IBSL Diploma in Banking and Finance (DBF) Exam cheat sheet

Banking means accepting deposits of money from the public, repayable on demand or otherwise, for lending or investment, withdrawable by cheque, draft or order (Banking Regulation Act 1949, s.5(b)).

CRR is the share of net demand and time liabilities (NDTL) held as cash with the central bank and earns no interest; SLR is held by the bank itself in cash, gold or approved securities.

CASA ratio = (current account deposits + savings account deposits) / total deposits; a higher ratio lowers cost of funds because these deposits carry low or zero interest.

Demand deposits (current, savings) are payable on demand; time deposits (fixed, recurring) have a fixed tenure and attract a penalty for premature withdrawal.

Banker-customer relationships: debtor-creditor for deposits, creditor-debtor for loans, trustee for collections, bailee for safe custody, agent for standing instructions.

A cheque is a bill of exchange drawn on a specified banker and payable on demand; for presentment in India it is valid for three months from the date of issue.

An account becomes a non-performing asset when principal or interest is overdue for more than 90 days; income on NPAs is recognised on receipt, not on accrual.

Nomination in a single account may be made by the sole holder; in a joint account all holders must join, and the nominee holds the proceeds as trustee for the legal heirs.

The priority sector lending target for domestic commercial banks is 40% of adjusted net bank credit; shortfalls are parked in the Rural Infrastructure Development Fund.

Accounting equation: Assets = Liabilities + Equity; every transaction preserves the equality because double entry records equal debits and credits.

A trial balance proves arithmetical equality of debit and credit ledger balances but cannot detect errors of principle, errors of omission or compensating errors.

Accrual accounting records revenue when earned and expenses when incurred; the matching principle aligns expenses with the income they helped generate in the same period.

Straight-line depreciation = (cost - residual value) / useful life; reducing-balance depreciation applies a fixed rate to the written-down value each year.

Provision: recognised when a present obligation exists, an outflow is probable and a reliable estimate is possible. Contingent liability: disclosed only, never recognised.

IFRS 9 classifies financial assets as amortised cost, fair value through OCI or fair value through profit or loss, based on the business model and contractual cash flow characteristics.

IFRS 9 impairment uses expected credit losses: 12-month ECL at initial recognition, lifetime ECL after a significant increase in credit risk, and lifetime ECL for credit-impaired assets.

Capital expenditure creates or enhances a long-term asset and is capitalised; revenue expenditure maintains earning capacity and is charged to the income statement.

Current ratio = current assets / current liabilities; return on assets = net income / total assets; both should use average balances consistently across periods.

GDP = C + I + G + (X - M) on the expenditure approach; real GDP removes price effects using a deflator, while nominal GDP does not.

Fisher relation: (1 + nominal rate) = (1 + real rate)(1 + inflation); for small rates, real rate is approximately nominal rate minus inflation.

Price elasticity of demand = % change in quantity demanded / % change in price; demand is elastic when the absolute value of the coefficient exceeds 1.

Monetary policy instruments: repo rate, reverse repo or standing deposit facility, open market operations, CRR, SLR, marginal standing facility and the bank rate.

Bond prices move inversely to yields; modified duration = Macaulay duration / (1 + y/m) estimates the percentage price change for a 1% change in yield.

A normal yield curve slopes upward with maturity; an inverted curve has short rates above long rates and often precedes an economic slowdown.

Money multiplier = 1 / reserve ratio in the simple model; it converts an increase in base money into a larger rise in broad money through bank lending.

Balance of payments: current account + capital/financial account + errors and omissions = 0; a current account deficit must be financed by inflows or reserve drawdown.

Purchasing power parity links exchange rates to relative price levels; interest rate parity links the forward premium to the interest differential between the two currencies.

Essentials of a valid contract: offer, acceptance, consideration, capacity of parties, free consent, lawful object and intention to create legal relations.

A contract of guarantee requires a principal debtor, a surety and a creditor and must be in writing; the surety's liability is co-extensive with that of the principal debtor.

Pledge transfers possession of movables to the lender; hypothecation leaves possession with the borrower; mortgage transfers an interest in immovable property.

The banker's general lien under s.171 of the Indian Contract Act permits retention of goods and securities until dues are paid, unless an express contract excludes it.

A suit for recovery of a bank debt must be filed within three years from the date the debt became due; written acknowledgement restarts the limitation period.

The SARFAESI Act 2002 lets a secured creditor enforce its security interest without court intervention after a 60-day demand notice to the defaulting borrower.

Under IBC 2016 the corporate insolvency resolution process must be completed within 180 days, extendable by 90 days; a s.14 moratorium bars recovery actions meanwhile.

Basel III minimums: common equity tier 1 of 4.5%, tier 1 of 6% and total capital of 8% of risk-weighted assets, plus a 2.5% capital conservation buffer.

Clayton's case: where a running account has a debit balance, credits are applied to the earliest debt first, unless a contrary intention appears.

The five Cs of credit: character, capacity, capital, collateral and conditions; character and capacity test willingness and ability to repay, while collateral only limits loss.

Expected loss = PD x LGD x EAD; pricing must cover expected loss plus operating cost plus a premium for unexpected loss and cost of capital.

DSCR = cash available for debt service / debt service; 1.0 is the break-even level and term lenders typically require 1.2 to 1.5.

LTV = loan amount / value of collateral; a lower LTV increases the cushion against loss given default and reduces the lender's net exposure.

NPA ageing in India: substandard for up to 12 months, doubtful beyond 12 months, and loss asset where the amount is considered unrecoverable; provisioning rises at each stage.

Capital adequacy ratio = eligible capital / risk-weighted assets; risk weights convert on- and off-balance-sheet exposures into credit-equivalent amounts.

Basel liquidity standards: LCR = HQLA / net cash outflows over 30 stress days, minimum 100%; NSFR = available stable funding / required stable funding, minimum 100%.

Altman Z-score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5; above 2.99 is safe, 1.81 to 2.99 is a grey zone, below 1.81 signals distress.

Main risk categories: credit (default), market (price, interest rate, FX), operational (people, process, systems, external events), liquidity (funding and market) and reputational.