MS-422: Bank Financial Management

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ASSIGNMENT

SECOND SEMESTER

2015

MS-422: Bank Financial Management

Course Code	: MS-422
Course Title	: Bank Financial Management
Assignment Code	: MS-422/TMA/SEM-II/2015
Coverage	: All Blocks

Note: Attempt all the questions and submit this assignment on or before 31st October, 2015 to the coordinator of your study centre.

1. Illustrate using suitable examples the different methods which could be used for analyzing Financial Statements of Banks.

Answer: Financial statements for banks present a different analytical problem than statements for manufacturing and service companies. As a result, analysis of a bank's financial statements requires a distinct approach that recognizes a bank's unique risks.

Banks take deposits from savers and pay interest on some of these accounts. They pass these funds on to borrowers and receive interest on the loans. Their profits are derived from the spread between the rate they pay for funds and the rate they receive from borrowers. This ability to pool deposits from many sources that can be lent to many different borrowers creates the flow of funds inherent in the banking system. By managing this flow of funds, banks generate profits, acting as the intermediary of interest paid and interest received, and taking on the risks of offering credit.

Leverage and Risk

Banking is a highly leveraged business requiring

2. How Cost of Funds is decided in a Bank? Explain the impact of different Rates which affect the Cost of Funds in a Bank.

Answer: Cost of funds is the interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one of the most important input costs for a financial institution, since a lower cost will generate better returns when the funds are deployed in the form of short-term and long-term loans to borrowers. The spread between the cost of funds and the interest rate charged to borrowers represents one of the main sources of profit for most financial institutions.

BREAKING DOWN 'Cost Of Funds'

For lenders such as banks and credit unions, cost of funds is determined by the interest rate paid to depositors on financial products including savings accounts and time deposits. Although the term cost of funds usually refers to financial institutions, most corporations that rely on borrowing are impacted by the costs they must incur to gain access to capital.

Cost of Funds Basics

3. Select any project of your choice and find out the process that has been used for Project Appraisal. Explain each step of this process in detail.

Answer: The Definition of Project Appraisal

Project appraisal means a pre-investment analysis of project to determine whether the project should be implemented or not. There are some inherent differences between the terms Project Appraisal and Project Valuation although they are often used interchangeably. Project appraisal refers to an ex-ante examination of a proposal project to determine whether the same should be implemented or not whereas project evaluation is an ex-post assessment of the impact of an accomplished project.

Project appraisal is defined to provide a base – technical, economic, and commercial for an investment decision about any project. It covers a

4. Explain the key financial parameters that need to be evaluated by any bank in order to manage credit risk in Inter-Bank Exposure.

Answer: Banks in the process of financial intermediation are confronted with various kinds of financial and non-financial risks viz., credit, interest rate, foreign exchange rate, liquidity, equity price, commodity price, legal, regulatory, reputational, operational, etc. These risks are highly interdependent and events that affect one area of risk can have ramifications for a range of other risk categories. Thus, top management of banks should attach considerable importance to improve the ability to identify, measure, monitor and control the overall level of risks undertaken.

The broad parameters of risk management function

5. Describe the Accounting Standards that are to be adhered to by the banking industry.

Answer: ACCOUNTING STANDARDS have come in for a great deal of contention in the reports submitted by statutory auditors for commercial banks. With such qualifications a rarity in the audit reports relating to other business enterprises, there is a feeling among the lay public that banking is a sector where established standards of accounting are least adhered to. The scams which keep popping up with a sickening regularity have not helped things either. Here we will examine the relevance of qualifications in the audit reports vis-a-vis

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