Chapter 26: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management (CAIIB – Paper 2)
1. Which of the following is the largest component on the liability side of a commercial bank’s balance sheet in India?
A. Borrowings from RBI
B. Share Capital
C. Deposits
D. Reserves and Surplus
Deposits form the largest portion of bank liabilities, usually more than 75% of the total balance sheet.
2. On the asset side of the balance sheet, which item represents the main source of income for banks?
A. Cash Reserves with RBI
B. Fixed Assets
C. Other Investments
D. Loans and Advances
Loans and advances are the primary source of income for banks, as they generate interest income.
3. Statutory Liquidity Ratio (SLR) investments such as government securities appear under which head of the bank’s balance sheet?
A. Investments
B. Borrowings
C. Other Liabilities
D. Reserves
SLR investments such as government securities are classified under the "Investments" head on the asset side of the balance sheet.
4. Which of the following is a non-interest-bearing liability of a bank?
A. Term Deposits
B. Current Deposits
C. Borrowings from other banks
D. Savings Deposits
Current account balances are non-interest bearing and represent a cheap source of funds for banks.
5. Cash Reserve Ratio (CRR) maintained by banks with RBI is shown in the balance sheet under which category?
A. Fixed Assets
B. Borrowings
C. Investments
D. Cash and Balances with RBI
CRR is maintained in the form of balances with RBI and is classified under "Cash and Balances with RBI".
6. Which of the following is an intangible asset in a bank’s balance sheet?
A. Government Securities
B. Advances to Customers
C. Goodwill
D. Revaluation Reserve
Goodwill is an intangible asset shown in the balance sheet under fixed assets (intangible).
7. What is Asset Liability Management (ALM) in banks primarily concerned with?
A. Managing the risk of mismatches between assets and liabilities
B. Preparing annual financial statements
C. Ensuring higher profitability through investment in equities
D. Monitoring employee productivity
Asset Liability Management is a strategic approach to manage risks arising due to mismatches in assets and liabilities, mainly interest rate risk and liquidity risk.
8. Which committee’s recommendations led to the formal introduction of Asset Liability Management in Indian banks?
A. Narsimham Committee I
B. Basel Committee
C. Rangarajan Committee
D. Ghosh Committee
The Ghosh Committee (1991) recommended ALM framework for Indian banks to strengthen risk management practices.
9. Which of the following risks is NOT directly managed through ALM?
A. Liquidity Risk
B. Operational Risk
C. Interest Rate Risk
D. Currency Risk
ALM focuses mainly on liquidity risk, interest rate risk, and currency risk. Operational risk is managed separately under Basel framework.
10. In banks, which committee is responsible for overseeing the implementation of ALM?
A. Board of Directors
B. Audit Committee
C. Asset Liability Committee (ALCO)
D. Risk Management Committee
Asset Liability Committee (ALCO) is constituted by banks to monitor and manage ALM risks, ensuring policies are implemented effectively.
11. What is the primary significance of Asset Liability Management for banks?
A. To balance profitability, liquidity, and risk
B. To maximize tax savings
C. To maintain customer relationships
D. To reduce employee turnover
ALM ensures that banks strike a balance between profitability, liquidity, and risk while meeting regulatory requirements.
12. How does ALM help in managing liquidity risk?
A. By reducing operating expenses
B. By focusing only on long-term assets
C. By ignoring short-term liabilities
D. By matching maturities of assets and liabilities
ALM manages liquidity risk by aligning the maturities and cash flows of assets and liabilities to ensure funds are available when obligations fall due.
13. Why is ALM important from a regulatory perspective?
A. It helps banks increase profits rapidly
B. It ensures compliance with RBI and Basel norms on risk management
C. It helps in staff training and development
D. It reduces operational costs
RBI and Basel Committee guidelines require banks to have strong risk management frameworks, and ALM plays a central role in meeting these norms.
14. Which of the following is a key benefit of ALM in interest rate risk management?
A. It improves staff performance monitoring
B. It eliminates credit risk completely
C. It minimizes earnings volatility due to interest rate changes
D. It helps banks reduce tax liabilities
ALM helps stabilize a bank’s Net Interest Income (NII) and Net Worth by minimizing the impact of fluctuating interest rates.
15. From a strategic point of view, how does ALM support banks?
A. By outsourcing risk to other institutions
B. By focusing only on asset growth
C. By reducing employee strength
D. By aligning risk management with long-term business goals
ALM provides a long-term strategic framework by aligning risk management practices with the bank’s overall business objectives and growth plans.
16. Which of the following best describes the main purpose of Asset Liability Management in banks?
A. To prepare statutory reports for RBI
B. To manage risks arising from mismatches in assets and liabilities
C. To forecast employee requirements
D. To maintain customer satisfaction indexes
The primary purpose of ALM is to manage liquidity, interest rate, and currency risks that arise from mismatches in maturities and cash flows of assets and liabilities.
17. One of the objectives of ALM is to ensure adequate liquidity. What does this mean for a bank?
A. The bank keeps maximum funds in long-term investments
B. The bank avoids giving loans beyond one year
C. The bank invests heavily in equity markets
D. The bank maintains funds to meet obligations as they fall due
Adequate liquidity means the bank has sufficient liquid assets or cash flows to meet deposit withdrawals, loan disbursements, and other obligations on time.
18. Which of the following objectives of ALM directly supports stable Net Interest Income (NII)?
A. Monitoring operational risk
B. Expanding branch network
C. Managing interest rate risk
D. Increasing customer base
By managing interest rate risk, ALM helps ensure stability in Net Interest Income (NII) and protects bank profitability from rate fluctuations.
19. A key objective of ALM is asset quality management. What does this involve?
A. Ensuring loans and investments generate sustainable returns with minimal NPAs
B. Reducing employee cost
C. Managing foreign exchange reserves
D. Expanding customer loyalty programs
Asset quality management under ALM ensures that bank assets such as loans and investments are performing, reducing the risk of NPAs and ensuring steady returns.
20. From a long-term perspective, one of the objectives of ALM is capital adequacy. Why is this significant?
A. It reduces branch operating costs
B. It ensures banks avoid mergers
C. It helps in marketing of new products
D. It ensures sufficient capital buffers to absorb losses and meet regulatory norms
Capital adequacy under ALM ensures banks maintain sufficient capital buffers to withstand losses and comply with Basel and RBI capital adequacy norms.
21. Why is ALM referred to as coordinated balance sheet management?
A. Because it focuses only on assets side management
B. Because it ignores the liability side of the balance sheet
C. Because it integrates the management of both assets and liabilities in a unified framework
D. Because it reduces reporting requirements to RBI
ALM is called coordinated balance sheet management as it simultaneously manages both assets and liabilities, ensuring harmony between liquidity, profitability, and risk.
22. Which of the following best illustrates ALM as coordinated balance sheet management?
A. Matching the maturity profile of deposits with loan disbursements
B. Increasing staff productivity through training
C. Enhancing branch marketing activities
D. Improving customer complaint handling
Coordinated ALM involves aligning the maturity of liabilities (like deposits) with the asset profile (like loans) to minimize mismatches and risks.
23. Coordinated balance sheet management through ALM primarily aims to avoid which problem?
A. Excessive branch expansion
B. Over-dependence on non-fund income
C. Increase in staff cost
D. Asset-Liability mismatches leading to liquidity or interest rate risk
The main aim of coordinated ALM is to avoid mismatches between assets and liabilities that can create liquidity stress or interest rate volatility.
24. Coordinated ALM ensures stability of which two key measures in banks?
A. Employee productivity and profitability
B. Net Interest Income (NII) and Net Worth
C. Market share and customer satisfaction
D. Fee income and branch expansion
Coordinated ALM seeks to stabilize Net Interest Income (NII) and Net Worth by balancing asset-liability positions against interest rate and liquidity changes.
25. Which committee within a bank is mainly responsible for implementing coordinated balance sheet management under ALM?
A. Audit Committee
B. Human Resources Committee
C. Asset Liability Committee (ALCO)
D. Shareholders Committee
The Asset Liability Committee (ALCO) is tasked with implementing ALM as coordinated balance sheet management, reviewing gaps, and taking corrective actions.
26. A bank has the following data:
RSA (Rate Sensitive Assets) = ₹500 crore
RSL (Rate Sensitive Liabilities) = ₹600 crore
What is the gap position?
A. Positive Gap of ₹100 crore
B. Negative Gap of ₹100 crore
C. Zero Gap
D. Cannot be determined
GAP = RSA – RSL = 500 – 600 = –100. Since it is negative, the bank has a Negative Gap of ₹100 crore.
27. If a bank has a negative gap in the 1–3 month bucket, what happens when interest rates rise?
A. Bank’s Net Interest Income will increase
B. No effect on bank’s profitability
C. Bank’s Net Interest Income will decrease
D. Bank’s Net Worth will remain unaffected
With a negative gap, liabilities reprice faster than assets. When interest rates rise, cost of funds increases faster than interest income → NII decreases.
28. A bank has RSA = ₹800 crore and RSL = ₹600 crore in the 6–12 month bucket. If interest rates fall, what is the impact on Net Interest Income?
A. Net Interest Income will decrease
B. Net Interest Income will increase
C. No impact
D. Depends on RBI’s CRR policy
Here the bank has a positive gap (RSA > RSL). If interest rates fall, asset yields decline faster than liability costs, reducing NII.
29. In ALM, which of the following is NOT a standard time bucket for liquidity gap analysis as per RBI guidelines?
A. 1–14 days
B. 15–28 days
C. 29 days–3 months
D. 7 years–15 years
RBI’s standard liquidity buckets go from 1 day up to >5 years. “7–15 years” is not a prescribed standard bucket for ALM gap reporting.
30. If a bank maintains excess liquid assets in the 1–14 days bucket, what is the likely impact?
A. Higher Net Interest Margin
B. Lower profitability due to idle funds
C. Increased interest rate risk
D. No effect on overall returns
Excess liquidity in the very short bucket reduces risk but also decreases profitability, as idle or low-yielding funds drag down Net Interest Margin.
31. Duration of Assets = 4 years, Duration of Liabilities = 2.5 years, Assets = ₹1,000 crore, Liabilities = ₹900 crore.
What is the Duration Gap?
A. 1.5 years
B. 0.5 years
C. 1.5 years (approx.)
D. 2.0 years
Duration Gap = DA – (L/A × DL) = 4 – (900/1000 × 2.5) = 4 – 2.25 = 1.75 (approx). Rounded, 1.5 years.
32. If the Duration Gap is positive, what does it imply for the bank when interest rates rise?
A. Economic Value of Equity (EVE) increases
B. Economic Value of Equity (EVE) decreases
C. No impact on EVE
D. Net Interest Margin (NIM) increases
A positive Duration Gap means assets are more sensitive than liabilities. When interest rates rise, asset values fall more → EVE decreases.
33. Duration Gap = –1.2 years. What does this signify?
A. Liabilities are more sensitive to interest rate changes than assets
B. Assets are more sensitive to interest rate changes than liabilities
C. Bank’s EVE will always rise with rate increase
D. No impact on balance sheet stability
Negative Duration Gap means liability values change more with interest rate movements than asset values. Thus, liabilities are more sensitive.
34. A bank has a Duration Gap of 2 years. If interest rates rise by 1%, what happens to the Economic Value of Equity (EVE)?
A. EVE increases by 2%
B. EVE remains constant
C. EVE decreases by 1%
D. EVE decreases approximately by 2%
Change in EVE ≈ – (Duration Gap × Δi). Here = – (2 × 1%) = –2%. So, EVE decreases by about 2%.
35. Which of the following is TRUE about Duration Gap Analysis?
A. It measures only short-term liquidity risk
B. It is unaffected by changes in market interest rates
C. It captures the impact of interest rate changes on the economic value of equity
D. It is the same as GAP Analysis
Duration Gap Analysis focuses on long-term interest rate risk by estimating how changes in rates affect the economic value of equity (EVE).
