Q6. What do meant by Asset Liability Management (ALM) of a financial institution?
Q7. What are the rationale of liquidity and liability management?
Q8. What are the sources of funds of a commercial bank and what are the regulations imposed on them?
Q9. Explain the different types of liabilities dealt with the financial institutions with example.
Q10. What do you meant by non-banking financial institutions and what are its different types?
Q7. What are the rationale of liquidity and liability management?
Q8. What are the sources of funds of a commercial bank and what are the regulations imposed on them?
Q9. Explain the different types of liabilities dealt with the financial institutions with example.
Q10. What do you meant by non-banking financial institutions and what are its different types?
Q6. What do meant by Asset Liability Management (ALM) of a financial institution?
Asset-Liability Management (ALM) is a senior level management responsible for supervision/ management of market risk (mainly interest rate and liquidity risks) comprises of senior officials from treasury, chief financial officer, business heads generating and using the funds of the bank, credit, and individuals from the departments having direct link with interest rate, foreign exchange and liquidity risks. The CEO must be the head of the committee.
Modern risk management now takes place from an integrated approach to enterprise risk management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated.
Q7. What are the rationale of liquidity and liability management?
The rationales behind liquidity management are as below:
1. Ensuring enough liquidity to guarantee the orderly funding of members needs;
2. Providing a prudent cushion for unforeseen liquidity needs;
3. Investing liquid funds in a manner which emphasizes the need for security and liquidity.
The rationales underlying liquidity and liability management are as below:
1. Liability management focuses on Economic Value.
2. Liabilities and their associated assets are mutually dependent.
3. The level of risk associated with a given financial objective can be reduced
4. Greater rewards are generally expected from portfolios with higher levels of risk.
5. Expected risk/reward trade-off tends to worsen as more constraints are imposed
6. Asset and liability cash flows cannot be projected with certainty.
7. The overall risk of a portfolio may be reduced through hedging.
Q8. What are the sources of funds of a commercial bank and what are the regulations imposed on them?
Banks are highly leveraged financial institutions, which mean that most of their fund comes form borrowing. However, just like any others business enterprise, the bank mobilizes fund from the following two categories of sources:
1. Funds form own sources: This source consists of funds owned by the banking institution, namely share capital, reserve fund and other reserves, retained earnings, etc.
2. Borrowed funds: this source consists of deposits in various types of accounts and borrowings from other banks, Bangladesh bank and other sources.
In case of banks, the borrowed funds, mainly the deposits in various types of accounts, constitute the major part of bank’s funds in comparison with the owned funds in the form of capital and reserve. Therefore, borrowed funds are main basis of banking 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
Q9. Explain the different types of liabilities dealt with the financial institutions with example.
The liabilities are differentiating 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 entity expects to pay off within one year from the reporting date.
b) Non-Current Liability: It is one which the entity expects to settle after 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 current
Loan
Trade Payables current
Debenture Non-current
Tax Payable Current
It may be appropriate to break up a single liability into their current and non-current portions. For instance, a bank loan spanning two years and carrying 2 equal installments payable at the end of each year would be classified half as current and half as non-current liability at the inception of loan.
Q10. What do you meant by non-banking financial institutions and what are its different types?
A non-banking financial institution (NBFI) is a company that regulated by the financial institutions act, 1993 of Bangladesh bank and engaged in the business of loans advances, acquisition of shares, bonds, debentures, securities by Govt. or local authority. A NBFI which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company.
NBFIs are doing functions like that of banks; however there are a few differences:
1. A NBFI can’t accept demand deposit
2. It is not a part of the payment and settlement system and as such can’t issue cheques to its customers
3. Deposit insurance facility is not available for NBFI depositors unlike in case of banks.
The NBFIs IS Classified that they are licensed by Bangladesh bank are as follows:
1. Equipment leasing company: It is the processing of securing the use of equipment by way of a rental agreement for a specified period of time.
2. Hire purchase Company: Leasing goods by making installment payment over the time basis on rent-to-own arrangement that buyer does not obtain ownership until the full amount is paid.
3. Loan Company: Lending to the others individuals, groups or companies.
4. Investment Company: It is a company that issues securities and is
primarily engaged in the business of investing in securities.
They do business in financing for venture capital, merchant banking, investment banking, mutual association, mutual company, leasing company and building society would be included as NBFIs.
Asset-Liability Management (ALM) is a senior level management responsible for supervision/ management of market risk (mainly interest rate and liquidity risks) comprises of senior officials from treasury, chief financial officer, business heads generating and using the funds of the bank, credit, and individuals from the departments having direct link with interest rate, foreign exchange and liquidity risks. The CEO must be the head of the committee.
Modern risk management now takes place from an integrated approach to enterprise risk management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated.
Q7. What are the rationale of liquidity and liability management?
The rationales behind liquidity management are as below:
1. Ensuring enough liquidity to guarantee the orderly funding of members needs;
2. Providing a prudent cushion for unforeseen liquidity needs;
3. Investing liquid funds in a manner which emphasizes the need for security and liquidity.
The rationales underlying liquidity and liability management are as below:
1. Liability management focuses on Economic Value.
2. Liabilities and their associated assets are mutually dependent.
3. The level of risk associated with a given financial objective can be reduced
4. Greater rewards are generally expected from portfolios with higher levels of risk.
5. Expected risk/reward trade-off tends to worsen as more constraints are imposed
6. Asset and liability cash flows cannot be projected with certainty.
7. The overall risk of a portfolio may be reduced through hedging.
Q8. What are the sources of funds of a commercial bank and what are the regulations imposed on them?
Banks are highly leveraged financial institutions, which mean that most of their fund comes form borrowing. However, just like any others business enterprise, the bank mobilizes fund from the following two categories of sources:
1. Funds form own sources: This source consists of funds owned by the banking institution, namely share capital, reserve fund and other reserves, retained earnings, etc.
2. Borrowed funds: this source consists of deposits in various types of accounts and borrowings from other banks, Bangladesh bank and other sources.
In case of banks, the borrowed funds, mainly the deposits in various types of accounts, constitute the major part of bank’s funds in comparison with the owned funds in the form of capital and reserve. Therefore, borrowed funds are main basis of banking 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
Q9. Explain the different types of liabilities dealt with the financial institutions with example.
The liabilities are differentiating 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 entity expects to pay off within one year from the reporting date.
b) Non-Current Liability: It is one which the entity expects to settle after 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 current
Loan
Trade Payables current
Debenture Non-current
Tax Payable Current
It may be appropriate to break up a single liability into their current and non-current portions. For instance, a bank loan spanning two years and carrying 2 equal installments payable at the end of each year would be classified half as current and half as non-current liability at the inception of loan.
Q10. What do you meant by non-banking financial institutions and what are its different types?
A non-banking financial institution (NBFI) is a company that regulated by the financial institutions act, 1993 of Bangladesh bank and engaged in the business of loans advances, acquisition of shares, bonds, debentures, securities by Govt. or local authority. A NBFI which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company.
NBFIs are doing functions like that of banks; however there are a few differences:
1. A NBFI can’t accept demand deposit
2. It is not a part of the payment and settlement system and as such can’t issue cheques to its customers
3. Deposit insurance facility is not available for NBFI depositors unlike in case of banks.
The NBFIs IS Classified that they are licensed by Bangladesh bank are as follows:
1. Equipment leasing company: It is the processing of securing the use of equipment by way of a rental agreement for a specified period of time.
2. Hire purchase Company: Leasing goods by making installment payment over the time basis on rent-to-own arrangement that buyer does not obtain ownership until the full amount is paid.
3. Loan Company: Lending to the others individuals, groups or companies.
4. Investment Company: It is a company that issues securities and is
primarily engaged in the business of investing in securities.
They do business in financing for venture capital, merchant banking, investment banking, mutual association, mutual company, leasing company and building society would be included as NBFIs.
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