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1. Risk Management
Part One:
Multiple Choices:
1. It representsthe owner’sstake inthe bank&it servesasa cushionfordepositors&creditorsto
fall backin case of losses.
a. Capital
b. Reserve &Surplus
c. Deposits
d. Borrowings
2. This involvesevaluatingwhetherabankhas sufficientliquiditydependsinlarge measureon
the behaviorof cash flowsunderthe differentconditions.
a. The maturityladder
b. AlternativeScenarios
c. Measuringliquidityoverthe chosentime frame
d. Assumptionsusedindeterminingcashflows
3. This isthe risk of adverse deviationsof the mark-to-marketvalueof the tradingportfolio,due
to marketmovements;duringthe periodrequiredtoliquidate the transactions.
a. Market Risk
b. LiquidationRisk
c. Market liquidityRisk
d. Credit& counterpartyRisk
4.__________ isbuyingorsellinganassetonlyforthe purpose of makingprofitfrommovement
of the assetprice overa periodof time.
a. Arbitrage
b. Derivatives
c. D-mat account
d. Speculation
5. A combinationof spot& forwardtransactionsiscalleda ___________
a. Advances
b. Foreignbills
c. Swap
d. Loans
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6.__________ Moneyreferstoplacementof fundsbeyondovernightforperiodsnotexceeding14
days.
a. Call money
b. Notice money
c. Term money
d. None
7. A short-termdebtmarketpaperissuedbycorporate,withamaximummaturityof 1 year.
a. TreasuryBills

2. b. Certificatesof deposit
c. Repo
d. Commercial paper
8. It refersto the abilityof a businessconcerntoborrow or buildupassets,onthe basisof a given
capital.
a. Leverages
b. Confirmation
c. DVP
d. Volatility
9.__________ Limitsare keptinplace to protectthe bankfromcreditrisk.
a. Exposure ceiling
b. Stop-loss
c. Organizational controls
d. Limitsontradingpositions
10. RAROCstandsfor _____________________.
Part Two:
1. Differentiate betweenoptions& Forward contract.
2. Write downthe steps whichare taken by RBI to encourage the derivative market.
3. Whatis Basic indicator Approach (BIA)?
4. Write a short note on profitabilityinIndian Banks.
END OF SECTION A
SectionB: Caselets(40Marks)
Caselet1
EverybodyBankwasset upwitha registeredofficeatGwalior in1995-96 by a leadingfinancial
organization,whenthe governmentliberalizeditspoliciesandallowedprivatesectorbanksto
operate.The branchat GwaliorwasestablishedonNovember13,1995. Everybodybankwasthe
firstprivate sectorbankto commerce itsoperationsatGwalior.The bankhad the advantage of
beingthe firstandgot good business.Subsequently,otherprivate sectorbanksalsoopenedtheir
branchesinGwalior.Dineshjoinedthe branchas branchheadin june-1998.His focuswas to
retainthe leadershipof the bankwithimprovedprofitability.He adoptedamulti-programmed
strategywhichyieldedgoodresultsduringthe three yearsof working.The banknotonly
continuedtobe a leaderinprivate sectorbanksbutalso establishednationalizedbanks.In2001, it
stoodto the State Bankof India.Profitabilityalsoimprovedduringtheseyears.
DineshhadjoinedEverybodyBankin1997, after servingmore than20 yearsina leading
nationalizedbank.Afterservingfor1.5 yearsinotherbranches,he was postedatthe Gwalior’s
branch as the Branch headin June 1998. The new generationof bankswassetupwithaclear
focuson the corporate sector duringitsinitial phases.The Gwaliorbranchof everybodybankalso
had the same focuswith85 percentof total advancesinthe corporate sector anda residual 15
percentinthe retail sector.Gradual openingupof the economy,andincreasingcompetition,
forcedthe corporate sector to improve the qualityof servicesandtoreduce the cost.In itssearch,
the interestcomponentgainedfocusandthe corporate startedlookingforavenuestomobilize low
cost funds.RBIalsograduallyreducedthe bankrate resultinginreductionof the marginof profit,
inthe banks.

3. The depositsof the Gwaliorbranchconsistedof highcostfunds,namely,certificate of depositsat
the rate of 13-14 percent.The needof the hourwas to collectthe resources;therefore,all
resourceswere tappedirrespective of theircosts.Consideringthe reductioninthe marginof
corporate sector,the bank changeditsfocusfrom the corporate to the retail segment.Itcame up
withthe portfolioof schemesinthe housingloans,carloans,educational loans,loanagainst
dematsharesand personal loans.Itresultedinthe increasesof the share of retail segmentfrom15
percentto 50 percentandcorrespondingreductioninthe corporate segmentfrom85 percentto15
percent.The strategyresultedinthe improvementof the marginof the bankto a level of 3-4per
cent.
Anotherstrategyadoptedby the bank,witha view toreduce the cost of resources,wasto
concentrate onsavingbankaccount and currentaccount. Witha view totap the low cost funds,
the strategyadoptedwasto setupa networkof branchesinvariouscities.In1998, there wasonly
one branch inthe city and bythe endof 2001 the numberof ATMs across the city.The numberof
ATMs increasedfromone tofive by2001. Theyalsocame up withserviceslikemobile banking,
internetbankingetc.
AnotherimportantsteptakenbyDineshinthisdirectionwasestablishedhighservice standards.
The complaintsfromthe customerswere takenupseriously.Also,schemesof performance
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linkedincrement/bonuswere adopted.The performance expectationsof the managementwere
high.The bank alsofocusedonall the areas of administrativecostveryreduction.Inthis
directionthe staff requirementwasreviewedandthe classfourpositionswerereduced.The
arrangementswithtaxi operators:courierservice companieswere renegotiatedforreducingthe
cost. For example,the couriercostperpackage was reducedfromRs.30 to Rs. 15. The
executivesvoluntarilydecidedtotravel inthe economyclassanddonot duringthe night,soas to
avoidovernightstaycharges.Althoughthe not,the overtimeallowanceswaspermissible,butin
orderto reduce the cost, the practice of paymentof overtime wasstopped.These strategies
resultedinsavingof the bank,fromRs. 4.2 crores in1998, to coverRs 20 croresin 2001. total
depositsincreasedduringthesethree yearsfromRs.112 crores to200 crores.
The assetsof the bankhad increasedfrom100 crore in1998 to 267 crore in2001. inadditionto
this,65 croreswere sanctionedinanon-fundlimit.Dineshalsoconcentratedonimprovingthe
qualityof assets.The proactive approachof Dineshresultedinthe leadingpositionof the branch
duringhistenure of three yearsas the bank,i.e.,businessperemployee wasthe highestamongst
all the 65 branchesof the bank andon the basisof profitperemployee,the branchwasranked
third.Achievementsof Dineshwere appreciatedbythe managementinthe meeting.After
returningtohisheadquarters,sittinginhischamberhe haswonderingastowhat shouldbe his
future planof actionfor furthergrowth.
Questions:
1. Criticallyanalyze the strategiesadoptedby Dineshto retain the leadingposition.
2. Whatadditional stepsDineshcould have taken to improve the profitability?
Caselet2
Establishedin 1950 RamakrishnaMotorsLtd.isone of the India’spioneersinvehicle
Manufacturingwitha total investmentof Rs.500crore and currentlyhasa gross capital Employed

4. of Rs 906 crores (Annexure I).Overthe years,RamakrishnaMotorsLtd,has Establisheda
reputationasa quality-consciouscompanywithaunique corporate culture.The companyhad
collaborationwithTshi Mishu,JapanRamakrishnaMotorsLtd.Was Recognizedinternationally
for itsexpertiseindesignandmanufacture of awide range of Productsfromgeneral purpose
enginestospecialty,technologyandprocesses.RamakrishnaMotorshada single productinthe
car segmentnamedAmanda.RamakrishnaMotorsLtd.Is a part of Ramakrishnagroup,which
besidesautomobile manufacturingalsohadanExportcompany?The companyhad enjoyeda
monopolyinthe passengercarsegmentfor50 years.Howeverithadfailedtodiversifyintoother
relatedproductsorintroduce cars; indifferentsegments.Ithadstarteditsoperationsthroughout
the country andhad plantslocatedat Rajkot,Nagpur,Bangalore andAgra.
AGRA PLANT
The Agra plantwas establishedinApril,1989 withan investmentof Rs150 crores. The project
was an ambitiousventurestartedwiththe intentionof convertingAgraintothe Detroitof India.
The requiredinvestmentof Rs.150crores wasfundedbythe promoteras Well as various
financial institutionssuchasInternational Financial Corporation(IFC),AsianDevelopment
Bank,IDBI, IFCIand ICICI.The institutionsprovidedthe fundsonThe basisof the future
projectionsof the Agraplant.The plantwas able to acquire fundsatThe rate of 6.25% from
foreignfinancial institutionnamely,IFCIandAsianDevelopmentBackwhereas,the loanfrom
the Indianfinancial institutionsnamely,IDBI,ICICIand IFCIwasobtainedat16%. The plant
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was setup on40 acresof landwhichwasleasedfromthe Uttar PradeshState Governmentfor99
yearsat the lowrate of 0.05 paisaper square metre.The plantemployedatotal of 1,000 persons
consistingof bothskilledandunskilledpersonnel tomanthe unit.The Agra planthadtwo units
namely,the gearbox unitand engine unit.The machineryinstalledinthe plantwasstate-of-theart
technology andimportedmainlyfromJapan.The total investmentinplantandmachinerywas
Rs. 120 crores whichwasdepreciatedunderSchedule14 of the CompaniesAct,1956 at the rate
of 4.75% for single shiftandatthe rate of 8.25% forthe double shiftforthe purpose of Income
Tax Act.The plantwas initiallyhopingtocome outwitha car in the small car segmentcalled
Libra.The car wasexpectedtocapture a large marketsegmentdue toitshighquality,cost
competitivenessandfewplayersinthe market.However,the companyfailedtoobtainthe license
for the manufacture of the vehicle due tothe governmentrequirementof foreigncurrencywhich
resultedinthe licensegoingtoMaruti Udyog Limitedwhichwasa foreigncollaborationof
Governmentof Governmentof IndiawithSuzuki,Japan.Itwastherefore,decidedthatthe Agra
plantwouldact as a feederplantforthe Bangalore plant,whichmanufacturedthe model Amanda.
The Agra planthopedto supply30,000 unitsand thereby,achieve100% installedcapacity
utilization.
In the earlyninetiesthe processof liberalizationandglobalizationwasusheredintoIndian
economy.Thisprocessof liberalizationsaw the endof the license raj anda numberof new
playersinthe car manufacturingsegmententeredthe market. Due tothis,the company’sproduct
facedstiff competitionandthere wasa steadydecline inthe salesof Amanda.Thisresultedina
decline indemandof the parentplantforthe productsmanufacturedatAgra. The parentcompany
whichhad a total workforce of 16,000 begandownsizingandretrenched10,000 of itsemployees.
The Agra plantwhichhad 1,000 employee strengthdownsizeditself toatotal of 500 employees.
Thisplantwhichwas setup anticipating100% capacity utilizationsaw itselffacingaproblemof

5. underutilizationof productioncapacityasonly40% of the capacitycouldbe utilized.The Agra
plantbeinga feederplantfounditselfinalossmakingsituationwhere itbecame difficultto
recoveritsfixedoverheads.Ataroundthistime,the Indianeconomytoowashitby a
recessionaryphase andthere wasanoverall declineindemandinthe passengercarsegment.The
Agra plantstartedconsideringwaystogetitself outof the lossmakingsituation.
The plant hasbeenrecordingalossand although ithas paidback the IFC loan,ithas beenunable
to pay back the Indianfinancial institutionsasa resultof whichitwas unable togetany further
fundingfromthem.In1999, one of itscompetitorsFordCompanyLtd.Approachthe plantwitha
proposal forusingthe unutilizedcapacity.The proposal wasthatthe five C’snamely,cylinder
block,cylinderhead,crankshaft,camshaftand connectingrodwhichthe plantwas makingfor
itsparentcompany,wouldbe modifiedandhomolocatedforthe Fordcompany cars.This would
involve anexpense of approximatelyRs.2crores intermsof general equipment.However,
specificequipmentandtoolswouldbe investedbythe FordCompany.Incase the arrangement
was discontinuedata laterdate,the Ford Companywouldtake awayitsequipment.The
arrangementwouldincrease capacityutilizationof the Agraplanttothe extentof 5%.The
finance managerwasseriouslyconsideringthisproposal andwasanalyzingthe investment
decisiononthe basisof AccountingRate of Return.
Questions:
1. Evaluate the company’sinvestmentdecisionwithspecificreferencetothe Agraplant.
2. Had you beenthe finance manager, wouldyou accept Ford Motors proposal?Why?
3. Do you think the finance manager needsto be concerned about the low depreciation
provision?Why?
4. Whataccording to you is the source of finance available to Ramakrishna Motors Ltd in
case it is requiredto finance the Ford proposal for the Agra plant?
SectionC:AppliedTheory(30Marks)
1. “Whenasteel company goes bankrupt, other companiesin the same industry benefit
because they have one lesscompetitor.But whena bank goesbankrupt, otherbanks do
not necessarilybenefit.” Explainthisstatement.
2. “The existence ofdepositinsurance makes it particularly important for there to be
regulationson the amount of capital banks hold.” Explainthis statement.