INSTITUTE OF BANKERS OF SRI LANKA
Intermediate in Applied Banking and Finance (IABF)
Commercial Banking - Guidance Questions
a) The questions below are provided to guide students and teachers in
their studies on the subject as per the syllabus.
b) Each question will carry 20 marks distributed as 5 marks for each subquestion.
c) It is expected that about 30-35 minutes will take to answer a question.
d) Precise answers are expected in points. Detailed essay typed long
answers are not expected.
1. Commercial banks operate various systems and strategies to raise funds for their
business operations. Answer the following questions:
i)
List the broad categories/sources of funds of commercial banks and
outline how such funds are raised.
ii)
Select the main source of those funds and its importance for each of the
following purposes of a commercial bank.
a) Solvency
b) Liquidity
iii) What is the importance of “Contingent Convertibles” in the event of a
threat of a commercial bank failure?
iv) What are the major factors affecting the cost of funds of commercial banks?
2. Interest income is a major source of income in many commercial banks in Sri
Lanka. Answer the following questions.
i)
Outline the major sources of interest income to commercial banks.
ii)
What are the short-term sources and medium/long-term sources of interest
income?
iii) Should commercial banks go for long-term sources or short-term sources of
such interest income? Why?
iv) Outline the major risks involved in interest income sources and major
underlying reasons.
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3. Maintaining capital under the Basel Capital Accords is a world-wide best
practice among banks. Answer the following questions.
i)
Outline major stages in evolution of the Basel Capital Accord so far?
ii) What are the major components of the Basel III Capital Accord?
iii) Outline the capital adequacy ratios effective for commercial banks in Sri
Lanka at present under the Basel Capital Accord?
iv) What are the major corrective actions imposed by the Central Bank on
commercial banks which are non-compliant with the capital adequacy
requirement in Sri Lanka?
4. A key part of the business of commercial banks is a deposit-taking business.
Answer the following questions.
i)
Outline the broad categories of deposits and underlying banking facilities
to those categories of depositors.
ii)
Outline the major factors determining deposit-taking business of
commercial banks?
iii) Explain the major risks involved in deposit-taking business of commercial
banks?
iv) Outline the major measures adopted by commercial banks to mitigate such
risks.
5. The following information shows the Sri Lankan banking sector performance
during last 6 years. Evaluate the performance of the banking sector during the
period in the following areas.
Indicator
2008
2009
2010
2011
2012
2013
Total Assets
2,793
3,118
3,655
4,379
5,236
6,107
Loans
1,635
1,596
1,975
2,601
3,149
3,426
54
78
59
54
68
129
219
243
295
371
436
491
Total Deposits
1,878
2,232
2,586
3,073
3,625
4,170
Total Contingencies
1,181
1,131
1,419
1,973
2,034
2,276
28
27
59
66
83
75
5,426
5,712
5,927
6,196
6,391
6,470
Net Non-performing Loans
Total Capital Funds
Profit After Taxes
Branch Network (No)
ATMs (No)
Employees (No)
1,676
1,899
2,042
2,262
2,415
2,511
45,173
44,784
46,014
48,744
49,448
51,565
14.5
16.1
16.2
16.0
16.3
15.8
Selected Performance Ratios (%)
Capital Adequacy Ratio
2
Net Non-performing Loan Ratio
Return on Assets (ROA)-After
Taxes
2.6
4.2
2.3
1.7
1.8
3.4
1.1
1.0
1.8
1.7
1.7
1.3
Return on Equity (ROE)
13.4
11.8
22.0
19.8
20.3
16.0
Efficiency Ratio (Operating Cost)
55.6
56.3
47.2
52.7
49.4
53.4
4.4
4.6
4.6
4.2
4.1
3.5
28.3
35.3
31.2
26.8
26.6
31.9
Interest Margin
Liquid Assets (Average)/ Total
Assets
i)
ii)
iii)
iv)
Long-term stability
Liquidity management
Asset quality
Earning soundness
6. Effective bank management is essentially the effective bank risk management.
Answer the following questions.
i)
Outline major categories of banking risks.
ii)
Explain the factors that cause each of those risks giving appropriate
examples.
iii) Outline key estimates/indicators of those risks.
iv) Outline one key measure used by commercial banks for mitigating each of
those risks.
7. Compare and contrast following banking operations.
i)
Universal Banking and Branch Banking
ii) Asset Management and Liability Management
iii) Audit Committee and Asset-Liability Committee
iv) Overdraft and Letters of Credit
8. Bank regulation and supervision are intended to help commercial banks in their
risk management. Analyze the importance of the following regulatory and
supervisory measures to risk management of commercial banks.
i)
Provisioning requirement for loans
ii) Liquid Assets requirement
iii) Capital Adequacy requirement
iv) Cease and Desist Orders
9. Recent global financial crisis has caused substantial reforms in banking business
models and regulatory methods. Outline the importance of the following for
prevention of future banking crises.
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i)
ii)
iii)
iv)
Separation of retail banking from investment banking.
Bank stress testing requirement
Macro-prudential supervision
Bank resolution plans requirement
10. Commercial banks use various operational systems to ensure smooth business
operations. Outline the following system and their importance to banks.
i)
Asset-Liability Committee
ii) Credit Committee
iii) Authority Limits
iv) Nostro Accounts
11. Commercial banks maintain numerous operational procedures and internal
controls in operating banking business. Describe key elements of such
procedures and controls on the following businesses.
i)
Opening of a deposit account.
ii)
Issue of a credit card
iii) Grant of a loan
iv) Sale of foreign exchange for travel purpose
12. Bank regulation and supervision is carried out through various procedures.
Answer the following questions relating to such procedures.
i)
Outline key elements of bank regulation and supervision in Sri Lanka.
ii)
How is the early warning system carried out?
iii) How are bank examinations conducted?
iv) What is meant by risk-focused bank supervision?
13. Monetary Board’s Directions on Classification of Loans and Advances, Income
Recognition and Provisioning issued to licensed commercial banks constitute
important regulatory measures to help bank mitigate credit risks. Answer the
following questions relating to these Directions
i) Outline criteria on classification of loans
ii) What is the requirement relating to income recognition in these Directions?
iii) What are the two types of provisioning and provisioning rates stipulated in
these Direction?
iv) What is the accounting procedure in the event of provisioning and recovery
of loans provided for.
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14. Describe the importance of following banking services to customers of
commercial banks.
i) Performance bonds
ii) Factoring
iii) Securities Investment Accounts (SIA)
iv) Margin trading
15. Monetary Board’s Directions on Corporate Governance issued to licensed
commercial banks consist of a number of principles and rules. Answer the
following questions.
i) List the 8 areas of principles covered in those Directions
ii) Specify the rules relating to the size of the Board, no. of non-executive
directors, age and term of office of non-executive directors and frequency of
Board meetings
iii) Who are the related parties listed in Directions? What is meant by “conflict of
interest” that banks should avoid on transactions with related parties?
iv) What is the meaning of corporate governance stated in the Directions?
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