Case study Revision – Bank Financial Management

1. An exposure of Rs 500 secured with financial collateral of A1 Debt securities of Rs 150 issued by
others with Hc of 6% . The term of exposure is 3 years and residual maturity of financial collateral
is 2 years. Determine the adjusted collateral and net exposure. Also calculate Value at risk.

Adjusted Exposure = C x ( 1- Hc – Hfx )

Hfx = 0 ( since there is no currency mismatch)

Adjusted exposure = 150 x (1 – 0.06) = 150 x0.94 = 141

Now we need to see the mismatch on the term. Since loan is for 3 years and collateral is for 2 years.

Adjusted collateral based on term = 141 x ( t-0.25)/(T-0.25)

Admissible collatéral value=141 x(2- 0.25 )/( 3-0.25) = 89.72

Net exposure qualifying for capital adequacy= 500 – 89.72 = 410.28

2. On 15th September UCO Bank received a mail transfer from its New York correspondent for USD
5,000 payable to its customer. Its account with the correspondent bank has been credited with the
amount of the mail transfer in reimbursement.

Assuming US Dollar / Rupee are quoted in the local interbank market as under:

Spot USD 1 = Rs. 49.2500 / 2700

Spot / October 2200 / 2300

Calculate the exchange rate and the Rupee amount payable to the customer bearing in mind that:

(i) The bank requires an exchange margin of 0.080% to be loaded in the rate, and

(ii) Rupee equivalent should be nearest to the whole rupee.

Buying rate = 49.2500

Less margin @0.08% =0.0394

Net rate = 49.2106

Rupee equivalent = 5000 USD x 49.2106 = 2,46,053 Rs.

3. M/s Exports Private Limited have received a letter of credit in their favour for export of certain
goods to UK. The date of expiry of the credit is on and about 31st December 2008. Since the process
involved in manufacturing of goods was little longer, the exporter could present the documents for
negotiation on 3rd January 2009. The documents and in the opinion of the bank, the documents have
not been presented for negotiation, in time. What is the position of the bank and the exporter.

a. Bank has to negotiate the documents as it gets 5 banking days to check the documents have been
presented have been presented during that period.
b. The beneficiary has the right to present the documents within 5 calendar days since date is written
as around Dec 31. Hence, the negotiating bank cannot refuse payment
c. The bank is not under obligation to negotiate the document as the last date for negotiation is over
d. The bank should seek instruction of the opening bank and applicant and more accordingly.

The stand taken by the bank that the documents have been presented after expiry date is not correct.
As per Article 3 (Interpretations) of Uniform Customs and Practices for Documentary Credits (UCPDC

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600), the expression “on or about” or similar, will be interpreted as a stipulation that an event is to occur
during a period of five calendar days before until five calendar days after the specified date, both start
and end dates included. The documents have been presented by the exporter within 3 banking days
after the specified date i.e. Dec 31, 2008. Hence, the bank should negotiate the documents if other wise
in order.

4. Received order of USD 50000(CIF) to Australia on 1.1.2015 when USD/INR Bill Buying Rate is 63.50. How
much pre shipment finance will be released considering profit margin of 10% and Insurance and
freight cost@ 12%. ( Consider Margin 25% for this case)

Value of consignment = 50000 x63.50 = 3175000 Rs

Less insurance & Freight @12% = 381000 Rs
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27,94,000 Rs
Profit margin @10% 2,79,400 Rs.
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25,14,600 Rs
Margin @25% 6,28,650 Rs
Value =18,85,950 Rs.

5. A UK based bank is maintaining is NOSTRO account with a popular bank in New Delhi. Overseas
bank wants to fund its NOSTRO account for an amount of Rs.50 cr against GBP. Spot GBP/INR is
78.70/80. No exchange margin is involved. If the Popular Bank agrees to fund the account, what rate
will be quoted and what amount will popular bank will get in GBP.

Nostro account is maintained by exporter.

Inward Remittance = 50,00,00,000 Rs

Rate to be quoted = 78.70.

Amount of USD = 50,00,00,000/78.70 Rs. =6353240 $

6. An exporter approaches the ABC Bank for pre-shipment and post-shipment loan with estimated sales
of Rs. 500 lakh. The bank sanctions a limit of Rs. 200 lakh, with 30 % margin for pre-shipment loan on FOB
value and margins on bills of 15 % on foreign demand bills and 20 % on foreign Usance bills.
The firm gets an order for USD 60,000 (CIF) to Australia. On 1.1.2015 when the USD/INR rate was Rs.65.50
per USD, the firm approached the Bank for releasing pre-shipment loan (PCL), which is released. On
31.5.2015, the firm submitted export documents, drawn on sight basis for USD 30,000 as full and final
shipment.
The bank purchased the documents at Rs.65.85, adjusted the PCL outstanding and credited the balance
amount to the firm's account, after recovering interest for Normal Transit Period (NTP).The documents
were realized on 30.6.2015 after deduction of foreign bank charges of USD 350. The bank adjusted the
outstanding post shipment advance against the bill.
Bank charged interest for pre-shipment loan @ 6 % up to 90 days and, @ 7 % over 90 days up to 180 days.
For Post shipment credit the Bank charged interest @ 8 % for demand bills and @ 8.5 % for Usance (D/A)
documents up to 90 days and @ 9.50 % thereafter and on all over due interest @ 12%.

a. What is the amount that the Bank can allow as PCL to the exporter against the given export
order, considering the profit margin of 5% and insurance and freight cost of 10% ?
Value of consignment = 60000 x 65.50 =39,30,000 Rs.
Insurance @10% = 3,93,000

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35,37,000

Profit margin @5% = 176,850 Rs

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33,60,150 Rs.

Margin @30% 10,08,045 Rs

Realisable value 23,52,105 Rs.

b. What is the amount of post shipment advance that can be allowed by the Bank under
foreign bills purchased, for the bill submitted by the exporter?
Post shipment = 30000 x65.85 = 19,75, 500 Rs.

c. In the above case, when should the bill be crystallized (latest date), if the bill remains
unrealised for over two months, from the date of purchase (ignore holidays)?

Crystallisation will be done when the bill becomes overdue after 25 days of normal transit
period. Date of overdue will be 25.6.2015. If bill remains overdue, it will be crystallised within
30 days i.e. up to 24.7.2015.

d. What rate of interest will be applicable for charging interest on the export bill at the time
of realisation, for the days beyond Normal Due Date (NDD)?
Rate of interest will be 12% as the overdue interest is stated as 12%

7. International bank has paid up capital of Rs.800 cr,

Free reserves of Rs.600 cr,

Provisions and contingencies reserve Rs.400 cr.

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Revaluation reserve of Rs.600 cr,

Perpetual non-cumulative preference shares of Rs.200 cr,

Subordinated debt of Rs.600 cr.

The risk weighted asset for credit and operational risk are Rs.20000 cr

For market risk Rs.8000 cr.

Based on the above information, answer the following questions?

a.Tier-1 = Capital + Free Reserves + Perpetual non-cumulative preference shares

= 800 + 600 + 200 cr = 1600 cr.What is the amount of Tier-1 capital?

b) Calculate the amount of Tier-2 capital?

=Provisions and contingencies reserves maximum 1.25% of risk weighted assets +

Revaluation reserve at 55% discount + subordinated debts

= (20000+8000) x1.25% + 600 x45% +600

= 350 cr + 270 +600 = 1220

c) Calculate the amount of capital fund? = 1600 + 1220 = 2820 Cr [ T1 capital + T2 capital]

d) What is the capital adequacy ratio of the bank?

= capital employed / RWA = (2820 /28000 ) x10.07%

8.International Bank is having following loan accounts:

(a) A cash credit accounts in favour of a medium enterprise, where sanctioned limit is Rs.100 lakh
(which is unconditionally cancellable) and where the drawn portion is Rs.60 lakh and the undrawn
portion of Rs.40 lakh.

(b) A TL of Rs.700 Cr is sanctioned for a large project which can be drawn down in different stages
over a 3 years period – Rs.150 cr in Stage I, Rs. 200 cr in Stage II and Rs.350 cr in Stage III. Where the
borrower needs the bank’s explicit approval for draw down under Stages II and III after completion
of certain formalities. The borrower has drawn already Rs.50 cr under Stage I.

a) What credit conversion factor will be used to convert the unavailed exposure into a fund-
based exposure other than TL?
Credit conversion factor would be 20%, if the limit is not cancelable and 0% ifs the limit is
unconditionally cancelable.
b) For the undrawn portion of Rs.40 lac, the risk weight value will be.
Risk weight = 40 x0 % = 0 Rs

c) On the term loan, for application of credit conversion factor, the undrawn portion will be taken into
account for:
with in 1 year =20% and more than 1 year = 50%

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d) If stage I is scheduled to be completed within one year, the CCF value of undrawn amount of Rs.100
cr shall be.
CCF = 100 x20% 20 Cr

e) If stage, I is scheduled to be completed in a period of more than one year, what will be the CCF
value?
= 50% x200 =100 Cr.

9. ABC Bank has provided following details :

Tier 1 Capital = Rs.2000cr
Tier 2 Capital = Rs.2400cr.
Risk weighted assets for credit risk = Rs.20000cr
Capital charge for market risk = Rs.1000cr
Capital charge for operational risk = Rs.600cr

a. Based on the given information, please calculate the amount of total risk weighted assets, if
the CAR is 9
Total Risk weight asset = 20000 + 1000/0.09 + 600/0.09 = 37,778.00 Rs

b. What will be the total capital Adequacy ratio ?

T1 = 2000 Cr and T2 is limited to 2000 cr [ T2 should not exceed T1]
CAR = [4000 /37778] x100 = 10.58%

10. Bank-A earned a net profit after tax and provisions of Rs.3000 cr and Bank-B of Rs.1200 cr. Common
Equity Tier I capital ratio of Bank-A is 6.75% after including the current period retained profits. This ratio
for Bank-B is 7%. Both the banks propose to mobilize fresh capital through public issue and to make the
issue attractive, want to pay highest dividend.
RBI rules regarding CCR provide as under:
Ratio after including the Minimum Capital Conservation Rations
Current periods retained (expressed as a percentage of earnings)
Earnings
5.5% - 6.125% 100%
>6.125% - 6.75% 80%
>6.75% - 7.375% 60%
>7.375% -8.0% 40%
>8.0% 0%
Based on the given information, answer the following questions:
a.What is the amount of net profit which the Bank-A is required not to distribute to ensure compliance
of Basel III prescription.
For Bank A , the CET1= 6.75% and conservation is 80% .[ 3000 x80% = 2400 Cr]
b.What is the maximum amount which the Bank-A can distribute as dividend to ensure compliance of
Basel III prescription.
For Bank A can distribute = 3000 -2400 = 600 Cr.

11. Popular bank made an investment in govt. bonds worth Rs.5 cr. The maturity period of the bonds is
5 years, the face value is Rs.100 and the coupon rate is 8%. The bond has a market yield of 10% and the
price is Rs.92.00. Due to change in interest rates, the market yield changes to 9.90% and the market
value to Rs.92.50.

Based on the above information,

a.please calculate the basis point value of the bond.

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Bond yield comes down from 10 % to 9.90 % . Change =10 BP (0.10%)
Bond value changes from 92.00 to 92.50 . Change = 50 Paise
For 10 BP = 50 Paise
1 BP = 50/10 = 5 Paise = 0.05 Rs
For 100 Rs /Bp = 0.05 Rs

b. What will be the change in value of investment, for the total investment of Rs.5 cr for per basis
point change in the yield?

For 5 Cr = {50000000 x0.05 /100}Rs = 25000 Rs.

c. If there is 0.10% change in the yield, what will be change in the value of the bond on an investment
of Rs.5 cr.
=25000 Rs.

12. Bank holds 3 years bonds with face value of Rs.1000 and coupon rate of 6% payable half-yearly.
The current yield is 10% ( YTM) on this bond.
a). What is the present market value of the bond?
b). What is the duration in the above case?
c). Calculate the modified duration in the above case?
d). In the above case, if the yield changes from 10% to 10.5% what will vp0pube the percentage in
value?
Coupon = 6% x1000 = 60/2 = 30 YTM = 10%/2 = 5%
T CF PV PVT
1 30 = 30/1.05=28.57 =28,57x1=28.571
2 30 = 30/1.05^2=27.21 =27.21 x2=54.42
3 30 = 30/1.05^3=25.92 =25.92x3=77.76
4 30 = 30/1.05^4=24.68 =24.68x4=98.72
5 30 = 30/1.05^5=23.51 =23.51x5=117.55
6 1030 = 1030/1.05^6=768.66 =768.66=4611.96
Total = 898.55 =4988.99 Rs

Duration = Sum of PVT /Sum of PV = 4988.99/898.55 =5.55 [5.55/2=2.76 years]

MD = D/(1+YTM) = 2.63 years
Change in Price = - MD x 0.5%= - 2.63 x0.5 = -1.32%

13. Mr. Raj purchases a call option for 400 shares of A with strike price of Rs. 100 having maturity after
03 months for Rs. 20 ( Premium ) and also buy a put option for 200 shares of B with strike price of Rs. 200
having maturity after 03 months for Rs. 30.( Premium ) On maturity, shares of A were priced at Rs. 130
and shares of B were priced at Rs. 180. What is the profit/lost for the individual on the transaction
(without taking the interest cost and exchange commission into calculation)?

Buyer of Call options will make profit => When the market moves up
Buyer of Put option will make profit => when the market goes down.
Shares of A closing price = 130 Rs
Shares of A Strike Price = 100 Rs ( Call option)
Profit = 130 -100 = 30 Rs Less premium paid
Net Profit on call = (30 -20) x 400 = 4000 Rs

Shares of B closing price = 180 Rs & Shares of B strike price = 200 Rs.
Profit = 200 – 180 Rs = 20 Rs Less premium paid
Net loss on Put = 20 – 30 = -10 x 200 = -2000 Rs
Total Profit = 4000 -2000 = 2000 Rs.

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14. . You are provided the following information about the no. loan accounts with different rating, in
International Bank as on Mar 31, 2019 and Mar 31, 2020.

Rating Mar 31, 2019 Mar 31, 2020

AAA AA+ AA A+ A BBB C Default
AAA 100 70 16 4 4 2 2 2 -
AA+ 100 10 60 14 10 - 2 2 2
AA - - - - - - - - -
A+ - - - - - - - - -
A 200 - - - 20 160 12 4 4
BBB 400 - - - 20 - 240 60 80
C 60 - - - - - 10 40 10
Default -
Based on this information, answer the following questions.

i. What is the %age of AAA rated borrower that reminded at the same rating level during the
observation period?
=70%
ii. What is the no. of AAA rated accounts as at the end of observation period:
=80 Accounts [ AAA = 70 + AA+ =10]
iii. What is the percentage of migration of borrowers from A and BBB category to default category
A = 4/200 = 2% and 80/400 = 20 %
iv. What is the percentage of migration of loan accounts from C rated to default category?
=10/60 = 16.66%
v. What is the total no. of borrower in the default category at the beginning and end of the
observation period?
At beginning = Nil . at the End =96
vi. Calculation the percentage for migration of AA+ account to AA category.
=14/100 =14%
vii. What is the percentage of BBB category accounts, that did not change their category during
the during the observation period?
(240/400) =60%
viii. What is the percentage of A category accounts that were upgraded to A+ category?
=20/200 = 10%

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6: Calculation of Standard Gap on the basis of changes in interest rate. International Bank has the
following re-pricing assets and liabilities:
Call Money (Asset) - Rs.500 cr
Cash credit loans - Rs.400 cr
Cash in hand - Rs.100 cr ( Not Rate sensitive)
Saving Bank - Rs.500 cr
Fixed Déposits - Rs.500 cr
Current Deposits - Rs.200 cr ( Not Rate sensitive)
There is reduction in rate of interest by 0.5% in call rates, 1% for cash credit, 0.1% for saving bank and
0.8% for FD.

Based on above information, answer the reprising assets and liabilities?

1. What is the adjusted gap in repricing assets and liabilities?
Adjusted gap = (Call Money + CC) -(SB+FD) = (500 + 400) – (500 + 500) = - Rs.100 cr (assets are less than
liabilities – Hence negative gap). The cash in hand and current account deposits are not subject to re-
pricing, hence these have been ignored.

2. Considering, the change in interest rate, calculate the amount of repricing assets as per the
standard gap method in repricing assets and liabilities?

Call money 500 x 0.5% = Rs.2.50 cr + cash credit 400 x 1% = 4.00 cr. Total = 6.50 cr.

2. Considering, the change in interest rate, calculate the amount of repricing liabilities as per the
standard gap method in repricing assets and liabilities?

SB 500 x 0.1% =0.50 cr + FD 500 x 0.8% = 4.0 cr. Total = 4.50 cr.

3. What is the standard gap of the bank in repricing assets and liabilities?
Net change of NII = 6.5 Cr – 4.5 Cr = 2 Cr.

LTV for Residential Housing,

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