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Banking Interview Questions

1.What are the two phases of Indian Banking after independence?

1st phase – Between 1948 –1968, the pre- nationalization era characterized by no
uniform law governing the banking activities, bank failures were common, big
industrialists and businessmen enjoyed the major portion of the credit facilities. Small
scale industries and agriculture did not receive much attention.
2nd phase – (1969 – 91) – Nationalization of banks. In1969, Fourteen major
commercial banks were nationalized. In 1980, 6 more private banks were
nationalized. So total number is 20. The purpose of nationalization was to establish
public control over the banking system. One feature of post nationalization – opening
of large number of branches in rural, semi-urban, backward regions and states that
were under banked. The share of rural and semi urban banks reached 76% in 1991
while it was only 26% in 1969.
2. What is social banking?
Social banking is banking which focuses on banks play a key role in promoting socio-
economic objectives.
3. What was the need for reforms in 1990s?
The phenomenal expansion of bank branches resulted in a number of problems.
1.Higher operating costs of branches resulted in profit erosion.
2. Inadequate capital base.
3.High level of non performing assets.
4.Low operational efficiency.
5.Poor balance sheets.
6.Lack of focus on profitability.
7.Lack of competition.
4. Name some of the committees that worked on banking reforms
1.Narsimhan committee, 2. Basel committee
5. What were the recommendations of the Narasimhan committee?
The recommendations of this committee became the blue print for banking reforms in
India. 1. Entry barriers were lowered
2. As a result the market opened up for entry of private and foreign banks.
3. The concept of capital adequacy came in to being became a worry for all banks.
4. Non performing assets ( NPAs) became a worry.
5. Profit earning became a priority.
6. Competition became intense.
7. As a result banking industry turned in to a buyer’s market.
8. Banks started wooing the customers for deposits and advances and other
banking services.
9. Banking industry embraced technology led by new private banks .
6. What were the contributions by the Basel committee?

Basel committee formulated the norms for Capital Adequacy Requirement (CAR) to be
followed by the international banking system ( 1988 – Basel 1).
Basel committee issued a set of norms for capital adequacy in 1999 ( Basel 2).
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Basel 1 addressed Credit Risk and Market Risk for arriving at CAR. Basel 2 has
included Operational Risk as a measure of CAR.
Basel –2 norms are expected to be implemented by international banking system
including banks of India by the end of 2006.
The minimum CAR for Indian Banks was fixed originally at 8% Of Risk Weighted
Assets. This was later raised to 9% by RBI.
On implementation of Basel-2, this is likely to go up and many banks in India will
be required to raise their capital base.
When nationalized banks increase their capital through public issue, the government
stake may gradually come down.
7. What do you mean by NPA’s?
The level of NPA’s in Indian banks has been declining in recent years. But it is still
high as per international standards.
All ‘Performing Assets’ are classified as Standard Assets, NPA’s are classified as
substandard doubtful or loss assets depending on the period for which they have
remained.
NPAs – NPAs affect banks’s performance by eating in to their profitability. One of the
most important conditions for improvement in the profitability of banks is reduction
in the level of NPAs.
8. What is SARFAESI?
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002 . This empowers bank to take possession and sell security
charge to them without intervention of civil courts.
9. Why is profitability important for a bank?
Profit is considered a decisive parameter for judging the performance of any bank.
Profit is needed to meet the share holders’ expectations, employee benefits and also
for building reserves.
10. What are unconventional methods that banks have adopted to increase
profitability?
(1) Providing services for payment of utility bills, using e-pay.
Eg: Electricity bills, Telephone bills, Insurance premium, property tax, Subscriptions
of journals, even donations to approved charitable organizations.
(2) Selling application forms for competitive exams.
(3) Collection of taxes, Payment of government pensions etc.
(4) Third party products are also being marketed by banks on commission bases.
There are banks which have tied up with UTI Mutual funds , Prudential ICICI Life
Insurance etc.
11. What is CBS?
Core banking system, it provides Centralized Systems which provide centralized
accounting, customer information management and transaction processing functions.

Once full migration to CBS is achieved, ‘Branch Banking’ will become irrelevant. All
the database is centralized in common, this will lead to reduction in manpower,
popularize internet banking and increase customer satisfactions.
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12. How do banks achieve, “ Anywhere, Anyhow, Anytime Banking” ?

Using ATMs, e-banking and telebanking.
13. How has MICR (Magnetic Ink Character Recognition) technology with specially
printed cheques with MICR bank printed at the bottom of the cheque contains
data that can be captured with the help of encoders facilitates faster sorting and
settlement of payment of cheques. This was earlier done manually and took a lot
of time.
14. What is RTGS?
RTGS stands for Real Time Gross Settlement. Customers can use RTGS to transfer
funds from one bank to the other. It is also used for inter bank payments. It will
substitute the practice of using demand drafts for remitting money.
15. What do you mean by cheque truncation?
It is a technological advancement for faster collection of cheques. It involves creation
of electronic records of contents of cheques through digital image process and the
collecting bank or clearing house will capture the electronic information for
settlement of payment.
Negotiable Instruments Amendment Act 2002 has included truncated cheques
within the definition of a cheque.

RBI Must Find a True Inflation Measurement System

Every time inflation increases we blame the producers of various commodities for this. In
Economics, inflation is the general rise in prices measured against a standard level of
purchasing power. So, using this definition, we can comfortably say that when prices of
commodities increase inflation is there.
Or is that when there is excess supply of money, the prices of commodities increase? To
clarify things further, let’s get to the root of the problem that is the demand-supply
mismatch which causes inflation.
RBI calculates the inflation rate using the Wholesale Price Index (WPI) which is the
measure of the change in the average price level of goods traded in the wholesale market.
World over, CPI (Consumer Price Index) is used for deriving inflation. So why is the RBI
using the WPI?
The answer is that India doesn’t have a single CPI that covers a broad range of industries.
Also same inflation cannot be applied to rural and urban areas. To worsen the matter, our
inflation figures do not consider services, (which contribute nearly 52% of India’s GDP).
Things become further complicated when inflation figures do not take into account other
price hikes such as real-estate. If that is also included then probably inflation would be
too high to calculate, causing the RBI to run for cover.
So when according to the current inflation rate of 4.5-5 percent, we are paying that much
percent more only for listed 447 commodities. This means that we are not paying
anything for the house that we stay in and services, (even going to a saloon) or they don’t
exist at all. If the inflation measure is so flawed, then what is the benefit of having it at
all?
Even if the government decides to use the CPI then, there are four different types of CPI
and that brings the question, which is the actual CPI one can use? However, the biggest
problem why the CPI cannot be used in India is the fact that there is too much of a lag in
reporting CPI numbers. In fact as of May 2007, the latest CPI number reported is for
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December 2006. Because of this time lag, it makes it a practically useless number as far
as monetary policy is concerned.
Whenever there is a rise in inflation, in order to curb it a lot of things are done by the
RBI. First interest rates are increased. Taxes are increased (though only to a certain
extent)

1. Inflation can also be described as a decline in the real value of money—a loss of
purchasing power.
2. A price index is an average of prices for a given class of goods or services in a
given region, during a given interval of time.
3. A consumer price index (CPI) is a measure of the average price of consumer
goods and services purchased by households.
4. Cost of living is the cost of maintaining a certain standard of living. Changes in
the cost of living over time are often operationalized in a cost of living index.
Cost of living calculations are also used to compare the cost of maintaining a
certain standard of living in different geographic areas.
5. NSE Index 50 or nicknamed Nifty 50 or simply Nifty is the leading index for
large companies on the National Stock Exchange of India.
6. The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-
weighted index composed of 30 stocks started in April, 1984. It consists of the 30
largest and most actively traded stocks, representative of various sectors, on the
Bombay Stock Exchange. These companies account for around one-fifth of the
market capitalization of the BSE. The base value of the sensex is 100 on April 1,
1979, and the base year of BSE-SENSEX is 1978-79.
7. Market liquidity refers to an asset's ability to be easily converted through an act
of buying or selling without causing a significant movement in the price and with
minimum loss of value
8. A mortgage is the pledging of a property to a lender as a security for a mortgage
loan
9. The current name "Official Bank Rate" was introduced in 2006 and replaced the
previous title "Repo Rate" (repo is short for repurchase agreement) in 1997. It is
the rate at which the reserve bank lends money to the banks.
10. Repo (Repurchase) Rate Repo rate is the rate at which banks borrow funds from
the RBI to meet the gap between the demand they are facing for money (loans)
and how much they have on hand to lend. If the RBI wants to make it more
expensive for the banks to borrow money, it increases the repo rate; similarly, if it
wants to make it cheaper for banks to borrow money, it reduces the repo rate.
11. Reverse Repo Rate This is the exact opposite of repo rate.

The rate at which RBI borrows money from the banks (or banks lend money to the RBI)
is termed the reverse repo rate. The RBI uses this tool when it feels there is too much
money floating in the banking system. If the reverse repo rate is increased, it means the
RBI will borrow money from the bank and offer them a lucrative rate of interest. As a
result, banks would prefer to keep their money with the RBI (which is absolutely risk
free) instead of lending it out (this option comes with a certain amount of risk).
Consequently, banks would have lesser funds to lend to their customers. This helps stem
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the flow of excess money into the economy. Reverse repo rate signifies the rate at which
the central bank absorbs liquidity from the banks, while repo signifies the rate at which
liquidity is injected.

12. Bank Rate This is the rate at which RBI lends money to other banks (or financial
institutions. The bank rate signals the central bank’s long-term outlook on interest rates.
If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.
Banks make a profit by borrowing at a lower rate and lending the same funds at a higher
rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest
that a bank pays for borrowing money (banks borrow money either from each other or
from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to
make a profit.

13. Call Rate Call rate is the interest rate paid by the banks for lending and borrowing for
daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow
from other banks according to their daily or short-term requirements on a regular basis.

14. CRR Also called the cash reserve ratio, refers to a portion of deposits (as cash) which
banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a
portion of bank deposits is totally risk-free and secondly it enables that RBI control
liquidity in the system, and thereby, inflation by tying their hands in lending money

15. SLR Besides the CRR, banks are required to invest a portion of their deposits in
government securities as a part of their statutory liquidity ratio (SLR) requirements. What
SLR does is again restrict the bank’s leverage in pumping more money into the economy.

16. Foreign Institutional Investor (FII) is used to denote an investor - mostly of the
form of an institution or entity, which invests money in the financial markets of a country

17. Securities and Exchange Board of India (SEBI) is the Regulator for the Securities
Market in India

18. Foreign direct investment (FDI), is defined as a company from one country making
a physical investment into building a factory in another country. The FDI relationship
consists of a parent enterprise and a foreign affiliate which together form a Multinational
corporation (MNC). In order to qualify as FDI the investment must afford the parent
enterprise control over its foreign affiliate. The IMF defines control in this case as
owning 10% or more of the ordinary shares or voting power of an incorporated firm or its
equivalent for an unincorporated firm; lower ownership shares are known as portfolio
investment.

19. P-Notes Participatory Notes -- or P-Notes or PNs -- are instruments issued by

registered foreign institutional investors to overseas investors, who wish to invest in the
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Indian stock markets without registering themselves with the market regulator, the
Securities and Exchange Board of India.

20. Foreign Exchange The purchase or sale of a currency against sale or purchase of another.

Deflation is simply a fall in the general price level. If this deflation a result of
improved productivity and greater efficiency, it could be benign. But, usually
deflation is caused by falling demand and lower growth. It is no coincidence that our
worst period of deflation was in the great depression of the 1930s. This kind of
deflation is very damaging because:

Lower Spending. When prices are falling, there is an incentive to delay purchases.
Why buy a TV now, when it will be cheaper in 12 months? Look at how the housing
market is suffering because of falling prices. Nobody wants to buy with falling house
prices; this is why property transactions have slumped and of course causes further
falls in prices. In Japan, the decade of deflation created a culture of thrift and saving.
Japanese housewives just wouldn't spend. Tax cuts, government spending and interest
rate cuts all failed to stimulate growth because all the Japanese wanted to do was save
(an example, of the Paradox of thrift)

Liquidity Trap. A liquidity trap occurs when lower interest rates fail to stimulate
spending. If prices are falling by 2%, it can be more attractive to save money in cash
then spend. Therefore, cutting interest rates to 0% may be ineffective in increasing
demand.

Increasing Burden of Debt. If you take out a mortgage and make mortgage payments
of say £500 a month, inflation will progressively reduce the real value of your
mortgage interest payments. High inflation thus makes a mortgage more attractive,
over time, it increases the disposable income of mortgage owners.

However, with deflation, this £500 a month becomes a bigger % of your disposable
income. In deflation, debt becomes an increasing burden reducing spending and
economic growth.

The problem is that the UK and US are increasingly indebted, personal savings are
very low. Personal debt is very high therefore, deflation would be very damaging for
an economy burdened with a legacy of debt.

4. Rising Real Wages. Workers will general seek to prevent a cut in nominal wages.
Therefore, with deflation, real wages rise by stealth. This can lead to real wage
unemployment. With deflation, it is much more difficult for prices and wages to
adjust.

How To Overcome Deflation.Basically, Monetary authorities need to implement bold

policies. In particular they need to increase inflationary expectations. The problem is
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Central banks are so used to trying to reduce inflationary expectations, that they can
struggle to implement the opposite. However, the experience of Japan in the 1990s
and 2000s suggests timid policies can lead to several years of economic stagnation