Bank Promotion Exam Quiz: Trivia!

The correct answer is Basle Committee on Banking Supervision. The Basle Committee on Banking Supervision (BCBS) is an international committee that sets global standards for banking regulations and supervisory practices. It aims to enhance financial stability by promoting effective banking supervision and ensuring consistent implementation of regulatory standards across countries. The committee consists of central bankers and banking supervisors from various countries and meets regularly to discuss and develop policies related to banking supervision.

The present delinquency norm for identifying an advance as NPA is 90 days. This means that if a borrower fails to make loan repayments for a period of 90 days or more, the loan is classified as a non-performing asset (NPA). This classification indicates that the borrower is at a high risk of defaulting on the loan and the lender may need to take necessary actions to recover the outstanding amount.

PNCPS stands for Perpetual Non-Cumulative Preference Shares. These are a type of preferred shares that do not have a fixed maturity date and do not accumulate dividends if they are not paid. They are considered a hybrid security, combining features of both equity and debt. These shares have a fixed dividend rate, which is paid regularly to the shareholders. However, if the company fails to pay the dividend, it does not accumulate and the shareholders do not have the right to claim the unpaid dividends in the future.

The correct answer explains that any amount due to the bank under any credit facility is considered 'overdue' if it is not paid on the due date determined by the bank. This means that if a payment is not made on time according to the bank's set due date, it is considered overdue.

The items to be deducted from Tier I capital are goodwill, investment in subsidiaries, and other intangible assets. These deductions are necessary because they represent intangible assets and losses that cannot be easily converted into cash. By deducting these items from Tier I capital, a more accurate measure of a bank's financial strength and ability to absorb losses is obtained.

The correct answer is "Supervisory Review and Evaluation Process." This is the most appropriate explanation because SREP is a commonly used acronym in the financial industry to refer to the supervisory review and evaluation process. This process is conducted by regulatory authorities to assess the financial soundness and risk management practices of banks and other financial institutions. It involves evaluating various aspects such as capital adequacy, risk management, governance, and internal controls. Therefore, this explanation aligns with the commonly understood meaning of SREP.

If the bank's CRAR (Capital to Risk Assets Ratio) is below the minimum regulatory requirement prescribed by RBI (Reserve Bank of India), it means that the bank does not have enough capital to cover its risk assets. In such a situation, the bank may not be able to afford paying interest on the innovative debt instruments. Additionally, if the payment of interest would further decrease the bank's CRAR or keep it below the minimum requirement, the bank may choose not to pay interest in order to maintain regulatory compliance. Therefore, both options A and B provide valid reasons for the issuing bank not paying interest in case of innovative debt instruments.

The correct answer is "All the above" because all the risks mentioned in the options are risks that are not comprehensively covered under BASEL II norms. These risks include interest rate risk in the banking book, credit concentration risk, liquidity risk, settlement risk, reputational risk, strategic risk, risk of weakness in credit-risk mitigants, model risk, residual risk of securitization, and risk of under-estimation of credit risk under both the IRB approaches and the standardized approach. Therefore, all of these risks are not fully addressed by BASEL II norms.

NBV stands for Net Book Value, which refers to the value of an asset after deducting any provisions that have been set aside for potential losses or depreciation. This value is calculated by subtracting the provisions held from the book value of the asset. Therefore, the correct answer is Net Book Value (i.e., book value less provisions held).

The claims of the investors in innovative instruments are both superior to the claims of investors in equity shares and subordinated to the claims of all other creditors. This means that the investors in innovative instruments have a higher priority in receiving payment compared to equity shareholders, but their claims are still lower in priority compared to other creditors.

The correct answer is "All the above" because all four principles mentioned in the options are key principles in regard to the Supervisory Review Process under Pillar 2. These principles include banks having a process for assessing their capital adequacy and maintaining their capital levels, supervisors reviewing and evaluating banks' internal assessments and strategies, supervisors expecting banks to operate above minimum regulatory capital ratios, and supervisors intervening early and requiring remedial action if capital is not maintained or restored.

The items to be deducted from Gross NPAs to arrive at Net NPAs include the balance in Interest Suspense Account, DICGC/ECGC claims received and held pending adjustment, part payment received and kept in Sundry creditors account pending adjustment, and total provisions held. All of these deductions are necessary to calculate the accurate value of Net NPAs.

A haircut in Basel II refers to a percentage that is deducted from the par value of assets used as collateral. The size of the haircut is determined by the riskiness of the security offered as collateral. This deduction from the par value helps to account for potential losses in case the value of the collateral decreases. Therefore, the correct answer is A & B above because both statements accurately describe the concept of a haircut in Basel II.

The RBI will look into the CRAR at the time of the call option and the CRAR after the exercise of the call option, as these are important indicators of the bank's financial health and ability to meet its obligations. The CRAR (Capital to Risk-Weighted Assets Ratio) measures the bank's capital adequacy and its ability to absorb losses, while the Net Interest Margin measures the bank's profitability. The Return on Assets indicates the bank's efficiency in generating profits from its assets. Therefore, the RBI will consider both the CRAR at the time of the call option and the CRAR after the exercise of the call option to make an informed decision.

The correct answer is A & B above. In order to exercise the call option, two conditions must be satisfied. Firstly, the instrument must have run for at least ten years. Secondly, the call option can only be exercised with the prior approval of RBI (Department of Banking Operations & Development). The other two options, no default in payment of interest and no run on Banks, are not conditions that need to be satisfied for exercising the call option.

A "Quick Mortality Account" refers to an asset that becomes a non-performing asset (NPA) as soon as it is disbursed. This means that the asset fails to generate the expected income or repayment within a short period of time after being disbursed. The term "quick mortality" suggests that the asset quickly deteriorates in terms of its performance or value, leading to its classification as an NPA.

The restructuring/rescheduling/renegotiation of the terms of a loan agreement can take place at various stages. It can occur before the commencement of commercial production, after the commencement of commercial production and after the asset has been classified as substandard, and also after the commencement of commercial production but before the asset has been classified as substandard. In all these stages, the principal and/or interest of the loan can be rescheduled or restructured, with or without any sacrifice. Therefore, all the options mentioned above are correct stages at which the restructuring/rescheduling/renegotiation of the loan agreement can occur.

The correct answer is "All the above." This means that all the risks mentioned in the options, such as interest rate risk, credit concentration risk, liquidity risk, settlement risk, reputational risk, strategic risk, risk of weakness in credit-risk mitigants, risk of under-estimation of credit risk under the standardized approach, "model risk" or the risk of under-estimation of credit risk under the IRB approaches, and residual risk of securitization, are not comprehensively covered under BASEL II norms.

ICAAP stands for Internal Capital Adequacy Assessment Process. It is a process that financial institutions use to assess their capital needs and ensure that they have enough capital to withstand potential risks and losses. This process involves identifying and measuring risks, determining the appropriate level of capital needed to mitigate those risks, and regularly reviewing and updating the capital adequacy plan. The ICAAP helps institutions to maintain financial stability and comply with regulatory requirements.

The Narasimham Committee is known for recommending various reforms in the Indian banking sector. One of their key recommendations was the implementation of Income Recognition and Asset Classification norms. These norms were introduced to ensure that banks accurately classify their assets and recognize income based on the actual repayment status of borrowers. This helps in maintaining the financial stability of banks and improves transparency in the banking system.

Collateral immovable property should be valued once in every three years. This is important to ensure that the property's value is accurately assessed and updated periodically. By getting the property valued regularly, the lender can have a clear understanding of its current market value, which is crucial for determining the loan amount or assessing the overall risk associated with the collateral. Additionally, regular valuations help in identifying any changes or damages to the property that may affect its value.

The elements of Tier I Capital include paid-up equity capital, statutory reserves, and other disclosed free reserves, if any. It also includes capital reserves representing surplus arising out of sale proceeds of assets. Additionally, innovative perpetual debt instruments eligible for inclusion in Tier 1 capital, which comply with the regulatory requirements, and perpetual Non-Cumulative Preference Shares (PNCPS), which also comply with the regulatory requirements, are part of Tier I Capital. Therefore, all the options mentioned in the question are correct elements of Tier I Capital.

The step-up option can be exercised under innovative perpetual instruments by following all of the mentioned conditions. It can only be exercised once during the entire lifespan of the instrument, in conjunction with the call option. The step-up option can be exercised after ten years have passed since the date of issue. Additionally, the step-up rate cannot exceed 100 basis points.

The maturity period of innovative instruments raised as Tier I capital is perpetual, meaning that there is no fixed maturity date. These instruments do not have a specific time frame for repayment and can be considered as a permanent source of capital for the issuer.

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Income can be recognized on advances against term deposits, NSCs, IVPs, KVPs, and life policies, as well as on fees and commissions earned by banks through re-negotiations or rescheduling of outstanding debts. However, it is important to ensure that there is adequate margin available in such accounts. Therefore, the correct answer is "All the above" as all the mentioned types of advances can generate income that can be recognized.

Banks can sell non-performing assets (NPAs) to another bank on a cash basis and sans recourse basis. Selling on a cash basis means that the transaction is settled in cash, while selling on a sans recourse basis means that the purchasing bank assumes the risk and responsibility for the NPA and the selling bank is not liable for any losses. Therefore, the correct answer is A & C above.

Banks are advised to have a parallel run, where they run both the existing system and the new BASEL II system simultaneously to ensure a smooth transition. The Board of Banks should review the results of this parallel run on a quarterly basis to monitor and assess the progress and effectiveness of the transition.

The rate of interest payable on the innovative instruments can be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate. This means that the instruments can have a predetermined interest rate or have an interest rate that fluctuates based on market conditions. Both options are available for the innovative instruments.

The other names given to Non Performing Assets are Impaired Assets, Stressed Assets, and Assets with well-defined credit weakness. These terms are used interchangeably to refer to assets that are not generating the expected level of income or are at risk of defaulting on their payments.

A consolidated bank refers to a group of entities where a licensed bank is the controlling entity. In this structure, the licensed bank has control over the other entities within the group. This means that the licensed bank has the authority to make decisions and exercise control over the operations and activities of the other entities. This allows for centralized management and coordination of the group's banking activities, ensuring a unified approach and potentially greater efficiency in operations.

A hybrid debt capital instrument is a financial instrument that combines certain characteristics of both equity and debt. This means that it possesses some features of equity, such as the potential for ownership or profit-sharing, as well as some features of debt, such as regular interest payments and a fixed maturity date. This combination allows investors to benefit from both equity-like upside potential and debt-like stability and income.

The total amount raised by a bank through innovative instruments shall not be reckoned as liability for calculation of net demand and time liabilities for the purpose of Reserve requirements and, as such, will not attract CRR/SLR requirements.

The correct answer is the Health Code-based system for classification of advances. The Income Recognition Asset Classification Provisioning and Capital Adequacy norms replaced the earlier system of classifying advances based on health codes. This means that the previous method of categorizing advances according to their health status was replaced by the new norms.

The correct answer is A & C above because according to the given information, the NPA buying Bank can sell it to another Bank after holding it in their books for 15 months. Additionally, they should not sell it back to the Bank from whom it was purchased. Therefore, both options A and C are correct.

The institutions have the right of conversion of their debt into equity when they are participating in the restructure exercise. This means that they can convert the amount of debt owed to them into shares or ownership in the company. This allows the institutions to become shareholders and potentially benefit from any future growth or success of the company.

The correct answer is "Borrowerwise" because for the purpose of asset classification, the accounts are classified based on the borrower. This means that each borrower's accounts are analyzed and categorized separately to assess their creditworthiness and potential risk. By classifying the accounts borrowerwise, it becomes easier to evaluate the overall financial health and repayment capacity of each individual borrower.

In the comprehensive approach, banks are required to adjust both the amount of exposure to a counterparty and the value of any collateral received to account for possible future fluctuations in value due to market movements. This adjustment is referred to as a "haircut". A haircut is a reduction in the value of an asset or collateral to reflect its potential risk or volatility. By applying haircuts, banks ensure that they have a sufficient cushion or buffer to absorb potential losses in case the value of the collateral or exposure decreases.

Assets are classified as Loss Assets straightaway when the available value of realisable security is less than 10% of the loan outstanding. This means that if the value of the security that can be recovered is very low compared to the amount of the loan, the assets are immediately classified as loss assets. This indicates that the loan is unlikely to be recovered and the assets are considered to be a loss for the lender.

Banks cannot reschedule/restructure/renegotiate borrowal accounts with retrospective effect. This means that they cannot make changes to the terms and conditions of a loan agreement that apply to a period of time that has already passed. They can only make changes that apply to future periods.

The correct answer is perpetual. Perpetual instruments have no fixed maturity date and can be considered as a form of permanent capital. They do not have to be repaid by the issuer, and they provide a stable source of funding for the issuer. In the context of Tier I capital, perpetual instruments are often used as a means of raising capital for banks and financial institutions.

The correct answer is "A party to whom a bank has an on- or off-balance sheet credit exposure." This means that the counterparty in bank credit transactions is the individual or entity that the bank has a credit exposure to, whether it is on their balance sheet or off their balance sheet. This could include borrowers, issuers of securities, or other entities that the bank has provided credit to.

Market discipline refers to the mechanism by which market participants, such as investors and creditors, use information and disclosures provided by companies to make informed decisions. In this context, disclosures play a crucial role as they provide transparency and accountability, allowing market participants to evaluate the financial health and performance of a company. By providing relevant and accurate information, disclosures enable market discipline by empowering investors and creditors to assess risks and make informed decisions about their investments. Therefore, the correct answer is "Disclosures".

The NPA status under Consortium Arrangements will be determined based on the record of recovery of the individual member banks. This means that each member bank's ability to recover loans will be assessed to determine if the loan has become a Non-Performing Asset (NPA). The NPA status is not dependent on the classification of 75% of the member banks, the Borrower's Auditor's observation, or the RBI Inspector's observation.

Revaluation Reserve will be considered at a discount of 55% for inclusion in Tier-II Capital.

The provisioning to be made for Country Risk is 0.25% to 100% on a graded scale, according to Country Risk. This means that the amount of provisioning required will vary depending on the level of risk associated with a particular country. The provision can range from as low as 0.25% to as high as 100% based on the risk assessment. Therefore, both options C and D, which state the same answer, are correct.

When erosion in the value of security reaches 50%, it is considered significant enough to classify the account as "Doubtful". This means that the value of the security has decreased by half, indicating a high level of risk and uncertainty regarding the recovery of the funds.

Divergence refers to the difference in assessment of the value of securities among different parties such as the bank, borrower, auditor, and valuer. It indicates that these parties have varying opinions or evaluations regarding the value of the securities. This difference in assessment can arise due to various factors such as differing methodologies, information asymmetry, or subjective judgments.

The innovative instrument in excess of 15% of Total Tier I capital should be treated as Tier II Capital and subject to limits prescribed for Tier 2 capital. This means that any innovative instrument that exceeds 15% of Total Tier I capital should be classified as Tier II capital and must adhere to the limits set for Tier 2 capital. This ensures that there are appropriate regulations and restrictions in place for these instruments to maintain the stability and integrity of the financial system.

The available options under innovative instruments include Call Option, Put Option, American Option, European Option, and In the Money or Out of the Money Option. A Call Option is a financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a specified price within a specific time period. It allows investors to profit from an increase in the price of the underlying asset.