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MA0038 -Bank Management

MA0038 -Bank Management


Summer 2013

Master of Business Administration- MBA Semester 3

MA0038 -Bank Management — 4 Credits

(Book ID: B1616)

Assignment- 60 marks

Note: Answer all questions. Kindly note that answers for 10 marks questions should not exceed 400 words. Each question is followed by evaluation scheme.


Q1. Intermediation is the process of linking savers of money with those who are in need of money. Explain the intermediation process of banks.

(explanation of intermediation process- 5 marks; role played by banks-5 marks) 10 marks


Answer : Intermediation process :

A situation in which a financial institution stands between counterparties in a transaction. For example, in the sale of a house, a bank usually serves as a financial intermediary by providing a mortgage to the buyer to pay the seller. In some non-traditional transactions, a bank may buy a product (e.g. corn) and immediately re-sell it for a profit to a third party. Most transactions requiring a loan to one of the parties include intermediation.


Importance :

Financial intermediation is so important because banks are responsible for most of the financing that occurs in economies. Although it seems risky to give one person’s money to someone else while it is not being used,


Q2 Business loans form the core of credit portfolio of banks .What are the basic objectives which the banks pursue while pricing their business loans?

( explanation of objectives of pricing the business loans- 5 marks; objectives of banks- 5marks marks) 10 marks

Answer : Objectives of pricing the business loans  :

Cost of funds –

The cost of funds is a significant factor to consider in loan pricing. For most institutions, the cost of funds for each loan product is determined by the treasury department of the bank or association.


Cost of operations –

Unlike the cost of funds, the cost of operations is not as easy to identify. The cost of operations includes salaries and benefits, cost of space, training, travel, and all other operating expenses. In addition, it includes insurance expense, financial assistance expense, and other System assessments.


Q3. Explain non-interest income and non-interest expenses.

(explanation of non-interest income – 5marks; explanation of non-interest expenses – 5marks) 10 marks

Answer : Non interest income :

Bank and creditor income derived primarily from fees. Examples of non-interest income include deposit and transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges, inactivity fees, check and deposit slip fees, etc. Institutions charge fees that provide non-interest income as a way of generating revenue and ensuring liquidity in the event of increased default rates.

Non interest expenses :

Fixed operating costs that a financial institution must incur, such as anticipated bad debt provisions. Noninterest expenses can include employee salaries and benefits, equipment and property leases, taxes, loan loss provisions and professional service fees.


Q4. Banks investment consists of different types of instruments. Explain the composition of investments.

(explanation of investments- 3 marks; composition of investments- 7 marks) 10 marks

Answer : Explanation of investments :

Corporate finance is the traditional aspect of investment banks which also involves helping customers raise funds in capital markets and giving advice on mergers and acquisitions (M&A). This may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment banking division is corporate finance, and its advisory group is often termed mergers and acquisitions.


Composition of investments :

Financial instruments :

1. Equities :

Equities are a type of security that represents the ownership in a company. Equities are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues. However, along with the possibility of greater returns comes greater risk.


Q5. What are the guidelines prescribed by the RBI to open a foreign bank branch in India?

(meaning of foreign bank-3 marks; guidelines prescribed by RBI -7 marks) 10 marks

Answer : Meaning of foreign bank :

A type of foreign bank that is obligated to follow the regulations of both the home and host countries. Because the foreign branch banks’ loan limits are based on the parent bank’s capital, foreign banks can provide more loans than subsidiary banks.

Guideline prescribed by RBI to open foreign bank branch in India :

The branch authorization policy for Indian banks shall also be applicable to foreign banks subject to the following:

1. Foreign banks are required to bring an assigned capital of US$25 million up front at the time of opening the first branch in India.

2. Existing foreign banks having only one branch would have to comply with the above requirement before their request for opening of second branch is considered.


Q6. Explain profitability analysis models.

( explanation of different models- 2 marks; explanation of profitability analysis- 6 marks; benefits-2 marks) 10 marks

Answer :

Different models for profit analysis :

There are several ways to measure company’s profits other than just looking at your bank account which, to tell the truth, doesn’t tell you much about profitability.

1. Margin (or profitability) ratios :

The use of financial ratios is a time-tested method of analyzing a business. Wall Street investment firms, bank loan officers and knowledgeable business owners all use financial ratio analysis to learn more about a company’s current financial health as well as its potential.

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