Basel III

Basel III is a set of international banking regulations developed by the Bank for International Settlements to promote stability in the international financial system. If you are a banking professional then you must checkout the questions and answers that can help you in an interview.

Q.1 What is Basel III?

Basel III is an internationally agreed collection of measures which are developed by the Basel committee on banking supervision in response to the financial crisis of 2007-09.

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Q.2 What is bank regulation?

Bank regulation is a type of government regulation that subjects banks to specific restrictions, requirements, and guidelines, designed for creating market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things.

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Q.3 What are the major banking services?

The major banking services are: Direct Deposit Online Bill Payment Access to Credit Cards Access to ATMs Deposit Insurance

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Q.4 What do you mean by the Basel accords?

The Basel accords refer to the banking supervision accords namely, Basel I, Basel II and Basel III that are issued by the Basel committee on banking supervision.

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Q.5 What are the pillars of Basel III?

Basel regulation comprises three pillars concerned with minimum capital requirements, supervisory review, and market discipline.

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Q.6 Mention the key principles of Basel III?

The key principles of Basel III are: Minimum Capital Requirements Liquidity Requirements Leverage Ratio

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Q.7 What are the different types of banks?

The different types of bank are central bank, specialised banks, commercial banks and cooperative banks.

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Q.8 Define Basel III leverage ratio.

The Basel III leverage ratio is the capital measure divided by the exposure measure, with this ratio expressed as a percentage.

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Q.9 What is the fundamental principle of Basel committee?

The core principles for effective banking supervision is minimum global standards for the sound prudential regulation and supervision of banks.

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Q.10 Mention some ways to design a revenue schedule?

Some of the common ways are: 1. Sales growth 2. Unit volume, change in volume, average price and change in price 3. Inflationary and volume/ mix effects 4. Dollar market size and growth 5. Volume capacity, capacity utilization and average price 6. Unit market size and growth 7. Product availability and pricing

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Q.11 What do the credit rating agencies do?

Rating agencies help in providing trust and confidence in financial markets by rating borrowers on their creditworthiness of outstanding debt obligations.

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Q.12 What are the Basel norms?

The Basel norms are an effort of coordinating banking regulations across the globe, with the objective of strengthening the international banking system.

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Q.13 What are the different kinds of financial ratios?

The 5 kinds of financial ratios are: 1. Liquidity ratios 2. Efficiency Ratios 3. Profitability Ratios 4. Market Valuation Ratios 5. Leverage Ratios

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Q.14 What does risk mitigation refer to?

Risk management refers to the risk associated with any single borrower exposure or group of exposures resulting in ample loss to the bank. Hence, the should reduce this risk by diversifying the borrower pool.

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Q.15 What do you mean by credit risk modeling?

Credit risk modeling is a method that is used by lenders in order to determine the level of credit risk associated with extending credit to a borrower. Credit risk analysis models can be based either on financial statement analysis, default probability, or machine learning.

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Q.16 What are Basel III new liquidity risk measures?

The Basel III LCR standard is designed in a way to ensure that a bank is maintaining an appropriate level of unencumbered, high-quality liquid assets that can be converted into cash to meet its liquidity needs for thirty days under a severe liquidity stress scenario.

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Q.17 What was the reason behind implementation of Basel III?

Basel III was implemented to improve the ability of banks to handle shocks from financial stress because of the impact of the 2008 global financial crisis.

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Q.18 What is the solvency ratio?

A solvency ratio indicates whether a company's cash flow is sufficient to meet its long-term liabilities and thus is a measure of its financial health.

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Q.19 What are the basic concepts of finance?

The three main concepts are: Financial Management, Financial Markets and Institutions and Investment

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Q.20 What does CDS stand for?

CDS stands for credit default swap that is a financial derivative or contract that allows an investor to swap or offset the credit risk with that of another investor.

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Q.21 What do you understand by the term working capital?

Working capital is basically the money available with any business for day-to-day operations. Working capital can be calculated by using the following formula: Working capital = Current Assets – Current Liabilities

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Q.22 What is Basel I?

Basel I is the round of deliberations by the central bankers around the world, and in 1988, the Basel committee in Basel, Switzerland, published a collection of minimum capital requirements for banks.

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Q.23 What is risk weight percentage?

Risk weight percentage refers to the total assets owned by the banks, however, the value of each asset is assigned a risk weight and the credit equivalent amount of all off-balance sheet activities.

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Q.24 What do you mean by credit risk?

Credit risk is defined as the potential that a bank counterparty or borrower would fail to meet its obligations in accordance with agreed terms.

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Q.25 How do we calculate RWA?

Risk-weighted assets are calculated by multiplying the exposure amount by the relevant risk weight for the type of asset or loan.

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Q.26 What is Basel II?

Basel II is a second international banking regulatory accord based on three major pillars namely regulatory supervision, minimal capital requirements, and market discipline.

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Q.27 What is free cash flow?

Free cash flow is equal to the cash from operations minus capital expenditures. Moreover, in financial modelling, unlevered free cash flow is used.

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Q.28 What is a Balance Sheet?

A balance sheet is basically the summary of the financial situation of a business which represents the actual position of assets, cash, liabilities or bank balance at a specific period of time.

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Q.29 Mention the main types of solvency ratios.

Well, the major types of solvency ratios are the debt-to-assets ratio, the equity ratio, the interest coverage ratio and the debt-to-equity ratio.

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Q.30 What does tier 2 capital include?

Tier 2 capital consists of revaluation reserves, general loan-loss reserves, hybrid capital instruments and subordinated term debt and undisclosed reserves.

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Q.31 Who are Business Correspondents (BCs)?

With a view to ensure the greater financial inclusion and increasing the penetration of banking services to vast sections of the underprivileged sections of the society, A few years back RBI allowed banks to use the services of well-established NGOs, SHGs, MFIs, Post Offices, and others as intermediaries. With the help of the intermediaries, through the use of Banking Correspondent model, banks can extend their services. In September 2010, RBI allowed banks to appoint companies as Business Correspondents who can sell banking products to vast sections of rural and semi-urban population. With this measure, companies like, HUL, ITC and Bharti Airtel, can be appointed as BCs by banks while in turn these companies will provide banking services to the people.

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Q.32 What is the audit rating of a branch?

The answer differs from branch to branch.

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Q.33 Can investors trade in stocks using their mobiles?

Yes, back in August 2010, the SEBI allowed share trading through mobiles or lap tops. While, some brokerage houses have already introduced share trading through mobiles. Using its proprietary Fastrade mobile application BSE launched mobile trading on September 22, 2010.

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Q.34 What is an ECB?

An ECB stands for the External Commercial Borrowing. An External Commercial Borrowing (ECB) is a commercial loan availed by domestic companies from non-resident lenders abroad for a minimum maturity of three years. Many Indian companies and financial institutions raise ECBs as interest rates abroad are much cheaper when compared to India. RBI Permits companies to borrow through ECBs in two routes – one is Automatic Route and the other is Approval Route Indian firms can borrow up to USD 40 billion in 2010-11 when compared to a limit of USD 35 billion in 2009-10.

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Q.35 What is an FCCB?

It's an acronym for Foreign Currency Convertible Bond. Its has got many features like: It works as a financial instrument through which companies raise money As it has features of both a bond and a stock so its hybrid instrument It is a bond which can be converted at the option of the bondholder in to an equity share at a predetermined price and after a specific period. It provides regular yield to the bondholder during the period. As the name suggests, it is denominated in a foreign currency.

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Q.36 Is there any minimum maturity period of a Certificate of Deposit (CDs)?

Yes, its a seven days maturity period of a Certificate of Deposit.

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Q.37 What are Basel III norms?

Basically the Basel III norms are an improvement over Basel II norms, they will coming after Basel I and Basel II norms and are third set On Banking Supervision (BCSB) Basel Committee did set them. So, as per Basel III norms, banks have to raise their Tier I capital from the present two per cent to 4.5 per cent by 2015. In addition, they will have to set aside another 2.5 per cent as contingency capital, with which the total capital adequacy ratio would go up to seven per cent. Indian Banks are not likely to be impacted by the new Basel III norms in accordance of the Governor of the RBI It may take some more time for RBI to come out with its guidelines on Basel III norms, as these norms are still evolving.

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Q.38 Explain what is ‘crystallization?

When an import bill is not paid within 10 days period from the due date, banks will convert it into rupee liability to honour their commitment and make payment. Such process of conversion is called crystallization.

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Q.39 Can you please state the importance of DSCR?

The meaning of DSCR is debt-service coverage ratio. It indicates whether or not the income generated out of the business is sufficient to meet term loan instalment along with the respective interest. For assessing whether a borrower has got the financial ability to repay the debt obligations this ratio is very important.

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Q.40 Why is the Government of India increasing thrust on developing MSME Sector?

The MSME sector provides employment to a large number of people in the lower strata of society For several new ideas it is a nursery of entrepreneurship The sector contributes eight per cent of India’s GDP It contributes 40 per cent of India’s exports It contributes 45 per cent of manufactured output A lot of value-added products are Provided by them to big industries

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Q.41 How the banks manage balance their assets and liabilities, that is, Asset- Liability Management (ALM)?

In Asset-Liability Management taking-out financing is one of the solutions for setting the banks’ mismatch. Another way is to issue to long-term bonds to insurance companies, pension funds, etc.

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Q.42 Can you answer why is Reverse Mortgage product yet to take off in India?

As we have seen Indians typically tend to pass on their assets to the heirs. So resultant they dislike the idea that they wont b able to pass on their house property to their children. Thus, the Reverse Mortgage has not yet taken off here in our Country.

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Q.43 What is a sick unit

"Sick industrial company" basically means an industrial company which has (i) the accumulated losses in any financial year equal to fifty percent, or more of its average net worth during four years immediately preceding such financial year; or (ii) and failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company; Any one of above two criteria is sufficient to consider such company as a sick industrial company.

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Q.44 At the end of September 2010 what is our Bank's net NPA%?

Here to answer this question you need to think of the exact situation and the only way to answer such question is through past examples: "The gross NPA of State Bank of Mysore as on September 30, 2010 is Rs 970 crore. In percentage terms it is 3.12 per cent. Thus, the net NPA is Rs 451 crore and in percentage terms it is 1.48 Percent."

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Q.45 Please tell what is doorstep banking?

Its is provision of banking services at the premises of customers by banks. In 2005, RBI had issued guidelines to banks for providing doorstep banking. Services such as: pick-up of cash, delivery of cash, pick-up of instruments, delivery of demand drafts and others are included in such banking. Doorstep banking can be provided through banks’ own employees or through agents.

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Q.46 Why have Micro Finance Institutions (MFIs) attracted so much media attention recently, especially, in Andhra Pradesh?

As some of us must have heard that Micro Finance Institutions have faced a lot of criticism from the media, especially in Andhra Pradesh. there are number of allegations were levelled against MFIs last month. And those allegations range from high interest rates, harsh measures of recovery and multiple lending. It is reported in the media that some micro-finance borrowers in Andhra Pradesh committed suicide due to debt trap.

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Q.47 What role is played by the IIFCL?

India Infrastructure Finance Company Limited (IIFCL) is owned Indian Government. To provide long-term financing to infrastructure projects in India, it was set up back in the 2006. IIFCL has surplus funds of Rs 20,000 crore. It started a take-out financing scheme, in October 2010.

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Q.48 What is a ‘Maharatna’ company?

ONGC, SAIL, NTPC and IOC have been accorded ‘maharatna’ status by the Government of India. With the approval of the Government the new status empowers the boards of these companies to make investments up to Rs 5,000 crore. The new status is higher than ‘navaratna’ status.

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Q.49 What are the factors that affect the interest rate?

It's based on many factors like: Government borrowings Supply of money Inflation rate

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Q.50 When does an agricultural loan become NPA?

In case of short-term loan the two crop seasons not exceeding two half-years, while in the case of long duration one crop season not exceeding one year crop from the due date of instalment or interest. In case of miscellaneous agricultural activity where income is going to be generated daily/monthly like dairy the NPA classification is once again as similar to P-segment/SBF advances.

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