Financial Institutions

1.  What  is  Financial  Institution (FIs)  ?

Financial  Institution (FIs) are foundations that gives budgetary administrations to its customers or individuals. Likely the most imperative money related administration gave by budgetary organizations is going about as monetary go-betweens. FIs incorporate business banks, reserve funds and advance affiliations, venture organizations, insurance agencies and annuity store. Each cutting edge economy has FIs, which perform key monetary capacities for people, families, enterprises, little and new business, and government.

2.  What  are  the  Different  types  of  Financial  Institutions ?

Different  types  of  FIs  are:

1.  Depository  Institutions:  These  are  the  FIs,  those receives  deposits.  These deposits  express the  liabilities  of  the  deposit-accepting  institution.  Their income  is  derived  from  two  sources: 

a)  the  income  generated  from  the loans  they  make  and  the  securities  they  purchase,  and

b)  fee  income.

The various  types  of  depository  institutions  are:

1.  Commercial  Banks: 

It gives various administrations in monetary framework. The administrations can group into i) individual keeping money, ii) institutional managing an account, and iii) worldwide saving money. b. Credit unions: They are usually known as agreeable social orders. The reason for credit union is to benefit their individuals' sparing and acquiring needs.

2.  Insurance  companies: 

It gives protection approaches, which are lawfully tying contracts for which the strategy holder pays protection premium and the organization guarantee to pay to arrangement holder on the event of future occasions.

3.  Mutual  Funds:  

These are the arrangement of securities, primarily stocks, securities, and currency business instruments. The speculation chief effectively deals with the portfolio i.e. purchase and offer securities.

4.  Pension  funds:  

It is a store that is set up for inevitable installment of retirement advantages financed by commitment by the manager. A benefits is a type of worker compensation for which the representative is not burdened until stores are pulled back.

3.  What  are  the  functions  of  financial  institutions?

The  main  functions  of  financial  institutions  of  this  nature  are  as  follows:

1.  Accepting  Deposits

2.  Providing  Commercial  Loans

3.  Providing  Real  Estate  Loans

4.  Providing  Mortgage  Loans

5.  Issuing  Share  Certificates.

Financial institutions give advances, business stock financing and aberrant customer advances. These organizations get their trusts by issuing bonds and different commitments. The elements of money related foundations, for example, stock trades, merchandise markets, fates, cash, and choices trades are essential for the economy. These organizations are in charge of keeping up liquidity in the business sector and overseeing value change dangers. As a feature of their different administrations, these establishments give speculation opportunities and help organizations to create stores for different purposes. The elements of money related establishments like speculation banks are additionally key and identified with the venture area. These organizations are included in various monetary exercises, for example, endorsing securities, offering securities to financial specialists, giving financier administrations, and gathering pledges guidance.

4.  Explain  the  different  types  of  services  provided  by  a  bank  or Financial  Institution.

Banks  provide  a  number  of  important  financial  services  to  businesses:

1. Loans furnish organizations with extension capital. A bank will give a business a given entirety for a predetermined span of time. 

2. Business account services empower a business to execute its regular issues, for instance paying wages into representative's records, paying bills, and assuming up times of praise.

3. Overdraft offices empower a business to have a brief time of credit to smooth out income challenges.

4. Cheques,  credit  cards  and  bank  drafts empower a business to easily deal with its regular instalments and exchanges.

5. The bank will likewise give orderly and continuous counsel, especially to little organizations and new businesses.

6. Banks likewise give long haul account as home loans for the buy of area and property.

7. Merchant banks and issuing houses additionally bolster organizations in the administration of offer issues.

5.  Why  Financial  Intermediary  is  necessary ? Or,  Importance  of  Financial  Intermediary.

Financial  intermediaries  seem to have a key part in the rebuilding and liquidation of firms in trouble. Specifically, rich confirmation money related go-between assume a dynamic part in the reallocation of dislodged capital. Money related middle people can perform this part by accumulating the data on firms gathered in the credit market. The capacity of middle people as relational arrangers in the middle of savers and firms in the credit business can bolster their capacity as inner markets for resources. In addition, the money related mediators likewise expect significance in today's reality as capacity for clearing and settling installments, capacity for procurement of an instrument for pooling of trusts and subdivision of shares, it permits procurement of approaches to exchange monetary assets, it permits procurement of approaches to oversee vulnerability and control danger, gives value data, etc.

6. What  do  meant  by  Asset  Liability  Management  (ALM)  of  a  financial institution?

Asset Liability Management (ALM) is a senior level administration in charge of supervision/administration of business danger (principally premium rate and liquidity dangers) involves senior authorities from treasury, CFO, business heads producing and utilizing the bank's trusts, credit, and people from the offices having direct connection with premium rate, remote trade and liquidity dangers. The CEO must be the board of trustees' leader. Cutting edge hazard administration now happens from an incorporated way to deal with big business hazard administration that mirrors the way that premium rate danger, credit danger, business sector danger, and liquidity danger are all interrelated.

7. What  are  the  rationale  of  liquidity  &  liability  management?

The  rationales  behind  liquidity  management  are  as  below:

1. Sufficiently guaranteeing liquidity to ensure the organized financing of individuals needs;

2. Giving a reasonable pad to unanticipated liquidity needs;

3. Putting fluid trusts in a way which accentuates the requirement for security and liquidity.

The  rationales  underlying  liquidity  and  liability  management  are  as  below:

1.  Liability  management  concentrates on money related monetary worth.

2.  Liabilities  and  their  associated  assets  are  correspondingly indigent. 

3.  The  stage  of  risk  connected with a given money related target can be decreased.

4.  Greater  rewards  are  for the most part anticipated from portfolios with larger amounts of danger. .

5.  Expected  risk/reward  exchange off has a tendency to exacerbate as more limitations are forced

6.  Asset  and  liability  cash  flows  cannot  be  anticipated with conviction. 

7. The overall risk of a portfolio may be diminished through supporting..

8.  What  are  the  sources  of  funds  of  a  commercial  bank  and  what  are the  regulations  imposed  on  them?

Banks are exceedingly utilized money related foundations, which imply that the vast majority of their trust comes structure acquiring. Be that as it may, much the same as any others business venture, the bank activates reserve from the accompanying two classifications of sources: 

1.  Funds  form  own  sources:

This source comprises of stores possessed by the keeping money foundation, in particular offer capital, store trust and different stores, held profit, and so on.

2.  Borrowed  funds: 

This source comprises of stores in different sorts of records and borrowings from different banks, Bangladesh bank and different sources. In the event of banks, the acquired stores, essentially the stores in different sorts of records, constitute the significant part of bank's trusts in correlation with the claimed trusts as capital and store. Subsequently, acquired trusts are primary premise of saving money operations.

Regulations  imposed  on  commercial  bank  by  BB:

As  a  central  bank,  Bangladesh  bank  imposed  some  rules  and  regulations  for banking  industry  are  mentioned  below:

1.  Minimum  capital  requirement:  Tk.  400  cr.

2.  SLR  for  banks-19%,  for  Islamic  banks-11.5%

3.  CRR  for  banks  and  Islamic  banks-6%

4.  Bank  rate-5%

5.  Repo-7.25%,  reverse  repo-5.25% 

6.  Interest  rate  on  credit:  Export-7%,  Agri.-7%,  Industrial  term-13%

7.  Single  borrower  exposure  limit-35%  for  funded  &  non-funded  credit

8.  KYC,  observation  on  abnormal  transactions

9.  Classification  on  performing  and  non-performing  loans  

10. Financial  inclusion-Opening  A/c  with  Tk.10/00

11. Green  Banking

12. Stress  testing

13. BASEL-II  and  Up  coming  BASEL-III

14. Environmental risk management. 

9.  Explain  the  different  types  of  liabilities  dealt  with  the  financial institutions  with  example.

The  liabilities  are  separating  into  two  types  i.e.  Current  and  Non-Current. 

The distinction  is  made  on  the  basis  of  time  period.

a)  Current  Liability: 

It is one which the element hopes to pay off inside of one year from the reporting date.

b)  Non-Current  Liability: 

It is one which the element hopes to settle following one year from the reporting date.

Types  and  examples

Following  are  examples  the  common  types  of  liabilities  along  with  their  usual classifications.

Liability                                        Classification 

*Long  Term Bank Loan                *Non-current

*Bank  Overdraft                            *current

*Short  Term Bank Loan                *current

*Trade Payable                             *current

*Debenture                                     *Non-current 

*Tax Payable                                  *Current.

It might be proper to separate a solitary obligation into their current and non-current segments. For example, a bank advance spreading over two years and conveying two equivalent portions payable toward the end of every year would be characterized half as present and half as non-current risk at the origin of credit.The liabilities are  into two sorts i.e. Current and Non-Current. 

10.  What  do  you  meant  by  non-banking  financial  institutions  and  what are  its  different  types?

A non-banking  financial  institutions (NBFI) is an organization that controlled by the monetary establishments act, 1993 of Bangladesh bank and occupied with the matter of advances, procurement of shares, securities, debentures, securities by Govt.. on the other hand neighborhood power. 

A NBFI which is an organization and which has its central business of accepting stores under any plan or course of action or some other way, or loaning in any way is likewise a non-saving money budgetary organization.

NBFIs  are  doing  functions  like  that  of  banks;  however  there  are  a  few differences:

1.  A  NBFI  can’t  acknowledge  demand  deposit.

2.  It  is  not  a  part  of  the  payment  and   settlement framework and in that capacity can't issue checks to its clients.

3.  Deposit  insurance  office is not accessible for NBFI investors not at all like in the event of banks. 

The  NBFIs  IS  Classified  that  they  are  licensed  by  Bangladesh  bank  are  as follows:

1.  Equipment  leasing  company:

It is the handling of securing the utilization of hardware by method for a rental assertion for a predefined duration of time. 

2.  Hire  purchase  Company:

Making so as to rent merchandise portion instalment over the time premise on rent-to-claim course of action that purchaser does not get proprietorship until everything is paid. 

3.  Loan  Company: 

Loaning to the others people, gatherings or organizations. 

4.  Investment  Company: 

It is an organization that issues securities and is basically occupied with the matter of putting resources into securities. They work together in financing for funding, trader saving money, speculation saving money, shared affiliation, common organization, renting organization and building society would be incorporated as NBFIs.

11.  What  is  financial  intermediary  and  what  are  the  advantages enjoyed  by  market  participants  from  this?

The  most  important  contribution  of  financial  intermediaries  is a consistent and moderately modest stream of stores from saver to last clients or speculators. Money related go-betweens incorporate store foundations, for example, business banks, reserve funds and advance affiliations, investment funds banks and credit unions, which obtain the main part of their trusts by offering their liabilities to the general population for the most part as store. Alongside this insurance agencies and annuity trusts are likewise go about as money related go-betweens. Focal points appreciated by business sector members:

1.  Investors  can  get  more  choices  concerning  maturity  for  their  investments &  borrowers  can  get  more  choices  for  the  length  of  their  debt  obligations.

2.  Borrowers  can  get  longer  term  loan  at  a  lower  cost. 

3.  Attaining  cost-effective  diversification.

4.  Lower  cost  accrue  to  the  benefit  of  the  investor

5.  Markets  participants  get  the  benefit  of  using  cheques,  credit  cards,  debit cards & electronic transfer of funds through financial intermediaries.

12.  Define  depository  institutions  and  describe  its  different  types.

Depository  Institutions  are  financial  institutions those acknowledges stores. These stores speak to the store's liabilities tolerating foundation. With the trusts raised through stores and other subsidizing sources, vault foundations both make direct advances to different elements and put resources into securities. Their wage is gotten from two sources: 

a)  the  income  generated  from  the  loans  they  make and  the  securities  they  purchase,  and 

b)  fee  income.  

The  various  types  of  depository  institutions  are:

1.  Commercial  Banks:  

It  provides  numerous  services  in  financial  system.  The services  can  classify  into 

i)  individual  banking, 

ii)  institutional  banking,  and

iii)  global  banking.

2.  Credit  unions: 

They are normally known as helpful social orders. The reason for credit union is to benefit their individuals' sparing and acquiring needs.

3.  Savings  and  loan  associations  (S&Ls): 

The essential viewpoints behind to giving of trusts to financing the buy of homes. The security for the credits would be the house being financed. S&Ls are either commonly possessed or have corporate stock proprietorship.

4.  Saving  Banks: 

this can be commonly possessed (in which case they are called shared funds banks) or stockholder claimed. The essential resources of reserve funds banks are private home loans and the primary wellspring of establishes is stores.

13.  What  do  you  mean  by  liquidity  management  and  what  are  its different  strategies?

Liquidity  management  alludes to those exercises inside of a budgetary organization to guarantee that possessions of fluid resources (e.g. money, bank stores and other monetary resources) are adequate to meet its commitments as they fall due, including unforeseen exchanges. Banks are fundamentally in the matter of raising stores and making credits that change fluid liabilities into fluid resources. It has two expansive angles: 

a.  Asset  Liquidity: 

It gauges the straightforwardness with which a bank can change over its benefits into money.

b.  Market  Liquidity: 

It gauges capacity to raise capital structure other business members at short notice.

The  main  strategies  that  bank  takes  positively  for  an  effective  liquidity management  are  as  follows:

1. Every bank needs to figure a suitable yet particular liquidity strategy.

2. In light of the past data or information, ALCO or liquidity mgt board of trustees must get coveted changes the creation of advantages and liabilities.

3. Constant client association with extensive borrowers, investors and other obligation holders and so on will assist the with saving money to secure obliged stores amid liquidity emergency.

4. Bank ought to get ready alternate course of action including game plan for line of credit with expansive banks and suppliers of credit unfriendly liquidity position emerging from banks particular emergency or general business emergency.


5. The inside standards/cutoff points may be settled for certain kind of exchange that will have an unfriendly effect or liquidity position. For instance: i) obtaining from call currency market and also from repo market, ii) Desired proportions for fleeting liabilities to transient resources, credits to aggregate stores.

14.  Why  are  financial  institutions  concerned  with  liquidity? Or,  Importance  of  liquidity  of  commercial  bank.

Liquidity,  or  the  ability  to  fund  increases  in  assets  and  meet  unbelievably due, is vital to the progressing suitability of any keeping money association. In this manner, overseeing liquidity is among the most imperative exercises led by banks. Sound liquidity administration can decrease the likelihood of difficult issues. Along these lines, banks must imagine and assess liquidity needs under diverse business situations. Liquidity speaks to the capacity to manage lack of stores and overflow of trusts. Regardless of size of a bank, sufficient liquidity is vital to meet responsibilities when due and to attempt new exchange when alluring. Considering the significance of overseeing liquidity hazard, every bank is obliged to have a suitable approach in such manner which must cover targets of liquidity administration, system for surveying and overseeing liquidity, subsidizing techniques and inside standards including assignment of power and so on.

15.  What  is  an  insurance  company  and  what  are  its  various  types?

A  company  that  offers  insurance  policies to people in general, either by offering straightforwardly to an individual or through another source, for example, a representative's advantage arrangement. An insurance agency is normally contained various protection operators. An insurance agency can spend significant time in one kind of protection, for example, life coverage, well being protection, or accident protection, or offer different sorts of protection. Sorts of Insurance Company: 

1.  Life  insurance: 

It pays the life's recipient protection approach in the passing's occasion of the guaranteed.

  

2.  Health  Insurance: 

The  risk  insured   is medicinal medications that the organization pays the protected all or a cost's segment of the therapeutic medications.

3.  Property  and  casualty  insurance: 

The  risk  insured  by property and setback insurance agencies is harm to different sorts of properties.

4.  Liability  insurance: 

The  risk  insured  against is suit or the danger of claims against the guaranteed because of activities by the safeguarded or others.

5.  Disability  insurance: 

It  insured  against  the failure of utilized persons to gain a salary in either their own occupation or any others.

6.  Long-term  care  insurance: 

It  insured  as  tend to the matured who get to be worried about outlasting their advantages and being not able to nurture themselves as they age.

16.  What  is  an  investment  company & What  are  its  different  types?

Public  corporation  organized  to  invest  in  large  blocks  of  securities  of differing firms, and to get its capital from issues of shares or units. Speculation organizations give a little financial specialist the benefit of a full time proficient venture administration, and an all that much more extensive spread of danger that it would have been generally conceivable. They are isolated into three noteworthy sorts:

1. Open-end  funds /  mutual  funds -  

That have a coasting number of issued shares, and offers or reclaim their shares at their present net resource esteem.

2. Closed-end  funds /  investment  trusts -  
That can offer just an altered number of shares that are exchanged on stock trades, more often than not at a rebate to their net resource esteem.

3. Unit  investment  trusts  /  unit  trusts -  

That offers their redeemable securities which speak to premiums in the securities held by the trust in its venture portfolio.

17.  What  do  you  mean  by  mutual  fund?  Discuss  the  different  aspects of  mutual  funds.

A  mutual  fund  is  a  type of Investment Company that pools cash from numerous financial specialists and puts the cash in stocks, securities, currency business sector instruments, different securities, or even money. The supervisor contributes this cash then keeps on purchasing and offer stocks and securities as per the style directed by the store's plan. 

There  are  several  important  aspects  of  mutual  funds:

1.  Investors  in  mutual  funds  own  a  prorata  share  of  overall  portfolio.

2. The  investment  manager   of the common reserve effectively deals with the portfolio, that is purchases a few securities and offers others

3. The  value  or  price  of  each  share  of portfolio, called Net Asset Value (NAV), levels with the business estimation of the portfolio short the liabilities of the common trust partitioned by the quantity of shares possessed by the shared store financial specialists.

4.  The NAV or cost of the store is resolved just once every day's, at the day end.

5.  Every single new speculation into the store or withdrawals from the trust amid a day are evaluated at the end NAV.

18.  Define  credit  risk.  What  are  the  three  steps  in  credit  risk management  process Or,  Discuss  the  risk  management  process  for  a  Bank/  Financial Institution.

Credit  Risk: 

Credit  risk emerges from the potential that a borrower will neglect to meet its commitments as per concurred terms. It likewise alludes the danger of negative consequences for the money related result and capital of the bank brought on by borrower's default. It originates from a bank's managing people, corporate, banks and money related establishments or a sovereign.

A  financial  institution  employ  a  four-step  procedure  to  measure  and  manage institution  level  exposure  are  mentioned  below:

1.  Risk  identification: 

The  institution  must perceive and comprehend dangers that may emerge from both existing and new business activities. Hazard distinguishing proof ought to be a proceeding with procedure, and ought to be comprehended at both the exchange and portfolio levels.

2.  Risk  Measurement: 

When risks have been distinguished, they ought to be measured keeping in mind the end goal to focus their effect on the managing an account establishment's productivity and capital.

3.  Risk  Monitoring: 

The establishment ought to put set up a powerful administration data framework (MIS) to screen risk levels and encourage auspicious audit of risk positions and special cases that ought to be visit, convenient, exact, and enlightening.

4.  Risk  Control: 

The organization ought to build up and convey risk breaking points through strategies, guidelines, and systems that characterize obligation and power that ought to serve as an intends to control presentation to different risks.

19.  Explain  interest  rate  risk  with  example.

Interest  rate  risk  is  a  risk  that the estimation of speculation will change because of an adjustment in without a doubt the level of interest rates, in the spread between two rates, in some other interest rate relationship. Interest rate danger influences the estimation of securities more specifically than stocks, and it is a noteworthy danger to all bondholders. As interest rates rise, security costs fall and the other way around. The method of reasoning is that as premium rates build, the open door expense of holding a security diminishes since financial specialists have the capacity to acknowledge more prominent yields by changing to different speculations that mirror the higher interest rate. As illustration, a 5% security is worth more if premium rates diminish following the bondholder gets a settled rate of return with respect to the business sector, which is putting forth a lower rate of return as a diminish's consequence in rates.

20.  Define  CAMELS  rating  and  write  down  the  composite  ratings  of  this.

A  CAMELS  rating  is  an  international  bank-rating framework where bank supervisory powers rate foundations as per six components. These are :

C - Capital ampleness 

A  -  Asset  quality

M  -  Management  quality

E  -  Earnings

L  -  Liquidity

S - Sensitivity to Market Risk

Bank supervisory powers allocate every bank a score on a size of one (best) to five (worst) for every variable. The framework helps the supervisory power recognize banks that need consideration.

Rating -1

The  composite  rating:

Composite Range  1  -  1.4 Description

Strong:  Highest  rating  is  indicative  of  performance  is higher.

Rating -2

The  composite  rating:

Composite Range 1.4 -  2.4

Description :

Satisfactory:  Performance  is  average  or  above  that adequately  provides  for  safe  and  sound  operation.

Rating -3

The  composite  rating:

Composite Range 2.5  -  3.4

Description :

Fair:  It  is  not  satisfactory  nor  unsatisfactory  but characterized  by  performance  of  below  average  quality.

Rating -4

The  composite  rating:

Composite Range 3.5  -  4.4 Description :

Marginal:  performance  is  below  average.  It  might evolve  into  weakness  that  could  threat  the  viability  if not  changed.  

Rating -5 & 6

The  composite  rating:

Composite Range  4.5 - 5 & 6  Description :

Unsatisfactory:  Performance  is  critically  deficient  that need  immediate  remedial  attention.

21.  Explain  the  concept  of  mobile  financial  services.  Discuss  the various  services  offered  by  it.

Mobile  banking  refers  to  the  activities  of  banking  and  financial  services  with  the help  of  mobile  communications.  The  scope  of  offered  service  may  include facilities  to  conduct  bank  and  stock  market  transactions,  to  administer  accounts and  to  access  customized  transaction.

The  mobile  banking  is  consists  of  3  inter-related  concepts:  

i)   Mobile  accounting,  

ii)  Mobile  brokerage,  

iii) Mobile financial information services.

Mobile  banking  can  offer  services  are:
 

i)  Accounting  information: 

Mini  statement, balance  checking, loan  & card accessibility, transaction  alert,  order  &  stop  payment  of  check,  etc.

ii)  Payments,  deposits,  withdrawals  &  transfers: 

Local  & bill  payment, commercial  payments,   global  fund  transfer,  etc.

iii) Investment:

Portfolio management service, real time stock quotes, etc.

[As  per Central  bank  DCMP  circular  in  September  2011,  the  following  mobile financial  services  may  be  allowed:  

1.  Disbursement  of  inward  foreign  remittances.

2.  Cash  in-out  using  mobile  account  through  agents/  bank  branches/  ATM's/ Mobile  operator’s  outlets .

3.  Person  to  business  payment  i.e.  utility  bill,  merchant  payments.

4.  Business  to  person  payment  i.e.  salary,  dividend  and  refund  warrant, vendor  payments,  etc

5.  Govt.  to  person  payment  i.e.  elderly  allowances,  freedom-fighter allowances,  subsidies,  etc

6.  Person  to  Govt.  payments  i.e.  tax,  levy  payments.

7.  Persons  to  person  payments

8.  Other  payments  like  micro finance,  overdrawn  facility,  insurance  premium, DPS, etc.]

22.  What  are  the  ways  in  which  an  investment-banking  firm  may  be involve  in  the  issuance  of  a  new  security ?

Investment  banking  involves  managing  pools  of  asset  such  as  closed  and  openend  mutual  funds.  Investment  bankers  act  as  agents  on  a  fee  basis  or  a principal,  purchasing  the  securities  from  the  issuer  at  one  price  and  seeking  to place  them  with  public  investors  at  a  slightly  higher  price.  The  objective  in  funds management  is  to  select  asset  portfolio  to  beat  some  return-risk  performance benchmark.  Since  this  business  generates  fees  that  are  based  on  the  size  of  the pool  of  asset  managed,  it  tends  to  produce  a  more  stable  flow  of  income  than does either investment banking or trading. Investment  banking  refers  to  activities  related  to  underwriting  and  distributing new  issues  that  can  be  either  first-time  issues  of  debt  or  equity  is  already  trading seasoned  issues.  Finally,  in  addition  investment  banker  operates  with  corporate securities  markets  that  may  participate  as  an  underwriter  (primary  dealer)  in govt., municipal and mortgage-backed securities.