Regulation of Financial Markets – Quiz No.

1 – Fall 2015 – IBA, Karachi

1. The ‘Surplus / Deficit on revaluation of Available for Sale’ category shall be taken into:
a. Profit & Loss Account
b. Surplus / Deficit on revaluation of Securities
c. Memorandum Account
d. None of the above

2. What are the three types of classification criteria:

a. Bad, doubtful, Poor
b. Sub-standard, Doubtful, non-recoverable
c. Other Assets Especially Mentioned (OAEM), substandard, Poor
d. Sub-standard, Doubtful, Loss

3. For credit analysis or allowing any exposure, which document is least important:
a. Loan Application Form (LAF)
b. CIB Report
c. Borrower Basic Fact Sheet (BBFS)
d. Audited financial statement

4. What are some of the risks financial institutions undertake (Choose the best):
a. Liquidity, interest rate, and foreign exchange risk
b. Default, financial, and international risk
c. Political, Credit, and stock market risk
d. Interest rate, Terrorism, and house price bubble risk

5. According to ‘Securities Regulation’, Fair and Orderly Markets can be ensured through:
a. Broker-Dealer Associations and Exchanges establish rules and ensure orderly executions at fair price
b. Secondary markets provide transparency to the public about High-Low prices, Bid-Ask prices, last price,
volume traded etc. for securities
c. Issuers of stocks provide accurate, complete, and timely disclosures
d. All of the Above

6. Why financial market regulations are important (Choose the best):

a. Prevent market exploitation and greater gains to small investors
b. Promote efficiency and lower lending rates for borrowers
c. Maintain financial market stability and provide consumer protection
d. Pursue social policies and provide jobs to poor people

7. What do we mean by non-fund based exposure / facility:

a. Lending to borrower with conditionality
b. Issuance of bank guarantee to client/(s)
c. Actually funds are extended but are not documented
d. No funds will be provided if the company is not registered with SECP

8. What do we mean by Prudential Regulations starting with “R”:

a. Responsible financing
b. Reasonable regulations
c. Risk Management
d. Return on capital

9. What do we mean by classified loans:

a. Loans provided to special persons
b. Loans that are categorized by degree of risk
c. Loans that are overdue

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 d. Loans to politicians

10. As per prudential regulations for corporate banking, What is the maximum limit of clean / unsecured financing
facility:
a. Rs. 500,000/=
b. Rs. 100,000/=
c. Rs. 2,000,000/=
d. Rs. 1,000,000/=

Short Q&A

What are some of the benefits of disclosures and Transparency in financial markets? Please be brief [not more than 5
lines].

Ans: The investors like to invest in securities which provide more and more disclosures in the books of account, in
financial markets. This makes easy for such firms to raise more capital through banks (debt financing) and by issuing
additional shares (equity financing). Further, disclosures are beneficial for financial regulators (they know that things
are going in the right direction). Disclosures inform stakeholders of the firm about its activities. Transparency is
beneficial in public interest; provide efficient means for the execution of secondary market transactions. Although,
disclosures and transparency costs money, but there are clear and immediate benefits.

Numerical:

1. Haji Khan had a LED TV manufacturing plant in Peshawar. He had a credit facility of Rs. 15 million from Silk Bank.
Due to availability of cheap Chinese LED TVs in the market, Haji Khan suffered huge losses and could not pay his
installment due on May 31, 2015. The outstanding principal balance as of May 31 was 11.8 million. If you are the
credit officer in the Advances Department and your manager asks you to inform about the 1) category of
classification? And 2) calculate the provision amount today (i.e., September 17, 2015). The collateral with the
bank is Plant and Machinery under charge of Haji Khan with Forced Sale Value (FSV) of 35 million.
Ans: 1) Substandard; and 2) 11.8 minus 10.5 = 1.3 million * 0.25 (25%) = 0.325 million.

2. Agha Steel Industries, currently availing long-term project financing facility from First Women Bank for building
Steel Billet products. The outstanding loan as of September 16, 2015 is Rs. 97 million. The company has provided
following documents / securities as collateral: 1) National Saving Scheme securities, encashment value Rs. 20
million; and 2) Mortgaged of Residential Property of 3 directors, Rs. 108 million. Calculate the exposure of First
Women Bank towards Agha Steel Industries.
Ans: 97 – 18 = 79 million

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