Examination Paper: 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 notes type questions.
•Answer all the questions.
•Part one questions carry 1 mark each & Part Two questions carry 5 marks each.
Part One:
Multiple Choices:
1. It represents the owner’s stake in the bank & it serves as a cushion for depositors & creditors to
fall back in case of losses.
a. Capital
b. Reserve & Surplus
c. Deposits
d. Borrowings
2. This involves evaluating whether a bank has sufficient liquidity depends in large measure on
the behavior of cash flows under the different conditions.
a. The maturity ladder
b. Alternative Scenarios
c. Measuring liquidity over the chosen time frame
d. Assumptions used in determining cash flows
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.__________ is buying or selling an asset only for the purpose of making profit from movement
of the asset price over a period of time.
a. Arbitrage
b. Derivatives
c. D-mat account
d. Speculation
5. A combination of spot & forward transactions is called a ___________
a. Advances
b. Foreign bills
c. Swap
d. Loans
Examination Paper: Risk Management
IIBM Institute of Business Management 2
6.__________ Money refers to placement of funds beyond overnight for periods not exceeding 14
days.
a. Call money
b. Notice money
c. Term money
d. None
7. A short-term debt market paper issued by corporate, with a maximum maturity of 1 year.
a. Treasury Bills
b. Certificates of deposit
c. Repo
d. Commercial paper
8. It refers to the ability of a business concern to borrow or build up assets, on the basis of a given
capital.
a. Leverages
b. Confirmation
c. DVP
d. Volatility
9.__________ Limits are kept in place to protect the bank from credit risk.
a. Exposure ceiling
b. Stop-loss
c. Organizational controls
d. Limits on trading positions
10. RAROC stands for _____________________.
Part Two:
1. Differentiate between options & Forward contract.
2. Write down the steps which are taken by RBI to encourage the derivative market.
3. What is Basic indicator Approach (BIA)?
4. Write a short note on profitability in Indian Banks.
END OF SECTION A
Examination Paper: Risk Management
IIBM Institute of Business Management 3
Section B: Caselets (40 Marks)
•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.
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
Examination Paper: Risk Management
IIBM Institute of Business Management 4
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 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
Examination Paper: Risk Management
IIBM Institute of Business Management 5
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-theart
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 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?
Examination Paper: Risk Management
IIBM Institute of Business Management 6
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?
Section C: Applied Theory (30 Marks)
•This section consists of Applied Theory Questions.
•Answer all the questions.
•Each question carries 15 marks.
•Detailed information should from the part of your Answer (Word limit 200 to 250 words)
1. “When a steel company goes bankrupt, other companies in the same industry benefit
because they have one less competitor. But when a bank goes bankrupt, other banks do
not necessarily benefit.” Explain this statement.
2. “The existence of deposit insurance makes it particularly important for there to be
regulations on the amount of capital banks hold.” Explain this statement.
END OF SECTION B
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 notes type questions.
•Answer all the questions.
•Part one questions carry 1 mark each & Part Two questions carry 5 marks each.
Part One:
Multiple Choices:
1. It represents the owner’s stake in the bank & it serves as a cushion for depositors & creditors to
fall back in case of losses.
a. Capital
b. Reserve & Surplus
c. Deposits
d. Borrowings
2. This involves evaluating whether a bank has sufficient liquidity depends in large measure on
the behavior of cash flows under the different conditions.
a. The maturity ladder
b. Alternative Scenarios
c. Measuring liquidity over the chosen time frame
d. Assumptions used in determining cash flows
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.__________ is buying or selling an asset only for the purpose of making profit from movement
of the asset price over a period of time.
a. Arbitrage
b. Derivatives
c. D-mat account
d. Speculation
5. A combination of spot & forward transactions is called a ___________
a. Advances
b. Foreign bills
c. Swap
d. Loans
Examination Paper: Risk Management
IIBM Institute of Business Management 2
6.__________ Money refers to placement of funds beyond overnight for periods not exceeding 14
days.
a. Call money
b. Notice money
c. Term money
d. None
7. A short-term debt market paper issued by corporate, with a maximum maturity of 1 year.
a. Treasury Bills
b. Certificates of deposit
c. Repo
d. Commercial paper
8. It refers to the ability of a business concern to borrow or build up assets, on the basis of a given
capital.
a. Leverages
b. Confirmation
c. DVP
d. Volatility
9.__________ Limits are kept in place to protect the bank from credit risk.
a. Exposure ceiling
b. Stop-loss
c. Organizational controls
d. Limits on trading positions
10. RAROC stands for _____________________.
Part Two:
1. Differentiate between options & Forward contract.
2. Write down the steps which are taken by RBI to encourage the derivative market.
3. What is Basic indicator Approach (BIA)?
4. Write a short note on profitability in Indian Banks.
END OF SECTION A
Examination Paper: Risk Management
IIBM Institute of Business Management 3
Section B: Caselets (40 Marks)
•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.
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
Examination Paper: Risk Management
IIBM Institute of Business Management 4
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 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
Examination Paper: Risk Management
IIBM Institute of Business Management 5
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-theart
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 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?
Examination Paper: Risk Management
IIBM Institute of Business Management 6
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?
Section C: Applied Theory (30 Marks)
•This section consists of Applied Theory Questions.
•Answer all the questions.
•Each question carries 15 marks.
•Detailed information should from the part of your Answer (Word limit 200 to 250 words)
1. “When a steel company goes bankrupt, other companies in the same industry benefit
because they have one less competitor. But when a bank goes bankrupt, other banks do
not necessarily benefit.” Explain this statement.
2. “The existence of deposit insurance makes it particularly important for there to be
regulations on the amount of capital banks hold.” Explain this statement.
END OF SECTION B
END OF SECTION C
No comments:
Post a Comment