lived.
4. Discuss various types of risks in banking business. How can these be managed ?
Ans: 1. Credit Risk – The Risk of Not Getting Paid Back
Arvind’s first stop is the Loan Approvals Department.
Here, officers review applications for home loans, business loans, and personal loans. But
every time the bank lends money, there’s a chance the borrower won’t repay—this is credit
risk.
Example: A business takes a ₹50 lakh loan to expand operations but goes bankrupt before
repaying.
Why It’s Serious:
• Direct loss of money for the bank.
• High defaults damage reputation and investor confidence.
Management Strategies:
• Credit Appraisal: Thoroughly check borrower’s income, credit history, and
repayment capacity.
• Diversification: Spread loans across sectors and geographies to avoid concentrated
exposure.
• Collateral & Guarantees: Secure loans with assets or third-party guarantees.
• Early Warning Systems: Monitor repayment patterns to spot trouble early.
2. Market Risk – The Risk of Changing Financial Conditions
Next, Arvind guides us to the Treasury Room, where large screens flash interest rates,
currency values, and stock market data.
Easy2Siksha.com
Market risk arises from changes in interest rates, foreign exchange rates, equity prices, or
commodity prices.
Example:
• A sudden drop in interest rates might reduce income from fixed-rate loans.
• Fluctuation in currency can affect the value of foreign investments.
Management Strategies:
• Hedging: Use derivatives like forwards, futures, or swaps to offset potential losses.
• Gap Analysis: Match the maturity of assets and liabilities to reduce interest rate risk.
• Value-at-Risk (VaR) Models: Measure the maximum expected loss over a given time
with a set confidence level.
3. Liquidity Risk – Running Out of Cash
In the Cash Management Office, staff ensure ATMs are filled and payments are processed.
Liquidity risk is the danger that the bank won’t have enough liquid cash to meet its
obligations, even if it has assets on paper.
Example: During a financial panic, many customers withdraw deposits simultaneously (a
“bank run”).
Management Strategies:
• Liquidity Buffers: Maintain a portion of assets in cash or highly liquid securities.
• Liquidity Coverage Ratio (LCR): Follow regulatory requirements to ensure high-
quality liquid assets cover net cash outflows for at least 30 days.
• Contingency Funding Plans: Identify backup funding sources in emergencies.
4. Operational Risk – Internal Failures and Human Errors
We enter the Operations Floor, buzzing with clerks entering transactions, IT staff
monitoring systems, and auditors checking records.
Operational risk stems from failures in processes, people, systems, or from external events.
Example:
• A clerical error that credits ₹10 lakh to the wrong account.
• A cyberattack that compromises online banking.
Management Strategies:
• Internal Controls: Clear checks and approval systems to prevent fraud and errors.
Easy2Siksha.com
• Staff Training: Regular upskilling on compliance, technology, and procedures.
• Business Continuity Planning: Backup systems and disaster recovery strategies.
• Cybersecurity Investments: Firewalls, encryption, and intrusion detection systems.
5. Compliance and Legal Risk – Breaking the Rules
In a corner office, the Compliance Department reviews new RBI circulars and legal updates.
Compliance risk arises when banks fail to follow laws, regulations, or ethical standards.
Example: Charging interest rates higher than permitted, leading to penalties.
Management Strategies:
• Compliance Monitoring: Regular audits and monitoring systems to ensure
adherence to all laws.
• Policy Manuals: Clear written guidelines for staff.
• Whistleblower Programs: Encourage reporting of unethical practices.
6. Reputational Risk – Losing Public Trust
On the wall of the Customer Experience Room, a large screen shows social media
comments and customer feedback.
Reputational risk is the potential damage to the bank’s brand due to scandals, poor service,
or negative publicity.
Example: News of data leaks or fraudulent employee behavior spreads online.
Management Strategies:
• Proactive PR Management: Address issues quickly and transparently.
• Strong Ethical Culture: From top management down to junior staff.
• Quality Customer Service: Resolve complaints effectively and courteously.
7. Strategic Risk – Making the Wrong Big Decisions
Finally, in the Boardroom, directors discuss expansion into new markets.
Strategic risk occurs when big business decisions turn out poorly because of misjudgment or
changes in the environment.
Example: Investing heavily in a sector that later faces government restrictions.
Management Strategies:
• Scenario Planning: Test strategies against different possible futures.
Easy2Siksha.com
• Market Research: Use data before making expansion or investment decisions.
• Agility: Ability to pivot quickly when conditions change.
Quick Reference Table
Type of Risk
Example Scenario
Key Management Tools
Credit Risk
Business fails to repay loan
Credit checks, collateral,
diversification
Market Risk
Interest rate drop cuts loan
income
Hedging, gap analysis, VaR models
Liquidity Risk
Sudden customer withdrawals
Liquidity buffers, LCR, contingency
plans
Operational Risk
Cyberattack on bank’s systems
Internal controls, training,
cybersecurity
Compliance Risk
Violation of RBI guidelines
Monitoring, audits, policy manuals
Reputational
Risk
Social media backlash
PR management, service quality
Strategic Risk
Failed overseas expansion
Research, scenario planning, agility
Closing Thoughts
As Arvind ends the tour, he reminds us:
“Banking isn’t just about handling money—it’s about managing uncertainty. Each risk is like
a hidden current in the financial river. The trick is to map those currents, respect their
power, and steer the boat with skill.”
In the world of finance, risks can’t be eliminated entirely—but with the right strategies, they
can be anticipated, controlled, and even turned into opportunities for growth. And that is
how a bank like Suraksha doesn’t just survive—it thrives.
SECTION-C
5. What is meant by Asset-Liability management? What are reasons for asset-liability
mismanagement? Explain its methods.
Ans: It’s a breezy Monday morning in the headquarters of Suraksha Bank Ltd. The sun
streams in through the glass windows, reflecting off tidy rows of spreadsheets on computer
screens. In the boardroom, the bank’s Chief Risk Officer, Mr. Dev Mehta, stands before a
group of young management trainees.
“Before you learn how to grow a bank,” he says, “you must learn how to keep it safe. And
the heart of that safety lies in something we call Asset–Liability Management, or ALM.”
Easy2Siksha.com
And with that, he begins telling them a story that makes the concept come alive.
1. What is Asset–Liability Management (ALM)?
Dev draws a scale on the whiteboard — one side labelled “Assets,” the other “Liabilities.”
• Assets for a bank are the loans, investments, and money lent out that generate
income.
• Liabilities are the deposits, borrowings, and obligations the bank must repay.
ALM is the coordinated process of managing these two sides so that:
• The bank always has enough cash to meet withdrawals and payments (liquidity).
• The bank earns a healthy margin between what it earns on assets and what it pays
on liabilities (profitability).
• Risks from interest rate changes, currency shifts, and mismatches in timing are
minimised.
In simple terms: ALM is like steering a boat — assets are the oars pushing you forward,
liabilities are the weight you carry. If you row without balancing the weight, you risk tipping
over.
2. Why ALM Matters — A Quick Scenario
Dev tells the trainees: “Imagine we take fixed deposits for 3 years at 6% interest, but lend
the money out as home loans at 8% for 20 years. If interest rates rise after 3 years, we’ll
have to renew the deposits at, say, 8%, but the home loans are still stuck at 8% — our profit
margin vanishes.”
This is exactly why ALM exists — to match the structure, timing, and interest rate
sensitivity of assets and liabilities.
3. Reasons for Asset–Liability Mismanagement
Dev shakes his head. “When ALM fails, trouble starts.” He lists the common causes:
a) Interest Rate Mismatches
When assets and liabilities reprice at different times, sudden changes in interest rates can
squeeze margins.
Example: Borrowing short-term at low rates but investing in long-term fixed-rate bonds. If
short-term rates rise, the cost of funds jumps while income stays fixed.
b) Liquidity Mismatches
When long-term loans are funded by short-term deposits, a sudden withdrawal wave can
cause a cash crunch.
Easy2Siksha.com
Example: Customers withdraw ₹500 crore in a panic, but most loans are locked for years —
you have paper wealth but no liquid cash.
c) Currency Mismatches
Banks dealing in foreign currency may have assets in one currency and liabilities in another.
Exchange rate shifts can cause big losses.
Example: Lending in dollars but borrowing in rupees — if the dollar strengthens, repayment
becomes costlier.
d) Over-Aggressive Growth
• Chasing high growth without stable funding sources can create funding gaps later.
e) Poor Risk Monitoring
• Failing to regularly track interest rate gaps, maturity profiles, and cash flows leads to
delayed problem detection.
f) External Shocks
• Economic crises, sudden policy changes, or global market swings can upset carefully
laid ALM plans.
4. Methods of Asset–Liability Management
Now Dev walks to the flip chart and explains how a smart bank uses ALM to stay balanced.
a) Gap Analysis
This is the most basic method.
• It measures the difference (gap) between rate-sensitive assets (RSA) and rate-
sensitive liabilities (RSL) in specific time buckets (0–30 days, 31–90 days, etc.).
• A positive gap (RSA > RSL) benefits when rates rise; a negative gap benefits when
rates fall.
Example: If in the 0–30 day bucket, RSA = ₹200 crore and RSL = ₹250 crore, the gap = –₹50
crore, meaning liabilities reprice faster — bad news if rates go up.
b) Duration Analysis
• It measures the weighted average time it takes to receive cash flows from assets and
liabilities.
• Helps in understanding how sensitive the bank’s portfolio is to interest rate changes.
• Longer duration = more sensitive to interest rate moves.
Easy2Siksha.com
Example: If loan portfolio duration is 6 years and deposits duration is 2 years, rising rates
will raise funding costs much sooner than asset yields, hurting profits.
c) Simulation Models
• Computer models forecast balance sheet performance under different interest rate
and liquidity scenarios.
• Allows “what-if” analysis for policy decisions.
Example: What if rates rise by 1%? The model shows net interest income falls by ₹20 crore
— prompting the bank to restructure funding.
d) Value at Risk (VaR) for ALM
• Estimates the maximum potential loss in asset values or earnings over a given
period, with a certain confidence level.
• Used especially for market risk in trading books.
e) Liquidity Gap Analysis
• Identifies periods where expected cash outflows exceed inflows, indicating potential
liquidity shortages.
• Plans funding or investment maturities to fill those gaps.
f) Matching and Laddering
• Matching: Aligning asset and liability maturities exactly to avoid gaps.
• Laddering: Staggering maturities so all money doesn’t reprice at once, smoothing
risk.
g) Use of Derivatives
• Interest rate swaps, currency swaps, forward rate agreements to hedge against rate
and currency risks.
5. How It All Comes Together
Dev sums it up: “A bank’s balance sheet is alive — rates change, deposits come and go,
loans grow and shrink. ALM is how we continuously adjust the sails so that we’re neither
starved for cash nor sunk by risk.”
At Suraksha Bank:
• The ALM committee meets monthly.
• Treasury tracks daily liquidity positions.
• Stress tests simulate worst-case scenarios (mass withdrawals, sharp rate hikes).
• Hedging policies guard against currency exposures.
Easy2Siksha.com
Key Points for Exams
Aspect
Summary
Definition of ALM
Coordinated process to manage assets & liabilities to balance
liquidity, profitability, and risk.
Reasons for
Mismanagement
Interest rate, liquidity, currency mismatches; aggressive
growth; poor monitoring; external shocks.
Methods
Gap analysis, duration analysis, simulation, VaR, liquidity gap,
matching/laddering, derivatives.
Closing Thoughts
In the end, ALM is the art and science of balance. Just as a tightrope walker constantly shifts
weight to stay upright, a bank must adjust its mix of assets and liabilities to stay safe, liquid,
and profitable — no matter how unpredictable the winds of the economy become.
That morning, the trainees left the boardroom with a clear vision: mastering ALM wasn’t
just about safeguarding a balance sheet — it was about steering the entire ship of the bank
through calm waters and storms alike.
6. What is meant by asset classification? Discuss prudential norms for asset classification.
Explain provisioning and income recognition.
Ans: 1. What is Asset Classification? – The Heart of Safe Banking
Neha begins with a simple analogy: “Think of our loan portfolio like a garden. Some plants
are blooming beautifully (regular loans), some are starting to wilt (loans with early
repayment stress), and some have dried up completely (bad loans). Asset classification is
how we label each plant so we know how to treat it.”
In banking terms: Asset classification is the process of categorising advances/loans based
on the degree of risk and the borrower’s ability to repay, in accordance with the RBI’s
prudential norms. It helps in:
• Identifying problem accounts early.
• Making adequate provisions to cover possible losses.
• Presenting a true and fair picture of the bank’s financial health.
2. Prudential Norms for Asset Classification – RBI’s Rulebook
The Reserve Bank of India has laid down strict and uniform norms for all banks to follow.
Neha draws four boxes on the whiteboard:
a) Standard Assets
• Loans where the borrower is repaying on time.
Easy2Siksha.com
• No overdue beyond 90 days for term loans.
• Interest and principal payments are regular.
• Carry normal risk.
Example: A customer’s home loan EMI is being paid every month without delay — this is a
Standard Asset.
b) Sub-Standard Assets
• An asset which has remained Non-Performing Asset (NPA) for 12 months or less.
• NPAs are loans where interest and/or principal is overdue for more than 90 days.
• Higher than normal credit risk.
Example: A business loan where instalments haven’t been paid for 4 months falls here.
c) Doubtful Assets
• Assets that have remained sub-standard for more than 12 months.
• Collection or recovery chances are highly questionable.
• Risk of loss is significantly higher.
Example: A factory loan overdue for 18 months, with the borrower’s operations shut down.
d) Loss Assets
• Assets identified by the bank, RBI, or auditors as uncollectible.
• May have some scrap value, but it’s not practical to continue carrying it as an asset.
• Should be written off immediately or provisioned 100%.
Example: A borrower has gone bankrupt, the collateral is destroyed, and no recovery is
possible.
Neha’s Tip: “Correct classification is non-negotiable. If we understate NPAs, we mislead our
shareholders and risk regulatory action.”
3. Provisioning – Preparing for Losses Before They Happen
Provisioning is like keeping emergency funds aside in anticipation of trouble.
When a bank anticipates that part of its loan portfolio might not be repaid, it must set aside
a percentage of the outstanding amount as provision. This reduces the profit today, but
ensures the bank can absorb losses tomorrow.
RBI’s Provisioning Norms (illustrative rates – actual may vary by guidelines)
• Standard Assets: Provision of 0.25%–1% depending on loan type.
• Sub-Standard Assets: Provision of 15% on the outstanding amount (secured
portion). 25%–100% for unsecured exposures.
Easy2Siksha.com
• Doubtful Assets:
o Up to 1 year in doubtful: 25% on secured portion.
o 1–3 years doubtful: 40% on secured portion.
o More than 3 years: 100% on secured portion.
o 100% on unsecured portion, regardless of age.
• Loss Assets: 100% provisioning or write-off.
Example from Samriddhi Bank: A ₹10 crore loan has been doubtful for 2 years, secured by
collateral valued at ₹5 crore:
• Secured portion: ₹5 crore × 40% = ₹2 crore provision.
• Unsecured portion: ₹5 crore × 100% = ₹5 crore provision.
• Total Provision: ₹7 crore.
4. Income Recognition – When to Book Interest Income
Neha warns her team: “Never count your chickens before they hatch — or your interest
before it’s received.”
Prudential Norm:
• For Standard Assets, interest is recognized on an accrual basis (even before it’s
actually received).
• For NPAs, interest should be recognised only on cash basis — that is, when it is
actually received.
Reason: If we accrue interest on NPAs, we inflate our income with amounts we might never
collect.
Example: If a ₹50 lakh loan becomes an NPA in June, any unpaid interest from July onwards
cannot be booked as income until the borrower actually pays it.
5. Why These Norms Matter – The Safety Net
At Samriddhi Bank, following prudential norms ensures:
• True Financial Reporting: Investors, depositors, and regulators get an accurate
picture.
• Stability of Banking System: Adequate provisions prevent sudden shocks from bad
loans.
• Early Warning: Timely classification allows proactive recovery actions.
• Public Trust: Customers feel confident that their deposits are safe.
6. A Quick Reference Table for Revision
Asset Class
Overdue Status
Provisioning Requirement
Income Recognition
Standard Asset
Up to 90 days
0.25–1%
Accrual basis
Easy2Siksha.com
Sub-Standard
NPA ≤ 12 months
15%–25%+
Cash basis
Doubtful
NPA > 12 months
25%–100%
Cash basis
Loss Asset
Identified loss
100%
Cash basis
Closing Thoughts
Asset classification, provisioning, and income recognition aren’t just technicalities — they’re
the moral compass and shock absorbers of the banking world. By truthfully categorising
loans, setting aside realistic provisions, and recognising income only when it’s right to do so,
banks like Samriddhi protect themselves, their depositors, and the economy at large.
As Neha tells her team, “In banking, honesty isn’t just the best policy — it’s the only policy
that keeps the whole system standing tall.”
SECTION-D
7. What is meant by corporate governance? How is it followed in banks ?
Ans: 1. What is Corporate Governance?
The Chairperson, Mrs. Radhika Nair, opens the meeting with a simple sentence:
“Corporate governance is how we run this bank in a way that protects every depositor’s
rupee, satisfies regulators, and keeps our conscience clean.”
In formal terms: Corporate governance refers to the framework of rules, relationships,
systems, and processes by which a company — in this case, a bank — is directed and
controlled. It balances the interests of various stakeholders: shareholders, management,
customers, regulators, employees, and the wider community.
Core Principles of Corporate Governance
Mrs. Nair clicks to the next slide, revealing four pillars:
1. Transparency – Clear, open, and accurate disclosure of information.
2. Accountability – Decision-makers answerable to stakeholders.
3. Fairness – Equal treatment of all stakeholders without bias.
4. Responsibility – Acting in the long-term interest of the organisation and society.
2. Why Corporate Governance is Critical for Banks
In banks, the stakes are higher than in most businesses because:
• They deal with public money — deposits from millions of individuals and businesses.
• Their failure can trigger a domino effect in the entire economy.
Easy2Siksha.com
• They are heavily regulated by the Reserve Bank of India (RBI) and must maintain
public trust at all times.
One scandal, one instance of mismanagement, or one major fraud can destroy years of
goodwill.
3. How Corporate Governance is Followed in Banks
Let’s go back to Suryodaya Bank’s meeting and see the practical aspects.
a) Board Structure and Committees
Composition:
• A healthy mix of executive directors (full-time management) and non-
executive/independent directors who bring outside perspective.
• Independent directors ensure decisions aren’t dominated by insiders.
Key Committees in Banks:
1. Audit Committee – Reviews financial statements, internal controls, and audit
findings.
2. Risk Management Committee – Oversees credit risk, market risk, liquidity risk.
3. Nomination & Remuneration Committee – Ensures fair and merit-based selection of
top executives.
4. Customer Service Committee – Monitors service quality and grievance redressal.
b) Compliance with Laws and Regulations
Banks must follow:
• Banking Regulation Act, 1949
• RBI’s Corporate Governance Guidelines
• SEBI’s Listing Obligations (for listed banks)
• Companies Act, 2013
At Suryodaya Bank, the Chief Compliance Officer briefs the board on any new RBI circulars
and the bank’s compliance status.
c) Disclosure and Transparency
Every quarter, the bank publishes:
• Unaudited financial results.
• Asset quality reports (like NPAs, provisioning).
• Capital adequacy ratios.
• Details of large exposures and related party transactions.
Easy2Siksha.com
This allows investors, customers, and regulators to see exactly how the bank is performing.
d) Ethical Standards and Code of Conduct
All employees, from tellers to the CEO, follow a Code of Ethics that covers:
• Avoiding conflicts of interest.
• No insider trading.
• Confidentiality of customer data.
• Zero tolerance for bribery or corruption.
At Suryodaya, new recruits must attend a “Values First” induction, where senior managers
share real-life ethical dilemmas and how they were resolved.
e) Risk Management Framework
Corporate governance in banks is incomplete without a strong risk culture:
• Daily monitoring of liquidity and capital adequacy.
• Credit appraisal systems to prevent reckless lending.
• Stress testing for worst-case economic scenarios.
The Risk Management Committee meets monthly, with reports going directly to the board.
f) Stakeholder Engagement
Good governance means listening to everyone with a stake in the bank:
• Shareholders – Annual General Meeting (AGM), earnings calls.
• Customers – Surveys, suggestion boxes, grievance redressal cells.
• Employees – Townhalls, performance feedback systems.
• Regulators – Regular inspections, prompt reporting of any irregularity.
4. RBI’s Role in Enforcing Corporate Governance in Banks
The Reserve Bank of India sets the guardrails:
• ‘Fit and Proper’ Criteria for directors — checking integrity, competence, and track
record.
• Restrictions on tenure for CEOs and whole-time directors.
• Approval for appointment or re-appointment of top executives.
• Mandatory rotation of auditors.
• Guidelines on related-party transactions to avoid misuse of funds.
5. Real-Life Lessons
Mrs. Nair shares a cautionary tale:
Easy2Siksha.com
“Years ago, a well-known private bank ignored early warning signs of rising bad loans. The
board relied too heavily on rosy projections from management, and there was no
independent risk oversight. Within two years, it faced massive losses, RBI intervention, and
loss of public trust. The lesson — governance isn’t about meetings and minutes; it’s about
asking the right questions, at the right time, and insisting on honest answers.”
6. Benefits of Strong Corporate Governance in Banks
At Suryodaya Bank, they’ve seen clear benefits:
• Customer Trust: More deposits flow in when people feel their money is safe.
• Lower Cost of Capital: Investors are willing to accept lower returns for a well-
governed bank.
• Regulatory Goodwill: Fewer penalties and smoother approvals.
• Resilience: Better ability to handle crises like economic downturns or pandemics.
Quick Reference Table – Corporate Governance in Banks
Aspect
How It’s Implemented in Banks
Board Composition
Mix of executive, non-executive, independent directors
Committees
Audit, Risk, Nomination, Customer Service
Compliance
Adherence to RBI, SEBI, Companies Act
Transparency
Timely, accurate public disclosures
Ethics
Code of Conduct, zero tolerance policy
Risk Management
Credit appraisal, stress testing, monitoring
Stakeholder Engagement
Meetings, surveys, grievance handling
Closing Thoughts
Corporate governance in banks is like the unseen operating system in a computer — you
don’t notice it when it’s working perfectly, but everything collapses without it. For banks, it’s
the blend of structures, ethics, accountability, and transparency that ensures they
safeguard depositors’ money and contribute to economic stability.
8. Explain different innovations in banking with respect to fee based services.
Ans: It’s a busy afternoon at Navjeevan Bank’s Innovation Expo, an open-to-public event
where the bank proudly showcases how it has moved far beyond the old days of just
accepting deposits and giving loans. Colourful stalls are set up across the hall, each one
buzzing with curious visitors. Above the main stage, a banner reads:
Easy2Siksha.com
“Future of Banking – Beyond Interest, Towards Service Excellence.”
The bank’s Chief Innovation Officer, Mr. Ayan Khurana, steps up to guide the crowd.
“Today,” he says with a smile, “we’re not here to talk about how banks earn from lending.
We’re here to explore the exciting world of fee-based services—innovations that give
customers convenience, choice, and speed while allowing banks to earn through service
charges, commissions, and fees rather than just interest.”
And with that, he begins the tour.
1. Wealth Management & Investment Advisory – The Financial GPS
At the first stall, digital screens display market charts and portfolio dashboards.
• What it is: Personalised advice for investments, insurance, tax planning, and
retirement solutions.
• Innovation: AI-powered robo-advisors and mobile portfolio tracking.
• Revenue for banks: Fees for advisory services, brokerage on mutual fund and stock
transactions, commission from insurance companies.
Story Angle: Mrs. Sen, a teacher, now manages her mutual funds through the bank’s app
with real-time recommendations, paying a modest advisory fee each quarter.
2. Payment & Settlement Services – The Digital Highway
Next, visitors try UPI kiosks, swipe machines, and QR code payments.
• What it is: Platforms for customers and businesses to send or receive money quickly.
• Innovation: Contactless payments via NFC, one-click bill pay, recurring subscription
setups, and cross-border instant remittances.
• Revenue: Merchant discount rates (MDR), transaction charges for premium
payments, and forex conversion fees.
Example: A café owner uses the bank’s POS terminal. For every card swipe, the bank earns a
small percentage while offering her instant settlement options for an additional fee.
3. Forex & Trade Services – Crossing Borders Without Leaving the Desk
Ayan leads the group to a counter draped in international flags.
• What it is: Foreign exchange, letters of credit, export/import documentation, and
remittance facilities.
• Innovation: Real-time currency rate booking via mobile apps, blockchain-based trade
document verification for speed and security.
• Revenue: Service charges, commission on letters of credit, spreads on currency
exchange rates.
Easy2Siksha.com
Story Angle: Raj, a textile exporter, now gets his export documents verified digitally within
hours instead of days, paying the bank a service fee that saves him both time and risk.
4. Safe Custody & Locker Facilities – Security as a Service
In a quieter corner, there’s a model of the bank’s high-security locker vault.
• What it is: Secure storage of valuables like jewellery, property papers, or bonds.
• Innovation: Biometric access, motion sensors, automated robotic retrieval of
lockers.
• Revenue: Annual locker rent and additional service fees for premium-size lockers or
extended hours.
Example: Newlyweds Sunil and Kavita keep their wedding gold safe in a biometric locker,
paying a yearly rental to the bank.
5. Distribution of Third-Party Products – One-Stop Financial Mall
Another stall shows brochures for insurance, travel cards, and IPO subscriptions.
• What it is: Selling insurance, mutual funds, bonds, travel packages, and more on
behalf of partner companies.
• Innovation: Fully integrated e-marketplace inside the bank’s app, enabling instant
purchase and KYC verification.
• Revenue: Commission from partner companies on each product sold.
Story Angle: Amit books travel insurance for his Europe trip directly through the bank’s
app—no need to visit multiple websites—and the bank earns a neat commission.
6. Cash Management Services – The Business Lifeline
In the “Business Solutions” section, large corporates test out the cash pick-up and smart
vault services.
• What it is: Efficient handling of a company’s receivables and payables, optimising
liquidity.
• Innovation: Automated reconciliation software, mobile-based cash deposit
machines, same-day credit for collected funds.
• Revenue: Fees for cash pick-up, deposit processing, and service bundles.
Example: A supermarket chain pays the bank for daily cash collection from all branches,
ensuring safety and speedy deposits.
7. ATM & Card-Related Services – More than Just Cash Withdrawal
The ATM stall is busy with demonstrations of cardless withdrawals.
Easy2Siksha.com
• What it is: Debit, credit, prepaid cards, and related services.
• Innovation: Virtual cards, dynamic CVV codes, loyalty and rewards programs
integrated into mobile wallets.
• Revenue: Annual card fees, interchange fees on transactions, and charges on ATM
usage beyond free limits.
Example: Ritu uses her bank’s co-branded credit card, enjoying shopping discounts while
the bank earns from merchant fees and annual charges.
8. Internet & Mobile Banking Value-Added Services – Banking in Your Pocket
Here, visitors test augmented reality (AR) branches via VR headsets.
• What it is: Digital channels offering payments, investments, ticket bookings, and
lifestyle services.
• Innovation: Personal financial management dashboards, AI chatbots for instant
query resolution, utility booking (flights, hotels) through the banking app.
• Revenue: Convenience fees, partnerships with service providers, subscription-based
premium features.
Story Angle: Neha books movie tickets via her bank app in under a minute, paying a small
convenience charge.
9. Project Advisory & Syndication Services – The Big League
At the final stall, business suits mingle over project plans and financial charts.
• What it is: Structuring large projects, arranging finance from multiple banks
(syndication).
• Innovation: Data analytics for project risk assessment, digital deal rooms for lender
coordination.
• Revenue: Advisory fees, arranger fees, success-based commission.
Example: The bank advises on a ₹500 crore highway project, coordinating with other
lenders and charging an arranger’s fee for bringing the deal together.
Quick Reference Table
Innovation Area
How It Works
Bank’s Revenue Source
Wealth Management
Investment advice, portfolio
mgmt
Advisory fees, brokerage
Payment & Settlement
UPI, POS, QR, online transfers
MDR, transaction charges
Forex & Trade
FX, letters of credit,
remittances
Commission, exchange
spreads
Safe Custody & Lockers
Secure storage
Annual rent
Third-Party Distribution
Insurance, MF, IPO, travel
products
Commission from partners
Easy2Siksha.com
Cash Management
Receivables/payables
solutions
Service fees
ATM & Card Services
Debit, credit, prepaid cards
Card fees, interchange
Internet/Mobile Banking
Add-ons
Lifestyle, bookings, AI tools
Convenience/subscription
fees
Project Advisory &
Syndication
Structuring, arranging finance
Advisory/arranger fees
Closing Thoughts
As the tour ends, Ayan addresses the crowd:
“Fee-based services aren’t just about extra revenue for banks—they’re about deepening
relationships with customers. When a bank becomes the single trusted point for every
financial and lifestyle need, customers stay loyal and satisfied. Innovation in these services
means more convenience for you and a more stable, diversified income for us.”
Walking out of the expo, visitors realise that in modern banking, the real magic happens
beyond interest rates—in the network of innovative, fee-based services that make life
smoother for customers and more sustainable for banks.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
