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SESSION February – March 2024
course CODE & NAME DBFI402,

Basel Regulations and Risk Management in Banking




Assignment Set – 1ST



  1. a) Summarize major functions of ALM.

Ans: Asset-Liability Management (ALM) is a critical function within financial institutions, especially banks, aimed at managing the risks that arise due to mismatches between the assets and liabilities in terms of maturity, interest rates, and liquidity.

Here are the major functions of ALM: 

  1. Interest Rate Risk Management Gap Analysis: Identifies mismatches between the maturity and reprising dates of assets and liabilities to understand the institution’s exposure to interest rate fluctuations.


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  1. b) Rate Sensitive assets of a Bank as on 31.03.2024 are ₹ 800 cr @ 8% and Rate sensitive liabilities as on 31.03.24 are ₹ 1000 cr @ 5%. Calculate Gap as on 31.03.2024 and Net Interest Income of the Bank.

Ans: To calculate the Gap as on 31.03.2024 and the Net Interest Income (NII) of the bank, we need to follow these steps: 

  1. Calculate the Gap

The Gap is the difference between the rate-sensitive assets (RSA) and the rate-sensitive liabilities (RSL).

It shows the bank’s exposure to interest rate changes.


= RSA − RSL Gap


  1. ABC bank has a portfolio of Mortgage loan (Rs.5000 crores) and Credit card lending (Rs.1000crores) as on 31.03.2024.Risk weights assigned to Mortgage Loans is 20% and Credit Card lending is 50%. Compute RWA (Risk Weighted Assets) of the Bank and regulatory capital requirement if CRAR (Capital to Risk Weighted Asset ratio) is 9%.

Ans: To compute the Risk-Weighted Assets (RWA) of the bank and the regulatory capital requirement, we’ll follow these steps: 

  1. Calculate the RWA for each asset class: Mortgage Loans:

Amount: ₹5000 crores Risk Weight: 20% Mortgage Loans = Amount × Risk Weight RWA

Mortgage Loans ​  =Amount×Risk Weight Mortgage Loans = ₹ 5000 crores × 20 % RWA


  1. Classify operational risk on the basis of causes and effects.

Ans: Operational risk can be classified based on its causes and effects, providing a comprehensive understanding of the various sources and consequences of operational failures within an organization.

Here’s a classification of operational risk based on causes and effects: 

  1. Classification Based on Causes: a. Human Factors:

Employee Error: Mistakes made by employees due to negligence, lack of training, or human error.



Assignment Set – 2ND


  1. a) Briefly explain liquidity risk for a Bank differentiating between funding liquidity and market liquidity risk.

Ans: Liquidity risk is the risk that a bank may not be able to meet its financial obligations as they come due without incurring unacceptable losses. It encompasses the possibility of being unable to fund assets or meet liabilities without experiencing significant losses or costs. Liquidity risk can be broken down into two main components: funding liquidity risk and market liquidity ris


  1. b) Elaborate on RBI guidelines for classifying volatile and core deposits in a Bank.

Ans: The Reserve Bank of India (RBI) provides guidelines for banks to classify deposits into two categories: volatile and core deposits. These classifications help banks assess their funding stability and manage liquidity risk effectively.

Below is an



  1. a) “Indian scheduled commercial banks are required to maintain a CAR of 9%.” Discuss.

Ans: The Capital Adequacy Ratio (CAR) is a regulatory requirement that measures a bank’s capital adequacy and financial strength. It is a crucial indicator of a bank’s ability to absorb losses and meet its financial obligations. In India, scheduled commercial banks are required to maintain a


  1. b) The risk weighted asset value of a Bank as on 31.03.2024 is ₹ 25000 cr. Capital of the Bank is Rs.2500 cr. Calculate CRAR (Capital to risk weighted asset ratio) of the Bank.

Ans: To calculate the Capital to Risk Weighted Asset Ratio (CRAR) of the bank, we’ll use the formula:




  1. a) Explain “Haircuts” for calculation of Capital requirement for a Collateralized Transaction. (Basel II, pillar I, Credit Risk)

Ans: In the context of Basel II regulations, “haircuts” refer to the reduction in the value of collateral accepted by a bank when calculating the capital requirement for a collateralized transaction, specifically in the calculation of credit risk under Pillar

  1. Haircuts are applied


  1. b) Exposure of a corporate loan (Rated BB, Risk weight 150%) to a Bank is Rs.100 crores which is collaterally secured by pledge of Govt. Securities valued at Rs.50 crores. If the hair cut for exposure is 10% and haircut for collateral is 5%, calculate the value of Risk Weighted Asset for this exposure.

Ans: To calculate the value of Risk Weighted Assets (RWA) for the exposure, we need to consider the exposure amount adjusted for the haircut and the value of collateral adjusted for its haircut. Then, we apply the risk weight to the adjusted exposure amount to determine the RWA.

Here’s how to calculate it:  Calculate Adjusted Exposure Amount:  Adjusted Exposure Amount = Exposure Amount – (