Examination Paper of Risk Management
IIBM Institute of Business Management 1
IIBM Institute of Business Management
Examination Paper MM. 100
Risk Management
Section A: Objective Type (30 Marks)
• This section consists of Multiple Choice questions & short questions.
• Answer all the questions.
• Part one questions carry 1 mark each & Part Two questions carry 5 marks each.
Part One:
Multiple Choices:
1. Which of the following is the characteristic of forward contract?
a. Is traded over the counter?
b. Is a customized financial product
c. Is a credit derivative
d. Both a & b
2. Coordinating all the operational risk activities of the bank, working towards achievement of the stated goals & objective are the task attributed to-
a. Operational risk management committee
b. Operational risk management department
c. Operational risk management officers
d. Chief risk officer
3. This is the risk of adverse deviations of the mark-to-market value of the trading portfolio, due to market movements; during the period required to liquidate the transactions.
a. Market Risk
b. Liquidation Risk
c. Market liquidity Risk
d. Credit & counterparty Risk
4. A fraud acts by a third party, of a type intended to defraud, misappropriate property or circumvent the law is called-
a. Internal fraud
b. External fraud
c. Damage to physical assets
d. Clients, products & business practices
Examination Paper of Risk Management
IIBM Institute of Business Management 2
5. In the standardized approach, bank’s activities are divided into how many business lines?
a. 4
b. 6
c. 8
d. 10
6. Credit risk management committee & credit policy & procedures committee monitors-
a. Market risk
b. Credit risk
c. Operational risk
d. All of the above
7. Which of the following are the duties of risk management committee for credit-
a. Implementation of risk management policy for credit strategy
b. Monitor credit risk
c. Regulatory/ Legal compliances
d. All of the above
8. Duration is defined as__________
a. Time to maturity
b. Average time
c. Weighted average time to maturity
d. Remaining maturity
9. ALCO stands for __________
10. RAROC stands for _____________________.
Part Two:
1. List the principles of risk management.
2. Discuss the sources of risk.
3. What is ‘Asset liability management’? List its objectives in banks.
4. Write a short note on Interest rate risk.
END OF SECTION A
Section B: Caselets (40 Marks)
Examination Paper of Risk Management
IIBM Institute of Business Management 3
• This section consists of Caselets.
• Answer all the questions.
• Each caselet carries 20 marks.
• Detailed information should form the part of your answer (Word limit 150 to 200 words).
Caselet 1
Everybody Bank was set up with a registered office at Gwalior in 1995-96 by a leading financial organization, when the government liberalized its policies and allowed private sector banks to operate. The branch at Gwalior was established on November 13, 1995. Everybody bank was the first private sector bank to commerce its operations at Gwalior. The bank had the advantage of being the first and got good business. Subsequently, other private sector banks also opened their branches in Gwalior. Dinesh joined the branch as branch head in june-1998. His focus was to retain the leadership of the bank with improved profitability. He adopted a multi-programmed strategy which yielded good results during the three years of working. The bank not only continued to be a leader in private sector banks but also established nationalized banks. In 2001, it stood to the State Bank of India. Profitability also improved during these years.
Dinesh had joined Everybody Bank in 1997, after serving more than 20 years in a leading nationalized bank. After serving for 1.5 years in other branches, he was posted at the Gwalior’s branch as the Branch head in June 1998. The new generation of banks was setup with a clear focus on the corporate sector during its initial phases. The Gwalior branch of everybody bank also had the same focus with 85 percent of total advances in the corporate sector and a residual 15 percent in the retail sector. Gradual opening up of the economy, and increasing competition, forced the corporate sector to improve the quality of services and to reduce the cost. In its search, the interest component gained focus and the corporate started looking for avenues to mobilize low cost funds. RBI also gradually reduced the bank rate resulting in reduction of the margin of profit, in the banks.
The deposits of the Gwalior branch consisted of high cost funds, namely, certificate of deposits at the rate of 13-14 percent. The need of the hour was to collect the resources; therefore, all resources were tapped irrespective of their costs. Considering the reduction in the margin of corporate sector, the bank changed its focus from the corporate to the retail segment. It came up with the portfolio of schemes in the housing loans, car loans, educational loans, loan against demat shares and personal loans. It resulted in the increases of the share of retail segment from 15 percent to 50 percent and corresponding reduction in the corporate segment from 85 percent to 15 percent. The strategy resulted in the improvement of the margin of the bank to a level of 3-4 per cent.
Another strategy adopted by the bank, with a view to reduce the cost of resources, was to concentrate on saving bank account and current account. With a view to tap the low cost funds, the strategy adopted was to setup a network of branches in various cities. In 1998, there was only one branch in the city and by the end of 2001 the number of ATMs across the city. The number of ATMs increased from one to five by 2001. They also came up with services like mobile banking, internet banking etc.
Examination Paper of Risk Management
IIBM Institute of Business Management 4
Another important step taken by Dinesh in this direction was established high service standards. The complaints from the customers were taken up seriously. Also, schemes of performance-linked increment/bonus were adopted. The performance expectations of the management were high. The bank also focused on all the areas of administrative cost very reduction. In this direction the staff requirement was reviewed and the class four positions were reduced. The arrangements with taxi operators: courier service companies were renegotiated for reducing the cost. For example, the courier cost per package was reduced from Rs. 30 to Rs. 15. The executives voluntarily decided to travel in the economy class and do not during the night, so as to avoid overnight stay charges. Although the not, the overtime allowances was permissible, but in order to reduce the cost, the practice of payment of overtime was stopped. These strategies resulted in saving of the bank, from Rs. 4.2 crores in 1998, to cover Rs 20 crores in 2001. total deposits increased during these three years from Rs. 112 crores to 200 crores.
The assets of the bank had increased from 100 crore in 1998 to 267 crore in 2001. in addition to this, 65 crores were sanctioned in a non-fund limit. Dinesh also concentrated on improving the quality of assets. The proactive approach of Dinesh resulted in the leading position of the branch during his tenure of three years as the bank, i.e. , business per employee was the highest amongst all the 65 branches of the bank and on the basis of profit per employee, the branch was ranked third. Achievements of Dinesh were appreciated by the management in the meeting. After returning to his headquarters, sitting in his chamber he has wondering as to what should be his future plan of action for further growth.
Questions:
1. Critically analyze the strategies adopted by Dinesh to retain the leading position.
2. What additional steps Dinesh could have taken to improve the profitability?
Caselet 2
Established in 1950 Ramakrishna Motors Ltd.is one of the India’s pioneers in vehicle Manufacturing with a total investment of Rs.500 crore and currently has a gross capital Employed of Rs 906 crores (Annexure I).Over the years, Ramakrishna Motors Ltd, has Established a reputation as a quality-conscious company with a unique corporate culture. The company had collaboration with Tshi Mishu, Japan Ramakrishna Motors Ltd. Was Recognized internationally for its expertise in design and manufacture of a wide range of Products from general purpose engines to specialty, technology and processes. Ramakrishna Motors had a single product in the car segment named Amanda. Ramakrishna Motors Ltd. Is a part of Ramakrishna group, which besides automobile manufacturing also had an Export company? The company had enjoyed a monopoly in the passenger car segment for 50 years. However it had failed to diversify into other related products or introduce cars; in different segments. It had started its operations throughout the country and had plants located at Rajkot, Nagpur, Bangalore and Agra.
AGRA PLANT
The Agra plant was established in April, 1989 with an investment of Rs 150 crores. The project was an ambitious venture started with the intention of converting Agra into the Detroit of India. The required investment of Rs.150 crores was funded by the promoter as Well as various financial institutions such as International Financial Corporation (IFC), Asian Development Bank, IDBI, IFCI and ICICI. The institutions provided the funds on The basis of the future projections of
Examination Paper of Risk Management
IIBM Institute of Business Management 5
the Agra plant. The plant was able to acquire funds at The rate of 6.25% from foreign financial institution namely, IFCI and Asian Development Back whereas, the loan from the Indian financial institutions namely, IDBI, ICICI and IFCI was obtained at 16%. The plant was set up on 40 acres of land which was leased from the Uttar Pradesh State Government for 99 years at the low rate of 0.05 paisa per square metre. The plant employed a total of 1,000 persons consisting of both skilled and unskilled personnel to man the unit. The Agra plant had two units namely, the gear box unit and engine unit. The machinery installed in the plant was state-of-the-art technology and imported mainly from Japan. The total investment in plant and machinery was Rs. 120 crores which was depreciated under Schedule 14 of the Companies Act, 1956 at the rate of 4.75% for single shift and at the rate of 8.25% for the double shift for the purpose of Income Tax Act. The plant was initially hoping to come out with a car in the small car segment called Libra. The car was expected to capture a large market segment due to its high quality, cost competitiveness and few players in the market. However, the company failed to obtain the license for the manufacture of the vehicle due to the government requirement of foreign currency which resulted in the license going to Maruti Udyog Limited which was a foreign collaboration of Government of Government of India with Suzuki, Japan. It was therefore, decided that the Agra plant would act as a feeder plant for the Bangalore plant, which manufactured the model Amanda. The Agra plant hoped to supply 30,000 units and thereby, achieve 100% installed capacity utilization.
In the early nineties the process of liberalization and globalization was ushered into Indian economy. This process of liberalization saw the end of the license raj and a number of new players in the car manufacturing segment entered the market. Due to this, the company’s product faced stiff competition and there was a steady decline in the sales of Amanda. This resulted in a decline in demand of the parent plant for the products manufactured at Agra. The parent company which had a total workforce of 16,000 began downsizing and retrenched 10,000 of its employees. The Agra plant which had 1,000 employee strength downsized itself to a total of 500 employees. This plant which was set up anticipating 100% capacity utilization saw itself facing a problem of under utilization of production capacity as only 40% of the capacity could be utilized. The Agra plant being a feeder plant found itself in a loss making situation where it became difficult to recover its fixed overheads. At around this time, the Indian economy too was hit by a recessionary phase and there was an overall decline in demand in the passenger car segment. The Agra plant started considering ways to get itself out of the loss making situation.
The plant has been recording a loss and although it has paid back the IFC loan, it has been unable to pay back the Indian financial institutions as a result of which it was unable to get any further funding from them. In 1999, one of its competitors Ford Company Ltd. Approach the plant with a proposal for using the unutilized capacity. The proposal was that the five C’s namely, cylinder block, cylinder head, crank shaft, cam shaft and connecting rod which the plant was making for its parent company, would be modified and homolocated for the Ford company cars. This would involve an expense of approximately Rs. 2 crores in terms of general equipment. However, specific equipment and tools would be invested by the Ford Company. In case the arrangement was discontinued at a later date, the Ford Company would take away its equipment. The arrangement would increase capacity utilization of the Agra plant to the extent
Examination Paper of Risk Management
IIBM Institute of Business Management 6
of 5%. The finance manager was seriously considering this proposal and was analyzing the investment decision on the basis of Accounting Rate of Return.
Questions:
1. Evaluate the company’s investment decision with specific reference to the Agra plant.
2. Had you been the finance manager, would you accept Ford Motors proposal? Why?
3. Do you think the finance manager needs to be concerned about the low depreciation provision? Why?
4. What according to you is the source of finance available to Ramakrishna Motors Ltd in case it is required to finance the Ford proposal for the Agra plant?
END OF SECTION B
Section C: Applied Theory (30 Marks)
• This section consists of Long Questions.
• Answer all the questions.
• Each question carry 15 marks each.
• Detailed information should from the part of your Answer (Word limit 200 to 250 words)
1. Define “Risk”, Explain types of risk faced by a bank or financial institutions?
2. What is “Credit risk management”? Explain its objectives?
END OF SECTION C
IIBM Institute of Business Management 1
IIBM Institute of Business Management
Examination Paper MM. 100
Risk Management
Section A: Objective Type (30 Marks)
• This section consists of Multiple Choice questions & short questions.
• Answer all the questions.
• Part one questions carry 1 mark each & Part Two questions carry 5 marks each.
Part One:
Multiple Choices:
1. Which of the following is the characteristic of forward contract?
a. Is traded over the counter?
b. Is a customized financial product
c. Is a credit derivative
d. Both a & b
2. Coordinating all the operational risk activities of the bank, working towards achievement of the stated goals & objective are the task attributed to-
a. Operational risk management committee
b. Operational risk management department
c. Operational risk management officers
d. Chief risk officer
3. This is the risk of adverse deviations of the mark-to-market value of the trading portfolio, due to market movements; during the period required to liquidate the transactions.
a. Market Risk
b. Liquidation Risk
c. Market liquidity Risk
d. Credit & counterparty Risk
4. A fraud acts by a third party, of a type intended to defraud, misappropriate property or circumvent the law is called-
a. Internal fraud
b. External fraud
c. Damage to physical assets
d. Clients, products & business practices
Examination Paper of Risk Management
IIBM Institute of Business Management 2
5. In the standardized approach, bank’s activities are divided into how many business lines?
a. 4
b. 6
c. 8
d. 10
6. Credit risk management committee & credit policy & procedures committee monitors-
a. Market risk
b. Credit risk
c. Operational risk
d. All of the above
7. Which of the following are the duties of risk management committee for credit-
a. Implementation of risk management policy for credit strategy
b. Monitor credit risk
c. Regulatory/ Legal compliances
d. All of the above
8. Duration is defined as__________
a. Time to maturity
b. Average time
c. Weighted average time to maturity
d. Remaining maturity
9. ALCO stands for __________
10. RAROC stands for _____________________.
Part Two:
1. List the principles of risk management.
2. Discuss the sources of risk.
3. What is ‘Asset liability management’? List its objectives in banks.
4. Write a short note on Interest rate risk.
END OF SECTION A
Section B: Caselets (40 Marks)
Examination Paper of Risk Management
IIBM Institute of Business Management 3
• This section consists of Caselets.
• Answer all the questions.
• Each caselet carries 20 marks.
• Detailed information should form the part of your answer (Word limit 150 to 200 words).
Caselet 1
Everybody Bank was set up with a registered office at Gwalior in 1995-96 by a leading financial organization, when the government liberalized its policies and allowed private sector banks to operate. The branch at Gwalior was established on November 13, 1995. Everybody bank was the first private sector bank to commerce its operations at Gwalior. The bank had the advantage of being the first and got good business. Subsequently, other private sector banks also opened their branches in Gwalior. Dinesh joined the branch as branch head in june-1998. His focus was to retain the leadership of the bank with improved profitability. He adopted a multi-programmed strategy which yielded good results during the three years of working. The bank not only continued to be a leader in private sector banks but also established nationalized banks. In 2001, it stood to the State Bank of India. Profitability also improved during these years.
Dinesh had joined Everybody Bank in 1997, after serving more than 20 years in a leading nationalized bank. After serving for 1.5 years in other branches, he was posted at the Gwalior’s branch as the Branch head in June 1998. The new generation of banks was setup with a clear focus on the corporate sector during its initial phases. The Gwalior branch of everybody bank also had the same focus with 85 percent of total advances in the corporate sector and a residual 15 percent in the retail sector. Gradual opening up of the economy, and increasing competition, forced the corporate sector to improve the quality of services and to reduce the cost. In its search, the interest component gained focus and the corporate started looking for avenues to mobilize low cost funds. RBI also gradually reduced the bank rate resulting in reduction of the margin of profit, in the banks.
The deposits of the Gwalior branch consisted of high cost funds, namely, certificate of deposits at the rate of 13-14 percent. The need of the hour was to collect the resources; therefore, all resources were tapped irrespective of their costs. Considering the reduction in the margin of corporate sector, the bank changed its focus from the corporate to the retail segment. It came up with the portfolio of schemes in the housing loans, car loans, educational loans, loan against demat shares and personal loans. It resulted in the increases of the share of retail segment from 15 percent to 50 percent and corresponding reduction in the corporate segment from 85 percent to 15 percent. The strategy resulted in the improvement of the margin of the bank to a level of 3-4 per cent.
Another strategy adopted by the bank, with a view to reduce the cost of resources, was to concentrate on saving bank account and current account. With a view to tap the low cost funds, the strategy adopted was to setup a network of branches in various cities. In 1998, there was only one branch in the city and by the end of 2001 the number of ATMs across the city. The number of ATMs increased from one to five by 2001. They also came up with services like mobile banking, internet banking etc.
Examination Paper of Risk Management
IIBM Institute of Business Management 4
Another important step taken by Dinesh in this direction was established high service standards. The complaints from the customers were taken up seriously. Also, schemes of performance-linked increment/bonus were adopted. The performance expectations of the management were high. The bank also focused on all the areas of administrative cost very reduction. In this direction the staff requirement was reviewed and the class four positions were reduced. The arrangements with taxi operators: courier service companies were renegotiated for reducing the cost. For example, the courier cost per package was reduced from Rs. 30 to Rs. 15. The executives voluntarily decided to travel in the economy class and do not during the night, so as to avoid overnight stay charges. Although the not, the overtime allowances was permissible, but in order to reduce the cost, the practice of payment of overtime was stopped. These strategies resulted in saving of the bank, from Rs. 4.2 crores in 1998, to cover Rs 20 crores in 2001. total deposits increased during these three years from Rs. 112 crores to 200 crores.
The assets of the bank had increased from 100 crore in 1998 to 267 crore in 2001. in addition to this, 65 crores were sanctioned in a non-fund limit. Dinesh also concentrated on improving the quality of assets. The proactive approach of Dinesh resulted in the leading position of the branch during his tenure of three years as the bank, i.e. , business per employee was the highest amongst all the 65 branches of the bank and on the basis of profit per employee, the branch was ranked third. Achievements of Dinesh were appreciated by the management in the meeting. After returning to his headquarters, sitting in his chamber he has wondering as to what should be his future plan of action for further growth.
Questions:
1. Critically analyze the strategies adopted by Dinesh to retain the leading position.
2. What additional steps Dinesh could have taken to improve the profitability?
Caselet 2
Established in 1950 Ramakrishna Motors Ltd.is one of the India’s pioneers in vehicle Manufacturing with a total investment of Rs.500 crore and currently has a gross capital Employed of Rs 906 crores (Annexure I).Over the years, Ramakrishna Motors Ltd, has Established a reputation as a quality-conscious company with a unique corporate culture. The company had collaboration with Tshi Mishu, Japan Ramakrishna Motors Ltd. Was Recognized internationally for its expertise in design and manufacture of a wide range of Products from general purpose engines to specialty, technology and processes. Ramakrishna Motors had a single product in the car segment named Amanda. Ramakrishna Motors Ltd. Is a part of Ramakrishna group, which besides automobile manufacturing also had an Export company? The company had enjoyed a monopoly in the passenger car segment for 50 years. However it had failed to diversify into other related products or introduce cars; in different segments. It had started its operations throughout the country and had plants located at Rajkot, Nagpur, Bangalore and Agra.
AGRA PLANT
The Agra plant was established in April, 1989 with an investment of Rs 150 crores. The project was an ambitious venture started with the intention of converting Agra into the Detroit of India. The required investment of Rs.150 crores was funded by the promoter as Well as various financial institutions such as International Financial Corporation (IFC), Asian Development Bank, IDBI, IFCI and ICICI. The institutions provided the funds on The basis of the future projections of
Examination Paper of Risk Management
IIBM Institute of Business Management 5
the Agra plant. The plant was able to acquire funds at The rate of 6.25% from foreign financial institution namely, IFCI and Asian Development Back whereas, the loan from the Indian financial institutions namely, IDBI, ICICI and IFCI was obtained at 16%. The plant was set up on 40 acres of land which was leased from the Uttar Pradesh State Government for 99 years at the low rate of 0.05 paisa per square metre. The plant employed a total of 1,000 persons consisting of both skilled and unskilled personnel to man the unit. The Agra plant had two units namely, the gear box unit and engine unit. The machinery installed in the plant was state-of-the-art technology and imported mainly from Japan. The total investment in plant and machinery was Rs. 120 crores which was depreciated under Schedule 14 of the Companies Act, 1956 at the rate of 4.75% for single shift and at the rate of 8.25% for the double shift for the purpose of Income Tax Act. The plant was initially hoping to come out with a car in the small car segment called Libra. The car was expected to capture a large market segment due to its high quality, cost competitiveness and few players in the market. However, the company failed to obtain the license for the manufacture of the vehicle due to the government requirement of foreign currency which resulted in the license going to Maruti Udyog Limited which was a foreign collaboration of Government of Government of India with Suzuki, Japan. It was therefore, decided that the Agra plant would act as a feeder plant for the Bangalore plant, which manufactured the model Amanda. The Agra plant hoped to supply 30,000 units and thereby, achieve 100% installed capacity utilization.
In the early nineties the process of liberalization and globalization was ushered into Indian economy. This process of liberalization saw the end of the license raj and a number of new players in the car manufacturing segment entered the market. Due to this, the company’s product faced stiff competition and there was a steady decline in the sales of Amanda. This resulted in a decline in demand of the parent plant for the products manufactured at Agra. The parent company which had a total workforce of 16,000 began downsizing and retrenched 10,000 of its employees. The Agra plant which had 1,000 employee strength downsized itself to a total of 500 employees. This plant which was set up anticipating 100% capacity utilization saw itself facing a problem of under utilization of production capacity as only 40% of the capacity could be utilized. The Agra plant being a feeder plant found itself in a loss making situation where it became difficult to recover its fixed overheads. At around this time, the Indian economy too was hit by a recessionary phase and there was an overall decline in demand in the passenger car segment. The Agra plant started considering ways to get itself out of the loss making situation.
The plant has been recording a loss and although it has paid back the IFC loan, it has been unable to pay back the Indian financial institutions as a result of which it was unable to get any further funding from them. In 1999, one of its competitors Ford Company Ltd. Approach the plant with a proposal for using the unutilized capacity. The proposal was that the five C’s namely, cylinder block, cylinder head, crank shaft, cam shaft and connecting rod which the plant was making for its parent company, would be modified and homolocated for the Ford company cars. This would involve an expense of approximately Rs. 2 crores in terms of general equipment. However, specific equipment and tools would be invested by the Ford Company. In case the arrangement was discontinued at a later date, the Ford Company would take away its equipment. The arrangement would increase capacity utilization of the Agra plant to the extent
Examination Paper of Risk Management
IIBM Institute of Business Management 6
of 5%. The finance manager was seriously considering this proposal and was analyzing the investment decision on the basis of Accounting Rate of Return.
Questions:
1. Evaluate the company’s investment decision with specific reference to the Agra plant.
2. Had you been the finance manager, would you accept Ford Motors proposal? Why?
3. Do you think the finance manager needs to be concerned about the low depreciation provision? Why?
4. What according to you is the source of finance available to Ramakrishna Motors Ltd in case it is required to finance the Ford proposal for the Agra plant?
END OF SECTION B
Section C: Applied Theory (30 Marks)
• This section consists of Long Questions.
• Answer all the questions.
• Each question carry 15 marks each.
• Detailed information should from the part of your Answer (Word limit 200 to 250 words)
1. Define “Risk”, Explain types of risk faced by a bank or financial institutions?
2. What is “Credit risk management”? Explain its objectives?
END OF SECTION C
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